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By now, most retirement plan sponsors will have received a flurry of disclosures from vendors who provide services to their plans.  Those disclosures, which are required by regulations issued under Section 408(b)(2) of ERISA (and which are thus commonly known as 408(b)(2) Notices), should have been provided by July 1, 2012.  (See our May 2011 and May 2012 articles for background on these disclosures.)  Employers may think that, once received, these disclosures may simply be filed away with other plan documents.  That approach, however, could prove to be a costly mistake.

The Department of Labor expects plan fiduciaries to carefully review the 408(b)(2) Notices they receive and then make informed, affirmative decisions based on them.  These disclosures are intended to give plan fiduciaries sufficient information concerning the services provided by the plan’s vendors – and the fees charged for those services – to determine whether the services are necessary and appropriate for the operation of the plan, and whether the arrangement and fees are reasonable.  If these disclosures are not provided – or if the services are not appropriate or the fees are unreasonable – the relationship will be a “prohibited transaction” under ERISA.  Any plan fiduciary who permits the plan to engage in such an arrangement will have committed a breach of fiduciary duty.


Who Must Provide Section 408(b)(2) Notices?  Not all retirement plan vendors are required to provide 408(b)(2) Notices.  Generally, employers should expect to receive these Notices from those entities that provide “covered services” to any defined benefit or defined contribution plan that is subject to ERISA.  Covered services include:

  • Services provided as a fiduciary to the plan;
  • Recordkeeping and brokerage services; and
  • Other services, if the provider receives “indirect compensation” for those services (i.e., compensation from sources other than the plan or the plan sponsor).

Covered service providers (CSPs) may include investment advisors, record-keepers, brokers, and managers of asset allocation models (i.e., risk-based portfolios), managed accounts providers, and those who manage customized target-date or life-cycle funds.

Next Steps for Plan Fiduciaries. Within the next few weeks, plan fiduciaries should carefully evaluate their vendor arrangements and the 408(b)(2) Notices they have received.  This evaluation process is the obligation of the “responsible plan fidicuiary,” which in most cases will be the administrative committee, investment committee, or trustees of the plan.  Those fiduciaries should:

  • Ensure that the plan receives a 408(b)(2) Notice from each of the plan’s CSPs.
    • If a CSP does not provide a Notice, the plan fiduciary must formally request one and then report the CSP’s failure to the Department of Labor if that failure is not corrected.
  • Review and evaluate the Notices to determine whether they include the required information.
    • This step may require professional assistance.  If a Notice does not provide the necessary information, or if the information is incomplete or difficult to understand, the plan fiduciary should ask for clarification.
  • Identify the services that each CSP provides and make sure that those services are consistent with representations made in the plan’s service agreement with the CSP.
    • Arrangements with CSPs must be documented in formal service agreements.  Plan auditors have been advised by the Department of Labor to request copies of such agreements.
  • Evaluate how, and how much, each provider is paid for its services (both directly and indirectly).
    • Often this information is not readily apparent from the 408(b)(2) Notice.  Professional assistance may be required to interpret the Notice.
  • Decide whether each CSP’s services are necessary and appropriate, and whether the fees the CSP receives for those services are reasonable.
    • It may be necessary to benchmark the services and fees against those offered by comparable providers to determine whether the plan’s arrangement is reasonable.
  • Formally document this evaluation process and the responsible plan fiduciary’s determinations.
    • This documentation will most likely be in the form of meeting minutes.

The 408(b)(2) Notice is intended to force plan fiduciaries to evaluate their service arrangements and more formally comply with ERISA’s prohibited transaction rules.  In many cases, plan fiduciaries will conclude that the services being provided to the plan are appropriate and necessary, and that the fees being charged for those services are reasonable.  In others, however, plan fiduciaries may decide that a service arrangement should be modified or a new vendor hired. In either case, however, simply receiving a 408(b)(2) Notice and the information it provides is only the beginning of the analysis.  In the Department of Labor’s eyes, what plan fiduciaries actually do with this information is much more important.

Gregory L. Ash, Partner

Spencer Fane Britt & Browne LLP