What Spiderman and 408(b)(2) Have in Common By: Gabriel PotterMBA, AIFA® 2012.09.12

The new 408(b)(2) rules make me think of Spiderman.  Specifically, it makes me think of this quote from the movie: “With great power comes great responsibility.”  That seems flippant, so please allow me to explain.

Our consultants have been making the rounds with clients and prospects about the 408(b)(2) disclosure rules.  We have had one-on-one meetings with CFOs, discussions with investment committees, web-based presentations to auditors, and posted white papers on the topic.  I think somewhere along the way, the basic principle for the new rules have been forgotten behind all of the legalese and the specialized language.  Let us condense the rules into a simple truism:  KNOW WHAT YOU ARE PAYING FOR.

At first glance, you might think this rule is simple to understand and easy to adopt, but we continue to be surprised how challenging the rule can be to apply.  For example, some employers can be lulled into contentment with their long-standing relationships with their existing service providers.  They simply may not realize that competitors offer more comprehensive services for their employees because they haven’t known which questions to ask.

Further, the 408(b)(2) rules means the employer should now be provided with a more thorough listing of the fees being charged.  With the new disclosures, employers may be actively reminded the obvious, hard-dollar fees they’ve been paying are only the tip of the iceberg; some employers simply have not realized they’ve been paying a lot more in fees because of revenue sharing arrangements between recordkeepers, investment managers, and affiliated financial consultants.  More pressing, the new 408(b)(2) rules require employers to thoroughly understand what they are paying and to act upon that knowledge for the benefit of their employees.  They’ve been given much greater transparency into the system of fees and thusly, their obligations for acting prudently given the additional knowledge is higher.

In other words, "with great power comes great responsibility".

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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