ERISA 408(b)(2) fee disclosures—not just for your clients’ retirement plans

A case of déjà vu

On average, employers spend nearly three times more on health insurance than their defined contribution plan as a percentage of compensation (6.9% versus 2.4%).¹ And it can be difficult for them to control this spending due to limited information about healthcare prices and fees. Over the last couple of years, this lack of transparency has caught the attention of legislators, regulators—and plaintiff attorneys. If this sounds familiar, it should. It wasn’t that long ago when we were at this same crossroad, making you uniquely qualified to help employers navigate the journey ahead.

Impact of the Consolidated Appropriations Act of 2021

Education is one of the first ways you can help demonstrate your value. Many employers may be unaware that the Consolidated Appropriations Act (CAA) of 2021 contains many provisions to help increase fee transparency in group health plans, including an amendment to ERISA Section 408(b)(2). This amendment, Section 408(b)(2)(B), requires certain service providers of group health plans to disclose the direct and indirect compensation they expect to receive for the services they provide. This disclosure must be given to a responsible plan fiduciary. And the hope is that it will have the same impact we’ve experienced in our industry—employers better equipped to assess the reasonableness of fees and expenses based on the value they’re receiving.

When you dig into the 408(b)(2)(B) amendment, you’ll discover that many of the provisions are the same or similar to the requirements for retirement plans. 

• A covered service provider (CSP) is defined as any provider that expects to earn $1,000 or more in direct or indirect compensation for the brokerage or consulting services it provides to the group health plan.
• Brokerage and consulting services include services related to plan design and implementation, the selection of insurance products, recordkeeping, compliance, and third-party administration.
• The disclosure must contain a description of the service and compensation received, as well as the provider’s fiduciary status with respect to the plan.
• For indirect compensation, the CSP must also disclose the arrangement between the CSP and the payer and the compensation formula or estimated payment.
• The plan sponsor must receive the disclosure prior to the contract taking effect or being renewed or extended.
• Updated disclosures must generally be provided within 60 days of any material changes to the arrangement. 

CSPs and plan fiduciaries are expected to implement these requirements using a good faith, reasonable interpretation of the law. DOL Field Assistance Bulletin 2021-03 provides guidance on what this means.  

The potential risk for plan sponsors

While increased transparency is a good thing, we know from experience that it can expose plan sponsors to additional liability.

• If a sponsor doesn’t receive the 408(b)(2) disclosures, the arrangement with the CSP could be considered a prohibited transaction. In that case, plan fiduciaries could potentially be held liable for any losses the prohibited transaction caused the plan and subject to civil penalties. The CSP may be required to return any plan fees they received and could also be subject to civil penalties.
• Participants who feel plan fees are unreasonable may pursue litigation, claiming a breach of fiduciary duty. In fact, the plaintiff attorney at the center of the 401(k) fee lawsuits has turned its attention to group health plans.   

Putting a fiduciary process in place for the CAA

You can use your retirement plan experience to help employers create an effective fiduciary process to help manage this added risk. And you don’t have to start from scratch. The components of proper 401(k) governance also apply to group health plans:

• Establish a plan committee
• Develop formal policies and procedures to comply with the CAA
• Document decisions and meeting minutes
• Maintain plan records
• Monitor the plan’s providers and consultants
• Benchmark plan fees and services  

If you’re worried that you don’t know enough about group health plans, consider collaborating with a colleague who understands the nuances and can help fine-tune the fiduciary process.     

408(b)(2)(B) disclosure and the CAA—an opportunity to differentiate yourself

The 408(b)(2)(B) amendment and CAA of 2021 signal a new era for group health plans. Financial professionals who recognize the similarities with 401(k) plans can be at the forefront of this change, using lessons learned to help guide clients and strengthen relationships—and their practices.