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408(b)(2.0) – The Next Steps for Plan Advisors

By Jason C. Roberts and Kimberly Shaw Elliott, Roberts Elliott, LLP

Finally, after months — potentially years — of preparation, diligent providers of services to retirement plans have completed their disclosures in satisfaction of ERISA Section 408(b)(2) and they lie in the hands (or at least the inboxes) of the responsible plan fiduciaries. The final deadline, July 1, has passed. While that milestone may merit a collective sigh of relief, the work is just beginning for the service providers that delivered the disclosures and the plan sponsors that received them. It is critical that both develop sound protocols to maintain compliance and to be prepared for what lies ahead.

Next Actions for Attentive Service Providers

1. Be prepared for questions.

The purpose of 408(b)(2) was to arm plan sponsors with the information they need to assess the reasonableness of the arrangements between the plans and those who provide services to their plans. The disclosures are also the first delivery of information required to complete the plans’ own disclosure obligations, such as to complete the Forms 5500 and to make the ERISA regulation 404a-5 disclosures to plan participants. Plan sponsors will likely have questions as they evaluate the extensive information received. Service providers are wise to welcome any opportunity to engage with their clients and to explain what services they provide and the resulting value they bring.

2. Benchmark your fees and the expenses of the investments you present.

The next step for plan sponsors is to deliver, by August 30, the disclosures to participants in participant-directed plans, as required by ERISA regulation 404a-5. Included among those disclosures will be information regarding the fees service providers receive and all the expenses charged against the participant’s investments. Service providers can be prepared for this new scrutiny by benchmarking these items in advance. ERISA does not require that the service provider or the funds it offers or recommends be the cheapest. Armed with new service schedules, as recommended next, superior providers should be able to illustrate the value they bring, relative to the charges assessed by peers.

3. Update your contracts to include compliant and competitive descriptions of the services you provide.

Having clear agreements with plan sponsors can serve a marketing function so that plan sponsors recognize the value of the services of the firm’s representatives by seeing a clear description of what duties they perform. When presented in a menu based, check-the-box format, plan sponsors can select exactly those services that meet their plan’s needs. It also permits an apples-to-apples comparison to the services of other providers as the majority of the most widely utilized benchmarking tools incorporate a check-the-box approach.

There are a number of formal requirements that must be complied with under ERISA 408(b)(2). If the disclosures are deficient, the arrangement could result in a prohibited transaction.

Unfortunately, however, many ERISA attorneys tend to focus on servicing employers, and securities lawyers typically shy away from giving advice on ERISA. It is recommended that plan advisors seek out law firms that are experienced with both securities- and investment-related matters to guide them in the development of competitive and compliant plan-level disclosures.

Equally important as describing the services to be performed is that the contracts can also describe what services, and corresponding duties, are not assumed. This reduces the risk of litigation arising from claimants alleging that the advisor has responsibility to take actions that are beyond the scope of the service agreement. For example, we have seen many complaints that a broker dealer should have noticed when plan contributions were not made on time or were for the incorrect amount. These are plan administration functions that can be disclaimed in a contract.

4. Adopt WSPs specific to ERISA services and review your activities for compliance traps.

Service providers that are subject to the Investment Advisers Act of 1940 (the “Act”) are required to “adopt and implement written policies and procedures reasonably designed to prevent violations of the Act and to review the adequacy of those policies at least annually (Rule 206(4)-7: Compliance Procedures and Practices). Similarly, FINRA requires broker-dealers to “establish, maintain, review, test and modify its compliance policies and written supervisory procedures in light of the nature of its businesses and the laws and rules that are applicable thereto... ” (FINRA Rule 3130: Annual Certification of Compliance and Supervisory Processes). Significant penalties can be imposed for failure to meet these requirements.

Providing services to ERISA plans imposes a number of unique considerations that should be addressed in ERISA-specific written supervisory procedures. While some activities will resemble services provided to individual or “retail” accounts (e.g., rendering investment advice), many services are specific to the retirement plans themselves (i.e., fiduciary governance, fee benchmarking, participant education, etc.).

Once developed, service providers should evaluate the policies and procedures of their supervising firms to ensure they account for ERISA-covered business and comply with these rules. There are many traps for the unwary.

This includes the books and records requirements. Part of the challenge to make the required disclosures may have been to identify and locate the account information for the covered plans that are serviced. In many cases, no service agreements were in place, accounts may have been held directly with the investment providers, direct data feeds may have been lacking and the broker dealer maintained no records about the retirement plan clients. With new service agreements in hand, advisors may reach out to clients and collect new information that not only fills the gaps in the advisors’ books and records but prepares the files for the future.

For example, broker dealers are currently grappling with the new suitability standards and the books and records that must be maintained to support them. Does your broker dealer have retirement plan data (on the plan, not individual level) on such measures as objectives for diversification, liquidity, time horizon and risk? If not, retirement-specific account information forms can be delivered with and incorporated into your new retirement services agreements.

Investment advisers may not ignore these same rules. While FINRA rules do not currently apply to investment advisers, exact or similar rules may be in place, should FINRA become the regulator of advisers. The 408(b)(2) scramble for data taught us that it is far better to have compliant data in your files, with a certification from the client that it is accurate, than to try to assemble that same data later. Advisers may use updated, retirement-specific brokerage account forms as a model to collect what information may be mandated in the advisers’ future.

Have you been providing investment advice? The most problematic issue a broker dealer may face is finding that it has actually been providing recommendations to brokerage clients in a manner that could be considered investment advice. If so, this has two very dangerous implications. First, the recommendations may rise to the level of investment advice that requires registration under the Investment Advisers Act. Secondly, the recommendations may be considered investment advice under ERISA and the broker dealer may have inadvertently become an ERISA fiduciary. If so, and it receives traditional brokerage compensation, the receipt of this non-level compensation may give rise to an ERISA prohibited transaction.

The consequences of either can be quite serious. We recommend gaining the assistance of skilled legal counsel as soon as possible to guide you through these perils.

Plan sponsors have a duty to seek the services of providers who can support sound and compliant practices.

5. Educate your plan sponsor clients about their own fiduciary duties to disclose.

ERISA Section 406(a)(1)(C) forbids a plan fiduciary from permitting a plan to enter into any contract for good or services. An exemption is available, under the terms of ERISA Section 408(b)(2), if both the arrangement and the compensation paid are reasonable. The new disclosure rules are designed to ensure that the plan fiduciary has the information required to make that determination of reasonableness.

A service provider can bring value to the plan sponsor by helping it through this process. Since this educational service can be provided without also rendering investment advice, the provider can help the sponsor understand her/her own fiduciary duties without the service provider also becoming a fiduciary. Evaluating reasonableness may include a process to:


• Develop and/or utilize methods for evaluating and benchmarking the disclosed fees vis-à-vis the services disclosed;


• File documentation relied upon and evidence of process for evaluation; and


• Coordinate delivery of data to Form 5500 preparer.


Information contained in the 408(b)(2) disclosures is just the starting point for making the required disclosures to plan participants, as required by DOL regulation 4041-5 and commencing with the first annual report. Providers can help plan sponsors establish procedures to:

• Coordinate with vendors to deliver required disclosures (using information contained in 408(b)(2) disclosures);

• Conduct fee-specific employee education;

• Prepare for situations in which participant inquiries will arise;

• Identify relevant documents required to be produced upon request;

• Implement procedures for delivery of requested information and escalation of participant inquiries;

• Assist in gathering materials for response;

• Deliver requested information and document receipt;

• Document resolution or escalate per procedures until resolved; and

• Prepare a record of any unresolved participant inquiries, forward to the designated person(s), and obtain acknowledgement of receipt.

6. Educate the largely uninformed plan participants about fees and costs.

Based upon a study conducted by AARP, seventy percent of plan participants believe that their 401(k) plans are free (AARP, 401(k) Participants’ Awareness and Understanding of Fees (2011)). Of the small number (23 percent) that understands that they do pay expenses for their plan investments, a full 62 percent report not knowing what those expenses are. Despite these alarming statistics, a whopping 81 percent report believing that the fees charged for their 401(k)s are important in decisions about their 401(k) investments.

Reaching the uninformed participants and correcting misunderstandings is a tremendous opportunity for advisors. Properly informed participants can make sound decisions about the investing opportunity presented by their employers, assess their own retirement readiness and address any savings gap. This presents a clear path to more assets under care or management and greater client satisfaction.

Grasping the Opportunity to Engage Aligns the Service Provider with the Interests of the Plan Sponsor

This new regulation should not be viewed as a burden. By following these simple steps you have the opportunity to engage with your plan sponsor clients and to align their interests with your own, as summarized below.

Service Providers

• Be prepared for questions.

• Benchmark your fees and the expenses of the investments you present.

• Update your contracts to include compliant and competitive descriptions of the services you provide.

• Develop ERISA-specific WSPs and review your activities for compliance traps.

• Educate your plan sponsor clients about their own fiduciary duties.

• Educate the largely uninformed plan participants.

• Educate plan participants to see the value of the benefits program you offer.

Plan Sponsors

• Monitor receipt of disclosures and take appropriate action for failures.

• Prepare for 404a-5 disclosures to participants.

• Know specifically what services are available to you and match them to your plan’s needs.

• Seek service providers that conduct sound and compliant practices.

• Create, document and follow a fiduciary process to evaluate reasonableness.

• Educate plan participants to see the value of the benefits program you offer.

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