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What is the 408(b)(2) Fee Disclosure?

What is the 408(b)(2) Fee Disclosure?

A couple of years back, I had a medical consultation. When I got the bill, there were a couple of surprises, things that I was not expecting. Perhaps you have had this experience or something similar to it. Just like my experience with this medical bill, it is pretty common for plan sponsors to have questions as to who is getting paid, how they are getting paid, and what they are getting paid to do; relating to service providers of a retirement plan (such as an advisor, TPA, record keeper things like that).

It is not uncommon for me to come across plan sponsors who do not know how much they pay their service providers or what those service providers are there to do. Unlike medical bills, you physically have to write a check or go online and pay. Not only can plan fees come directly out of account balances, but they can come out automatically.

Now, participant fee notices are given out, but sometimes they are not all that easy to understand. On top of this, participants do not have a say in a lot of those fees. Yes, they can likely choose the funds they want to invest in and the expense ratios associated with those. But, they do not really cast a vote for who manages the plan and who the record keeper is, and who the advisor is. So you, as a plan fiduciary, have to make decisions that are in their best interest. Decisions that you are essentially making on behalf of the plan participants and their beneficiaries. This is why 408(b)(2) fee disclosures are so important.

If you have been involved with managing your 401(K) plan, you may have heard of ERISA. ERISA, or the Employee Retirement Income Security Act was enacted in 1974 and created minimum standards for company-sponsored retirement plans such as 401ks. Section 408(B)(2) talks about service providers, disclosures of the services they provide, and the fees being charged. So, why is all of this so important for you as a fiduciary of your plan?

Let's jump into some bullet points that are directly found on the IRS website. Some of the basic duties of a plan fiduciary include, “Acting solely in the interest of the participant 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 care, skill, prudence, and diligence of a prudent person familiar with the matters.” These are three of the five basic fiduciary duties. I think all three of these touch base on why it is important to understand the fees charged and the services being rendered.

OK, so now when you think of 408(B)(2), think of fee disclosure for services provided. Getting a copy of the 408(b)(2) fee disclosure should be pretty easy. Just reach out to your service providers and ask for a copy. Or talk to your 401K advisor. Now, to get a better idea of what to do with the 408(b)(2) fee disclosure, let's take a trip to the grocery store.

You probably have an item that you buy regularly. Let's say it is milk. You go to the grocery store, and you see the milk. You say, “Hey! This is a great price.” You know this because you buy the same brand of milk at another store (or maybe from the same store). But now it is a little bit less. You have bought it enough to understand what is a good price and what is not a good price. You at least have an idea of what is reasonable. Now let's use that same concept with the 401K.

How do you know if the cost you are paying a reasonable for the services you are getting for your 401K plan? This question is a lot more difficult to answer because there are a lot more factors. The size of the plan, the number of participants, and the services that you have requested can make a difference in whether or not the costs are reasonable. But the concept is the same as going into buying milk. You need a baseline of what is reasonable. How do you find that out? You benchmark.

This is one of those areas where a solid 401K advisor can add a lot of value. They can help you understand and read the 408(b)(2) fee disclosure. Sometimes they are pretty easy to understand, but sometimes it takes a little bit more effort. So, they can help you understand that. But, also look at independent sources to see how your plan looks compared to other providers. Or see if your current provider will lower their fees but regardless of what you do, make sure you have a process and you document the reasons for your decisions.

I hope this was helpful. We have other helpful content on our website at www.cuiwm.com. We also have a podcast, "In Your Business" with Michael Sayre. You can also look for us on social media, Twitter, Facebook, and LinkedIn. If you want to hear more of this or be informed next time we get more content like this, please subscribe.

BIBLIOGRAPHY IRS.

(n.d.). Retirement Plan Fiduciary Responsibilities. Retrieved from irs.gov: https://www.irs.gov/retirement-plans/... 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/file...

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