Groups Anticipate Fee Disclosure Issues for 403(b)s

Kristi Cook, JD, told the IRS Advisory Council on Employee Welfare and Pension Benefit Plans that individually owned contracts of deselected vendors, where the employer exercises no authority with regard to such contracts, can create challenges under ERISA §408(b)(2). It is not entirely clear if ”deselected” annuity contracts, which do not have to be included in the plan’s financial statements under Department of Labor Field Assistance Bulletin (FAB) 2010-01, will be considered plan assets for purposes of the ERISA §408(b)(2) regulation.   

Cook noted that if so, then the required service provider disclosures relating to these contracts would appear to be necessary, but responsible plan fiduciaries receiving these “deselected” disclosures will often have incomplete information about the deselected providers. Fiduciaries may not have the ability to properly assess if the deselected provider had completed the disclosure properly. It is also not clear what actions the fiduciary could take with regard to these deselected contracts if the information and compensation disclosed does not appear to be reasonable. Clarification and transitional relief is likely necessary to address this problem.  

According to Cook, ASPPA and NTSAA strongly support the mandate in the ERISA §408(b)(2) regulations that requires the disclosure of estimates of the costs of administrative services when there is no explicit charge for the service in a “bundled” arrangement. This is particularly important in the 403(b) marketplace, where the costs of recordkeeping services have historically been bundled into the total cost of the investment products, without any specific itemization of the services being rendered or the costs related to those services.  

This is likely to create a transitional challenge for 403(b) fiduciaries. Cook said the groups anticipate that there will be variation from provider to provider in the disclosures of the “estimated” costs of the services to plan sponsors. This is because there is no specific standard for a uniform method of disclosing this estimate. Additionally, there may a different level of service for the same 403(b) product and sometimes vendors provide different services for the different products they offer.  

According to Cook, this means that, until the marketplace develops standards by which such disclosures can be judged, 403(b) fiduciaries will be faced with making a determination on the “reasonableness” of compensation without a clear basis by which to judge them. Specifically with regard to the application of the prohibited transaction exemption under ERISA §408(b)(2), a plan sponsor with multiple 403(b) vendors will not have the capacity, in many cases, to determine the basis of the differences in the data disclosed to it from different providers. Such differences in this data should not impose a duty upon the sponsor to further explore the reasonableness of the disclosure, even where similar products are involved.  

Cook said ASPPA and NTSAA are working with other organizations to create a 403(b) Model Disclosure Form to facilitate such comparisons.