FacebookTwitterLinkedInFeed

What are these “408(b)(2)” rules that I keep hearing about?

Posted on Mar 15, 2012 by  in Changes in the Law: What You Should Know, Retirement Plans for Business

This is the first part of a two-part series on the U.S. Department of Labor’s (DOL) new fee disclosure initiatives.  Stay tuned for a second post focusing on the 404(a) participant fee disclosure initiatives.

First off, the 408(b)(2) rules, also known as the service provider disclosure rules, are a key part of the DOL’s recent effort to create more transparency and consistency around the operation and arrangements of private retirement plans.  They will require nearly all companies and individuals providing services to retirement plans (investment advisors, recordkeepers, third-party administrators, etc.) to provide written information about the arrangement including a description of the services and fees to the employer or a plan fiduciary (plan fiduciaries).

Are you ready to enter the world of 408(b)(2)?

These new rules provide regulatory guidance under section 408(b)(2) of ERISA which provides a “prohibited transaction exemption” for contracts and arrangements with service providers that are “reasonable.”  This means that a contract or arrangement with a service provider will be a prohibited transaction unless it is reasonable.  Engaging in a prohibited transaction will cause one or both parties to be subject to excise taxes.  In order for a contract or arrangement to be reasonable and avoid the prohibited transaction, the new rules require most service providers for retirement plans (those that are “covered service providers”) to disclose comprehensive information to plan fiduciaries about their arrangements with the plan including information regarding fees and possible conflicts of interest.  More specifically, the new rules require that service providers describe in writing (1) the services that they intend to provide to the plan, (2) whether the service provider intends to assume a fiduciary role with respect to the plan, and (3) the compensation that the service provider will receive for the provision of services. 

The DOL intends that plan fiduciaries use this information to evaluate the reasonableness of the arrangement and the fees paid to the service provider.  The rule goes into effect beginning on July 1, 2012, so plan fiduciaries should expect to receive the required disclosures on or before that date.  Once they receive these disclosures, employers or plan fiduciaries should use them as a tool to evaluate the various service providers for the plan. 

What are you doing to get ready for 408(b)(2)?

Leave a Reply

Recent Blog Entries
    Fiduciary Focus: Tibble v. Edison International and the U.S. Department of Labor’s Proposed Fiduciary Investment Advice Rules
    Fiduciary, a term that is rarely used in everyday conversation, has been garnering a lot of attention in Washington, D.C. as of late. While fiduciary status has long been an important issue to retirement plan sponsors and service providers, with all three branches of government weighing in on fiduciary issues, now is a good time
    New IRS Guidance on Accepting Rollover Contributions
    Qualified retirement plans can generally accept rollovers that were distributed from other eligible retirement plans such as another 401(k) plan, 403(b) plan, governmental 457(b) plan, or IRA. However, certain distributions such as required minimum distributions, hardship distributions, and distributions from an inherited or Roth IRA cannot be rolled into a qualified plan. Prior to accepting
    Safe Harbor Contributions: Changes to Mid-Year Suspension Rules
    The IRS released new regulations in November of last year that changed the rules for suspending safe harbor contributions during the middle of the plan year.  In general, employers cannot make changes that affect the safe harbor contribution during the plan year; such changes must be made before the beginning of the plan year in
    Reaction to the PBS Frontline show “The Retirement Gamble”
    I dutifully watched the PBS Frontline report “The Retirement Gamble” last night.  I am a regular PBS viewer and I know that Frontline is a reliable source for good information, so it was with some trepidation that I anticipated the airing of this particular episode.  I say this because the advance reports on the show
    Impact of Fee Disclosure: A success, a failure, or too soon to tell?
    Over the last several years, retirement plan sponsors and their service providers have spent a lot of time preparing to comply with the DOL’s participant and service provider disclosure rules that became effective in 2012.  Now that the rules have been effective for the better part of a year, many of us in the retirement