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Impact of 408(b)(2) Guide on 403(b) Advisors

This article originally ran on September 23, 2014.

By Kimberly Flett and Jeannine Souders

The Department of Labor (DOL) issued numerous fee disclosure regulations in an effort to make fees more transparent for plan sponsors and hold them accountable as fiduciaries, a role that requires them to act prudently and for the benefit of plan participants and their beneficiaries. For this reason, ERISA outlines mandatory duties of a plan fiduciary, one of which includes paying “reasonable” plan expenses. To assist plan fiduciaries in determining what was considered “reasonable,” the DOL stepped in and introduced vital regulations under 408(b)(2), made final in 2012. It requires service providers of qualified plans, including 403(b) plans, to disclose fees, fiduciary status, the investment’s annual operating expenses (if applicable), all direct and indirect compensation and how it is to be paid, and services to be provided to plan sponsors. (These regulations do not apply to welfare plans.)

The disclosure requirements apply to investment advisors and fiduciaries, defined as “covered service providers” that expect to receive compensation of $1,000 or more for rendering services to a plan. Additionally, individuals who receive indirect compensation such as accountants, consultants, legal and actuarial must be disclosed. 

The disclosures must be in writing and list a description of the services to be provided to the plan, a statement regarding whether the provider is a fiduciary to the plan, and descriptions of all direct compensation, indirect compensation, whether the fees are based on commissions or 12b-1 fees and other types of fees, termination fees, recordkeeping services, and how the fees will be received.

The DOL outlines the following disclosure timelines:

  • any changes to the initial disclosure no later than 60 days of when the covered service provider was informed of the change, and
  • investment changes at least annually.

In addition, ongoing reporting should be met before the fiduciary has to meet its participant level disclosure requirements annually. Failure to comply with the fee disclosure requirements under 408(b)(2) will result in the plan fiduciary and the covered service provider engaging in a prohibited transaction.

Special Reprieve for 403(b) Plans

Exclusion of 403(b) plans prior to 2009.

The DOL lists four reasons in Field Assistance Bulletins 2010-01 and 2009-02 under which accounts in 403(b) plans can be excluded from the requirement if the following conditions are met:

  • the contract or account was issued to a current or former employee before Jan. 1, 2009;
  • the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account for periods before Jan. 1, 2009;
  • all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and
  • the individual owner is fully vested in the contract or account.

Non-ERISA Plans

Non-ERISA 403(b) plans are exempt from the 408(b)(2) requirements. It’s important to distinguish the difference between an ERISA and non-ERISA plan.

A basic definition of ERISA vs. non-ERISA includes the employer’s involvement. In an ERISA plan, an employer chooses the investment options, controls the deposit and timing of employee contributions and may also provide an employer matching contribution. In a non-ERISA plan an employer is not involved except in compliance activities. The employee chooses the investments and controls the deposit and, following determination of eligibility, the withdrawal of funds. Governmental plans are exempt from ERISA coverage, while church plans and related church-organizations plans (in general funded by church contributions and revenues) are exempt from ERISA unless an affirmative election is made to be subject to ERISA.

It’s important for plan sponsors to consult with their plan advisors to ensure they are complying with the important requirement for fee disclosures. A comprehensive team should be established, contract terms reviewed, and compliance monitored on an ongoing basis. Financial Advisors should be prepared to help their client participants understand the fees as they are disclosed —  and also to clearly explain the services provided in exchange for those fees. 

Kimberly Flett, CPA, QKA, QPA, is Director of SS&G, Inc. Retirement Plan Design and Administration. Jeannine Souders, RP, is an Associate at SS&G, Inc. Retirement Plan Design and Administration.