Ask the Experts May 10, 2022

Frequency of Receiving Provider Fee Disclosures

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“I am a fiduciary of an ERISA 403(b) plan and don’t recall having seen a 408(b)(2) fee disclosure from my recordkeeper of late. Aren’t we supposed to receive these annually?” 

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

The 408(b)(2) disclosures do seem like they should be provided annually, don’t they? But, the way the Department of Labor set up the 408(b)(2) regulation, a “covered service provider,” i.e., a service provider that enters into a contract or arrangement with the covered plan and reasonably expects $1,000 or more in compensation to be received in connection with its services, is only required to provide a “responsible plan fiduciary,” i.e., someone who has the authority to cause the plan to enter into a contract or arrangement with the service provider, with the required disclosures reasonably in advance of the plan entering into or renewing a contract or arrangement. As a result of evergreen and multi-year contracts, it could be years between 408(b)(2) furnishings, unless there is a change in certain specified information that triggers the regulation’s fairly narrow annual updating requirement.   

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The DOL seemed to recognize this perceived shortcoming of the 408(b)(2) regulation when it published a proposed rule for a 408(b)(2) fee disclosure guide in 2014. This proposed regulation not only required covered service providers to provide the 408(b)(2) disclosures in a specific format, but it also introduced a broader annual updating requirement. However, this proposal was never finalized and likely never will be.   

The regulation does require a covered service provider to disclose any changes to the 408(b)(2) disclosures as soon as practicable, but not later than 60 days from the date on which the covered service provider is informed of such change, unless such disclosure is precluded due to extraordinary circumstances beyond the covered service provider’s control, in which case the information must be disclosed as soon as practicable. As a result, the lack of an updated 408(b)(2) disclosure can generally be understood as indicating that the information previously disclosed is still applicable.  

Because the failure to provide the 408(b)(2) disclosures is likely to result in a prohibited transaction under Section 408(b) of ERISA, many covered service providers will go beyond what is required under the regulation and provide annual 408(b)(2) disclosures while others are happy to furnish an updated 408(b)(2) disclosure upon the request of a responsible plan fiduciary.   

The DOL has been asking plan fiduciaries to provide copies of the plan’s 408(b)(2) disclosures for key service providers as part of their plan investigations. So, if you did not retain your most recent 408(b)(2) disclosures, now may be the time to ask your service providers to refresh and resend those notices, in case the DOL ever comes knocking. 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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Administration May 9, 2022

Pension Plan Sponsors Can Tackle Improper Payments

More rigorous approaches may be needed for corporate pension plan sponsors to curtail profligate payments.

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Timely and accurate pension participant data is critical to assist plan sponsors’ efforts to guard against improper payments.

Pension plan sponsors can implement additional steps and processes, including more frequent participant location and address updates, to prevent payments to deceased participants, overpayments to recipients and missed required minimum distributions, according to industry experts.

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“The challenges have been exacerbated by COVID,” says PBI Research Services President John Bikus, a pension plan management provider. “What plan sponsors should be looking at right now are systems or processes [that are] the best demonstrated practices to continuously monitor populations.”

He advises that pension plans should use population location services more often to find missing participants and update beneficiary information and lists of participants. “The way to do that is to have what is called constant population monitoring,” he says. “That means more than once every couple of years.”

Plan sponsors should follow up an initial letter with a certified mailing, Monica Gallagher, partner at October Three Consulting adds. After those two steps, an employer can reasonably identify a participant as lost or missing, and go to a third party for additional assistance.

Depending on the frequency that is chosen, services can be done quarterly to update participants’ personally identifiable information, and providers can perform weekly sweeps for deceased participants and outreach to locate participants and update address information.

PBI Research finds that every year, billions of dollars are paid out to deceased pension participants. Overpayments and missed required minimum distributions also lower the longevity of pensions, can open the door for fraud, and deteriorate the trust of plan participants, according to PBI. Its research finds that overpayments are often only detected via an audit, by a service provider, or are reported by a family member.

Several prominent instances of improper payments have occurred at public plans over the years. The California Public Employees’ Retirement System paid out approximately $42 million to 22,000 dead people. The federal government sent over $1.4 billion in stimulus checks in 2020 to deceased citizens. And, over four years, 11 of Illinois’ 15 major government pension funds made $2.2 million in payments to dead people that they later became aware of and tried to recover.

“If you don’t have updated information on participants, and in some case, the beneficiaries, there are audit implications from the IRS—there are regulatory rules on what you should be doing to find and maintain your participant list,” Bikus says. Significant amounts of improper pension payments are likely to bring heightened regulatory attention from the Department of Labor and the IRS, and possible plan fines, he adds.

“The other reason is just maintaining the life of a pension plan. For example, if you are making payments to deceased people, you’re essentially taking money away from people who are owed it in the future,” Bikus says. 

Additionally, paying to the wrong participants from a pension is zero-sum because there are finite amounts of funds in total, he adds. Drained resources can limit the longevity of the pension.

“People who have worked really hard for years and years and years can’t get the money that’s owed them in retirement if you don’t accurately identify them as a lost participant,” Bikus explains, adding that incorrect payments can also cause problems. “You’re paying money out to people who shouldn’t be getting those payments.”

Bikus adds: “A lot of plan sponsors, especially [because of] COVID, might be resource-constrained, and if you start to get into an audit situation that really is going to drain resources.”

Gallagher explains that defined benefit plan fiduciaries owe a fiduciary duty to inform plan beneficiaries of benefits due as required under the Employee Income Retirement Security Act, and must make payments to eligible participants. The Employee Benefits Security Administration branch of the Department of Labor has for several years made missing plan participants one of its key areas of focus, and has published guidance for plan sponsors to follow to establish processes for finding missing participants.

Gallagher says plan sponsors should account for the most prevalent causes for improper pension payments to avoid this issue.

Beyond missed payments, the most common reason for overpayments is a death, she says. Additional causes are if the participant chose to receive the benefits by a period-only payout option—monthly annuities payments for a guaranteed period of time such as 5, 10, 15, or 20 years—or a level income option that allows a participant to ‘level’ their income from the pension plan and Social Security benefits.

“In other words, the pension plan pays a certain benefit amount before Social Security benefits commence and a lower pension plan benefit amount after Social Security benefits commence,” she explains. “The overpayment occurs when the larger pension benefit amount is not reduced at the appropriate date (i.e., there is an end date for the pre-Social Security period.)”

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