408(b)(2) fee disclosure

What a 408(b)(2) disclosure is

ERISA prohibits a plan from paying a service provider unless the arrangement is reasonable. Department of Labor regulation 29 CFR 2550.408b-2 says an arrangement is reasonable only if the provider discloses certain information in writing before the contract is signed, renewed or extended. It applies to “covered service providers” that expect to receive $1,000 or more in compensation, such as recordkeepers, investment advisers and certain third-party administrators.

The disclosure must describe:

• The services to be provided.

• Whether the provider will act as an ERISA fiduciary or a registered investment adviser.

• Direct compensation paid from the plan.

• Indirect compensation received from other sources, such as payments from fund companies, and who pays it.

• Compensation shared among related parties.

• Any fee charged when the contract ends.

Providers must report changes within 60 days of learning of them.

Why it matters to employers

The disclosure is addressed to you as the responsible plan fiduciary, and receiving it is the start of your job. You are expected to read it, understand the total compensation each provider receives, and decide whether it is reasonable for the services, usually by comparing it with other providers. Keep a record of that review.

If a provider fails to give the disclosure, ask for it in writing. If it is still missing 90 days later, the rules call for you to notify the Department of Labor, and to consider ending the arrangement, to keep your own protection.

Common mistakes

• Filing the disclosure without reading it.

• Looking only at fees billed to the company and missing compensation paid out of plan investments.

• Not asking for updated disclosures when services or funds change.

• Confusing it with the 404(a)(5) notice, which goes to participants.

• Having no written record that fees were reviewed.