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Experts Advise 401k Plan Sponsors on 408(b)(2) Fee Disclosure Template

July 31
01:18 2012

Brooks Mosley, who specializes in 401k plan administration, tells the DOL’s new Fee Disclosure Rule is good news. He says Rule 408(b)(2), as it is technically known, “makes plan sponsors more aware of who they are paying and what they are paying for.” Mosley, who serves as President of Independent Pensions Solution in Jackson, Mississippi, does concede there’s bad news, too. He believes 408(b)(2) has created “a larger amount of paperwork and headaches for small to medium sized businesses, who tend to have smaller staffs to deal with the additional paperwork.” Mosley likes that “the fees and expenses are down to about 1-2 pages for clients to see.” He might have received the luck of the draw on that one, though.

Unfortunately, in some cases, the 408(b)(2) fee disclosure has only confused 401k plan sponsors. “The fee disclosures are entirely too long and still do not clearly state what some fees are,” says James Holland, Assistant Compliance Officer at Millennium Investment & Retirement Advisors LLC in Charlotte NC. He says plan sponsors “are still unclear what the disclosures say and what they are supposed to do with them. I still believe there are many plan sponsors who do not fully understand their responsibilities as a plan sponsor or the personal liability they are assuming as the plan sponsor.”

Quite a few experts fear the DOL may have “missed the boat.” “Every report is different. The goal of fee disclosure was to compare apples-to-apples,” explains Mosley, who goes on to say, “Insurance companies are reporting differently than third party administrators. Some insurances companies don’t disclose investment advisory fees because they believe the advisory firm should report that, even though money is being deducted from the plan. This creates a problem when participants are trying to compare fees; it makes insurance plans seem cheaper because those fees are not reported in their disclosure. There needs to be standard in what fees are reported for all plans.”

Mosley is not alone in this assessment. Karen Matingou, President & CEO of Atéssa Benefits, Inc. in San Diego says, “Covered Service Provider (CSP) reporting should be more concise and uniform so that responsible plan fiduciaries are able to make an apples-to-apples determination of value. The regulation doesn’t currently require disclosures be made in any particular format and guidance is limited. Disclosures that we have reviewed have really run the gamut from clear and specific to ambiguous and general. It is still a very burdensome task for plan sponsors to evaluate these disclosures.” Matingou has recently assisted many plan sponsors with evaluating their 408(b)(2) disclosures and concluded, “it was disappointing to see many of the CSPs not make a sincere effort to make a full disclosure in one document, but rather told the plan sponsor to look to their service agreements for the pertinent disclosure information. This put the burden back on the plan sponsors to cull the information out of their service agreements.”

Perhaps this has been the biggest complaint about 408(b)(2). In promulgating the Rule, the DOL initially promised to offer a disclosure template. That never materialized, and service providers were left to their own creativity. “The biggest improvement the DOL could make is to create a template of how they would like to have the fees disclosed,” says Chace Cannon, Investment Advisor Representative at Cannon Capital Management, Inc., in Salt Lake City, Utah. “All the Covered Service Providers are left to present the information in a way that they see fit. It would be useful if the DOL created a universal disclosure form that had a spot for each fee and the CSP associated with that fee, and a place that the CSP could input the description of their services and the explanations needed.”

Matingou takes this a step further. She keeps reminding her clients they’re in charge. Since they’ve hired these CSPs, it is their right (and, quite possibly, their responsibility,) to return to the CSP and reject confusing “disclosures” as “incomplete” and “non-compliant.” Indeed, she believes 401k plan sponsors should specify the layout of the disclosure that best allows them to fulfill their fiduciary obligation under 408(b)(2).

That being said, just what are the components of the ideal fee disclosure template experts recommend?

Susan Conrad, Vice President Retirement Plan Advisors at Plancorp, LLC in St. Louis, Mo feels benchmarking is the key. For example, she would like to see a “benchmark to the average mutual fund expense ratio” as well as a “benchmark to average total fee for similar plan size with similar demographics.” Larry Karle, Vice President of Longfellow Advisors in Boston, echoes this idea of benchmarking. He says, “especially for plan sponsors without an advisor (who should be benchmarking their plan), a peer group should be provided to the plan sponsor so that if they want to try to measure how competitive their fees and expenses are, they have a starting point.”

Others feel a more precise definition of “compensation” might offer help. “There are a host of items of value that get exchanged by parties in the industry without any connection to services for a retirement plan, and the DOL’s guidance suggests that they intend to construe compensation very broad terms,” says Pete Swisher, Senior Vice President and National Sales Director at Pentegra Retirement Services and who also serves as Chairman of the Government Affairs Committee for the National Association of Plan Advisors. He adds, “While that sounds like the sort of thing a regulator is expected to do to protect participants, it can actually hurt participants by raising costs and making it harder for fiduciaries to do their jobs. There is also a need for clarification on how model portfolios must report performance since there is a myriad of performance reporting methods, with some being potentially misleading.”

But the biggest area for improvement remains the template itself. Cannon’s description of a “universal disclosure form” would be a major step in that direction. He would also like to see benchmarking. This would include “average total fees so that the plan sponsor does not have to pay to get their plan benchmarked; returns benchmarked for target date and risk based funds and portfolios; and, average fee for each CSP based on size of the plan.”

Mosley, who admits being “scared with what the DOL may come up with” has concerns about templates in general because he says “one size does not fit all.” Still, he says “All fees that are deducted from plan assets should be disclosed at the third party administrator level, whether an insurance firm is handing the disclosure or a small third party administrators. Participants will be able to compare apples-to-apples which, gives participants a clearer picture.” He also prefers a general and shorter reporting format. He says, “a shorter disclosure will be easier for participants to read and understand; even the bigger firms with more assets should be able to adhere.” Finally, Mosley maintains “fees should be disclosed similarly. Right now certain firms report their fees in basis points where others use dollar amounts. Most people who work in the retirement industry are more familiar with dollar amounts. It is also easier for participants to see their fees in dollar amounts and convert it to basis points where they see fit, as oppose to the other way around.”

But a template whose structure allows that “apples-to-apples” comparison currently missing remains the ideal. Matingou would like to see “a clear yes/no check box with a statement declaring the fiduciary status of the provider; a section to break out fees for service providers with multiple service codes; and a section where service provider is required to list fees received for an applicable time period (e.g., as of this date here are the fees we have been paid to date and the formula, and, if formula is provided, it should also be calculated out to an annualized dollar amount).”

Perhaps it’s best we end with the words of Mike DiCenso, President of Gallagher Fiduciary Advisors, LLC in the Chicago Area, who allowed us to use this comment he recently wrote in a LinkedIn group, “408(b)(2) is nothing new. It has been in ERISA since 1974. It is just now the DOL is shining a spotlight on it to get the plan sponsors to not only focus on knowing their fees, but to determine if they are reasonable. I welcome the day all of our industry peers hold themselves to the fiduciary standard, whether acting in the role of fiduciary or not, for the betterment of our industry.”

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Tim Wood
    Tim Wood September 12, 12:26


    As usual, a great article.

    Unfortunately, I saw this coming when I started reading the disclosure requirements. It first started on a simple premise, let people know in real dollars the full cost of participation in their retirement plan. I have been doing that since 2006 when I found a record keeper that was willing to issue a statement that showed the cost for the previous quarter on the statements.

    However, this idea has been lobbied to death, making it almost impossible to understand. If a provider issues a disclosure statement that is over three pages, including the chart which should take up two of the pages, that provider is trying to hide something.

    I similarly fear that with some of the loopholes allowed under the current regulations, even the statements will be difficult for some to understand.

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