Plan Fee
Disclosures Due
August 30th –
Action Required
Robert A. Lavenberg, CPA,JD,LL.M
BDO USA LLP
®
®
Mark D. Mensack, AIFA ,FDE
Independent Fiduciary Consultant
Proposed Definition of Fiduciary Rule
- Who’s a Fiduciary?
- Named Fiduciary (specifically named or appointed)
- Functional Fiduciary (due to job functions performed)
“Day-toDay”
Decisionmakers
Functional
Fiduciaries
“HighLevel”
Decisionmakers
Plan Fee Disclosures Due August 30th – Action Required
Page 2
Fiduciary Responsibilities
Act Solely In
Interest of
Participants &
Beneficiaries
Identify Parties
In Interest
Make Policy
Decisions
Monitor Service
Providers
Act Under ERISA
Standards of
Conduct (as a
“Prudent”
Fiduciary)
Ensure Plan Pays
Only Reasonable
Fees
Plan Fee Disclosures Due August 30th – Action Required
Page 3
Fiduciary Responsibilities: Ensure Plan Pays Only
Reasonable Fees
Understand How
Fees Are Paid
(Paid by Sponsor,
the Plan, Both or
by Other Means?)
Continually
Monitor Fees &
Expenses
Obtain
Explanation of
Direct & Indirect
Fees from Service
Providers
Plan Fee Disclosures Due August 30th – Action Required
Page 4
Not Meeting Fiduciary Responsibilities?
Personal Criminal Liability
(Including imprisonment)
Personal DOL Civil Liability
for 20% to 50% of Monies
Recovered
Personal Liability under
ERISA §409
Civil Liability of Sponsor
(2008 LaRue Decision)
Plan Fee Disclosures Due August 30th – Action Required
Page 5
Improved Transparency through 3-Pronged Fee Disclosure
Regulations
Service Provider
Fee Disclosures Form 5500
Schedule C
Service
Provider Fee
Disclosures to
Fiduciaries 408(b)2
Plan Fee Disclosures Due August 30th – Action Required
Page 6
Fee
Disclosures to
Participants –
404(a)5
Regulatory Update: Implementation of Fee Disclosures
404(a)(5)
First Annual
Disclosures
(Effective
August 30,
2012)
Form 5500
Schedule C
Disclosures
(Effective
2009)
Regulations
408(b)(2)
Disclosures
(Effective July 1,
2012)
Plan Fee Disclosures Due August 30th – Action Required
Page 7
First Quarterly
Disclosures to
Participants
Effective
November 14,
2012
408(b)(2) Disclosure Rules
All services to be provided under the
agreement
• A Covered Service
Provider must disclose:
The compensation or fees to be received
for each service
The manner of receipt of compensation or
fees
Information about conflicts of interest
There is integration of these
items with the disclosures on
Form 5500, Schedule C.
Plan Fee Disclosures Due August 30th – Action Required
Page 8
Who is a Covered Service Provider?
Receives $1,000 or more in
DIRECT and/or INDIRECT*
compensation:
• Fiduciary
• Serving investment contract,
product or entity that holds
assets, in which plan has direct
equity investment
• Directly serving as advisor,
manager or administrator
Receives $1,000 or more in
INDIRECT compensation:
• Accounting
• Auditing
• Legal
• Investment consulting
• Custodial
• Actuarial
• Appraisal
*“…several billion dollars of revenue-sharing fees are being hidden annually
from plan sponsors and plan participants…”
Jay Sanders, The CPA Journal, NYSSCPA, 2005
Plan Fee Disclosures Due August 30th – Action Required
Page 9
Consequences of non-compliance?
Covered Service
Provider become
disqualified person
All transactions
between the Plan
and a disqualified
person are
prohibited!
Plan Fee Disclosures Due August 30th – Action Required
Page 10
Prohibited
transactions must
be reported on
Form 5500 and as
schedule to
financial statements
Questions as to why
the fiduciary is
allowing the plan to
pay fees to a
disqualified person
404(a)(5) Disclosure of Fees & Expenses to Participants
Plan Sponsors must use data provided by CSP under 408(b)(2 )to prepare
a participant disclosure under 404(a)(5) which includes:
- Plan-related information
•
•
•
General plan information
Administrative expense info
Individual expense info
- Investment-related information
•
•
•
Performance data in an “apples to apples” comparison format
Benchmarking info
Fee & expense info
Quarterly statements must disclose specific fees & expenses deducted from individual accounts
Plan Fee Disclosures Due August 30th – Action Required
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404(a)(5): Quarterly & Annual Disclosures to Participants
Quarterly
Disclose investment
expenses per $1,000
of investment
Quarterly
Report of expenses
allocated to &
incurred directly by
participant
November 14th
First disclosure due
Plan Fee Disclosures Due August 30th – Action Required
Page 12
Annual
Plan-related
information
August 30th
First disclosure due
404(a)(5)
Quarterly &
Annual
Disclosures
Annual
Investment-related
info (comparative
format)
Why Does It Matter to the Participant?
Investment
Returns
Contributions
Current
Plan
Balance
Assets
Needed to
Retire
Fees
1% in excess fees over the average American’s working lifetime,
reduces a participant’s nest egg at retirement by 28%
DOL, EBSA Website
Plan Fee Disclosures Due August 30th – Action Required
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Intent of New Rules
Plan Participant
Service Provider
404(a)(5)
408(b)(2)
Plan Sponsor
Plan Fee Disclosures Due August 30th – Action Required
Page 14
Intent of New Rules
• Force Plan Sponsors to be engaged in the fiduciary process
• Force service providers to disclose fees & compensation
• Expose indirect 401k costs
• Engage participants in order to apply downward pressure on 401k costs
“Over the ten-year period 2012-2021, the Department estimates that the present value of
the benefits provided by the final rule will be approximately $14.9 billion…”*
*http://www.dol.gov/ebsa/pdf/frparticipantfeerule.pdf
Plan Fee Disclosures Due August 30th – Action Required
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ERISA 404(a)(5): A Game Changer?*
• Section 404(a)(5) of ERISA…requires that every one of 72 million plan
participants are told something that they never knew…how much they pay
each quarter for their 401(k) plan.*
• …this amount is not some complex formula or even a percentage but is
dollars and cents that can be compared to their mortgage, rent, car
payments or what they spend on vacation.
• Consider if only one in ten people who discover what they actually pay
become concerned and do what comes naturally… Many of these
concerned people will camp out at their plan administrator’s door,
demanding to know why they are paying so much!
*Dalbar Report, February 2012
*71% of 72 million participants believed they paid no fees - AARP, 2011
Plan Fee Disclosures Due August 30th – Action Required
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Reality of New Rules
Plan Sponsor
408(b)(2)
Rock
Plan Fee Disclosures Due August 30th – Action Required
Page 17
404(a)(5)
Hard
Place
Take Action - Step One
The Prohibited Transaction Exemption
In order to understand your responsibilities under Rule 408(b)(2) the first step
is to understand the Prohibited Transaction Exemption.
ERISA § 406(a)(1)(c) prohibits plan assets to be used to pay ANY party in
interest for ANYTHING! Violation of this statute is a prohibited transaction!
ERISA §408(b)(1) provides a prohibited transaction exemption only if three
criteria are met:
1. The services must be necessary for the operation of the plan;
2. The services must be furnished under a contract or arrangement
which is reasonable and;
3. No more than reasonable compensation is paid for the service.
Plan Fee Disclosures Due August 30th – Action Required
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July 1st – What should’ve happened?
• Covered Service Provider (CSP) delivered a written disclosure
which included:
- CSP’s Fiduciary Status
- Listing of services rendered by CSP
- Compensation or fees for each service
- Description of the arrangement between the CSP and whoever is
paying the CSP
• This information SHOULD be sufficient for the plan sponsor
to prepare the 404(a)(5) participant disclosure by Aug 30th
What could’ve happened?
• CSP failed to provide any disclosures
• CSP provided incomplete disclosures
• Additional information is needed to determine if the
contract or arrangement is reasonable and/or conflict
free.
*For simplicity these scenarios are “Problem Disclosures”
Take Action - Step Two
• In the event of a problem disclosure situation:
- Plan Sponsor MUST demand necessary information in a
comprehensible format
• If CSP fails to provide this info within 90 days of the request:
- Plan Sponsor MUST report CSP to DOL within 30 days, AND
simultaneously begin the process to replace the CSP as
expeditiously as possible*
• Failure to terminate a non-compliant CSP would be a fiduciary
breach under ERISA 404(a)*
*29 CFR 2550.408b-2(c)(1)(ix)(G); 77 FR 5647-48 (2-3-12)
Take Action - MUST?
“The Department does not believe that responsible plan fiduciaries should be
entitled to relief provided by the class exemption absent a reasonable
belief that disclosures required to be provided to the covered plan are
complete.
To this end, responsible plan fiduciaries should appropriately review the
disclosures made by covered service providers. Fiduciaries should be able to, at
a minimum, compare the disclosures they receive from a covered service
provider to the requirements of the regulation and form a reasonable
belief that the required disclosures have been made.” *
Translation: If you don’t fulfill Step Two, YOU are party to a prohibited
transaction!
*77 FR 5647-48 (2-3-12)
Can’t I just pass on the CSP’s disclosure?
“The regulation requires two things to happen: The disclosure to be
made, and then, the determination that the disclosure is reasonable,
that the contract is necessary, and that the fees are reasonable.
So relying on the service provider’s disclosure would be a mistake on the
part of the plan fiduciary. The whole idea is to go through a prudent
process and make sure that everything is reasonable. So if he just
accepted the disclosures on the part of the service providers, it wouldn’t
meet the terms of the exemption… Clearly the regulation sets out that
it’s the responsibility of the sponsor to make the determination. So I
guess a short answer to the question is no, a plan sponsor cannot
rely on service providers.”
Mary Rosen, Associate Regional Director,
DOL Employee Benefit Security Administration
Plan Fee Disclosures Due August 30th – Action Required
Page 23
Take Action – Step Three
What do I do with the disclosures?
• Read the disclosures & any referenced disclosure documents
• Understand what services are being provided
• Determine if there are conflicts of interest
• Determine if fees/comp are reasonable
• Determine if the disclosures meet 408(b)(2) requirements.
• Prepare & deliver participant 404(a)(5) disclosure by August 30th
If the disclosures don’t make sense, or if you aren’t able
to use them to complete the tasks above, see Step Two!
Take Action – Step Three
What do I do with the disclosures?
The DOL will be looking for:
- Documentation that a prudent process was used
- Actions that are taken in response to an unreasonable finding
- Conflicts of interests are identified and addressed
- Prohibited Transactions
• So you want evidence that:
- Fees are reasonable relative to services
- Services are necessary
- The contract under which services are provided is reasonable
- 404(a)(5) Participant disclosure
Plan Fee Disclosures Due August 30th – Action Required
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The Potential Challenges
of Step Three
• Regulations permit disclosures that are a patchwork, requiring plan
sponsors and participants to do a scavenger hunt without the clues to
put the pieces together…
Dalbar, Inc.
• The burden of having to reasonably believe that service providers
disclosed the requisite information is of great concern.
Jeff Mamorsky
• That, in effect, requires the employer plan sponsor to retain experts to
ascertain compliance with the regulations and identify all “hidden”
fees.
Jeff Mamorsky
Plan Fee Disclosures Due August 30th – Action Required
Page 26
.
“Disclosures that are a patchwork”
How bad could it be?
Three approaches to disclosure:
- Spirit of the Law
- Letter of the Law
- Business as Usual / Needle in a Haystack
Spirit of the Law
What should’ve happened
“Based on an understanding of what plan sponsors are required
to do, the service provider presents the required disclosure in an
easily understood format that can be used directly to fulfill the
plan sponsors obligations under both 408(b)(2) and
404(a)(5).”
Lou Harvey, Dalbar Inc.
.
Plan Fee Disclosures Due August 30th – Action Required
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Letter of the Law
Consolidates existing language and tables from various
sources into a single document, thus requiring the plan
sponsor to navigate the legal and technical language to
assess reasonableness.
Lou Harvey, Dalbar Inc.
Plan Fee Disclosures Due August 30th – Action Required
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Letter of the Law
“In 2011, when viewed in relation to total MSSB client assets of in excess
of $1.6 trillion, the payment made by each* such service provider…equaled
an amount of not more than 31/10,000 of one basis point (otherwise expressed,
31/1,000,000 of one percent). We do not believe that such payments were
made in connection with retirement plan business specifically, and were
certainly not made in connection with any particular retirement plan, but,
for perspective, the amount of retirement plan assets included in the total MSSB
client asset number set forth above is approximately $112 billion.”
*28 service providers listed below this paragraph
How do you use this info to prepare your 404(a)(5) disclosure?
Plan Fee Disclosures Due August 30th – Action Required
Page 30
Letter of the Law
“In 2011, when viewed in relation to total MSSB client assets of in excess
of $1.6 trillion, the payment made by each such service provider…
equaled an amount of not more than 31/10,000 of one basis point
(otherwise expressed, 31/1,000,000 of one percent).”
31/10,000 = 0.0031% or 0.00000031
$1,600,000,000,000 x 0.00000031 = $496,000
$496,000 from EACH
28 listed (“but other providers may have made similar payments.”)
28 x $496,000 = $13,888,000?
Problem disclosure?
Plan Fee Disclosures Due August 30th – Action Required
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Take Action
“If you have any questions regarding our services or compensation
in connection with your qualified retirement plan, or if you would
like to request hard copies of the referenced disclosure documents,
please reach out to your MSSB Financial Advisor or call MSSB
Client Support line…”
If you receive a problematic disclosure from your CSP
immediately demand, in writing, a comprehensible
explanation! Putting your CSP on the spot is the only way to
protect yourself from a prohibited transaction!
Plan Fee Disclosures Due August 30th – Action Required
Page 32
Needle in a Hay Stack
Does not present the relevant information in one place but
instead list a number of references, prospectuses, websites,
plan documents, etc., where the plan sponsor can search
for answers.
Lou Harvey, Dalbar Inc.
Plan Fee Disclosures Due August 30th – Action Required
Page 33
Needle in a Hay Stack
Plan Fee Disclosures Due August 30th – Action Required
Page 34
Needle in a Haystack QUIZ
• How many documents / pages must a plan sponsor review
in order to read all of the available fee & compensation
information before adopting a group annuity 401(k) plan?
(Lets assume there is just one mutual fund in the plan!)
• a) 2 documents / 127 pages
• b) 7 documents / 539 pages
• c) 34 documents / 827 pages
Answer: B
1.
2.
3.
4.
5.
6.
7.
Prospectus – 72 pages
Statement of Additional Information (SAI)– 285 pages
Annual Report – 44 pages
Semi-Annual Report – 36 pages
Group Annuity Contract – 33 pages
Plan Level Documents – 58 pages
Admin. Service Agreement – 11 pages
How long will it take to prepare your
404(a)(5) participant disclosure?
Plan Fee Disclosures Due August 30th – Action Required
Page 36
7 Documents
539 Pages
One Needle in the Haystack
•
…Each sub-adviser may cause a fund to pay a broker-dealer an amount in
excess of the amount that another broker-dealer would have charged for the
same transaction, in exchange for “brokerage and research services”…
Neither the management fees nor the sub-advisory fees are reduced
because the sub-advisers receive these products and services. These products
and services may be of value to the sub-advisers in advising their clients (including the
funds), although not all of these products and services are necessarily useful and
of value in managing the funds.
•
• These products and services may include research reports, access to management
personnel, financial newsletters and trade journals, seminar and conference fees…
Hartford Advisor SAI Page 167 of 285
Under Step Three, how would you handle this disclosure?
TAKE ACTION
When in doubt ALWAYS remember the three requirements
required in order to gain the protection of the prohibited
transaction exemption:
1. The services must be necessary for the operation of the plan;
2. The services must be furnished under a contract or
arrangement which is reasonable and;
3. No more than reasonable compensation is paid for the service
Plan Fee Disclosures Due August 30th – Action Required
Page 38
Another Needle in a Haystack
1.10%
0.98%
0.37%
0.25%
2.7%
Avg. Expense Ratio
Investment Management & Admin Charge
Annual Charges & Fees
Contract Asset Charge
Total Cost
These were the expenses on an $8 million plan
Investment Management & Admin Charge
The IM and Admin Charges are 0.93%
The IM and Admin Charges are 0.94%
The IM and Admin Charges are 1.11%
The IM and Admin Charges are 0.97%
The IM and Admin Charges are 1.21%
Page 66 of 68
Plan Fee Disclosures Due August 30th – Action Required
Page 40
What if the plan sponsor fails to spot
excessive compensation?
 Both the plan sponsor and the service provider engaged in a PT.
 The service provider’s PT is the receipt of the excessive compensation;
 The plan sponsor’s PT is that it allowed the plan to pay
unreasonable compensation.
In these circumstances, there is no relief for the plan sponsor or
for the service provider.
Fred Reish, Esq.
What’s Unreasonable?
Plan Fee Disclosures Due August 30th – Action Required
Page 42
What’s Unreasonable?
Haystack Plan
1.10%
0.98%
0.37%
0.25%
2.7%
Avg. Fund Costs
IM & A Charge
Annual Charges & Fees
Contract Asset Charge
Total Cost
Spirit of the Law Plan
0.40%
0.20%
0.06%
0.50%
1.16%
Avg. Fund Costs
Admin
Custodial Fee
Fiduciary Adv. Fee*
Total Costs
2.7% - 1.16% = 1.54%
$8,000,000 x 1.54% = $123,200
$123,000 / 63 participants = $1,955 per participant annually
Which set of fees would you want to disclose to your participants?
Plan Fee Disclosures Due August 30th – Action Required
Page 43
*This quote included an ERISA 3(38) fiduciary
Fiduciary Status
• Pay special attention to your service provider’s fiduciary status in the
408(b)(2) disclosure, and ignore marketing materials.
• Excerpt from a “Fiduciary Warranty”:
“…we are committed to helping you meet the highest fiduciary
standards in the investment selection and monitoring process and commit
to restore losses and pay litigation costs in the event that legal action is
brought against qualifying plans. Now that’s security for your plan!”
• “Review the minimum Fund requirements and a copy of the Warranty
Certificate (PS 9613) to see if your plan qualifies.”
Fiduciary Status
“Also, since past performance is not a guarantee of future results, we
cannot warrant or guarantee either that any investment option will
yield any specific return, or even that it will yield a positive return.
Nor does our Fiduciary Standards Warranty extend to claims
that any expenses paid directly or indirectly by the Plan are
reasonable.”
John Hancock Warranty Certificate, PS9613, 12/05 – 10024
Take Action – Step Three
Can I handle this in-house?
If you have a:
Spirit of the Law 401k – Probably yes
Letter of the Law 401k – Probably not
Haystack 401k – Highly unlikely
What if I’m not comfortable doing this in-house?
“Unless they possess the necessary expertise to evaluate such factors,
fiduciaries would need to obtain the advice of a qualified, independent
expert.”
DOL Reg. § 2509.95-1(c)(6)
Plan Fee Disclosures Due August 30th – Action Required
Page 46
408(b)(2) Outsourcing
Dalbar, Inc. is the nation's leading
financial services market research firm
and performs a variety of ratings and
evaluations of practices and
communications that are committed to
raising the standards of excellence in the
financial services and healthcare
industries. With offices in both the US
and Canada, Dalbar develops standards
and measurement systems that improve
the quality of products, service and
compliance for the retirement, mutual
fund, broker/dealer, discount brokerage,
life insurance, healthcare and banking
industries.
Additional info
www.PrudentChampion.com
•
•
Independent Third Party support for advisors and plan sponsors to comply with
ERISA Fee Disclosure
Outsourcing of Service Provider & DOL communication requirements in
the event CSP provides problem disclosure
•
Negotiations with CSPs in the event plan fails to comply with 408(b)(2)
•
RFP & Vendor Search Services in the event a CSP needs to be replaced
•
Information regarding 408(b)(2), 404(a)(5), fiduciary best practices, delegating
fiduciary responsibility under ERISA 402(a), ERISA 3(21) & ERISA 3(38)
•
Free fiduciary education webcast series from US Department of Labor - EBSA:
www.dol.gov/ebsa/newsroom/webcasts.html
Q&A
Robert A. Lavenberg, CPA, JD, LL.M
BDO USA LLP
rlavenberg@bdo.com
215.636.5576
Mark D. Mensack, AIFA®, FDE®
Mark@PrudentChampion.com
(856) HIT-401K