November 4, 2017—408(b)2 Provider Disclosures have created confusion for employers who sponsor 401(k) and 403(b) plans ever since the rules first requiring them took effect in 2012. To make matters worse, with the June 2017 effective date of the Department of Labor’s Fiduciary Rule, employers’ responsibility with respect to the disclosures increased.
As I meet with retirement plan sponsors, I encounter a range of questions related to the disclosures. The query posed by one plan Administrator – “What is a 408(b)2?” – wasn’t all that surprising or odd. Some employers don’t realize they receive the disclosures and most are unaware that it is their responsibility to make sure the disclosures are received. Fewer still understand their additional responsibility, that the disclosures must be reviewed and understood, with plan sponsors documenting the levels of service and determining that the associated fees are reasonable.
So, today’s blog seeks to clear up some of the confusion in the interest of helping employers stay compliant and ensure plan participants are well served.
Here are the facts:
A Provider Disclosure Report – otherwise known as a 408(b)2 report – should be received by the plan sponsor from each service provider who is receiving payment from the company’s 401(k) or 403(b) plan. A “payment from the plan” means that the fees are being collected from plan participants. Service providers can include advisors, recordkeepers, third party administrators, custodians, auditors – anyone who provides a plan service – but employers need only receive disclosures from providers paid by the plan, not from those to whom the employer makes a direct payment.
It’s worth noting that there are two methods used to collect service provider fees from participants. Some plans remove fees directly from a participant’s account. Such fees are transparent, making it easier for plan sponsor and participant alike to measure service value. However, some plans use a “revenue-sharing” method where the fees are removed from the participant’s investment returns before they become a part of the participant’s retirement account. Such “hidden” fees are not reported in a participant’s quarterly plan statement, are difficult to identify and have led some plan participants to believe their retirement plans are free!
(In addition to the service provider fees, each mutual fund or annuity has a management fee to compensate the managers who buy and sell the fund’s underlying securities. These fees are always removed from the participant’s investment returns and they also will be disclosed on a 408(b)2 report.)
Once a 408(b)2 report is received, employers must comb through it in detail to first understand the services being provided and whether the providers are fiduciaries. Service providers acting as fiduciaries must specifically state that they are doing so; if a provider is silent regarding fiduciary status, it is not a fiduciary. The new Fiduciary Rule creates an additional responsibility for employers; they must verify their advisors are fiduciaries.
Prior to the Fiduciary Rule, brokers and insurance representatives were not required to act as fiduciaries. If plan sponsors have not received a new 408(b)2 report from their advisor since the Fiduciary Rule took effect, they will want to re-visit their “old” 408(b)2 reports. If their advisor previously served as a fiduciary and stated so, those reports will suffice. However, if the advisor was silent on fiduciary status, the advisor was not a fiduciary and the plan sponsor must take steps to make sure they receive a new 408(b)2 report that states the advisor’s fiduciary status and describes the fiduciary nature of the advisor’s services.
A prominent ERISA attorney Fred Reisch suggests in a recent blog the kinds of service descriptions for which an employer might search to confirm an advisor is acting as fiduciary. Such descriptions might include “making investment recommendations, “referring to other investment advisors or managers, or “providing selective lists of investments.”
Once employers understand all plan services and have verified the fiduciary status of their advisor, they must document that plan fees are reasonable in light of the services provided. There should be an explanation of the fee that is being collected for each service and whether the fee is assessed on a per-participant basis or as a percentage of assets.
What about fee reasonableness? Employers should consider the range and level of services they are receiving as they analyze or benchmark their fees. The Department of Labor doesn’t require employers to find the providers with the lowest fees; they must conclude their fees are “reasonable” when measured against the services received. Plan sponsors can benchmark their fees against those paid by other plans by hiring a consultant, soliciting RFPs from other providers or consulting the 401k Averages Book.
408(b)2 compliance can be confusing, but it doesn’t have to be, and a proper review of a plan’s provider disclosure report can result in plan improvements to the benefit of participants. I’d welcome a phone call to help you comb through this process.
This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.