Plan Sponsors to Face New Responsibilities Under 408(b)(2)

February 22, 2012 ( – The Department of Labor's (DoL) final 408(b)(2) regulation will bring a slew of new responsibilities for plan sponsors.  

During a webinar, Ronald E. Hagan, president and CEO of Roland|Criss, explained the implications the final regulation will have on plan sponsors.

The disclosure rule is effective on July 1, 2012. Vendors of services, including investments advisers, recordkeepers, third-party administrators, mutual funds and bank custodians must make full and complete written disclosure of their fee structures to their clients by September 1, 2012. The vendors must also reveal any relationships they have with other providers and what types of services they provide.

By the end of their current plan year, plan sponsors will need to have gone through the exercise of taking into account the fees they are paying, determine the quality of their service and make a report among themselves that they have considered the reasonableness of the fees.

In order to comply with the regulation, plan sponsors will need to verify receipt of appropriate disclosures from vendors; examine the disclosures to ensure that they are adequate; and determine by an auditing process that the fees provided within the disclosure are reasonable. According to Hagan, the latter two requirements are a significant adjustment for plan sponsors.

During the webinar, Hagan spoke with John Vazquez, director of administration and fiduciary committee chairman at Sherwin Alumina Company. Vazquez explained the process his company went through over the past several years in regards to examining the company’s plans and providers.

“In the course of examining our plans and provider, we discovered that we had some questions on performance,” said Vazquez. “As the legislation [408(b)(2)] began to develop, we began to ask questions about our fees, how they were determined and how they were allocated. We found it quite difficult to get straight answers to those questions.”

In 2009, Vazquez said, the company made a decision to make a change or consider a change in the providers they were using for their plan. They finally decided in 2010 to change providers. “Going through that process we found that our primary objective of restructuring our system, the benefit around fees, developed and manifested itself, and there were actually fees that were being charged for services we did not know about and that we were not receiving,” said Vazquez.

After implementing the new structure, Vazquez said most of the fees and the fee structure went down for the plan participants significantly.

According to Vazquez, in order to perform this type of audit you need to have the right type of quality input and participation from experts in the field in order to make the entire process less threatening.

Moving forward with the adoption of 408(b)(2), Hagan suggests that plan sponsor verify the services that they are paying for from vendors are received as promised. Plan sponsors should test fees against the services that are received. It is appropriate to also challenge the pricing structures.

The plan sponsor should also evaluate investment consultants and money investment managers against the value added work they are asking them to provide. “I’m suggesting that collectively plan sponsors have an understanding of what mutual fund managers do and how they do it,” added Hagan.

Recordkeepers and third-party administrator fees should also be examined in order to ensure no overpayments are made.

And finally, Hagan suggested that during this first year of the 408(b)(2) regulation being in place, plan sponsors should consider conducting an audit as a prerequisite to complying with the regulation (see "White Paper Examines Benefits of a 408(b)(2) Audit").

“In this new era, it is up to the plan sponsor to take the steps necessary to become informed. Close that information gap that exists,” added Hagan.