By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
408(b)(2) is a set of rules about retirement plan fees. Companies that handle retirement plans like 401(k) plans have to explain the fees they charge and services they provide after July 1st 2012. Employers offering retirement plans will be better able to understand how much the plan costs and whether or not they're getting a good deal.
Before 408(b)(2), it was difficult for employers to identify costs inside of retirement plans. While some costs are easy to identify (when billed with an invoice, for example), others are not -- particularly when they are baked into investment fees.
When 401(k) plan services are offered as part of a package deal (sometimes called bundled plans), employers can enjoy one-stop-shopping and minimize the number of service providers they have to work with. Bundled plans are not necessarily bad, but they have made it more difficult to understand retirement plan costs.
For example, investment expenses may be the only obvious fees in a plan. However, a variety of service providers are still getting paid to work with the plan, including:
These providers may swap funds behind the scenes (some mutual fund companies make payments to third party administrators, for example), or different departments of a single firm may perform all of the duties above -- using revenue from one area to offset fees in another. This makes it difficult to compare options, so employers have been unable to tell if they're really getting a good deal. In some cases, employers and employees are not aware that they pay anything at all -- they think the 401(k) plan is "free."
Unfortunately, employers are often fiduciaries -- responsible for acting in the best interests of the employees who participate in the plan -- and they have to make sure they're not paying too much. They don't have to use the cheapest options available, but they should be sure that fees paid by plan participants are "reasonable."
Fee disclosure under 408(b)(2) makes this easier. Service providers need to:
The Employee Benefits Security Administration (EBSA), part of the Department of Labor (DOL), provides guidance on how and when service providers should comply with ERISA Section 408(b)(2).
What about employees? DOL has also issued participant fee disclosure rules so everybody will know how much they pay.
Justin Pritchard is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Justin Pritchard is no way related to Cetera Advisor Networks LLC or its registered representatives.