With the launch of our new custom 408(b)(2) checklists, we’ve received numerous inquires as to whether it is proper for a Covered Service Provider (CSP) of a plan to assess their own services and fees under 408(b)(2). We think this a very interesting question as to which there is no definitive guidance from the Department of Labor (DOL). With no specific DOL prohibition, we conclude that a CSP is free to provide an “initial assessment” of their fees and services to a Responsible Plan Fiduciary (RPF) as long as the substance and the spirit of the 408(b)(2) regulations and other ERISA fiduciary duties are followed. However, a RPF must ultimately be the one to who signs off on the “final assessment.”
What do we mean by initial and final assessment? An initial assessment would be the process of gathering all of the information necessary to make a determination whether 408(b)(2) has been complied with. This involves collecting a CSP’s disclosure, service agreement, and reviewing for compliance issues. The final assessment involves a review of this compiled information, as well as making the ultimate fiduciary decision of whether 408(b)(2) is satisfied.
The following considerations lead us to our conclusion:
The first consideration is that 408(b)(2) specifically requires a RPF of a plan to assess whether a CSP’s fees are reasonable and services necessary. A RFP is defined as a fiduciary with authority to cause the covered plan to enter into, or extend or renew, the contract or arrangement. In all reasonable circumstances, this will never include the CSP. Thus it follows that the RPF must be the one who takes the ultimate responsibility for the assessment.
The second consideration is that a prudent fiduciary under ERISA is required to seek out assistance in areas that they themselves lack expertise. This is primarily the reason for the vast expansion of services provided by ERISA 3(21) investment advisors. Thus, it follows that it is consistent with prudent behavior for a RPF to seek help with their 408(b)(2) obligations at the initial assessment phase, if they feel they do not have the expertise.
The third consideration is that a prudent fiduciary under ERISA is also required to ensure that a plan pay only reasonable fees. If a RPF concludes that it is proper for a 408(b)(2) assessment to be paid from plan assets (which there has been no guidance on but one can easily make the argument that it falls in line with other expenses that have been approved by the DOL to be paid from plan assets), then the RPF has an obligation to ensure the fees are reasonable. It follows that a plan CSP already has an intimate knowledge of the plan, and presumably they are helping to assess the other CSPs of the plan, so there are economies of scale to be leveraged here by using them.
The fourth and final consideration is ERISA’s loyalty requirements and the duty to avoid conflicts of interest. Whether a plan CSP is used to assess its own fees and services or an independent firm is used, the RPF must ultimately sign off on the findings of necessity and reasonableness. Given that 408(b)(2) only allows the RPF to do this and the personal liability at stake, it is not proper for the RPF to just “skim and sign” an assessment put in front of them, even if prepared by an independent firm. The RPF cannot delegate the process of getting involved and making a decision. Thus, the RPF’s heightened involvement by definition eliminates any conflict from a plan CSP initially assessing their own fees and services because the RPF will itself make an independent examination, even if they get help in initially preparing needed information.
When prudent and loyal considerations are observed, we believe that a plan CSP can help conduct an assessment of its own services and fees under 408(b)(2) as long as the RPF is the final authority that determines whether the results of the assessment prove fees are reasonable for services rendered and that disclosures are complete in comparison to the regulations. If the RPF concludes they lack the necessary expertise, plan CSPs that assist the RPF offer a value added service that provides the RPF both time and cost efficiencies.