Consequences of Failure to Comply

Posted on November 7, 2011, by Fred Reish in 408(b)(2), fiduciary, Plan Sponsors, prohibited transaction, Service Providers. Comments Off on Consequences of Failure to Comply

This is another in the series of articles about the 408(b)(2) disclosures – and the consequences of a failure to comply.  This article discusses the legal responsibilities of plan sponsors.

If a service provider fails to make the required disclosures, then under ERISA both the service provider and the plan sponsor (that is, the responsible plan fiduciary) have engaged in a prohibited transaction. The 408(b)(2) regulation provides a procedure where plan sponsors can obtain relief for the failures of service providers; however, there is no similar provision for service providers.

What if the disclosures are made, but are not reviewed by the plan sponsor? Then the plan sponsor will have committed a fiduciary breach . . . since there is an affirmative obligation on fiduciaries to review and evaluate the compensation of service providers.

To take it a step further, what if the plan sponsor either fails to review the information, or does review the information, but fails to spot that excessive compensation is being paid to the covered service provider (for example, the recordkeeper or advisor). In that case, both the plan sponsor and the service provider will have engaged in a prohibited transaction. The service provider’s prohibited transaction is the receipt of the excessive compensation; the plan sponsor’s prohibited transaction is that it allowed the plan to pay unreasonable compensation. In these circumstances, there is not relief for the plan sponsor or for the service provider.

As a result, if the DOL or a plaintiff’s attorney spots the issue and files such a claim, both the plan sponsor and the service provider will be in a position of bearing the burden of proving that the compensation was reasonable. With benchmarking services and other comparative information, it will be easier for the Department of Labor and the plaintiff’s attorneys to identify cases where compensation may be excessive.


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