I'm Paying for What?
A few years ago, I had a medical consultation and found several surprises on the bill. There were services I didn't know I was receiving or getting charged for. You may have had a similar experience or have heard similar stories. Just like this medical bill, it's common for me to come across company-sponsored retirement plans where plan fees may not make sense or may not be clear.
I often come across 401(k) plans where the plan sponsor does not understand the fees being paid and services provided. Unlike your medical bill, there may be 401k plan fees that you are not writing out a physical check to pay. Unlike medical bills, 401(k) fees can come out of participant account balances automatically. Though plan participants receive fee notices, it's not always easy to understand them. As a plan fiduciary, you make the decisions that directly impact fees that come out of the balances of participant accounts. This is where the importance of 408(b)(2) disclosure comes into play.
How do I Understand 401(k) Fees and Services of Provided?
The Employee Retirement Income Security Act (ERISA) was enacted in 1974. This legislation created minimum standards for company-sponsored retirement plans such as 401(k)s. Section 408(b)(2) of this document outlined needed service provider disclosures. The purpose of these disclosures was to help plan fiduciaries:
- Assess the reasonableness of service provider compensation.
- Aid in identifying conflicts of interest.
- Meet reporting disclosure requirements.
This doesn't pertain to SEP IRAs, SIMPLE IRAs, or other IRA accounts. (U.S. Department of Labor, 2012)
Why do I Need to Understand the 408(b)(2) Fee Disclosure?
Here are three bullet points (out of 5) directly from the IRS website (IRS, n.d.) outlining a plan fiduciary's basic duties.
- "acting solely in the interest of the participants and their beneficiaries;
- acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
- carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;"
All three of these points argue the importance of understanding and qualifying plan fees and services. As a plan fiduciary, you make decisions that impact the fees coming out of participant account balances to pay service providers. Considering this, these fiduciary duties makes sense.
How do I Get a Copy of the 408(b)(2) Fee Disclosure?
Ask your 401(k) advisor to gather copies of the 408(b)(2) fee disclosure from the providers you work with (RIA, recordkeeper, etc.). Make sure to have the advisor's fees included Consider keeping updated copies of these documents in a fiduciary file.
How do I Use the 408(b)(2) Fee Disclosure?
When you are shopping, you see some items so often that you develop a feel of what's a fair price. When you shop online, you can open multiple browser windows and see the costs of goods side-by-side. 401(k) is different. Some of the factors that influence whether expenses are "reasonable" could include:
- The size of the plan.
- The services providers are offering.
- Whether or not providers are taking on a fiduciary role.
Because each plan is unique, plan fiduciaries should have their 401(k) plan periodically benchmarked. This allows them to see how their plan compares to other plans in a similar peer group. When a plan is benchmarked, if the plan fiduciary finds evidence that the plan is more expensive than those in their peer group, they should consider acting based on the findings and document the reason for their decisions. Make sure to include advisor fees in your benchmark analysis.
Do I Need to Choose the Cheapest Option?
The bullet points from the IRS website say “reasonable expenses” not the cheapest option. Make sure you can justify the decisions made for the plan. Work with your advisor to create a process to make decisions for he plan and document the reasons for the decisions you make.
IRS. (n.d.). Retirement Plan Fiduciary Responsibilities. Retrieved from irs.gov: https://www.irs.gov/retirement-plans/retirement-plan-fiduciary-responsibilities
U.S. Department of Labor. (2012, February). Final Regulation Relating to Service Provider Disclosure Under Section 408(b)(2). Retrieved from Fact Sheet: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/final-regulation-service-provider-disclosures-under-408b2.pdf