408(b)(2) is a pending regulation that amends a prohibited transaction rule under ERISA and the Internal Revenue Code.  That rule says that it is a prohibited transaction for a plan to enter into an arrangement with a service provider unless the “arrangement” is reasonable and the compensation being received by the service provider is reasonable.  The regulation adds disclosure requirements for the service provider so that plan fiduciaries can determine whether a service provider arrangement is reasonable.

Historically it has been difficult for plan fiduciaries acting on behalf of their respective companies to accurately determine whether or not their plan related fees were reasonable.  In fact, many believed that they were receiving certain plan related services for “free” when actually plan participants were footing the bill by paying higher expenses associated with their chosen investment vehicles.  Over time these higher investment related fees incurred by plan participants erode the amount of money set aside for their retirement years.  Given the fact that many are not adequately prepared for retirement, something needed to be done.

408(b)(2) will equip plan fiduciaries with the knowledge of service provider fees needed to accurately select and deliver a retirement benefit program that is in the best interest of their plan participants.  This should ultimately lead to lower plan participant costs and over time add more money to their retirement accounts.

This article was last updated on October 14, 2011