Update on 408(b)(2) for Retirement Plan Fiduciaries By: Sean PattonAIF® 2013.01.31
Retirement plan sponsors continue to struggle with how to execute their duties under the new Department of Labor (DOL) fee regulations. I recently spoke with a plan sponsor fiduciary and asked him how his organization was handling the new fee disclosures and his response was, “Our service provider is taking care of it for us.” Unfortunately, under the new rules by the DOL, this response constitutes a prohibited transaction under ERISA, for which plan fiduciaries can be held personally liable.

Per the DOL, the service provider disclosures are intended to enable responsible plan fiduciaries to understand the services being provided; assess the reasonableness of the compensation (direct and indirect) paid; and identify any conflicts of interest that may impact the service provider's performance.

Accordingly, responsible plan fiduciaries are obligated to review the disclosures and assess whether fees being charged to the plan are “reasonable.” Most plan sponsors will struggle to determine if the disclosures are adequate and correct. More importantly, the disclosure must tell you about all the compensation the service provider or its affiliates are receiving, directly or indirectly, because of the services provided to your plan. For example, your adviser may be receiving payments from the 401(k) investments or other providers that are “behind the scenes.” How can you know if the disclosures include those payments?

The DOL explained its position in the introduction to the regulation:

“The Department believes that plan fiduciaries need this information, when selecting and monitoring service providers, to satisfy their fiduciary obligations under ERISA section 404(a)(1) to act prudently and solely in the interest of the plan’s participants . . . “

Another major duty is to evaluate the disclosures. As explained by the DOL in the introduction to the regulation:

“ERISA section 404(a) also obligates plan fiduciaries to obtain and carefully consider information necessary to assess the services to be provided to the plan, the reasonableness of the compensation being paid for such services, and potential conflicts of interest that might affect the quality of the provided services.”

 The failure to take this step is a fiduciary breach. To do the proper evaluation of your covered service providers you must engage in a prudent process. That means you need to:

  • Gather the relevant information;
  • Conduct a benchmarking or live “go to market” pricing assessment of your Covered Service Provider’s;
  • Consider the quantity, quality and nature of the services; and
  • Make an informed and reasoned decision about issues such as reasonableness of compensation of the provider, adequacy of services, and conflicts of interest.

While the DOL has yet to provide meaningful practical guidance on what steps responsible plan fiduciaries must take to make a determination of whether such fees are reasonable, it is clear that in 2013, a plan sponsor should be able to provide documented proof of evaluation to satisfy the DOL regulations.


Sean D. Patton

Sean is a Founding Partner of Westminster Consulting, where he currently works with corporate, non-profit and foundation clients.

Sean is involved in the local community through his memberships in Rochester Rotary. He is also the Past-President of the Board of Directors for Camp Haccamo, a Rotary...

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