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ERISA 408(b)(2)
On July 1, 2012, the Department of Labor (DOL) enacted new regulations under ERISA Section 408(b)(2). In accordance with the revised regulations, fees paid by a Covered Plan to a Covered Service Provider must also be “reasonable” to avoid triggering a prohibited transaction. Section 408(b)((2) now defines responsible parties and clarifies the actions they must take in order to earn an exemption from the prohibition against final fee disclosures.
Under the new rules, a Covered Plan is any ERISA-covered qualified retirement plan (401(k), 403(b), profit sharing, defined benefit plans), whether or not the plan is participant-directed. A Responsible Plan Fiduciary (RPF) is any person(s) involved in “operating” a plan (plan entrance, extension, or renewal). Typically, this is the plan sponsor. A Covered Service Provider (CSP) is any service provider requiring direct or indirect fees expected to be more than $1,000 for such services including, for example, investment advisory, actuarial, and recordkeeping.
The burden for complying with the current 408(b)(2) regulation falls to both the CSP and the RPF when the plan meets the definition of a “Covered Plan.”
CSPs are required to provide RPFs with the following written disclosures:
• Members’ fiduciary status, descriptions of all services to be provided, fees to be
charged for services provided, whether direct or indirect.
RPFs are required to:
• Thoroughly review and determine that fees are reasonable and accurate and
take action if fees are not disclosed.
• Report the CSP to the DOL within 30 days if required disclosures are not
received within 90 days of the date the request for disclosures was made.
• Replace CSPs failing to comply with necessary protocols.
Plan sponsors can now make an informed decision as to whether there is an opportunity to reduce the cost of their retirement plan either by negotiating a lower fee with the current provider or switching to another, lower cost provider.
Fortunately, plan sponsors have resources to call on for assessing their options and determining which of the myriad platforms are best suited for the company/plan participants.
One such resource is the Department of Labor, which is charged with protecting the interests of plan fiduciaries and participants. (The DOL website is an excellent resource for both fiduciaries and participants).
Another resource is an independent retirement plan adviser. Those individuals who combine the requisite qualifications with absolute objectivity play a very important role in guiding plan sponsors through the process of selecting the right platform, and in assisting plan fiduciaries in controlling costs, maintaining compliance, and seeking to minimize risk.
Assessing Plan Costs
Performing a quantitative analysis is one component in the process of determining whether your plan meets the “reasonability” standard with regard to costs. In the event you conclude you must lower costs as a result of this analysis, your options can range from simply moving to funds with lower fees (including index funds) to changing platforms. It should be noted that “reasonable” does not always translate to the lowest cost option, nor should it.
There are, however, risks involved in not subjecting your plan to deeper analysis.
In other words, simply deploying a quantitative solution to complying with 408(b)(2) typically may not rise to the definition of “best practice.” More specifically, in addition to the quantitative analysis, you should consider conducting an overall risk or qualitative assessment of your plan.
When the results are viewed in combination, the quantitative and qualitative analysis will measurably enhance the prospect of making the best possible decision for your plan and participants.
And, to develop the basis for these analytics, you should explore the advantages of adopting a systematic, repeatable (ongoing) methodology for monitoring the inevitable changes within the retirement plan industry, and for monitoring and benchmarking both your plan provider’s services and your fund managers’ performance.
Many advisers focus only on the quantitative measures of cost reduction. Treasury Partners views this as “backwards thinking” because, in a vast majority of situations, a core focus on overall risk reduction will most likely lead directly to cost reduction.
The Advisory Role
An adviser can perform an extensive analysis on your plan, and based on that analysis, recommend you negotiate improvements to the plan with your service provider, including negotiating lower fees.
In addition, if you have not taken your plan “to market” in several years, you should do so as a means of assessing the competitive landscape and fulfilling one aspect of your fiduciary responsibilities.
About The Author
Steve Bogner is a director with Treasury Partners, and is responsible for the firm’s retirement planning services. His areas of expertise include control/restricted stock, defined contribution/benefit plans, life insurance/annuities, and estate planning. He is a Certified 401(k) Professional (C(k)P), and holds Series 7, 31, and 63 securities licenses, a Series 65 investment advisor license, and is life and health insurance licensed.
About Treasury Partners
Headquartered in New York City, Treasury Partners is a team of 19 investment, portfolio management, analytical, and administrative professionals. Treasury Partners delivers an array of wealth management, corporate cash management, and retirement planning services.
Treasury Partners is registered with HighTower Securities, LLC, member FINRA, MSRB, and SIPC, and & HighTower Advisors, LLC, a registered investment advisor with the SEC. See http://treasurypartners.com.
About HighTower Advisors
HighTower is a financial services firm offering a platform that blends objective wealth management advice with innovative technology. See http://hightoweradvisors.com.
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.