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
To fulfill their fiduciary obligations, plan sponsors need to ensure that service providers subject to 408(b)(2) rules satisfy their disclosure requirements under ERISA. If a service provider fails to meet their reporting requirements under 408(b)(2), the plan sponsor is required to act by sending the service provider a written request for compliance.
Once the request has been sent, the service provider has 90 days in which to respond. If the provider fails to respond in that time, the plan sponsor must report the failure to disclose to the Department of Labor (DOL). Since a disclosure failure may result in a prohibited transaction that must be reported on the plan’s Form 5500 filing, plan sponsors should consult with legal counsel before acting.
The ERISA attorneys at Hall Benefits Law help our clients manage legislative and regulatory changes to employee benefit plans. To get help with your plans today, call 678-439-6236.
Hall Benefits Law, LLC
