Understanding Retirement Plan Vendor Disclosure Requirements Under ERISA

Understanding Retirement Plan Vendor Disclosure Requirements Under ERISA

When managing an employer-sponsored retirement plan, one of the most crucial fiduciary responsibilities is ensuring that all fees paid from plan assets are reasonable and that the services provided are necessary. To help plan sponsors make informed decisions, ERISA mandates that certain retirement plan vendors disclose detailed information about their compensation and services. But who exactly falls under this requirement, and what must they disclose?

Who Must Provide Compensation & Services Disclosures?

ERISA Section 408(b)(2) specifically targets retirement plan service providers who are compensated $1,000 or more, directly or indirectly, for the services they offer to a plan [1] [3]. The key players who must provide these disclosures typically include:

1. Recordkeepers: These vendors handle the day-to-day administration of the plan, including maintaining participant records, processing transactions, and ensuring compliance with regulatory requirements [1] [5].
2. Investment Advisors: Advisors who provide investment advice to plan fiduciaries or participants are obligated to disclose how they are compensated, whether through a flat fee, commission, or other forms of compensation [4].
3. Third-Party Administrators (TPAs): TPAs are responsible for managing various aspects of the plan’s administration, from compliance testing to preparing plan documents. Given their integral role, they must also be transparent about their fees [1] [3].
4. Brokers and Consultants: These professionals often facilitate the sale of plan investments or provide consulting services to the plan sponsor. Their compensation structures, which may include commissions, revenue sharing, or other forms of indirect compensation, must be disclosed [3] [5].
5. Custodians: Entities responsible for holding plan assets in trust are also required to provide detailed disclosures if they receive any compensation for their services [1].

What Must Be Disclosed?

The disclosures required under ERISA Section 408(b)(2) are designed to ensure that plan sponsors can evaluate the totality of the service provider's compensation and the services offered [3]. These disclosures generally include:

• Description of Services: A detailed explanation of all services the vendor provides to the plan, enabling the sponsor to assess the necessity and value of these services [1] [5].
• Direct Compensation: This refers to payments made directly from the plan to the service provider. It includes flat fees, per-participant fees, or other payments tied directly to the services provided [4].
• Indirect Compensation: Any payments that are not made directly by the plan but that the provider receives from other sources, such as revenue sharing from mutual funds or commissions from third parties, must be disclosed [3].
• Conflicts of Interest: Vendors must disclose any potential conflicts of interest, such as relationships with investment firms whose products they recommend. This helps plan sponsors understand any biases that may influence the vendor's advice or services [1].
• Termination Fees: Any fees that may be charged if the plan sponsor terminates the vendor's services must also be disclosed. This is crucial for understanding the long-term cost implications of engaging with a particular service provider [3].

Why These Disclosures Matter

These disclosures are not just a bureaucratic requirement—they are essential tools that empower plan sponsors to fulfill their fiduciary duties. By reviewing the information provided, plan sponsors can determine whether the fees charged are reasonable in relation to the services rendered, and whether any potential conflicts of interest might affect the vendor’s objectivity [5]. Failing to adequately assess these disclosures could lead to costly litigation or penalties under ERISA, not to mention the potential financial impact on the plan participants [3].

"A fiduciary shall discharge that person's duties with respect to the plan solely in the interests of the participants and beneficiaries; for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan"  [3].

In summary, retirement plan vendors providing significant services to ERISA-covered plans must disclose detailed information about their compensation and services. As a plan sponsor, it's your responsibility to thoroughly review these disclosures to ensure you're making prudent decisions in the best interest of your plan participants.

For support in managing your fiduciary responsibilities, visit Fiduciary In A Box.  

© 2024 Fiduciary In A Box, Inc. All rights reserved

References

[1] U.S. Department of Labor, Employee Benefits Security Administration. (n.d.). Final regulation service provider disclosures under 408(b)(2)  [PDF]. Retrieved from https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/final-regulation-service-provider-disclosures-under-408b2.pdf 

[3] ForUsAll. (2023, October 16). 401(k) fee disclosures: A comprehensive guide to 408(b)(2) fee disclosures. Retrieved from https://www.forusall.com/401k-blog/401k-fee-disclosures 

[4] Cornell Law School. (n.d.). 29 CFR § 2550.408b-2 - General statutory exemption for services or ... Retrieved from https://www.law.cornell.edu/cfr/text/29/2550.408b-2 

[5] John Hancock Retirement. (2023, December 18). ERISA 408(b)(2) and group health plans. Retrieved from https://retirement.johnhancock.com/us/en/viewpoints/practice-management/erisa-408-b--2--fee-disclosures-not-just-for-your-clients--retir