408(b)(2) Fee Disclosures: How to Read Them and What to Do With Them

Since July 2012, Department of Labor rules have required 401(k) service providers to tell plan sponsors what they do and how they are paid. These are known as 408(b)(2) disclosures, after the section of ERISA they come from.

Many sponsors receive these documents, file them, and never read them. That is a missed opportunity, and a potential fiduciary gap, because the disclosures are the primary tool you have for judging whether your plan's fees are reasonable.

Why the disclosures exist

ERISA generally prohibits a plan from paying a service provider unless the arrangement is reasonable and the compensation is no more than reasonable. Under the DOL's rule, an arrangement is not considered reasonable unless the covered service provider makes the required disclosures.

In other words, the disclosures are not a courtesy. They are a condition of the arrangement being permissible.

Who must disclose

The rule applies to covered service providers that expect to receive at least $1,000 in direct or indirect compensation. The covered categories include:

• Providers acting as ERISA fiduciaries or registered investment advisers to the plan
• Recordkeeping and brokerage providers to plans that offer participant-directed investments
• Providers of certain other services, such as accounting, actuarial, consulting, legal, or third-party administration, when they receive indirect compensation

In a typical small plan, that usually means the recordkeeper, the third-party administrator, and the plan's financial advisor.

What the disclosures must include

A complete 408(b)(2) disclosure generally covers:

• Services. A description of the services the provider will perform.
• Fiduciary status. Whether the provider will act as an ERISA fiduciary, a registered investment adviser, or both.
• Direct compensation. Amounts paid directly by the plan.
• Indirect compensation. Amounts received from sources other than the plan or sponsor, such as revenue sharing from fund companies, and who pays them.
• Compensation shared with affiliates or subcontractors when it is set on a transaction basis.
• Termination compensation. Any fees charged when the arrangement ends.
• Recordkeeping cost. A reasonable, good faith estimate of recordkeeping compensation, even when it is bundled with other services.
• Investment information. Expense ratios and other details for the plan's investment options.

Compensation can be expressed as a dollar amount, a percentage, a formula, or a per-participant charge, but it must be described clearly enough for you to evaluate it.

Timing rules

Providers must deliver disclosures before a contract is entered into, extended, or renewed. Changes generally must be disclosed as soon as practicable and no later than 60 days after the provider learns of the change. Investment-related information must be updated at least annually. Errors or omissions made in good faith must be corrected within 30 days of the provider learning of them.

If a disclosure is missing or incomplete

If you do not receive a required disclosure, or it leaves out required information, request it in writing. If the provider does not respond within 90 days, the responsible plan fiduciary must notify the Department of Labor to preserve relief under a related exemption, and should consider whether to end the relationship.

How to review the disclosures

A practical annual review looks like this:

1. Gather every provider's disclosure, including any updates received during the year.
2. Consolidate them into a one-page summary showing each provider, each service, how the provider is paid, and the estimated annual cost in dollars.
3. Compare the disclosures with contracts and invoices to confirm they match what you are actually paying.
4. Look closely at indirect compensation, including revenue sharing, sub-transfer agency fees, and 12b-1 fees embedded in fund expenses.
5. Confirm fiduciary status matches your expectations. If you believe your advisor acts as a 3(38) investment manager, the disclosure should say so.
6. Benchmark the total against similar plans.
7. Document the review in committee minutes or your fiduciary file.

What about a guide?

Disclosures can run dozens of pages and be scattered across multiple documents. In 2014, the DOL proposed requiring providers to include a guide pointing to where key information appears. That proposal was not finalized, but some providers include a guide anyway. If yours does not, ask the provider to point you to the compensation sections.

408(b)(2) versus 404a-5

The two are easy to confuse. 408(b)(2) disclosures go from service providers to the plan sponsor. 404a-5 disclosures go from the plan to participants, describing plan and investment fees each year. Both matter, and they should tell a consistent story.

Want a second look at your plan's fee disclosures? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review plan fees and providers. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.

Frequently asked questions

Do we have to give 408(b)(2) disclosures to participants?

No. They are provided to the responsible plan fiduciary, typically the plan sponsor. Participants receive separate 404a-5 fee disclosures.

What if a provider says its fees are "included" without giving a dollar amount?

Ask for a clearer description. The rule requires compensation to be described in a way you can evaluate, such as a dollar amount, percentage, or formula, including a reasonable estimate for bundled recordkeeping.

How often should we review these disclosures?

At least once a year, and whenever a provider sends an update or you renew or change a contract.

This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.