408(b)(2) Regulations Help Meet Fiduciary Responsibilities
Are you wondering why there is so much buzz these days about ERISA Section 408(b)(2) fee disclosures? After all, your service provider tells you what you pay for the services provided, right? Maybe.
Service provider pricing and compensation can be structured many different ways, so it may prove difficult for you, a responsible plan fiduciary (RPF), to evaluate plan fees. The Department of Labor (DOL) recognizes this and, in 408(b)(2) regulations, is mandating what information is to be disclosed to help you assess the reasonableness of fees paid for by the plan. The regulations also aim to help identify conflicts of interest that may impact a service provider’s performance.
Doing Your Duty
By July 1, 2012, your covered service providers (CSPs) must disclose in writing – either paper or electronically – the following:
- A description of the services provided.
- A definitive statement as to whether the service is being provided in a fiduciary and/or registered investment advisor capacity.
- All compensation that the service provider, an affiliate or subcontractor expects to receive along with the manner of receipt.
- Information about conflicts of interest.
- Additional designated investment alternatives that may be available to the CSP.
CSPs are now required to provide information to you that will help you fulfill your fiduciary responsibilities in regards to plan fees. However, you are responsible for addressing information not disclosed by service providers and evaluating the information that is provided.
On July 2, send letters to any CSPs who did not provided the required information by July 1. Response is required within 90 days.
If you do not make this request, you are considered to have entered into a “prohibited transaction” with the service provider. You will be subject to an excise tax of 15 percent of the fees charged by the CSP and may face potential liability for a fiduciary breach.
If there is no response to your request or if the CSP refuses to disclose the information, you must fire the CSP and notify the DOL of the non-compliance. Failing to do so will subject you to “prohibited transaction” penalties and potential liability for fiduciary breach.
When You Have All Information
With the necessary information gathered, you must review the disclosures to determine if:
- Compensation and costs are reasonable.
- Services are adequate and appropriate.
- Any conflicts are manageable.
Reasonableness is subjective and involves several considerations. Case law encourages you to seek outside qualified experts when you lack the expertise to execute fiduciary obligations. In a recent case, it was found that simply monitoring the reasonableness of the overall expense ratio of the plan’s investment funds was not sufficient to determine fee reasonability. It indicated that benchmarking should be part of the process.
When you benchmark your plan, you receive fee information by service provider in an easy to use format. You will know all fees paid so you can analyze each vendor to determine if action is needed where fees are above average.
Let our Ohio Employee Benefits Professionals Lighten the Burden
You have a fiduciary duty to determine that fees are reasonable, but you don’t have to do all the work yourself. Contact Rea & Associates. Our PlanComparesm benchmarking service can help keep you compliant and may save the plan money. Contact Rea’s Ohio Retirement Plan Services team to learn about how PlanCompare can help you do your fiduciary duty.