401(k) Fee Disclosures: A Comprehensive Guide to 408(b)(2) Fee Disclosures
401(k) plan fees and expenses are one of the most important factors determining the quality of your retirement. Expensive plan fees can eat into your investment returns, slowing account growth and leading to less income during retirement. High 401(k) fees do not guarantee better results. They only guarantee you and your employees will keep less of your investment earnings.
In 2012, the Department of Labor (DOL) mandated new fee disclosure requirements to make 401(k) plan fees more transparent. This post will discuss what every 401(k) fiduciary should know about 408(b)(2) disclosures. We will explain what they are, who is responsible for providing them, and why they often fail to provide fee transparency.
What are 401(k) fee disclosure statements?
The DOL requires all covered service providers to send employers and plan participants the details of 401(k) plan expenses. The goal of 401(k) fee disclosures is to provide everyone sufficient information so they can make an informed choice on whether to join the plan. They are also designed to help employers exercize their fiduciary responsibility to review 401(k) fees. There are two primary required disclosures:
- 408(b)(2) fee disclosures - designed for employers sponsoring a 401(k)
- 404(a)(5) disclosures - designed for 401(k) plan participants
What is a 408(b)(2) fee disclosure?
Retirement providers must provide 408(b)(2) disclosures to plan administrators showing a detailed breakdown of all plan fees. These disclosures help employers assess the total cost of the 401(k) plan and the direct and indirect revenue each service provider earns.
Why are 408(b)(2) fee disclosures important?
Plan sponsors must ensure that the 401(k) plan fees are fair, considering the services provided. Failing to monitor and scrutinize fees properly can create significant legal liability for the employer.
A fiduciary shall discharge that person's duties with respect to the plan solely in the interests of the participants and beneficiaries; for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan.
People commonly refer to these legally required notices as 408b disclosures or 408b notices. Named after ERISA section 408b-2, these disclosures must show fee information, including direct and indirect 401(k) plan costs.
Key 408(b)(2) Fee Disclosure Requirements
Direct fees
Direct fees are the most transparent fees charged directly by service providers. The employer can often pay these fees or have providers deduct them directly from employee accounts. These fees typically include:
- Annual base recordkeeping fees (either a percentage of assets or a flat dollar amount)
- Per participant account fees (either a percentage of assets or a flat dollar amount)
- Trustee fees (typically a percentage of assets)
- Custodial fees (typically a percentage of assets)
- Advisor fees (typically a percentage of assets)
Indirect fees:
Indirect fees are less transparent, can significantly lower your investment returns, and create significant conflicts of interest. Providers often bury these "hidden fees" in mutual fund expense ratios or deep in the footnotes of provider agreements.
For example, expensive, poor-performing mutual funds may encourage 401(k) advisors to choose their products through high sales commissions. 401(k) recordkeepers might also encourage advisors to recommend expensive recordkeeping services by sharing some of the revenue they collect.
What is mutual fund revenue sharing?
Revenue sharing is when investment managers share fees with recordkeepers or advisors who support or recommend their product. The annual operating expenses (e.g., expense ratio) for plan investments indicate the total cost of the mutual fund. However, mutual fund companies often share some of this revenue to cover the cost of other providers (recordkeepers, advisors, TPAs, etc.). Revenue sharing is often in one of two forms:
- 12b-1 fees - typically sales commissions paid to a broker, advisor or insurance agent.
- Sub-Transfer Agency fees (sub-TA) - typically paid to a recordkeeper.
What are wrap fees?
Retirement providers and insurance companies often "wrap" or add asset-based fees on top of investments. A recordkeeper can increase the index fund expense ratio (0.05%) by adding a 0.30% with a "wrap fee." This makes the total fees 0.35%.
Participant Service Fees:
Participant service fees (or individual service fees) are flat dollar amounts charged to employee accounts per transaction.
- 401(k) loan initiation and annual maintenance fees
- 401(k) rollover fees (i.e., rolling your account to an IRA or new employer)
- Distribution Fees for retirement plan distributions or hardship withdrawals
- Self-directed brokerage (SDBA) fees which can include account maintenance and trading fees
Who must provide a 408(b)(2) fee disclosure?
The DOL enacted the final regulation for fee disclosures under ERISA Section 408(b)(2) on July 1, 2012. This final regulation required all "covered service providers" ("CSPs") to disclose information about their services and fees to plan fiduciaries. The DOL defines covered service providers as any provider reasonably expecting to receive at least $1,000 in annual fees. The DOL's goal is to help employers execute their fiduciary responsibility to ensure fees for employee benefits are reasonable.
Types of Covered Service Providers:
- ERISA fiduciary service providers or "plan asset" vehicle
- Investment advisers registered under state or federal law
- Recordkeepers or brokers who make designated investment alternatives ("DIAs") available
- Accountants, auditors, banks, insurance brokers, securities brokers, third-party administrators, or valuation services that receive indirect compensation.
Each CSP must describe the services they provide and describe the service to which revenue sharing relates.
ERISA Section 404(a)(1)(A):
A fiduciary shall discharge that person's duties with respect to the plan solely in the interests of the participants and beneficiaries; for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan.
408(b)(2) disclosure timing
Covered service providers must send updated 408(b)(2) disclosures annually. If the fees of the plan change, then providers need to send updated notices within 60 days of the fee changes. Providers must also send corrected 408(b)(2) notices within 30 days of identifying the error. Failure to provide correct fee disclosures could create a prohibitive transaction.
If a service provider doesn't give fee details in 90 days, employers must inform the DOL and end the relationship.
404(a)(5) Participant Fee Disclosures
In addition to providing employers with a fee disclosure, providers must also disclose fees to employees. This is where the 404a-5 disclosure (also referred to as a 404(a)(5) fee disclosure) comes into play.
Fee Disclosures Fail to Provide Transparency
408(b)(2) fee disclosures have largely failed to live up to their promise of transparency. Pew Trust found fewer than 1 out of 5 small to midsized businesses were "Very familiar" with their retirement plan fees.
More worryingly, less than half surveyed reported having read and understood their disclosures in the past year. A 2021 GAO study found that 40% don't understand fee information, while 41% aren't even aware there are fees. Only 1/4 of the surveyed understood the disclosure.
How we can help:
As a plan sponsor you have a duty to make sure service providers are sending their 408(b)(2) disclosures. If you can't find yours, learn how to request a 408(b)(2) form.
If you would like to get yourself out of this disclosure loop, you may want to look for a provider that actually takes on responsibility for these functions. At ForUsAll we offer full 3(16) fiduciary services. That means we can reduce your workload and disclosure worries. We manage and send participant notices and disclosures including annual 404(a)(5) notices.
We can also help you understand how the fees you are paying stack up against industry benchmarks. We believe that efficiency and transparency are the best policies. If there are simpler ways to pay each vendor and clearly disclose those payments, then why use the less transparent methods of 12b-1 payments and revenue sharing?
You can get started on assessing your plan’s costs by downloading our fee evaluation worksheet below. This can also help you identify those opaque costs, including 12b-1 fees. We can even craft a low-cost fund lineup that is that is appropriately risked, prudently monitored, and free from revenue sharing and 12b-1 payments. If you need help, don’t hesitate to get in touch!
Frequently Asked Questions
- What is the main purpose of the 408(b)(2) and 401k fee disclosures? They ensure transparency regarding the fees associated with retirement plans.
- Who is responsible for providing these disclosures? Retirement plan service providers that expect to receive $1,000 or more must provide the 408(b)(2) disclosure.
- What is the difference between direct and indirect compensation? Direct compensation are fees paid from the plan to a service provider. Indirect compensation occurs when one service provider shares a portion of their revenue with others.
- Are these disclosures mandated by law? Yes, ERISA 408(b)(2) disclosures are mandated by the Employee Retirement Income Security Act of 1974 (ERISA).
