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408(b)(2) Compliance and the Service Provider List

March 06
00:33 2012

In February 2012, the DOL issued a Fact Sheet outlining the final regulations of its Fee Disclosure Rule set to go effective on July 1, 2012. Among the fiduciary duties 401k plan sponsors are now liable to undertake include obtaining fee disclosure 1924_9037_checking_facts_stock_xchng_royalty_free_300information from, according the Fact Sheet, “the following covered service providers:

  • ERISA fiduciary service providers to a covered plan or to a ‘plan asset’ vehicle in which such plan invests;
  • Investment advisers registered under Federal or State law;
  • Record-keepers or brokers who make designated investment alternatives available to the covered plan (e.g., a ‘platform provider’);
  • Providers of one or more of the following services to the covered plan who also receive ‘indirect compensation’ in connection with such services: Accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services.”

Being that many 401k plan sponsors received these services from one source, otherwise known as a bundled service provider, and since the new Fee Disclosure Rule now requires fees to be broken out by service, thought it might be instructive to review the different service providers and their primary duties.

Corporate Trustee – Here we do not refer to the trustees of the plan, who are individuals named by the plan sponsor to safeguard and administer the plan. Instead, a Corporate Trustee, usually a bank trust company, provides “trust services” to the plan, including acting as a fiduciary to the plan. The Corporate Trustee may be directed by the plan sponsors or it may have discretionary powers. In neither case does a trustee relationship remove the fiduciary liability from the plan sponsor. As such, it is not expected for plans to have a Corporate Trustee. Most plans settle for a Plan Custodian and a Plan Investment Adviser (see below).

Plan Counsel – This is the ERISA attorney that administers to the plan and who specializes in employee retirement benefit plan regulations and legal proceedings. Plans using customized plan documents generally require plan counsel. Plans using prototype documents can try to get by without one, but it makes sense for plan sponsors to have a good ERISA attorney in their rolodex. Only a lawyer can answer legal questions.

Plan Accountant – Plans above a certain size require an annual independent audit; hence, the need for a plan accountant. Even plans below the required sized should have an accountant on hand to answer any tax questions. Only a tax adviser like an accountant can answer tax questions.

Plan Custodian – This is the institution that actually holds the assets of the plan.

Plan Recordkeeper – The Plan Recordkeeper maintains all participant data and trade processing, including the disposition of salary deferrals from the Payroll Processor. The Plan Sponsor can also delegate to the Plan Recordkeeper, through a limited power of attorney, the authority to instruct the Plan Broker to initiate trades and the Paying Agent to make distributions. The Plan Recordkeeper may also provider TPA functions (see below).

Plan Third Party Administrator (TPA) – The Plan TPA is involved in monitoring and testing the plan for ERISA compliance and for other administrative duties such as processing loans.

Plan Investment Adviser – The Plan Investment Adviser acts as a fiduciary to the plan, as required by the SEC (the DOL is currently reviewing its definition of fiduciary to determine whether it should be expanded to include other of the service providers listed here). The Plan Investment Adviser drafts the Plan’s Investment Policy Statement, provides recommendations on the selection of investment options and performs periodic due diligence monitoring on behalf of the Plan Sponsor. A Corporate Trustee can also provide these same functions. Also, like the situation of a Corporate Trustee, while hiring a Plan Investment Adviser does mitigate certain fiduciary liability (primarily under the Uniform Prudent Investor Acts), it does not fully remove fiduciary liability from the plan sponsor.

Plan Broker – A plan may use a Plan Broker in lieu of a Plan Investment Adviser. A Plan Broker currently does not have to act as a fiduciary to the plan. The Plan Broker may be a stock broker or an insurance broker, or both.

Underlying Investment Options – These would include mutual funds, annuity contracts and other vehicles the plan may choose to invest in. Generally the plan does not pay direct fees to these entities, although, for example, mutual funds have operational expenses that generate an “expense ratio” that is disclosed in the fund’s prospectus and financial reports.

Payroll Processor – Some plan sponsors contract their payroll processing duties to a third party. This is the Payroll Processor. The Payroll Processor must work closely with both the plan sponsor and the Plan Recordkeeper to maintain the data of the plan. In some cases, the Payroll Processor will take on the duties of the Plan Recordkeeper, although many plan sponsors prefer the functions be performed independently of one another so as to add another audit and control layer to the process of moving participant money.

Paying Agent – Usually the job of the Plan Custodian, this service includes disbursing any funds from the plan to any other party, including paying service fees and distributing assets to plan beneficiaries. In smaller plans, the plan sponsor may do this to save the plan money, but it’s generally preferred to have an independent party performing this function.

These are the most often used service providers, although plans may hire consultants, actuaries or other vendors for tasks. The new Fee Disclosure Guidelines require 401k plan sponsors to obtain fee information from any vendor receiving more than $1,000 and from any vendor receiving indirect compensation.

The DOL is particular concerned with plan sponsors uncovering conflicts-of-interest as a result of fee disclosure. These conflicts-of-interest may occur in cases where certain services are bundled together or when preferential advice is given in return for payment. It is the intention of the Fee Disclosure Rule to reveal these conflicts-of-interest and for the plan sponsor to address them in an appropriate manner.

As such, it’s a good idea for 401k plan sponsors to examine their list of service providers even more closely.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Gregory W Kasten
    Gregory W Kasten March 06, 13:29

    I disagree with your summary of the discretionary trustee. “…In neither case does a trustee relationship remove the fiduciary liability from the plan sponsor. As such, it is not expected for plans to have a Corporate Trustee.”

    ERISA §403(a) clearly specifies who has the responsibility to manage plan assets. The primary responsibility falls to the plan sponsor and the plan trustee. ERISA envisioned that the plan sponsor would hire the trustee to make prudent decisions. Since the trustee was empowered to make decisions, they were always a discretionary trustee, and would take over day to day plan management.

    Under ERISA, the discretionary trustee “shall have exclusive authority and discretion to manage and control the assets of the plan”.

    The plan sponsor must prudently hire the discretionary trustee and periodically reaffirm the decision. Other than that, all decision-making belongs to the trustee. In ERISA litigation, our experience has found that the plan sponsor seldom was involved and the discretionary trustee (us) handled the entire matter. Likewise, I have not seen a court case where the discretionary trustee allowed the plan sponsor to face the litigation alone, or even in a significant way. Can you show me such a case?

    It is true that today, most plan corporate trustees do not make decisions but instead are directed by the plan sponsor’s retirement committee. The directed trustee is synonymous with passive trustee or custodial trustee. The custodial function is to safeguard or hold plan assets and to do what the plan sponsor instructs, although ensuring that only directions from the plan sponsor that are consistent with ERISA and the plan document are executed. Most, if not all, directed trustees disavow fiduciary status in their contracts. They do not give advice to the other plan fiduciaries regarding the assets in their custody, nor do they have discretion to make investment decisions.

    But the discretionary trustee provides a significant service by holding the exclusive authority and discretion to manage and control the assets of the plan. Not only does this protect the plan sponsor—but we can show improved outcomes, namely the number of plan participants on track to retire successfully with adequate benefits, is significantly higher.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author March 06, 15:17


    Thanks for your comment. You are correct, but you are also in agreement with what was written. The plan sponsor still maintains some fiduciary liability when hiring a corporate trustee. The article mentions the same thing for hiring an investment adviser as a fiduciary. It’s important for 401k plan sponsors to understand this distinction. While they can reduce their fiduciary liability, they can never remove it.

  3. David Kolhoff
    David Kolhoff March 06, 18:34

    I disagree that “the new Fee Disclosure Rule now requires fees to be broken out by service….” Except for some specific fee disclosure requirements related record keeping and investments, the 408(b)(2) regulations do not require fees to be broken out by service. In fact, with respect to the required disclosure of direct compensation, the regulations explicitly recognize that such direct compensation may be disclosed “either in the aggregate or by service.” See DOL Regulation 2550.408b-2(c)(1)(iv)(C)(1).

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