New DOL Regulations Impact Plan Sponsors

They’ll be more involved, more scrupulous in 2012

By Ronald E. Hagan

Mr. Hagan is Chairman of the Fiduciary Standards Committee of Roland|Criss. He can be reached at

There have been many articles addressing the Department of Labor’s (DOL) new 408(b)(2) and 404(a)(5) regulations, most of which have focused on the rules’ impact on retirement plan vendors. Just as advisors must understand the rules’ mandates for their role, they also must understand how retirement plan sponsors will be affected in order to provide helpful advice and counsel to their clients going forward. In reality, retirement plan sponsors are inheriting a sea change in their fiduciary role and responsibilities, and many will be seeking assistance to understand and appropriately implement effective practices for compliance. This paper will provide a brief background of the 408(b)(2) and 404(a)(5) rules, strategies plan sponsors may implement for compliance, as well as an overview of how plan sponsors’ vendor relationships may be enhanced through these new regulatory mandates.

Origination of the Rules: Closing the ‘Information Gap’

Over the past three decades, there has been an information disadvantage, what the DOL has termed an ‘information gap’ in the ERISA market between plan sponsors and their vendors. The DOL researched this information gap concern and produced a public report on its findings in the July 16, 2010 issue of the Federal Register, in which the DOL used pointed language to illustrate the potential danger inherent if the information gap persists between plan sponsors and their service providers.
The two new fee disclosure rules- ERISA sections 408(b)(2) and 404(a)(5)- are the DOL’s reaction to these findings and its subsequent effort to minimize the information gap before additional damage is incurred on plan sponsors and, more importantly, their participants. Both rules dictate that vendors adjust how they relay information to plan sponsors and participants in order to become more transparent in communicating their services and related fees. However, the rules impose a hefty new responsibility on plan sponsors- requiring them to become more involved and scrupulous with their vendors in order for these rules to have their intended positive effect on the market.

What 408(b)(2) Mandates for Plan Sponsors

The oft-used term ‘fee disclosure rule,’ referencing the new 408(b)(2) regulation, is somewhat of a misnomer for plan sponsors. The title implies that the primary onus lies on vendors to disclose proper and fair fees to their plan sponsors. This is only part of the rule’s dictate. The more important and impactful mandate for plan sponsors is what the rule requires of them after vendors’ fees have been disclosed.
Specifically, 408(b)(2) requires the following ongoing actions of plan sponsors (also illustrated in Figure A, below):

  • Verifying that they have received the appropriate disclosures from vendors;
  • Testing that these disclosures are adequate under the new rule; and
  • Determining that the fees provided within the disclosure are reasonable, or fair, given the vendor services rendered.


Previously, the mere receipt of vendors’ reports provided plan sponsors with a sense of security regarding their fiduciary duty. Under the new regulation, however, plan sponsors are expected not only to ensure the receipt of their vendors’ reports, but also to prove that they reviewed the reports, decided on the adequacy of the reports, and concluded that their vendors’ fees are reasonable. Next, we will address the action that plan sponsors can and should take in order to satisfy their revised fiduciary requirements under the new DOL regulation, while minimizing risk and enacting effective stewardship principles.

The Key to An Effective Risk Management Approach: 408(b)(2) Audit

Plan sponsors have a variety of choices regarding their approach to fulfilling their duty as primary fiduciaries. They may engage an ERISA Section 3(16) Fiduciary. Such a firm accepts total responsibility for the operation of the plan, which includes such duties as the hiring of service providers, ensuring appropriate and timely filings, and handling disclosures. The 3(16) Fiduciary operates the plan, rather than the plan committee, business owner or board of directors. The 3(16), appoints a 3(38) Fiduciary to be responsible for the management of the plan’s investments. The only responsibility of the business owner or board of directors is to select and monitor the 3(16) Fiduciary.
Alternatively, plan sponsors can combine their internal practices with occasional counsel from a 3(16) Fiduciary, or they can choose to undertake all of the responsibility and have annual ‘spot-checks’ to ensure their practices are prudent and in line with current fiduciary law.
Regardless of the avenue plan sponsors choose for fulfilling their fiduciary duty, the safest way to ensure that they earn the prohibited transaction exemption embedded in the new fee disclosure rule is to have a 3(16) Fiduciary conduct a 408(b)(2) annual audit. Specifically, such an audit examines:

  • The consistency of value delivered by the plan’s vendors;
  • The appearance of any vendor conflicts of interest and their potential harmful effects on the plan or its participants;
  • The reasonableness of the plan vendors’ fees;
  • The effectiveness of the plan vendors’ practices; and
  • Any areas that fall below the standard as set by ERISA.
The most revolutionary offering that is available with the 408(b)(2) audit revolves around garnering a score that assesses a particular vendor's performance.

Let’s explore the audit benefits in more detail

Clarifying and Updating Vendor Arrangements

While most plan sponsors are familiar with ensuring the receipt of vendor disclosures, many are unfamiliar with testing the adequacy of these vendor documents under the new rule. The first benefit of the 408(b)(2) audit is the vital identification and assessment of existing vendor arrangements. For some plan sponsors who have maintained a longstanding vendor relationship, it is difficult to locate or interpret their original signed contract. Furthermore, many existing vendor arrangements are not defined in writing making compliance with the rule nearly impossible. The audit process enables plan sponsors to fully understand the terms of their vendor contracts, as well as update and revise them, where needed.

Illuminating What and How Plan Fees Are Paid

Due to the complex nature of vendor fee structures and service models within the retirement plan industry, it is often difficult to discern exactly what fees are being charged for which services, as well as from where those fees are being extracted. A particularly enlightening discovery during the 408(b)(2) audit often is related to learning the ratio of employer-paid fees vs. plan-paid fees. Although many plan sponsors assume their vendor fees are taken exclusively from the company pocket, there are many arrangements that generate vendor payment directly from plan assets, which translates to a reduced amount of investable assets for plan sponsor participants. One of the most valuable takeaways of the 408(b)(2) audit can be understanding and challenging these unbalanced or unfair plan-paid fees.

Analyzing Vendor Value

The most revolutionary offering that is available with the 408(b)(2) audit revolves around garnering a score that assesses a particular vendor’s performance. The audit provides plan sponsors with an objective analysis of their vendors’ fees based upon a scientific calculation of value (i.e., services delivered vs. fees rendered over the same specific time period). With this calculation, plan sponsors not only are able to view fee trends over a certain amount of time (i.e., ‘we have been overpaying in a particular area of our plan for three consecutive years’), but they are equipped with the knowledge of whether their vendor’s fees are ‘reasonable’ as defined by ERISA. This in-depth analysis virtually never has been available to the plan sponsor market prior to 408(b)(2), and is changing the way plan sponsors select and monitor their vendors.

Enhancing Positioning for a Department of Labor Audit

A tangible result of the 408(b)(2) audit is that it proves that a plan sponsor is working to adhere to a high level of fiduciary care and comply with the new regulations. The 408(b)(2) audit report stands as firm testimony to a plan sponsor’s intention to adequately fulfill fiduciary responsibilities and update policies as needed when regulatory changes occur. The 408(b)(2) audit places in a distinctively advantageous position those plan sponsors that are required by ERISA to obtain an annual CPA’s financial audit for their plans.

Relief from Breach of Fiduciary Duty

In a strangely seeming ‘Catch 22′, ERISA prohibits payments from the assets of a qualified plan to a so-called party in interest. Vendors are parties in interest if their compensation is derived from a plan’s assets. Effective July 1, 2012, the only relief that plan sponsors may obtain from ERISA’s heavy penalty for harboring a scenario that pays vendors from their plans’ assets is to document an analysis and conclusion that the vendors’ fees are reasonable. If the analysis proves otherwise, additional steps mandated by the new rule are required. A 408(b)(2) provides an unbiased view of vendors’ fees, guides a plan sponsor on how to react to the findings, and activates the exemption.

Going Forward: Aligning Plan Sponsor and Vendor Intent

The 408(b)(2) rule, no doubt, impinges on both the plan sponsor and vendor communities, requiring from them much more effort and diligence than ever before. For plan sponsors, especially, the fiduciary role can be intimidating, as it typically couples potential liability and changing laws with a lack of in-depth training on fiduciary principles or vendor management skills. To the extent that vendors and plan sponsors can align their focus on stewardship principles and work together toward maximizing stakeholder value, this relationship will grow in trust and prove to be invaluable in the years ahead. Instead of viewing 408(b)(2) as an increased burden, vendors and plan sponsors may view it as an opportunity to mend a relationship that has been misaligned for many years. The information gap served not only as a definitive communication disadvantage between vendors and their plan sponsor clients, but it also decreased the likelihood of building synergy around shared intent and desired outcomes. By generating true transparency around fees and building a shared vision of success, vendors may be able to utilize 408(b)(2) as the catalyst to an enhanced relationship with plan sponsors in 2012 and beyond.