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)?

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