Understanding Your 408(b)(2) Fee Disclosure

Section 408(b)(2) of ERISA requires every "covered service provider" — your recordkeeper, financial advisor, TPA, auditor, and others — to give you a written disclosure of the services they provide and all compensation they receive, direct and indirect.

You should receive a 408(b)(2) disclosure before the service provider is retained and whenever there is a material change in compensation. In practice, most plan sponsors receive an annual disclosure.

What Must Be Disclosed

The regulation requires covered service providers to disclose:

• A description of the services to be provided
• Whether the provider is acting as a fiduciary
• All direct compensation (paid directly from the plan)
• All indirect compensation (paid by third parties, such as revenue sharing from mutual funds)
• Compensation paid between related parties
• Compensation for termination of the contract

Direct vs. Indirect Compensation

Direct compensation is what you write a check for — a per-participant fee, a flat annual fee, or an asset-based percentage billed to the plan.

Indirect compensation is more hidden. It includes revenue sharing paid by mutual fund companies to the recordkeeper, 12b-1 fees, sub-transfer agent fees, and other payments. These ultimately come from plan assets, even though you never see an invoice for them.

Understanding total compensation — direct plus indirect — is critical to knowing what your plan actually costs.

How to Read Your Disclosure

1. Find the service description. Confirm what services are actually being provided for the fees charged.
2. Identify all compensation. Add up all direct fees (per-participant fees, flat fees, asset-based fees) and all indirect fees (revenue sharing, 12b-1 fees).
3. Convert to common units. Express total compensation as both a per-participant annual amount and as a percentage of plan assets. This allows comparison to benchmarks.
4. Compare to a benchmark. This is where FEEDUCIARY comes in. Upload your fee totals and we'll show you where they fall relative to market rates for plans your size.

What Happens If You Don't Review It

The 408(b)(2) regulation was designed to give plan sponsors the information they need to make an informed decision about their service providers. If you receive a disclosure but don't review it — and don't benchmark the fees — the DOL takes the view that you've failed your fiduciary duty, regardless of whether the fees were actually reasonable.

The disclosure alone is not protection. Acting on it — or at minimum documenting that you reviewed it and found fees reasonable — is what creates the fiduciary shield.