ERISA 408(b)(2) Fee Disclosure and Indirect Compensation

ERISA Section 408(b)(2) requires every covered service provider to a retirement plan to give the plan’s responsible fiduciary a written description of its services, its status as a fiduciary or registered investment adviser, and all compensation it expects to receive, whether that money comes from the plan, the employer, or a third party the fiduciary would otherwise never see. Without that disclosure, the service arrangement loses its exemption from ERISA’s prohibited transaction rules, and both the provider and the plan are exposed to penalties.

Which Providers Have to Disclose

Three categories of providers are covered. The first is any provider that acts as an ERISA fiduciary or as a registered investment adviser to the plan or to an investment vehicle holding plan assets. The second is recordkeepers and broker-dealers that offer a platform of designated investment alternatives for participants. The third covers accounting, actuarial, consulting, custodial, insurance, legal, third-party administration, and valuation services, but only when the provider expects to receive at least $1,000 in indirect compensation for the work.¹

The rule covers pension plans and retirement savings vehicles like 401(k) and profit-sharing plans. It does not apply to health or welfare benefit plans in its original form.¹ A separate statute reaches group health plan brokers; more on that at the end.

What the Written Disclosure Must Contain

Every disclosure begins with a description of the services the provider will perform. Bundled arrangements often blur the line between recordkeeping, investment advice, and plan administration, and a fiduciary can only judge whether a fee is reasonable when the fee is tied to a specific service.

The provider must also state whether it will act as an ERISA fiduciary or a registered investment adviser in connection with the plan.¹ That status affects who carries legal liability for investment advice. A Section 3(21) adviser makes recommendations while the plan sponsor keeps the final decision; a Section 3(38) investment manager has full discretion. When a 3(38) manager actually exercises that discretion, the sponsor who appointed it generally will not be liable for investment losses the manager causes, provided the sponsor followed a prudent selection and monitoring process.

Direct Compensation

Direct compensation is any payment the provider receives straight from plan assets or from the sponsoring employer. The disclosure must state the exact dollar amount or the formula: a percentage of assets under management, a flat annual retainer, a per-participant charge. It must also explain how the fee is paid, whether by separate invoice or by deduction from participant accounts.¹

Indirect Compensation

Indirect compensation is any payment the provider receives from a source other than the plan or the employer. The provider must identify who is paying, what services justify the payment, the amount or formula, and the arrangement under which the money flows, so the fiduciary can see potential conflicts of interest.¹ This is where most of the complexity in a retirement plan fee structure lives, and it gets its own section below.

Termination-Related Compensation

The disclosure must describe anything the provider will collect if the contract ends, including surrender charges, deferred sales charges, and early termination penalties. If prepaid fees are involved, the disclosure must explain how a refund would be calculated.² Fiduciaries often overlook this during initial negotiations and discover a large surrender charge only when they try to change providers.

The Kinds of Indirect Compensation to Look For

Most plan sponsors write one check for recordkeeping and assume that is the provider’s total pay. In reality, the recordkeeper or adviser may collect several additional streams from the investments on the platform.

12b-1 fees are charged by mutual funds to cover marketing and distribution, and a portion typically flows to the broker or adviser that placed the fund on the menu. Sub-transfer agency fees pay recordkeepers for maintaining individual participant records on behalf of the fund company. Shareholder servicing fees cover the cost of answering participant questions and processing account transactions.²

Revenue sharing is the broadest category. A portion of a fund’s internal expense ratio is paid back to the recordkeeper, effectively subsidizing the cost of plan administration. This is not automatically improper, but it creates a conflict when the recordkeeper has a financial reason to keep higher-cost share classes on the platform because those classes generate more revenue sharing. To evaluate reasonableness, a fiduciary has to add revenue sharing to the direct recordkeeping fee to see the provider’s total economic benefit.

Float is another form that often goes unnoticed. When cash sits in a holding account between transactions, the custodian earns interest on it. Float can arise when contributions have arrived but have not been invested, when cash is held pending trade settlement, or when a distribution has been authorized but not yet paid out. Custodians and recordkeepers must disclose float as indirect compensation.

When the Disclosure Is Due and How Updates Work

The initial disclosure has to reach the plan’s responsible fiduciary reasonably in advance of the date the service contract is entered into. The regulation does not set a fixed number of days; the phrase means enough time for the fiduciary to actually review the information before committing the plan.¹

Two update rules follow. If previously disclosed information changes, the provider must notify the fiduciary as soon as practicable and no later than 60 days after learning of the change. If the provider discovers an error or omission in a prior disclosure, the correction must go out within 30 days of discovery, provided the provider has been acting in good faith.¹

Providers must also furnish compensation information whenever the plan fiduciary or administrator requests it for reporting purposes, such as completing Form 5500.

What Happens When a Provider Doesn’t Disclose

Section 408(b)(2) exempts service arrangements from ERISA’s prohibited transaction rules when the services are necessary, the arrangement is reasonable, and the compensation is no more than reasonable.² When a provider fails to make the required disclosures, the arrangement no longer qualifies for that exemption, and it becomes a prohibited transaction under ERISA Section 406.³

A prohibited transaction triggers an initial excise tax of 15% of the amount involved for each year or partial year the violation continues. If the transaction is not corrected within the taxable period, an additional tax of 100% of the amount involved applies. The tax falls on the disqualified person who participated in the transaction, and for service arrangements the “amount involved” is limited to the excess compensation, meaning the portion above what would be considered reasonable.⁴ The excise tax is reported and paid on IRS Form 5330, due by the last day of the seventh month after the end of the filer’s tax year.⁵

What the Fiduciary Has to Do

A fiduciary who realizes a provider has not delivered the required disclosures cannot simply wait. The regulation lays out a specific path that also protects the fiduciary from liability for the provider’s failure:

Send the provider a written request for the missing information.
If the provider does not furnish it within 90 days of the request, notify the Department of Labor of the failure.⁶
Decide, on the plan’s best interests, whether to terminate the arrangement. Continuing with a non-compliant provider without a documented rationale is itself a potential breach of fiduciary duty.

Following that process gives the fiduciary access to a regulatory exemption that shields them from personal liability for the provider’s disclosure failure. Skipping any step, or ignoring a known gap, gives it up.

Turning the Disclosure Into a Fee Reasonableness Decision

Receiving the disclosure is only the first step. ERISA requires fiduciaries to use the information to determine whether the fees being charged are reasonable for the services provided.⁷ A disclosure that shows a recordkeeper earning $150 per participant in direct fees plus another $80 per participant through revenue sharing tells the fiduciary the true cost is $230 per participant, a figure that can be compared against competitive bids.

A defensible process pulls together all direct and indirect compensation from the disclosure, compares total provider compensation to industry benchmarks, checks whether the plan is using the most cost-effective available share classes, and periodically runs a formal request-for-proposal. You cannot benchmark what you cannot see, which is the point of the disclosure requirement.

Watch how revenue sharing is applied. If those payments offset the employer’s out-of-pocket costs rather than being credited back to participants, and lower-cost share classes with less revenue sharing are available, that raises a fiduciary issue.

Group Health Plan Brokers Are Covered by a Separate Rule

The retirement plan version of 408(b)(2) does not reach health and welfare plans, but a separate provision in the Consolidated Appropriations Act of 2021 does. Since December 27, 2021, brokers, consultants, and their subcontractors who expect to receive more than $1,000 for services to an ERISA-covered group health plan must disclose all direct and indirect compensation to the plan fiduciary.⁸ The DOL’s initial enforcement approach, in Field Assistance Bulletin 2021-03, focuses on providers who do not follow a good-faith, reasonable interpretation of the statute. A detailed final regulation comparable to the retirement plan version has not been published, so providers work from the statutory text and the enforcement guidance.

1
U.S. Department of Labor. Fact Sheet: Service Provider Disclosure Regulation
2
eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space
3
Office of the Law Revision Counsel. 29 USC 1106 – Prohibited Transactions
4
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
5
Internal Revenue Service. Instructions for Form 5330
6
eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space
7
U.S. Department of Labor. FAQs About Retirement Plans and ERISA
8
U.S. Department of Labor. U.S. Department of Labor Announces Enforcement Policy on Disclosure Requirements for Group Health Plan Service Providers