New 401k Disclosure Requirements

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In a little less than two months from now the new 408(b)-2 regulations take effect and retirement plan sponsors and plan committees will need to begin evaluating information from plan service providers.  Despite the inherent difficulties of a plan sponsors, usually the business owner or high level executive, evaluating plan services, compensation and arrangements, there are considerable opportunities coming for those businesses that understand who is a fiduciary and the levels of protection provided by investment advisors who willingly serve as fiduciaries.

Current 408(b)-2 Law

There are three basic requirements that the Department of Labor (DOL) enforces from 408(b)-2:

  1. Services to the plan must be necessary.
  2. Contracts or arrangements under which services are provided must be reasonable.
  3. Compensation from service providers must be reasonable.

According to the DOL, every business owner or sponsor of a qualified retirement plan needs to have a process in place whereby all aspects of the plan are considered including contractual agreements with service providers and compensation.  In fact, it is a breach of fiduciary duty as well as a prohibited transaction to pay more to your service providers than what is reasonable.  Plan sponsors also have a duty to know about how service providers are being paid whether by direct compensation or indirect compensation such as 12b-1s or other revenue sharing arrangements and whether or not those arrangements present a conflict of interest.  The principle of monitoring service providers has been in place for years and is not changing during the upcoming law change.

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Upcoming Legislation

Essentially, this law seeks to provide business owners and sponsors the information needed to evaluate information concerning their retirement plans.  Changes in ERISA 408(b)-2 require service providers to disclose to the plan sponsor: services rendered, fiduciary status and how compensation is paid to providers.

-Services Rendered

Service providers must disclose to the plan sponsor a list of services rendered.  The idea here is that the business owner needs to be able to determine if services provided are worth compensation paid.

-Fiduciary Status

The second disclosure requires retirement plan service providers to disclose to the plan sponsor or committee whether or not the provider is serving as a fiduciary.  For example, if your advisor makes any recommendations as to plan investments or retains any discretion over plan assets, your provider must disclose their fiduciary status.  The idea here is that plan sponsors need to know anyone listed as a fiduciary on the plan.  The same principle applies in regards to compensation.  If a business owner is paying costly fees for an advisor and the advisor does not accept fiduciary status for the plan, the business owner isn’t receiving as much value compared to a service provider that accepts liability for the investments in the plan not to mention the possibility of entering into a prohibited transaction if the provider is in fact performing fiduciary duties.


The last disclosure to be made to the plan sponsor or committee is compensation.  Compensation here is ambiguous. Anything of value including trips, gifts or money can be considered compensation.  All compensation that is received for services including direct compensation such as fees collected upfront and indirect compensation such as commissions or payments to a third party are to be disclosed.  This is a simplification as the law goes into great detail the various forms of compensation.  But the principle is still the same here as business owners and plan sponsors need the proper information in fulfilling their fiduciary duties to the plan and its participants.  In my experience I am still shocked by the business owners who fail to know the number of people receiving indirect payments or commissions from plan assets.



Business owners have a hard enough time running and managing a business without having to spend more time on regulations and updated retirement plan laws.  Furthermore, terms such as, “prohibited transaction” are enough to cause a business owner to consider terminating the plan all together.  But there is hope and opportunity here for the plan sponsor.  For the first time, plan sponsors are close to having the information necessary to adequately fulfill their fiduciary duty.  I’ve written before about a vast majority of participants and plan sponsors alike having no idea how much they pay for services.  Further education as to how much and to who compensation is paid from the plan is also informative to business owners who seek to get the best value for their money.  Going forward, there a few things plan sponsors can do in complying with the changes to 408(b)-2:

  • Have a plan in place where every aspect of your retirement plan is routinely considered.  This was true before the law change and will be even more important afterwards.
  • Document everything.  If you are researching quarterly mutual fund performance, print it, date it and sign it.  These are pieces of information the DOL will want to see in an audit.
  • Keep up to date copies of your plan agreements.  This seems elementary but I would guess one out of every five small business owners I talk to have no idea where their documents are.
  • Have services for your retirement plan quoted by an outside source at least once every three years.  Having an idea of what others in the market would charge for services shows that you are considering cost and the value you are receiving for services.  You might also find like other companies that your plan is a lemon when you see what services are available for the same amount or less.
  • Now more than ever consider hiring a competent, fee-only advisor who is willing to serve as the 3(38) fiduciary to the assets in your plan.  One of the reasons the law is being redefined is there are many advisors who are unwilling to state their fiduciary status. A fiduciary is someone who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty.  [sws_highlight hlcolor=”9e0b0f”] If any advisor is unwilling to serve as your fiduciary, this should be a red flag to you. [/sws_highlight]


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