20.4 Which Service Providers Must Deliver Fee Disclosures & the Sponsor-Level §408(b)(2) Requirement
Key Takeaways
- ERISA §408(b)(2) requires a covered service provider expecting at least $1,000 in compensation to disclose its services, status and direct and indirect compensation to the responsible plan fiduciary in advance of the arrangement.
- Covered service providers are ERISA fiduciary service providers, registered investment advisers, recordkeepers and brokers offering a platform of designated investments, and providers receiving indirect compensation for named services.
- A fiduciary who receives no §408(b)(2) disclosure must request it in writing and, if it is not furnished within 90 days, notify the Department of Labor and terminate the arrangement to preserve exemptive relief.
- The §408(b)(2) disclosure runs from the provider to the plan fiduciary; the ERISA §404(a)(5) disclosure runs from the plan administrator to participants, and satisfying one does not satisfy the other.
Two Disclosures Running in Opposite Directions
Candidates conflate these constantly. They are different regulations, different directions, different recipients, and different deadlines.
| ERISA §408(b)(2) | ERISA §404(a)(5) | |
|---|---|---|
| Who discloses | The covered service provider | The plan administrator |
| Who receives | The responsible plan fiduciary (the sponsor) | Participants and beneficiaries |
| Purpose | Let the fiduciary judge whether fees are reasonable | Let participants understand what they pay |
| Timing | Reasonably in advance of the arrangement | On or before eligibility, then annually |
| Ongoing | Changes disclosed within 60 days of the provider learning of them | Annual disclosure plus quarterly statements of actual charges |
| Consequence of failure | Prohibited transaction under ERISA §406(a)(1)(C) | Fiduciary breach; no exemptive relief at stake |
Satisfying one does not satisfy the other.
The Statutory Problem §408(b)(2) Solves
ERISA §406(a)(1)(C) prohibits a plan from furnishing services with a party in interest — and every service provider becomes a party in interest by virtue of providing services. Without relief, every recordkeeping and advisory contract would be a prohibited transaction.
ERISA §408(b)(2) supplies the exemption, but conditions it: the arrangement must be reasonable, the services necessary, and no more than reasonable compensation paid. The 2012 regulation at 29 CFR §2550.408b-2(c) made the disclosure a condition of reasonableness. No disclosure, no exemption, and the arrangement becomes a prohibited transaction — with excise taxes under IRC §4975 reported on Form 5330.
Who Is a Covered Service Provider
A covered service provider (CSP) is a provider that enters into a contract with a covered plan and reasonably expects $1,000 or more in total direct and indirect compensation. Three categories:
1. ERISA Fiduciary Services
- A provider acting as an ERISA fiduciary to the plan;
- A provider acting as a fiduciary to an investment vehicle holding plan assets in which the plan invests;
- A provider registered as an investment adviser under federal or state law.
2. Recordkeeping and Brokerage Services
Providers of recordkeeping or brokerage services to a participant-directed individual account plan where designated investment alternatives are made available through a platform.
3. Other Services With Indirect Compensation
Providers of specified services — accounting, actuarial, appraisal, auditing, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third-party administration, or valuation — that receive indirect compensation or certain transaction-based compensation.
Who Is Not a Covered Service Provider
| Provider | CSP? |
|---|---|
| A TPA receiving only a flat fee paid directly by the sponsor, with no indirect compensation | No — direct-only compensation for those services, outside category 3 |
| An auditor paid a direct fee only | No |
| A provider expecting under $1,000 total | No |
| Any provider to a plan with fewer than 100 participants? | Yes, still covered — there is no small-plan exemption from §408(b)(2) |
| A provider to a SEP, SIMPLE IRA, or IRA | No — not a covered plan |
| A provider to a welfare plan | Not under this rule (a separate disclosure regime applies to group health plans) |
The absence of a small-plan exemption is the most reliably tested point here. Unlike the Form 5500 audit rules and the 80-120 rule, §408(b)(2) applies to a 6-participant plan exactly as it applies to a 6,000-participant plan.
What Must Be Disclosed
| Item | Requirement |
|---|---|
| Services | A description of the services to be provided |
| Status | Whether the provider will act as an ERISA fiduciary and/or a registered investment adviser |
| Direct compensation | Amounts received directly from the plan, in the aggregate or by service |
| Indirect compensation | Amounts received from any source other than the plan or sponsor — revenue sharing, 12b-1 fees, sub-transfer agency fees — including the payer and the arrangement under which it is paid |
| Related-party compensation | Compensation paid among the provider, affiliates, and subcontractors, if set on a transaction basis |
| Termination compensation | Any compensation payable on contract termination |
| Recordkeeping compensation | Specifically identified, including the reasonable and good-faith estimate where recordkeeping is provided without explicit cost |
| Investment disclosures | For designated investment alternatives, the annual operating expenses and ongoing charges |
The disclosure must be in writing, but need not be a single document and need not be signed by the fiduciary.
Timing
- Reasonably in advance of the date the contract is entered into, extended, or renewed;
- Changes: within 60 days of the date the provider is informed of the change;
- Errors: corrected within 30 days of discovery, with good faith preserved;
- On request: information a fiduciary needs to comply with reporting and disclosure obligations must be furnished reasonably in advance of the date the fiduciary states it is needed.
The Fiduciary's Duty When Disclosure Does Not Arrive
This procedure is precise and is tested as a sequence:
- Request the information in writing from the covered service provider.
- If the provider fails to comply within 90 days of the request, notify the Department of Labor.
- The DOL notification must be filed within 30 days of the earlier of the provider's refusal or the end of the 90-day period.
- Terminate the arrangement as promptly as prudent if the information relates to future services.
A fiduciary who follows this sequence retains the §408(b)(2) exemption even though the disclosure was never received. A fiduciary who simply lets it go has engaged in a prohibited transaction and is personally exposed.
Common ASPPA QKA Exam Traps
- Trap 1 — Reversing the direction of the two disclosures. §408(b)(2) is provider → fiduciary; §404(a)(5) is administrator → participant.
- Trap 2 — Assuming a small-plan exemption. There is none under §408(b)(2).
- Trap 3 — Treating a direct-fee-only TPA as a covered service provider. Category 3 turns on indirect compensation.
- Trap 4 — Missing the $1,000 threshold. It is total expected compensation, direct plus indirect.
- Trap 5 — Getting the 90/30 sequence wrong. 90 days for the provider to respond; 30 days after that for the fiduciary to notify the DOL.
- Trap 6 — Forgetting the consequence. Failure makes the service arrangement a prohibited transaction, with §4975 excise taxes on Form 5330.
A plan fiduciary requests missing ERISA §408(b)(2) disclosure in writing from a recordkeeper, which does not respond. What must the fiduciary do to preserve the prohibited transaction exemption?
Which statement about the scope of the ERISA §408(b)(2) service provider fee disclosure is correct?
How do the ERISA §408(b)(2) and §404(a)(5) disclosures differ?