Since 2012, retirement plan service providers have been required to provide compensation disclosures to plan sponsors every year under Section 408(b)(2) of the Employee Retirement Income Security Act (ERISA). Once plan sponsors have received the disclosures, they are in turn required to issue 404a-5 fee disclosures to plan participants.
Under ERISA’s prohibited transaction rules, a service agreement must be reasonable for plan assets to be used to pay provider fees. Under 408(b)(2) rules, service providers must provide the required disclosures for their service agreement to be deemed reasonable. In fact, unless the service provider provides its 408(b)(2) disclosures in a way that meets all the appropriate content and delivery requirements, the usage of any plan assets to pay a provider’s fees will trigger a prohibited transaction.
If a prohibited transaction occurs, a service provider will be subject to civil penalties as well as excise taxes under ERISA. In addition, the plan sponsor may face personal liability as the plan fiduciary for continuing to engage the service provider. Therefore, a plan sponsor should never authorize service fees if a service provider has failed to fulfill its disclosure obligations under 408(b)(2).
Not all service providers are subject to 408(b)(2) disclosure rules. Those that are covered typically include:
- Fiduciary investment advisors and managers
- Broker/dealers and recordkeeping platforms
- Providers of other services that also get revenue sharing payments or other types of indirect compensation other than from the plan sponsor or plan
