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

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.

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:

• What plan fees are paid to service providers

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• If those fees are paid directly or indirectly

• What services they (or their affiliates or subcontractors) perform

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)

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“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%.

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.

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• 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.

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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.