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Being Reasonable: The Essence of 408(b)(2)
By Louis S. Harvey, CEO Dalbar, Inc. on Jul 12, 2012

With all this riding on being reasonable, the question of what constitutes reasonableness becomes a critical issue for the responsible plan fiduciary. Regulators rely on the “Prudent Person” standard of care to answer the question. Paraphrased to apply to reasonableness of services, the Prudent Person standard is acting in the interests of participants with care, skill, prudence and diligence with the available information that a prudent expert acting in a like capacity and familiar with such matters would consider reasonable.

Three requirements are at the core of ERISA Section 408(b)(2). These requirements are for responsible plan fiduciaries to ensure that services which are paid for by participants are 1) necessary, 2) reasonable and 3) that the cost is reasonable.

Determining whether a service is necessary is fairly straightforward. If there is a regulation, business need or participant need then the service is clearly necessary. If the responsible plan fiduciary is unable to provide the necessary service it must be outsourced to a competent provider.
Determining whether a service is reasonable and that the costs are reasonable is a more intricate matter and depends on what the responsible plan fiduciary considers reasonable. There are any number of analogies that illustrate the variability of reasonableness, including restaurants, hotels, clothing, sporting events, etc.
This variability proves that no common standard for reasonableness can exist, but instead reasonableness depends on the value placed on the service by the responsible plan fiduciary. One responsible plan fiduciary may consider personal service to be highly valuable and be unconcerned with the technology platform or capitalization of a service provider. Another, in a similar circumstance, may value technology very highly and consider the high touch approach to be undesirable.
The first principle of complying with 408(b)(2) is that reasonableness varies according to the value to the responsible plan fiduciary, acting on behalf of plan participants. In other words, each responsible plan fiduciary must exercise his/her judgment of the value of services.
The next consideration is that responsible plan fiduciary must be able to demonstrate that the reasonableness decision was arrived at through a prudent process, acting in the best interest of participants. The ability to demonstrate this is essential to answer examinations by regulators and to defend against litigation.
Demonstrating a prudent process begins with expert standards that are used to determine the value of the services. The expert standards in the case of plan services are the items considered essential in assessing the value of these services. Responsible plan fiduciaries who are experts in plan services should establish their own standards but if not, should turn to an independent expert to provide the standards.
Standards used by Dalbar are factors, grouped into four categories. These are categories are factors that 1) contribute to the success of the plan, 2) meet the needs and preferences of the responsible plan fiduciary and participants, 3) limit liability and 4) define the range and quality of services.
The second principle of complying with 408(b)(2) is having a well defined set of items that are considered in determining value.
The third principle is to maintain records of what went into the decision to retain or remove a service provider or other action that was taken. This documentation is essential to demonstrate the process that was used.

Using this approach, the concept of being reasonable is transformed into a business process that reflects the judgment of the responsible plan fiduciary.


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Louis S. Harvey
President & CEO



Founder and leader of Dalbar, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Using Dalbar’s research capabilities, Lou Harvey seeks insights from inside and outside the industry to understand and anticipate changes in customers’ needs and the ways products are distributed.


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