Fall is in the air and budgets are in full swing. Human Resources departments are reviewing open enrollment items and retirement plan committees are thinking about 408(b)2 disclosures again. This is the third year for these notices, and I have seen committees and plan sponsors look at them with some disdain, as they see the apathy most participants have toward them.
Committees and plan sponsors have a fiduciary duty to make sure all plan expenses are fair and reasonable. The problem most groups have is how to determine what is fair and reasonable. If the disclosures lack enough detail to enable the committee to determine if the fees paid by the plan are reasonable for the services the plan provides, the committee should request additional information from the vendors. This gets to the underlying question as to how to determine what is adequate when reviewing 408(b)2 disclosures. While these requirements can be confusing and hard to understand, committees can base part of their decisions on some fundamental items.
First, committees should identify the various service providers for the plan and the services they provide. The committee should then review the disclosures from each vendor and review if they are serving as a fiduciary to the plan or not. Part of this step is to review a description of the services they provide to the plan. This is an important step for committees and a good process for committees to do annually.
By periodically reviewing the service agreement, committees can discover new services or features offered by the vendor that can add value to either the plan sponsor or the participant. Vendors will continue to add new services or educational items as the market drives new things, and this gives committees the opportunity to determine what additional services they may want to include and at costs as they continue to look for ways to drive better participant outcomes.
The next step is to determine how each vendor is paid and by whom. While this may seem easy, this is often hard for committees to quantify and understand, as they are usually dealing with vendors who are collecting either direct or indirect compensation. It is not only important to know how much is paid but also the manner in which it is paid. With the increase in usage of accounts such as ERISA buckets, committees will have to be diligent in their review as they gain a better understanding of their plan expenses.
Another important step for committees to take is to have a process around reviewing or benchmarking their plan on an ongoing basis. I believe committees should annually look at their fees and benchmark the plan against industry averages or same-size peers. In addition, committees and their advisers should take an active role in benchmarking their plan in the market with other vendors. This gives the committee another way to determine if their expenses are fair and reasonable.
Ludwig, ChFC, AIF, CRPS, is an LPL Financial adviser with LHD Retirement. He can be reached at
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
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