408(b)(2) vs. 404(a)(5): What 401(k) Plan Sponsors Need to Know About Fee Disclosures

If you sponsor a 401(k) plan, you’ve probably received a packet labeled “408(b)(2) disclosure” from your recordkeeper or advisor, while your employees receive a “404(a)(5)” participant fee disclosure. Both deal with plan fees, so it’s easy to treat them as the same thing. They aren’t.

This guide for business owners, HR leaders, and plan committees explains what each disclosure is, who sends it, what’s in it, when it’s due, and how to use it. It’s educational, not legal advice; please consult your ERISA counsel about your plan.

The short answer

• 408(b)(2) disclosures go from covered service providers (such as the recordkeeper, advisor, and third-party administrator) to the plan fiduciary who hires them, so the fiduciary can judge whether the arrangement and its costs are reasonable.
• 404(a)(5) disclosures go from the plan administrator to participants who direct their own investments, so they can make informed decisions.

One informs your decisions as a fiduciary; the other informs your employees’ decisions. Most 401(k) sponsors need both.

What is a 408(b)(2) disclosure?

Section 408(b)(2) of ERISA allows a plan to pay for necessary services only under a reasonable contract or arrangement, for no more than reasonable compensation. Under the Department of Labor’s regulation, an arrangement is reasonable only if each covered service provider gives the responsible plan fiduciary (usually the employer or plan committee that signs the service agreement) certain information in writing.

Covered service providers generally include firms serving the plan as an ERISA fiduciary or registered investment adviser, recordkeepers or brokers that make the plan’s investment menu available, and certain other providers, such as auditors, consultants, or third-party administrators, that receive indirect compensation. The rule applies to ERISA retirement plans such as 401(k) plans and ERISA-covered 403(b) plans, but not to SEPs, SIMPLE IRAs, or IRAs.

A 408(b)(2) disclosure must include:

• Services the provider will deliver.
• Status: whether the provider will serve the plan as an ERISA fiduciary or a registered investment adviser.
• Direct compensation paid by the plan, and indirect compensation from other sources, such as revenue sharing from investment providers, including who pays it and why.
• Termination compensation, including how prepaid amounts are refunded.
• Recordkeeping cost, with a good-faith estimate if recordkeeping is bundled or offset by other revenue.
• Investment information, such as expense ratios for the plan’s investment options.
• How fees are paid: billed to the plan or deducted from plan accounts or investments.

Timing rules:

• Initial disclosure: reasonably in advance of the date the contract is entered into, extended, or renewed.
• Changes: as soon as practicable, and no later than 60 days after the provider is informed of a change, barring extraordinary circumstances. Investment-information changes must be disclosed at least annually.
• Information requests: compensation information you request in writing for ERISA reporting and disclosure (the Form 5500, for example) must arrive reasonably in advance of the compliance date you give the provider.
• Errors: a good-faith error doesn’t make the arrangement unreasonable if the provider corrects it as soon as practicable, and within 30 days of learning of it.

What if a 408(b)(2) disclosure is missing or incomplete?

According to the DOL, if a covered service provider fails to disclose required information, the arrangement becomes a prohibited transaction for the responsible plan fiduciary, not just the provider. A class exemption offers relief to fiduciaries who didn’t know about the failure and reasonably believed the disclosures were complete, if they:

1. Request the missing information from the provider in writing.
2. Notify the DOL (EBSA offers an online Fee Disclosure Failure Notice) within 30 days if the provider refuses or doesn’t comply within 90 days of the request.
3. Decide whether to end or continue the arrangement, consistent with the duty of prudence. If the missing information relates to future services and isn’t provided promptly after the 90 days, the regulation requires terminating the arrangement as expeditiously as possible, consistent with that duty.

Because the stakes are high, involve your ERISA counsel before relying on this process.

What is a 404(a)(5) participant fee disclosure?

Despite searches for a “404(a)(5) plan,” it isn’t a type of retirement plan. It’s a disclosure rule for participant-directed plans, such as most 401(k) plans. The plan administrator, often the employer, must give participants and beneficiaries who direct their investments the information they need to make informed decisions. Recordkeepers often prepare these notices, but responsibility stays with the plan administrator, who generally isn’t liable for the accuracy of information it relies on reasonably and in good faith from a service provider.

The disclosure has two parts:

• Plan-related information: how to give investment instructions, the investment options and any brokerage window, and administrative fees (such as recordkeeping) and individual fees (such as loan processing) that may be charged to accounts.
• Investment-related information: for each option, its type, 1-, 5-, and 10-year performance alongside an appropriate benchmark, its expense ratio and other fees, a website for more detail, and a glossary, in a chart designed for side-by-side comparison. The DOL provides a model comparative chart.

Timing rules:

• Before a participant can first direct investments.
• At least annually, defined as at least once in any 14-month period, whether the plan uses a calendar or fiscal year. (A 2015 DOL amendment changed this from 12 months to 14.)
• At least quarterly, a statement of fees actually charged to the participant’s account in the prior quarter, noting if some administrative expenses were paid through investment expenses such as revenue sharing. This is often part of the quarterly benefit statement.
• Plan-related changes: generally 30 to 90 days before they take effect.

408(b)(2) vs. 404(a)(5) at a glance

“Which is more helpful?” is the wrong question

The original version of this article asked whether 408(b)(2) or 404(a)(5) is more helpful. That framing misses the point. The two disclosures serve different audiences, and they were designed to work together: the 408(b)(2) regulation requires providers to pass along the investment information plan administrators need for 404(a)(5) disclosures.

For a sponsor, 408(b)(2) is the working tool: it shows what the plan pays, to whom, and for what. 404(a)(5) is what employees see, and understanding the first helps you answer questions about the second.

How to use 408(b)(2) disclosures to benchmark fees

ERISA requires fiduciaries to pay only reasonable plan expenses. The DOL notes that the law doesn’t specify a permissible level of fees, but fees must be reasonable and should be monitored over time. Your 408(b)(2) disclosures are the raw material:

1. Gather every disclosure: recordkeeper, advisor, third-party administrator, and others.
2. Total direct and indirect compensation, including revenue sharing and investment expenses, not only what’s invoiced.
3. Express costs in comparable terms, such as a percentage of plan assets and per participant.
4. Compare with similar plans, since size and services affect pricing. See how often to benchmark your 401(k) plan fees and fee trends in small vs. larger plans.
5. Confirm the plan receives the services it pays for.
6. Document what you reviewed and decided in committee minutes. An investment policy statement can frame the investment side, and our plan benchmarking guide covers process tips.

An advisor with a fiduciary standard can help you gather this information and compare it with similar plans.

Example: A 60-employee company’s committee sees in its 408(b)(2) packet that the recordkeeper is paid partly through revenue sharing, with no separate recordkeeping cost shown. The committee requests the good-faith estimate the regulation calls for, compares total plan cost with similar-sized plans, and records its decision in the minutes.

Common mistakes plan sponsors make

• Filing the 408(b)(2) disclosure without reading it.
• Looking only at invoiced fees and missing indirect compensation.
• Not tracking change notices and renewals.
• Assuming the recordkeeper is responsible for 404(a)(5) notices. It may prepare them, but the plan administrator remains responsible.
• Missing the 14-month window for the annual participant disclosure.
• Not following up in writing when information is missing, and not documenting the fee review.

A simple 408(b)(2) and 404(a)(5) checklist

1. List every provider paid directly or indirectly from plan assets.
2. Keep a current 408(b)(2) disclosure from each covered service provider with plan records.
3. Review services, status, direct and indirect compensation, and how fees are paid.
4. Request missing information in writing, and calendar a 90-day follow-up.
5. Benchmark total plan fees against similar plans and document your conclusions.
6. Confirm annual 404(a)(5) notices go out within 14 months of the last one, and quarterly fee statements each quarter.
7. Review change notices as they arrive, and bring compliance questions to your ERISA counsel.

FAQs

What is a 408(b)(2) disclosure?

A written disclosure that covered service providers, such as recordkeepers, advisors, and third-party administrators, must give the plan fiduciary. It describes services, fiduciary or registered investment adviser status, and direct and indirect compensation, so the fiduciary can judge whether the arrangement is reasonable.

What is a 404(a)(5) participant fee disclosure?

The notice the plan administrator gives participants who direct their own investments. It explains how the plan works, what fees may be charged to accounts, and how the investment options compare on performance, benchmarks, and fees.

How often must the 404(a)(5) disclosure be provided?

Before a participant can first direct investments, then at least once in any 14-month period. Participants also receive a statement of fees actually charged to their accounts at least quarterly.

Is there a standard 408(b)(2) form?

No. The regulation spells out what must be disclosed but not a specific form, so disclosures vary by provider. If a required item is missing, ask the provider in writing.

When must a service provider disclose changes under 408(b)(2)?

As soon as practicable, and no later than 60 days after the provider is informed of the change, barring extraordinary circumstances. Investment-related changes must be disclosed at least annually.

What should we do if a provider doesn’t send its 408(b)(2) disclosure?

Request the information in writing. If the provider refuses or doesn’t comply within 90 days, the class exemption calls for notifying the DOL within 30 days and deciding whether to continue the arrangement. Consult your ERISA counsel.

Do these rules apply to 403(b) plans and SIMPLE IRAs?

They generally apply to ERISA-covered plans, including many 403(b) plans. SEPs, SIMPLE IRA plans, and plans not subject to ERISA, such as governmental plans, aren’t covered. 404(a)(5) applies only when participants direct their investments.

Want a second set of eyes on your plan’s fees?

If your 408(b)(2) disclosures are sitting in a drawer, or you’re not sure how your plan’s fees compare with similar plans, we can help. Retirement Partners of California offers fee benchmarking reviews for plan sponsors: we’ll walk through your disclosures with you, benchmark your plan’s fees against similar plans, and help you document the review. See how it works or explore our services for plan sponsors.