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Plan Sponsors Prepare for Department of Labor 408(b)(2)
by Steven D. Brett, President of Marcum Financial Services LLC

In February 2012, the Department of Labor (DOL) issued a final rule regarding the long-awaited 408(b)(2) regulation. The 408(b)(2) regulation will require certain covered service providers (CSPs) to employer sponsored retirement plans to disclose certain information to the plans' responsible plan fiduciaries (RPFs).

This announcement extended to July 1, 2012 the effective date by which service providers must provide a disclosure notice to new and existing plan sponsor clients. With this effective date in place, the clock has begun ticking on 404a-5 (effective August 30, 2012) which will require plan sponsors to disclose plan facts and fees to eligible employees, participants whether or not actively deferring, and beneficiaries who have the ability to direct the investment of their account.

This information is designed to assist the RPFs in assessing reasonableness of contracts or arrangements, including the reasonableness of the service providers' direct and indirect compensation and any potential conflicts of interest that may affect the service providers' performance.

Disclosure under 408(b)(2) includes the following:

  • The final 408(b)(2) regulation requires "covered service providers" (CSPs) to disclose their services, status, and compensation to responsible plan fiduciaries. The disclosure must be made in writing, and it must be made reasonably in advance of the effective date of the arrangement.
  • Plans covered by 408(b)(2):
    • ERISA-covered defined benefit and defined contribution plans
  • Plans not covered by 408(b)(2):
    • Simplified employee pension plans (SEPs)
    • SIMPLE retirement accounts
    • Individual Retirement Accounts (IRAs)
    • Certain annuity or custodial 403(b) plans (generally non ERISA 403(b) plans)
  • 408(b)(2) requires CSPs to provide responsible fiduciaries with information to assess reasonableness of total compensation, both direct and indirect, received by the service provider, its affiliates, and/or subcontractors
  • Identify potential conflicts of interest
  • Satisfy ERISA reporting and disclosure requirements

Covered Service Providers include:

  • Service providers who expect to receive at least $1,000 in direct or indirect compensation over the life of the arrangement
  • ERISA fiduciary service providers to a covered plan or to a plan investment
  • Investment advisors registered under federal or state law
  • Record keepers or brokers who make designated investment options available to the plan
  • Providers of one or more of the following services who also receive "indirect compensation" in connection with providing the following services: accounting, actuarial, consulting, insurance, legal, securities brokerage, valuation services, auditing, banking, custodial, investing advisory, recordkeeping, and third-party administrators

Covered Service Providers are required to disclose in writing:

  • A description of services and the fees associated with each service described
  • Status
  • Compensation (both direct and indirect)
    • Direct compensation is compensation received directly from the plan
    • Indirect compensation which is generally compensation received from any other source other than the plan sponsor

CSP's who disclose indirect compensation must also disclose the source, the arrangement with the payer of the indirect compensation and the services to which the indirect compensation relates.

The Timing of Disclosure

With regard to the timing of disclosures, the DOL reminds plans fiduciaries that when selecting and monitoring service providers, they must act prudently and solely in the interest of plan participants and beneficiaries. The DOL also states that responsible plan fiduciaries are obligated to ensure that the arrangements they enter into with service providers are "reasonable" and that only "reasonable" compensation is paid for the services provided. Crucial to that process is not only provision of the disclosure, but allowing the responsible plan fiduciary the time necessary to make the appropriate comparisons reasonably in advance of signing an agreement with a service provider:

  • Disclosure to current clients must be made on or before July 1, 2012
  • For arrangements with new clients, disclosure must be made reasonably in advance of the arrangement
  • 408(b)(2) contains no definition for "reasonably in advance." Other advance notices required by the Internal Revenue Service (IRS) and DOL are generally to be provided 30 days in advance.
  • For changes affecting arrangements with existing clients, disclosure must be provided to the responsible fiduciary "as soon as practicable," but not later than 60 days in advance of the change
  • In the case of errors or omissions in the disclosure, the CSP must provide the correct disclosure no later than 30 days from the date the CSP discovered the error or omission

With July 1st here, it is important that you contact an advisor who not only specializes in 401k plans, but whose service model includes education of both plan sponsors and plan participants. The communication of the knowledge and education of the changes made to the regulations governing qualified and nonqualified retirement plans is important to assist in making certain that you and your plan remains in compliance.

We encourage you not to ignore these changes but to take the necessary action as soon as possible. If you would like to learn more about 408(b)(2) or the upcoming 404a-5, please call your Marcum Group Team Member.


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