What is a 408(b)(2) Disclosure? | Human Interest (2023)

Key Takeaways

  • Plan sponsors have a fiduciary duty to review 408(b)(2) fee disclosures

  • Each of a plan’s covered service providers is required to provide a 408(b)(2)

  • These disclosures help plan sponsors benchmark their retirement plan to make sure the fees paid by the plan are reasonable

A 408(b)(2) Disclosure is a legally required disclosure produced by a covered plan service provider to the plan sponsor (generally you, the employer). When offering a retirement plan like a 401(k), plan sponsors have a fiduciary duty to the plan’s participants.

One of these duties is ensuring that plan assets are only used to pay reasonable expenses. To fulfill that fiduciary responsibility, plan sponsors should review all the relevant documents and disclosures, including the 408(b)(2) fee disclosure for 401(k) retirement plans.

The 408(b)(2) Disclosure can help plan sponsors monitor their service providers and the fees they charge, help ensure reasonable fees and that services are appropriate. Fees can significantly cut into the savings of plan participants. So, while becoming acquainted with something called a 408(b)(2) may sound administrative in nature, it’s essential if you offer a retirement plan.

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

What is a 408(b)(2) Disclosure?

408(b)(2) refers to a section of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA sets the requirements for employee retirement benefit plans, particularly the minimum standards required to protect the employees who participate in these plans and ensure fair access to the plans. Section 408(b)(2) of ERISA requires defined benefit and defined contribution plan service providers give information to the plan fiduciary that it can use to understand:

To do this, a 408(b)(2) disclosure should:

  • Identify each listed service provider’s fiduciary status

  • List all compensation expected to be paid to those service providers including direct and indirect compensation

  • Describe all services being provided (by the entity and its affiliates or subcontractors)

    (Video) 408(b)(2) Are You Ready?

“Direct compensation” refers to fees paid directly to service providers from the plan. “Indirect compensation” refers to fees paid from one plan service provider to another, rather than through the plan itself, an arrangement that is known as “revenue sharing.”

For example, in exchange for tracking share ownership of each fund for each plan participant, a 401(k) recordkeeper may receive a portion of the fees the fund company charges to the individual investors. (Those fees would be included in the fund’s expense ratio.) Such indirect compensation arrangements must be documented in the 408(b)(2) disclosure.

Why do you need the 408(b)(2) disclosures?

Ultimately, the information provided in 408(b)(2) Disclosures allows employers and any other plan fiduciaries to

  • Assess the reasonableness of fees charged directly and indirectly by a service provider (whether paid to that vendor, its affiliates, or subcontractors)

  • Identify any potential conflicts of interest

  • Satisfy fiduciary reporting duties and disclosure requirements to plan participants

This data makes it possible for plan sponsors and other fiduciaries to monitor the fees paid by the plan to ensure they’re reasonable.

The Employee Benefits Security Administration uses an example involving an employee with 35 years until retirement and a current 401(k) account balance of $25,000. Assuming an average return of 7% over the next 35 years, with fees and expenses reducing those average returns by 0.5%, the account balance grows to $227,000 in the example, even without further contributions to the account. However, if fees and expenses are 1.5%, the account balance only grows to $163,000 in the example. According to the DOL, a 1% difference in fees and expenses can reduce retirement savings by 28%.

(Video) 408(b)2 Fee Disclosure for the Auditor

Who’s responsible for preparing 408(b)(2)Disclosures?

A Covered Service Provider (CSP) is any entity that enters into a contract or arrangement (whether written or not) with a plan and reasonably expects to receive $1,000 or more in compensation in connection with the services. CSPs may include:

  • Recordkeepers

  • Registered investment advisers

  • Providers receiving indirect compensation for services such as accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services

  • Other fiduciary service providers

What fees should I compare with a 408(b)(2) Disclosure?

​​Plan administration fees are those associated with managing a plan, including day-to-day operations and essential administrative services. This could include a long list of providers, from accountants to recordkeepers to account managers. Depending on plan design, employers may cover 401(k) administration costs, or pass them on to employees as flat fees or as a percentage of assets in the plan. Investment and individual service fees are generally paid by employees.

401(k) processing and ongoing fees are charged to companies and/or plan participants when specific actions or events occur. Below are just a few of these fees:

  • Form 5500 preparation fee:Form 5500 is a report that plan sponsors must file annually to provide the IRS and Department of Labor (DOL) with details about the plan and plan financials. With many plan providers, preparation of Form 5500 can cost between $250 and $750.

    (Video) New 401k Fee Disclosure Rules in Effect | Webinar | Sikich LLP

  • Plan restatement fee: As laws change, plan documents must be updated—and a plan restatement is a rewriting of the plan document. To comply with laws and regulations enacted by the IRS, the DOL, and Congress, most retirement plans must update those documents to incorporate legislative and regulatory changes once every six years. Many providers have charged $1,500 for 401(k) plan restatements.

How do I request a 408(b)(2) fee Disclosure?

Covered service providers are required to furnish you with the 408(b)(2) Disclosure with your initial contract and update them with any changes in a timely manner. The DOL’s Employee Benefits Security Administration (EBSA) strongly encourages CSPs to also offer a companion “guide,” summary, or similar tool to assist employers in reviewing the required disclosures. To get a sense of what this should look like, you can refer to EBSA’s Sample Guide to Initial Disclosures.

Providers must disclose changes to the initial fee information, including cost and vendor updates, within 60 days of the provider being informed. Changes to investment-related information are to be disclosed at least annually. Providers must disclose compensation or other information related to their service arrangements upon the request of the plan sponsor, according to the DOL, “reasonably in advance of the date” when they must comply with ERISA reporting requirements.

How should I use a 408(b)(2) Disclosure?

Ultimately, 408(b)(2) disclosures can help you benchmark your 401(k). Benchmarkingmeans comparing plan details and fees against industry averages to assess how well your plan is allowing your employees (and you) to prepare for retirement—and if you need to update the plan.

Benchmarking is both an act of self-interest for a business—you don’t want to overpay in fees that cost your business—and a legal fiduciary responsibility to act in the best interest of participants of the plan. For both of these reasons, it’s important to regularly compare your plan’s details with those of other providers.

  • Compare your 408(b)(2) Disclosures with a list of every vendor providing services for your plan to ensure you have a disclosure for each provider.

  • Schedule a regular review of all the 408(b)(2) Disclosures and have your plan administrator help you benchmark the fees you’re paying with other similar plans to assess whether or not your fees are reasonable.

  • Maintain these documents, including the benchmarking data.

    (Video) Can You Use a 408k Plan to Buy Rental Real Estate?

At Human Interest, we’re committed to helping employers and employees get the most value out of their retirement plan. That’s why we don’t charge 401(k) transaction fees and offer free retirement plan benchmarking. If you’d like to find out how much your plan is paying in fees and compare the cost of your plan to other, similar plans, reach out to us.


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Section 408(b)(2) of ERISA requires defined benefit and defined contribution plan service providers give information to the plan fiduciary that it can use to understand: What plan fees are paid to service providers. If those fees are paid directly or indirectly.

What are 408 B 2 disclosure requirements? ›

The 408(b)(2) disclosure regulation requires a covered service provider that reasonably expects to be a fiduciary to an ERISA plan to disclose to the responsible plan fiduciary its status as a fiduciary, along with a description of its services and fees.

What is 408 B 2 exemption? ›

Section 408(b)(2) of ERISA provides a statutory exemption from the party-in-interest prohibitions for any “reasonable” contract or arrangement with a party-in-interest, including a fiduciary, for any office space or legal, accounting or other services (including investment management services) “necessary” for the ...

What is 408 B )( 2 disclosure health plans? ›

ERISA Section 408(b)(2)(B) requires brokers and consultants expecting $1,000 or more in direct and indirect compensation for services provided to group health plans to make detailed disclosures to the “responsible plan fiduciary” regarding their services and compensation.

What is 408 B )( 2 of the Employee retirement Income Security Act ERISA? ›

Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (the Act) refers to the payment of reasonable compensation by a plan to a party in interest for services rendered to the plan.

Is a 408b the same as a traditional IRA? ›

408(b) is the section describing an IRA annuity. 408(a) is a non annuity IRA. They are both subject to the usual IRA rules, and rollovers or direct transfers can be done between these types of IRA in the usual manner.

What is the difference between 401k and 408p? ›

Here are some features that distinguish the 408(k) SEP IRA from the 401(k): In general, only employers can contribute to a SEP IRA. Unlike a 401(k), employee contributions are not permitted as part of SEP contribution limits. There are contribution limits for 408(k)s.

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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.

What is the difference between 404a5 and 408 b 2? ›

A common misunderstanding between 408(b)(2) and 404(a)(5) is the nature of the requirements: 408(b)(2) requires the service provider's contract with the plan's fiduciary contain certain, specific terms. It does NOT require that those fees be disclosed to participants, nor does it require annual disclosure.

What is a prohibited transaction exemption? ›

The prohibited transaction exemption (PTE) refers to a ruling by the US Department of Labor (DOL) based on specific facts and circumstances that a transaction is allowable under Employee Retirement Income Security Act (ERISA) regulations.

What is a 408b 2 disclosure? ›

A 408(b)(2) Disclosure is a legally required disclosure produced by a covered plan service provider to the plan sponsor (generally you, the employer). When offering a retirement plan like a 401(k), plan sponsors have a fiduciary duty to the plan's participants.

What is a 408 B 2 fee? ›

Employer Fee Disclosure - 408(b)(2)

By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA. 408(b)(2) is a set of rules about retirement plan fees. Companies that handle retirement plans like 401(k) plans have to explain the fees they charge and services they provide after July 1st 2012.

What is a 401k fee disclosure? ›

Annual fee disclosure notice – Describes information about plan fees and investments. This notice consists of two parts: Participant fee disclosure - Reports certain plan administration information, including the plan and individual-level fees that might be deducted from participant accounts.

What is a 408 B retirement plan? ›

§408(b), Individual Retirement Annuity

For purposes of this section, the term “individual retirement annuity” means an annuity contract, or an endowment contract (as determined under regulations prescribed by the Secretary), issued by an insurance company which meets the following requirements: 408(b)(1)

What is Section 408b of ERISA? ›

Specifically, section 408(b)(2) provides relief from ERISA's prohibited transaction rules for service contracts or arrangements between a plan and a party in interest if the contract or arrangement is reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable ...

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Section 406(b)(2) provides that a fiduciary with respect to a plan shall not in his or her individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or ...

What is a 408 B disclosure statement? ›

A 408(b)(2) fee disclosure should enable an employer to review the providers serving a plan and understand who is being paid out of the 401(k) plan fees, how much, and under what circumstances.

What are the requirements for hedge accounting disclosures? ›

Hedge accounting disclosures shall provide information about:
  • an entity's risk management strategy and how it is applied to manage risk;
  • how the entity's hedging activities may affect the amount, timing and uncertainty of its future cash flows; and.

What are the 84 24 disclosure requirements? ›

If there is an ongoing relationship, an independent agent will need to use Prohibited Transaction Exemption (“PTE”) 84-24 to avoid having the sale and your commission treated as a prohibited transaction. This requirement includes both new sales and additional purchase payments to existing contracts.


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