The ERISA 408(b)(2) fee disclosure rule requires most retirement plan service providers to give the plan’s responsible fiduciary a written account of their services, their fiduciary status, and every dollar of direct and indirect compensation they expect to receive, before the plan enters into or renews the contract. The rule applies to any covered service provider expecting $1,000 or more from the arrangement.1Federal Register. Reasonable Contract or Arrangement Under Section 408(b)(2)-Fee Disclosure A missing or defective disclosure automatically turns the arrangement into a prohibited transaction, with excise taxes that can reach 100% of the compensation paid.
The rule covers ERISA pension plans, including defined benefit plans, 401(k)s, SEP-IRAs, SIMPLE retirement accounts, and 403(b) annuity contracts and custodial accounts.2U.S. Department of Labor. Final Regulation Relating to Service Provider Disclosures Under Section 408(b)(2) Welfare benefit plans such as group health and life insurance plans are not currently within its scope; the welfare plan section of the regulation remains reserved while the Department of Labor works through a separate rulemaking.
Who Has to Disclose
The obligation falls on “covered service providers”: any provider that contracts with a covered plan and reasonably expects $1,000 or more in direct or indirect compensation from the arrangement.1Federal Register. Reasonable Contract or Arrangement Under Section 408(b)(2)-Fee Disclosure That threshold counts compensation received by the provider, its affiliates, and its subcontractors combined, so it sweeps in most vendors a plan works with.
Three categories of provider are covered:
- Providers acting as ERISA fiduciaries to the plan, and registered investment advisers under federal or state law.
- Recordkeepers and broker-dealers serving participant-directed individual account plans where designated investment alternatives are offered through the provider’s platform.
- Firms providing accounting, actuarial, legal, consulting, custodial, insurance, third-party administration, valuation, or similar services that expect indirect compensation from a source other than the plan or plan sponsor.1Federal Register. Reasonable Contract or Arrangement Under Section 408(b)(2)-Fee Disclosure
That last category is the one providers often misread. A consulting firm or TPA paid only a flat fee by the plan sponsor, with no indirect payments from any other source, may sit outside it. Once the provider or an affiliate collects revenue-sharing, finder’s fees, or similar third-party compensation, the disclosure duty attaches.
What the Disclosure Must Contain
The disclosure has to give the plan fiduciary enough information to judge the total cost of the arrangement. At a minimum it must describe the services to be furnished, state whether the provider will act as an ERISA fiduciary or registered investment adviser, and itemize all expected compensation.3eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space
Direct and Indirect Compensation
Direct compensation is any payment made by the plan itself or the plan sponsor to the provider. Indirect compensation is everything else, meaning payments the provider receives from any other source. Indirect compensation is where conflicts of interest tend to sit: a recordkeeper collecting revenue-sharing from mutual funds on its platform has an incentive to favor higher-cost funds, and the fiduciary needs to see that.
The regulation calls for specific disclosure of transaction-based and investment-related compensation, including commissions, Rule 12b-1 fees, soft dollars, finder’s fees, sales loads, deferred sales charges, redemption fees, surrender charges, exchange fees, and account fees.4eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space For each type of indirect compensation, the provider must identify the payer and describe the arrangement under which the payment flows.
Investment-Related Information
Providers that make designated investment alternatives available to the plan owe additional detail on each option, including compensation charged directly against the investment that is not part of the fund’s stated annual operating expenses. Sales charges, redemption fees, and surrender charges fall into this bucket: costs that participants do not see in a fund’s expense ratio but that still reduce their returns.4eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space
When the Disclosure Is Due
The initial disclosure has to reach the responsible plan fiduciary “reasonably in advance” of the date the contract is entered into, extended, or renewed.4eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space The regulation fixes no specific number of days, but the burden sits with the provider to show the fiduciary had enough time to review the information before signing.
After the initial disclosure, material changes to compensation or service arrangements must be reported as soon as practicable and no later than 60 days after the provider learns of the change. Changes to investment-related information must be disclosed at least annually.2U.S. Department of Labor. Final Regulation Relating to Service Provider Disclosures Under Section 408(b)(2)
What the Plan Fiduciary Should Do With It
Receiving a 408(b)(2) disclosure is not a filing exercise. The plan fiduciary, usually the plan sponsor or a designated committee, has a standing duty to prudently select and monitor every service provider, and the disclosure is the raw material for that job. The fiduciary needs to understand the total compensation flowing to the provider from every source, including indirect payments the plan never sees on an invoice.
The working test is whether the compensation is reasonable for the services received. Fiduciaries typically evaluate that by benchmarking disclosed fees against plans of similar size and complexity. A plan with $5 million in assets should not be paying the same per-participant recordkeeping fee as a plan with $500 million. The analysis should be documented: the data relied on, the alternatives considered, and the reasoning behind the conclusion. That file becomes the fiduciary’s defense if the arrangement is later challenged.
Fee reasonableness also shifts over time. An arrangement that fit a 50-participant plan may not fit the same plan at 500 participants if the provider’s economies of scale are not being shared. ERISA’s prudence standard demands periodic re-evaluation, not a single review at hiring.
What Happens If a Provider Doesn’t Disclose
When the 408(b)(2) exemption fails, the service arrangement becomes a prohibited transaction, and the consequences land first on the provider. Internal Revenue Code Section 4975 imposes an initial excise tax of 15% of the “amount involved” for each year or partial year the prohibited transaction remains uncorrected.5Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions The amount involved is generally the compensation paid under the arrangement.
If the provider fails to correct within the taxable period, a second-tier tax of 100% of the amount involved is imposed on top of the initial 15%. In dollar terms, a provider taking in $200,000 annually in plan compensation could face a $30,000 first-year tax, plus an additional $200,000 if the problem is not fixed.
The fiduciary side carries separate risk. A fiduciary who signs or continues a service contract without required disclosures may have breached ERISA’s prudence and loyalty duties. Under ERISA Section 409, a breaching fiduciary is personally liable to restore any losses the plan suffered. In serious cases, the Department of Labor can seek to bar the person from serving as an ERISA fiduciary going forward.
The Fiduciary Safe Harbor
The regulation gives fiduciaries a structured way out when the provider is the one at fault. To qualify for the safe harbor and avoid personal liability for the prohibited transaction, the fiduciary must satisfy every one of the following conditions.3eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space
- The fiduciary did not know the provider had failed or would fail to disclose and reasonably believed the required information had been furnished.
- On discovering the failure, the fiduciary requests the missing information from the provider in writing.
- If the provider does not comply within 90 days of the written request, the fiduciary notifies the Department of Labor. The notice must be filed within 30 days after the earlier of the provider’s refusal to furnish the information or the end of the 90-day window.
- If the information is still not furnished, the fiduciary determines whether to terminate or continue the arrangement, weighing the nature of the failure, the provider’s other services, and the plan’s available alternatives.
The DOL notice has to identify the plan, the fiduciary, and the provider, describe the services, spell out what the provider failed to disclose, and give the date of the written request. It can be filed electronically through the Department of Labor’s website or mailed to EBSA’s Office of Enforcement.6U.S. Department of Labor. Fee Disclosure Failure Notice A fiduciary who spots a disclosure failure and does nothing, or who sends the written request but misses the DOL notice deadline, loses the protection and may end up personally liable for plan losses tied to the prohibited transaction.