ErisaALERT©
You received your 408(b)(2) disclosures from your covered service providers. Have you looked at them? Do you know what you are looking at? Do you know what you are supposed to do next? In this ALERT we will focus on the plan sponsor’s responsibility with respect to the covered service provider (CSP) fee disclosures.
We have issued numerous ALERTs over the past few years regarding the various disclosures (see
ErisaALERT 2012-03). Failure to comply with the rules can result in a prohibited transaction.
Depending on whether you view the current situation as adversity or difficulty, plan sponsors are faced with disclosures (we have heard of one plan sponsor who received a 51 page disclosure!) which must be read, understood – opportunities abound.
You have the opportunity to:
- Really understand your plan fees
- Avoid a prohibited transaction
- Fulfill your fiduciary responsibility to monitor service providers
- Review your investment fund line up
- Reassess the reasons why you selected your service provider
- Engage your responsible plan fiduciaries and potentially your investment committee
Service Provider Disclosures
As mentioned in ErisaALERT 2012-03, the DOL expects plan sponsors to review the covered service
provider (CSP) disclosures vs the actual regulations to ensure that the plan sponsor received the
necessary disclosures. If the CSP fails to provide the required disclosures, the plan sponsor should request the disclosure in writing. If the disclosures are not received within 90 days of the written request, the plan sponsor must notify the DOL (visit our facebook page for more details), consider terminating the CSP arrangement and must terminate services if the disclosures relate to future services. Failure to do so could lead to a breach of fiduciary responsibility and result in a prohibited transaction. Likewise, failure to carefully review the plans fees for reasonableness could result in a prohibited transaction. We have added two checklists (excerpted from our 401(k) self audit tool currently under revision) to the Tools You Can Use© section of our website based on the regulations to help you review the CSP disclosures. The
checklist titled “Identify your Covered Service Provider” enables you to list your covered service providers and quickly review your disclosure solely for the existence of the information. The checklist titled “§408(b)(2) Covered Service Provider (CSP) Disclosure Review Checklist” should enable you to review your disclosure vs the disclosures contained in the regulations. Please keep in mind that completion of the checklist is merely a guide to help you assess the completeness of the required disclosures. It is only one step in a prudent fiduciary process.
Evaluating fees and services
After confirming that the required disclosures have been recieved, plan fiduciaries must evaluate fees and services to ensure that the fees are “reasonable”. As you begin the review, always keep in mind that ERISA is often referred to as a process statute and you should document your efforts. Reasonableness is based on the facts and circumstances of each plan.
The reasonableness of fees is plan specific; there is no magic number where if fees are less than x% of plan assets, then the fees are reasonable. There are many factors to be considered including:
- The level of services provided
- The types of share classes the funds are invested in
- Benchmarks for similar funds
- Benchmarks for recordkeeping services
As you review the services provided you might to revisit the selection criteria utilized when hiring your current service provider. Chances are you had a list of “must have” and “nice to have” services; you weighted each item on your list and scored each proposal. You may have developed a more detailed version of your vendor selection criteria for the finalist interview process. If you don’t already review these criteria on a regular basis, now is the time to start.
You may want to develop and document a review process which you can place in your files as evidence
that you performed your due diligence. Some hard and soft items for consideration in your checklist
include:
- Did you receive the services as outlined in the service agreement?
- Did the services meet your expectations, exceed your expectations or need some work?
- Did the fees charged reflect the services provided?
- How do your fees compare to a similarly situated plan? Have you benchmarked fees and services
vs industry standards since selecting the service provider? Is it time to send out an RFP? - Is your service provider easy to work with or cause your staff extra work?
- Does the service provider explain fees in a way you can understand?
- Does the service provider meet with the Investment/Administrative Committee on a regular basis to review the plan’s operation and fees? Is it appropriate to involve an independent investment consultant to review the fund line up and related fees?
- How will the service provider help you communicate plan fees to participant?
What should Plan Sponsors do?
- View the fee disclosure process as an opportunity to:
- Avoid a prohibited transaction
- Fulfill fiduciary responsibility of monitoring plan providers
- Engage the investment/administrative committee
- Consider engaging an independent investment advisor to review fund fees and fund line-up.
- Consider engaging a consultant or your counsel to review the disclosures.
- Add service provider review to your annual compliance calendar.
- Document, document, document.
You may want to check our Facebook page periodically for quick updates on compliance issues.
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any
circumstances constitute legal advice and should not be used as a substitute for legal advice. You should
seek the advice of counsel when applying the requirements to your plan. For more information on this
ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen, 610-337-7270 and ask for
Paul Protos (ATR, Inc.) or 215-508-5629 and ask for Theresa Borzelli, Esq. (SFE&G)
ErisaALERT© are copyrighted articles and can only be reused or distributed with the expressed consent of ERISAdiagnostics.
