What is a 408(b)(2)?
posted by Fisher 401(k) September 26, 2018
Employers who offer a 401(k) to their employees are responsible for working with service providers and protecting the best interests of anyone who saves and invests money in the company plan. That involves reviewing paperwork like the 408(b)(2) fee disclosure. And while that name might be a little intimidating, it’s important to understand what these documents are, and how they can help employers monitor their service providers and the fees they charge.
What does “408(b)(2)” mean?
Generally speaking, a 408(b)(2) disclosure is a fee document associated with employer-sponsored retirement plans. The term comes from a specific part of the Employee Retirement Income Security Act of 1974 (ERISA), which outlines the rules for employer-sponsored defined benefit and defined contribution retirement plans like a 401(k). Regulations issued under Section 408(b)(2) require service providers to give employers (and other responsible fiduciaries in a retirement plan) all the information necessary for those individuals to do the following:
• Assess the reasonableness of fees charged directly and indirectly by a service provider and paid out to both that vendor and any affiliates or subcontractors;
• Identify any potential conflicts of interest; and
• Satisfy fiduciary reporting duties and disclosure requirements.1
What does a 408(b)(2) disclosure say?
A 408(b)(2) fee disclosure should enable an employer to review the providers serving a plan and understand who is being paid out of the 401(k) plan fees, how much, and under what circumstances. Specifically, a 408(b)(2) should include the following:
• A description of all services being provided by the adviser or any of its affiliates or subcontractors;
• Identification of each listed service provider’s fiduciary status; and
• All expected compensation to be paid to any of the listed service providers, including both direct and indirect compensation.2
“Direct compensation” refers to fees paid directly to service providers from the plan. Sometimes, advisers may also receive “indirect compensation” from other service providers on the plan. For example, administrative fees may be subsidized by dollars paid to your adviser by a firm managing one of the investment options in your plan’s fund lineup. Those dollars would come out of the individual investment fees paid by your employees. This is an arrangement called “revenue sharing,” and any indirect compensation set up like this should be clearly documented in your 408(b)(2) fee disclosure.3
Who prepares 408(b)(2) disclosures?
Certain types of service providers are designated as “covered service providers” (CSP) by the 408(b)(2) rule, including:
• Fiduciary service providers
• Registered investment advisers
• Any provider who is paid by indirect compensation and is performing accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services.
Any CSP working on your plan will be obligated to prepare disclosures and share them with you.4
How do I get a 408(b)(2) disclosure from my provider?
Providers are required to give you one when you initially contract with them and are encouraged by the Department of Labor to provide a guide to help you review it. Both this initial 408(b)(2) disclosure and any guide your adviser may have provided can often be found in your initial contract. Any changes to the information provided in your initial 408(b)(2), such as changes to fees or the vendors serving your account, must be disclosed to you within 60 days of your provider being notified of the change. Changes to investment-related information must be disclosed at least annually.5 If you haven’t seen an updated 408(b)(2) for several months or longer, you can request a new fee disclosure from any CSV at any time.
What do I do with a 408(b)(2) disclosure?
As a fiduciary, you have a responsibility to periodically review your service providers and make sure you and your employees participating in the plan are receiving an appropriate level of service for a reasonable fee. Take the following steps in order to meet that responsibility and demonstrate your process:
1. Ask your 401(k) adviser for a 408(b)(2), and also ask them for a list of every vendor providing a service for your account; make sure you have a 408(b)(2) disclosure for each provider.
2. Periodically review all 408(b)(2) disclosures, and ask your adviser to benchmark your plan against other, similar plans so you can determine the “reasonableness” of your plan provider contracts.
3. File the 408(b)(2) disclosures, any benchmark data you receive, and your notes reviewing these materials in your fiduciary audit file.
For a complete walkthrough of how to utilize 408(b)(2) disclosures as part of a broader 401(k) fee review process, read this article about monitoring and understanding 401(k) fees.
The 408(b)(2) fee disclosure is a powerful tool in the employer’s 401(k) toolbox. By periodically reviewing these disclosures from your 401(k) service providers, you can better assess whether you are providing a beneficial 401(k) plan with reasonable fees to help your employees retire.