A guide to 408(b)(2) fee disclosures for retirement plan sponsors

The need for transparency in retirement plans has been a key focus in recent years—especially the transparency of fees. ERISA Section 408(b)(2) stipulates that covered service providers (CSPs) must disclose information about their services and fees in writing to the plan’s fiduciaries. But this isn’t only a CSP duty—as a fiduciary, you also have a duty to understand and evaluate the disclosures and determine whether the cost of services provided by the plan’s CSPs is reasonable.

Explaining the 408(b)(2) fee disclosures for plan sponsors

ERISA requires that your CSPs disclose service and fee information to you and that they notify you of any changes to that information. CSPs must notify you of changes as soon as practicable, but no later than 60 days after they’re informed of the change.

In order to pay for the operation of the plan with plan assets and avoid a prohibited transaction, the fees must be reasonable under ERISA Section 408(b)(2). Use this guide to make sure your CSPs have provided you with all the information and disclosures required under ERISA Section 408(b)(2).

Description of services
  • Details the type of services the CSP will provide to the plan
  • Helps fiduciaries understand the support they may/may not receive from the CSP
Statement of fiduciary status (if applicable)
  • Includes a statement about the fiduciary status of the CSP, affiliate, or subcontractor 
  • Not required if the CSP isn’t acting as a fiduciary—however, the plan sponsor may ask for clarification of the CSP’s fiduciary role
Description of compensation
  • Direct compensation to be received (from the plan) in connection with the services provided 
  • Indirect compensation to be received (from sources other than directly from the plan or plan sponsor) in connection with the services provided, including: 
    • a description of the services, 
    • identity of the payer, and
    • a description of the arrangement between the payer and CSP, affiliate, or subcontractor.
  • Compensation (if any) paid among the CSP, an affiliate, or subcontractor, and how it will be allocated if the compensation is set on a transaction basis or charged directly against the plan’s investment and reflected in the net value of the investment
  • Compensation to be paid in connection with the termination of the contract and how any prepaid amounts will be calculated and refunded 
  • Manner in which the compensation will be expressed: monetary amount, formula, percentage of plan’s assets, or charge to participant/beneficiary accounts
Description of recordkeeping disclosures
  • If recordkeeping services are provided in the contract, the disclosures must also include a description of the direct and indirect compensation that the CSP,  affiliate, or subcontractor expects to receive, attributable to the recordkeeping services
  • If recordkeeping services are provided without explicit compensation or the compensation is offset or rebated as a result of other compensation received by the CSP, a reasonable, good faith estimate of the cost to the plan of the recordkeeping services must be disclosed
Description of investments and disclosures

CSPs that offer designated investment alternatives (DIAs) to a plan (through a platform) in connection with recordkeeping or brokerage services must also provide a description of:

  • Any compensation that will be charged directly against an investment in the DIA (e.g., commissions, sales loads, sales charges, or redemption fees,) and isn’t included in the annual operating expense 
  • The DIA’s total annual operating expense expressed as a percentage and calculated in accordance with U.S. Department of Labor (DOL) Regulation Section 2550.404a-5 (Note: This requirement will be satisfied by providing the comparative investment chart that’s included in the annual 404a-5 disclosure.)
  • Any other information needed for a plan administrator to comply with the disclosure requirements of DOL Regulation Section 2550.404a-5 

How to handle incomplete 408(b)(2) fee disclosures

If you discover that you’ve received incomplete disclosures from a CSP, you can obtain exemptive relief and avoid a prohibited transaction by doing the following:

  • Send the CSP a written request for the missing information. The CSP has 90 days to respond.
  • If the CSP fails to comply with your request, then notify the DOL within 30 days of the earlier of: 
    • the CSP’s failure to comply with the written request for information, or 
    • 90 days after the written request is sent.

Note: Generally, the DOL notice must be filed no later than 120 days after the request is made to the CSP, unless the CSP notifies you of its failure to comply with your request prior to the 120-day deadline. If that’s the case, then the DOL notice must be filed within 30 days of the CSP’s notice of failure to comply.

  • If the requested information isn’t provided within 90 days of the date of request, you must decide whether to terminate or continue the contract, consistent with your duty of prudence.
  • If the information requested relates to future services and isn’t disclosed promptly after the 90-day period, then terminate the contract as expeditiously as possible, consistent with your duty of prudence.
  • Regardless of the situation, consider consulting legal counsel for guidance on how to prudently proceed. 

You can find more information about how to handle incomplete 408(b)(2) disclosures on the DOL website

More tips for monitoring your service providers

In addition to making sure you’ve received all your 408(b)(2) disclosures, there are some best practices you should follow to monitor your service providers.

  • Have a clear understanding of which services you need for your plan.
  • Review the CSP’s credentials, such as education, license, work experience, customer references, satisfaction surveys, reputation, liability insurance, and any other factors.
  • Make sure you understand the terms of any contract or arrangement you enter into, including the types of services offered and not offered.
  • Understand all related fees and how to compare them to relevant benchmarks.
  • Periodically review the CSP’s performance, service level and support, reasonableness of fees, types of services offered compared with those needed, and other details.
  • Document your selection process and the reason for your hiring decision. 
  • Document your monitoring process and findings. 

As with all your fiduciary duties, documentation is critical, as it may be helpful in answering any future questions about your decisions and compliance with your fiduciary duties.

Track your 408(b)(2) disclosures for compliance

The intention behind 408(b)(2) is to provide the plan fiduciary with a description of the services provided by the plan’s CSP and fees charged for those services. As such, it imposes disclosure requirements for your CSPs and for you as a fiduciary. Make sure you’ve received all the 408(b)(2) disclosures you’re due from each of your CSPs, and document their receipt, any actions you take to track down incomplete/missing disclosures, and any related filings with the DOL. Similar to other fiduciary duties, your duties under 408(b)(2) are procedural. Following and documenting a prudent process relating to 408(b)(2) disclosures can help you manage and comply with your 408(b)(2) fiduciary duties. 

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date but may be subject to change. John Hancock does not provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.