If your plan is large enough to require that its financial statements be audited (which generally means that you have over a 100 eligible employees), in the next month or two your accountants will be asking about your procedures for handling the 408(b)(2) disclosures by your “covered” service providers. That raises an obvious question: what is the “right” answer?
Before answering the question, let me set the context. Your covered service providers are required to give you—as the responsible plan fiduciary, or RPF—written disclosures about their services, status as fiduciaries, and compensation. The “RPF” is the person or persons who have the authority to hire service providers for your plan; typically, that is the plan committee. (For ease of reading, we refer to “plan sponsor”.) “Covered” is a defined term in the 408(b)(2) regulation, but for our purpose, the best approach is to assume that all of your plan’s service providers are covered, unless you know that they are not. Covered service providers include, for example, your investment advisors, financial advisors, brokers, recordkeepers, bundled providers, investment consultants, and so on. On the other hand, your attorneys, accountants and actuaries are not covered service providers—unless they receive indirect compensation, that is, compensation from anybody other than the plan or the plan sponsor.
Plan sponsors, in their fiduciary capacity, have had two distinct duties related the 408(b)(2) disclosures. The first is to obtain the disclosures and make sure that they are adequate. The second is to review the disclosures and determine that, among other things, the compensation of the service providers is reasonable.
So, what should you say to the accountants? The best answer . . . the disclosures have been compared to the requirements in the 408(b)(2) regulation and, based on that comparison, the committee members have made a reasonable and good faith determination that the disclosures are complete. It would be helpful to provide the accountants with a written copy of the comparison of the disclosures to the requirements of the regulation. To help our clients form that “reasonable and good faith belief ”, we have developed a checklist based on the requirements of the regulation and have reviewed the disclosures for a number of clients. In some cases, the disclosures have not been adequate— and we have followed up with the service providers to obtain the needed information. (In most of those cases, the incomplete disclosures were about the indirect compensation that the service providers are receiving—that is, compensation from investments or other providers, as opposed to payments from the plan.) After we made a written request for the missing information in those cases, the service providers immediately sent us additional information—since they are aware of the dire consequences in the regulation for failing to provide adequate disclosures.
Once the information is obtained and the checklist is completed, we recommend that the checklist be presented at a committee meeting and reviewed by the committee members. Those facts should be documented in the committee minutes, together with a determination by the committee members that, based on the checklist and the discussion, they have a reasonable and good faith belief that the required disclosures were made.
The next step is to review the disclosures and determine whether the total direct and indirect compensations being received by the service providers is reasonable— compared to the services they are providing. While a discussion of that process is beyond the scope of this article, one critical factor is that the committee members review market data about compensation paid by similarly situated plans for comparable services. In other words, the marketplace establishes whether compensation for a particular set of services is reasonable or not.
Forewarned is forearmed. Your accountants will be asking about your 408(b)(2) procedures. Be prepared to respond.