408(b)(2) Fee Disclosure: A Comprehensive Guide for Plan Sponsors

Introduction

Under the Employee Retirement Income Security Act of 1974 (ERISA), plan sponsors are required to provide participants with clear and understandable information about fees and expenses associated with their retirement plans. This disclosure, known as the 408(b)(2) fee disclosure, plays a critical role in ensuring that participants have the necessary knowledge to make informed decisions about their investments.

Importance of 408(b)(2) Fee Disclosure

408(b)(2) fee disclosure is essential for several reasons:

• Transparency: It provides participants with a clear understanding of all fees and expenses related to their plan, enabling them to assess the overall cost of their investments.
• Informed Decision-Making: Participants can use this information to compare plans and investment options, allowing them to choose the ones that best align with their financial goals.
• Accountability: It holds plan sponsors accountable for the fees and expenses they charge participants, fostering trust and confidence in the administration of the plan.

Legal Requirements for 408(b)(2) Fee Disclosure

The Department of Labor (DOL) has established specific requirements for 408(b)(2) fee disclosure, including:

• Timing: Disclosures must be provided at least annually and within 30 days of a participant's request.
• Content: Disclosures must include all fees and expenses associated with the plan, including investment fees, administrative fees, and recordkeeping fees.
• Format: Disclosures must be presented in a clear and concise manner, using easily understandable language.

Components of a 408(b)(2) Fee Disclosure

Typically, a 408(b)(2) fee disclosure will include the following sections:

1. Plan Fees:

This section outlines the fees charged by the plan itself, such as:

• Administrative fees
• Recordkeeping fees
• Trustee fees
• Legal and accounting fees

2. Investment Fees:

This section provides information about the fees associated with each investment option within the plan, including:

• Investment management fees
• Sales charges
• Redemption fees
• Annual fund operating expenses

3. Estimated Total Annual Plan Costs:

This section estimates the total annual cost of the plan, including both plan fees and investment fees. It is expressed as a percentage of the participant's account balance.

4. Explanation of Fee Structure:

This section explains how fees are calculated and assessed, including any tiered fee structures or performance-based fees.

5. Comparison of Fees:

This section may provide a comparison of fees between the plan and similar plans in the industry.

Common Mistakes to Avoid

Plan sponsors should be aware of the following common mistakes when preparing and distributing 408(b)(2) fee disclosures:

• Incomplete Information: Failing to include all relevant fees and expenses.
• Confusing Language: Using jargon or technical terms that participants may not understand.
• Vague Estimates: Providing imprecise estimates of total plan costs.
• Lack of Context: Not explaining how fees compare to industry benchmarks or similar plans.

Effective Strategies for 408(b)(2) Fee Disclosure

Plan sponsors can enhance the effectiveness of their 408(b)(2) fee disclosures by employing the following strategies:

• Use Technology: Utilize online tools or mobile applications to deliver disclosures in a convenient and accessible manner.
• Provide Personalized Disclosures: Tailor disclosures to individual participants based on their account balances and investment choices.
• Offer Educational Materials: Supplement disclosures with educational materials to help participants better understand fees and their impact on their investments.
• Conduct Participant Education Programs: Host workshops or webinars to engage with participants and address their questions.

Step-by-Step Approach to 408(b)(2) Fee Disclosure

1. Gather Data: Collect all relevant fee information from plan providers and investment managers.

2. Prepare Disclosure: Draft a clear and concise disclosure that meets all legal requirements and includes the required components.

3. Review and Approve: Thoroughly review and approve the disclosure with legal counsel and relevant plan officials.

4. Distribute Disclosure: Distribute the disclosure to participants in accordance with the required timing and format.

5. Track and Monitor: Monitor compliance with disclosure requirements and make any necessary adjustments based on changes in plan fees or investments.

Benefits of 408(b)(2) Fee Disclosure

For Participants:

• Increased transparency and accountability
• More informed investment decisions
• Reduced risk of overpaying for plan services

For Plan Sponsors:

• Improved participant satisfaction and trust
• Reduced potential for litigation
• Enhanced compliance with fiduciary duties

Conclusion

408(b)(2) fee disclosure is a crucial element of ERISA compliance that empowers plan participants with the knowledge they need to make informed investment decisions. By providing clear and comprehensive disclosures, plan sponsors can demonstrate their commitment to transparency and accountability, while also protecting themselves from potential liability. By embracing effective strategies and avoiding common mistakes, plan sponsors can optimize the impact of their 408(b)(2) fee disclosures, foster participant engagement, and ultimately enhance the financial well-being of their workforce.

Additional Resources

• Department of Labor: 408(b)(2) Fee Disclosure
• Investment Company Institute: 408(b)(2) Fee Disclosure Guide
• National Association of Plan Advisors: 408(b)(2) Fee Disclosure Best Practices

Tables

Table 1: Estimated Costs of 408(b)(2) Fee Disclosure

Table 2: Comparison of Fee Structures

Table 3: Impact of Fees on Investment Returns

Table 4: Best Practices for 408(b)(2) Fee Disclosure