The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Colorado is representative of a question we commonly receive on the service provider disclosures required under ERISA §408(b)(2). The advisor asked:
“One of my clients sponsors a self-directed 401(k) plan for his employees. The record keeper for the plan told the plan sponsor that it does not have to provide a 408(b)(2) disclosure because it does not receive indirect compensation. Is that true?”
Highlights of Discussion
• No, that is not true. If a plan record keeper which permits participants or beneficiaries to direct the investment of their accounts into one or more designated investment alternatives that it makes available in connection with such record keeping services (e.g., through a platform) receives $1,000 or more of either direct or indirect compensation, the service provider must disclose to plan fiduciaries the specific services it provides along with the amount of compensation it receives. (Treas. Reg. §2550.408b-2(c)(1)(iii)(B)) The final disclosure regulations refer to this type of record keeper as a “Category 2” covered service provider.
• The disclosure is distinct from the record keeping contract itself because generally, the service provider must provide the disclosure in advance of the date the contract or arrangement is entered into, extended or renewed (Treas. Reg. §2550.408b-2(c)(1)(v)(A)) in order to provide the plan sponsor time to evaluate whether the contract is reasonable.
• If a plan service provider that is subject to or “covered” by the 408(b)(2) regulations fails to comply, it faces a prohibited transaction and a potential 15% penalty tax.
Conclusion
Though the final 408(b)(2) regulations have been in effect since 2012, plan service providers of all shapes and sizes are still struggling to understand the nuances of when they are required to provide 408(b)(2) disclosures. Financial advisors who understand the 408(b)(2) disclosure requirements, or who can access ERISA experts who do, can keep a watchful eye out for their plan sponsor clients, and serve as a valuable resource to their record keeper colleagues.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
