• Vitaly Novok

Complying With the 408(b)(2) Regulation



When it comes to managing and administrating a 401(k) plan, there are some duties that a plan sponsor can delegate. For example, a 401(k) plan sponsor that has neither the resources nor skills to mange the plans’ assets can delegate these functions to a third-party who has the time, resources, and expertise to perform such work. This decision would be prudent and in the best interest of participants. Another example of delegation would be hiring a Third Party Administrator (TPA) to perform tasks related to the administration of the plan. TPAs can bring a lot of value by making sure the plan is compliant with numerous regulatory requirements.

However, some duties can never be delegated. Plan sponsors have a fiduciary obligation to select and monitor service providers they hire. They must be sure that their service providers are acting prudently and solely in the best interest of the plan’s participants and beneficiaries. Moreover, plan sponsors must be sure that the compensation they pay is reasonable. That’s where things get complicated.

The problem with compensation and fees is that they are very complex and not transparent. Sometimes they can be so deeply hidden that even third-party professional can have a hard time discovering them. Nevertheless, plan sponsors are still held liable for being sure that neither they nor plan participants are being charged excessive fees.

Key Provisions of the 408(b)(2) Regulation

Understanding the complexity of this issue, the DOL released a final regulation relating to service provider disclosures in 2012. The regulation requires covered service providers (CSP) to provide plan fiduciaries with all of the services performed for the plan, and all direct and indirect compensation received by a CSP, its affiliates, or subcontractors. While good in theory, in practice the 408(b)(2) regulation turned out to be far from perfect.

In accordance with the 408(b)(2) regulation, a 401(k) plan sponsor must be confident that it received all disclosures from CSPs and that they are complete. That means you need to know all “covered” service providers, the services they provided to the plan, and be sure all of the disclosure are adequate. Needless to say, this is hard, if not impossible to do.

Another problem is that there is no way to be sure that a CSP included all of the compensation they received for the services provided to the plan on the disclosure. It’s common for a CSP, such as an adviser, not to include compensation he or she receives from plan investments. This type of indirect compensation can be so deeply hidden in the expense ratio that you didn’t even have a clue about it being there. Yet, the regulation requires you to know that information. If you missed anything, you committed a prohibited transaction with all that it implies.

Mitigating Fiduciary Liability

So how can you protect yourself and avoid an alleged breach of fiduciary duty when reviewing service providers and the fees they charge? The following list of actions can help you minimize the risk and enhance the positive intentions of the 408(b)(2) regulation.

  1. Make sure the information received is adequate and complete. If you think something is missing, make a written request to a CSP to provide this information.

  2. Thoroughly evaluate the fee disclosure and make sure that the fees being charged by your CSP are comparable to other service providers. If needed, make a request for quotation. An even better approach is to benchmark your plan and see what other, similar (in terms of assets and participants) plan sponsors are paying.

  3. Document all actions you have taken.

  4. If still in doubt, ask for compliance help. There are professionals that will review the actions you’ve taken and provide you with an independent report.

  5. Hire service providers that are willing to charge only direct fees. Direct fees are transparent and straightforward.

  6. Have a fee policy. A fee policy has the same purpose as an investment policy statement for monitoring investments and investment managers. It proves that there is a prudent process for monitoring service providers and evaluating the fees they charge.


The DOL 408(b)(2) regulation is a huge step towards helping plan sponsors understand what services they are actually getting, and what fees they are being charged. However, it is not a panacea. Plan fiduciaries still have a legal duty to make sure the information they receive from CSPs is adequate and complete. Failure to do so can result in a breach of fiduciary duty. By following the above 6-step process, we believe that your fiduciary risk will be minimized, and overall plan finances will only get better.

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