Plan Fees and Fiduciary Responsibilities
- Preparing for the New Rules
Marcia S. Wagner, Esq.
Transforming the Retirement System

Regulatory landscape is changing.

DOL is rolling out new rules for 2012.
◦ Fee disclosures for plan sponsors
◦ Participant-level fee disclosures
◦ Participant investment advice

Proposed Rulemaking

DOL Interaction with White House
◦ Working with White House’s Middle Class Task Force
◦ Coordinated actions to improve retirement security
2
401(k) Fiduciary Toolkit

Plan sponsors need to understand their
current and new fiduciary responsibilities.

Advisors can help plan clients navigate the
changing regulatory landscape.

Topics covered by Fiduciary Toolkit
◦
◦
◦
◦
◦
◦
◦
Plan Fees
Fiduciary Status
Fiduciary Liability
Rollover Assets
Investment Duties
Investment Menu
Due Diligence
3
1.
2.
3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
4
DOL Finalizes Participant
Fee Disclosure Regulations

DOL issues final reg’s on Oct. 14, 2010.
◦ DOL press release explained that existing law did not
require plans to provide necessary information.
◦ New rule requires comparison of plan’s investments.

Types of plans covered
◦ New reg’s apply to DC plans with participantdirected investments.
◦ Covers plan even if not designed to comply with
ERISA Section 404(c).

Coverage of participants
◦ New reg’s apply to all eligible employees.
5
Annual and Quarterly Disclosure
of Plan-Related Information

Must disclose general info about plan.
◦ Must include explanation of general admin. service
fees and individual expenses on annual basis.
◦ Must disclose dollar amount of fees/expenses
charged to participant accounts on quarterly basis.

Disclosure only required for fees/expenses
not embedded in expenses of investments.
◦ If service provider only receives indirect
compensation from investments, provider’s fees are
not subject to this disclosure requirement.
◦ But must disclose that a portion of general admin.
service fees is paid from expenses of investments.
6
Annual Disclosure of
Investment-Related Information
 Must disclose fee and performance-related
info for plan’s investment alternatives.
◦ This disclosure must be in comparative format.
◦ Must be provided on annual basis.

Required information for disclosure in
comparative format includes:
◦
◦
◦
◦
Name and type of investment option
Investment performance data
Benchmark performance data
Total annual operating expenses for each investment
and any extra shareholder-type fees.
◦ Internet website address
7
Other Requirements

Info that must be available upon request
◦ Prospectuses, shareholder reports and financial
statements provided to plan.

Form of disclosure
◦ Must be understood by average participant.

Impact on sponsor’s other fiduciary duties
◦ No relief for duty to prudently select/monitor plan’s
providers and investments.
◦ New reg’s modify ERISA 404(c) disclosures.

Effective date
◦ Plan years beginning on or after Nov. 1, 2011.
◦ Initial disclosures due May 31, 2012 for calendar
year plans.
8
Potential Impact

Automatic delivery of fund prospectuses will
no longer be required under ERISA 404(c).

RIA fees presumably must be disclosed on
annual and quarterly basis as “general
administrative” fee.

Plan participants are likely to scrutinize
plan’s investments and fees, impacting
sponsors and advisors.

Educate your plan participants before
disclosure.
9
1.
2.
3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
10
How Can Inv. Advice Be Conflicted?

Non-fiduciary provider receives variable
compensation from plan’s investments.
◦ Broker-dealer receives different 12b-1 fees.
◦ Fund platform offers proprietary funds to plan clients.

Provider has incentive to steer participants.
◦ Can not provide fiduciary advice to participants.
◦ Conflicted advice triggers prohibited transaction (PT).
◦ PT occurs even if advice provided in good faith.
11
DOL Final Rules for Participant Advice
 Pension Protection Act included statutory
exemption for participant-level advice.
◦ Fiduciary Adviser must be RIA, bank, insurer or brokerdealer.
◦ Eligible Investment Advice Arrangement must have:
(1) Fee-Leveling (Fiduciary Adviser’s fees do not vary)
(2) Computer Model certified by expert.

Other conditions for exemption.
◦ Authorization from separate plan fiduciary.
◦ Annual review by independent auditor.
◦ Advance notice to participants with disclosures for
fees and material affiliations of parties (i.e., conflicts).
12
Fee-Leveling Arrangement
 Fiduciary Adviser’s fee must not vary.
◦ Fiduciary Adviser’s employee/rep must receive level
compensation.
◦ Fiduciary Adviser’s affiliate may receive variable
compensation.

Example: ABC Fund Platform for Plan Clients
◦ Plan invests in ABC Funds and third party funds.
◦ ABC Fund Manager cannot give participant advice
(due to incentive to steer participants to ABC Funds).
◦ New affiliate, ABC Fiduciary Adviser, is created to
provide advice to participants.
◦ DOL imposes fee-leveling on ABC Fiduciary Adviser.
◦ But ABC Fund Manager can earn compensation that
varies with participants’ allocation decisions.
13
Computer Model Arrangement
 Advice must be from computer model.
◦ Model must be certified by investment expert.
◦ Must consider participant’s personal info.
◦ Fiduciary Adviser may receive variable compensation.

Does DOL favor index funds?
◦ Proposed rules suggested that model should favor
cheapest menu option in each asset class.
◦ Fortunately, DOL backed away from this approach.

Can a Computer Model be used for IRAs?
◦ DOL permits it.
◦ But are Computer Models capable of advising IRA
owners?

DOL rules become effective on Dec. 27, 2011.
14
1.
2.
3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
15
When Are Service Providers Conflicted?

Plan sponsor is looking for provider of
administrative services.

Provider offers two options:
◦ Services ordered a la carte:
◦ Pre-packaged services and menu:

$10,000.00
$ 4,000.00
Plan sponsor may incorrectly conclude
pre-packaged option is best for participants.
◦ Doesn’t realize that provider receives “hidden”
compensation from funds and fund managers.
◦ Full compensation may be more than $10,000.
◦ Hidden cost is actually shifted to participants.

Provider has incentive to steer uninformed clients
to more profitable option.
16
Retirement Security Initiative

Improving transparency of 401(k) fees.
◦ Administration’s goal is to make sure workers and plan
sponsors are getting services at a fair price.
◦ Pushing to “finalize” interim final reg’s this year.

Rationale for interim 408(b)(2) reg’s.
◦ DOL efforts to educate plan sponsors about 401(k)
plan fees started with Nov’ 97 hearing.
◦ Plan sponsors still not asking the right questions.
◦ DOL will now require providers to furnish the fee info
sponsors should be requesting.
17
Covered Providers and Disclosures

Covered Service Providers
◦ Fiduciaries (including ERISA fiduciary or RIA).
◦ Providers of recordkeeping and brokerage services.
◦ Providers of accounting, actuarial, legal and other
professional services if they receive indirect fees.

Required to disclose compensation in writing.
◦ Must be provided before entering into contract.
◦ Formal contract not required.
◦ Indirect compensation requires more detailed
disclosure.
◦ Service-by-service disclosure of fees is generally not
required.
18
Disclosure of Compensation
 Format and manner of disclosure
◦ Dollar amount, formula, percentage of plan assets, per
capita charge, or any other reasonable method.
◦ Whether fees will be billed or deducted and any other
manner of receipt must be disclosed.

Compensation shared among related parties
◦ Generally, compensation paid to affiliates or
subcontractors does not have to be disclosed.
◦ But must disclose if payment flows to related party on
transactional basis (e.g., commissions, 12b-1 fees).

Special Rules for Platform Providers
◦ Must provide fee info for each investment alternative.
◦ Requirement can be met by passing through fund
prospectuses.
19
Timing for 408(b)(2) Disclosures

Required Deadlines
◦ Disclosure must be made reasonably in advance of
starting or renewing services.
◦ Changes to info must be made no later than 60
days after provider becomes aware of change.
◦ Erroneous info will not result in violation if provider
has acted in good faith and with diligence.
◦ Errors and omissions must be disclosed within 30
days after coming to light.
20
Prohibited Transactions and
Interim 408(b)(2) Regulations
 If provider fails to make disclosure, plan’s
payment of fees is a prohibited transaction.
◦ Disclosure failures can be cured.
◦ Plan must make written request for information, and
provider must respond within 90 days.
◦ Refusal or inability to comply with request requires
plan fiduciary to notify DOL.

No fiduciary conflicts permitted.
◦ 408(b)(2) disclosure does not cure self-dealing
violations.

Outlook
◦ Effective date delayed from July 16, 2011 to
April 1, 2012.
21
1.
2.
3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
22
DOL’s Campaign to Expose Conflicts

DOL Strategy
◦ Roll out new fee disclosure rules.
◦ Impose fiduciary status on more providers.
◦ Force non-fiduciary advisors to make disclaimers.

DOL releases proposed reg’s on Oct. 21, 2010.
◦ Broadens “investment advice fiduciary” definition.
◦ Withdrawn on September 19, 2011.
◦ To be re-proposed with more input from public.
23
Overview of Existing Definition

If you provide investment advice, you are
automatically deemed a fiduciary.

DOL’s current definition for investment advice
is based on 5-factor test:
◦
◦
◦
◦
Advice on value or advisability of investments,
that is provided on a regular basis,
pursuant to a mutual agreement or understanding,
that such services will serve as a primary basis for
investment decisions, and
◦ that individualized advice will be based on the
particular needs of the plan.
24
Overview of DOL’s Initial Proposal

Existing Definition
◦ Advice may be investment advice if it is primary
basis for plan decisions and given on regular basis.

DOL’s Initial Proposal
◦ Include any advice that may be considered by plan.
◦ May include casual advice or one-time advice.
◦ Non-fiduciary advisors must make disclaimer:
(1) advisor is acting as seller of securities.
(2) advisor’s interests are adverse to client.
(3) advice is not impartial.
25
Potential Impact on Providers

Non-Fiduciary Advisors
◦ Would need to change service model.
◦ Must disclose they are not providing impartial
advice.
◦ Or they could accept fiduciary status and become
subject to ERISA.

Re-proposed Rule in 2012
◦ New definition to include individualized advice only.
◦ Will be similar in approach to DOL’s initial proposal.
◦ DOL is coordinating with SEC.
26
1.
2.
3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
27
Final and Proposed Rules
Will Impact Many Plan Clients

408(b)(2) Fee Disclosures
◦ Providers must furnish detailed fee disclosures by
April 1, 2012.
◦ Will also impact plan sponsors directly.

Plan sponsors have duty to ensure plan’s fees are
reasonable under ERISA.
◦ Duty will extend to fee information included in
providers’ 408(b)(2) disclosures.
◦ Sponsors are likely to need assistance in light of
complexity of plan arrangements.
◦ Advisors can assist in prudent evaluation of fees and,
if necessary, in search for alternative arrangements.
28
Fee Disclosures to Participants

Many participants may be caught off guard
by fee disclosures under the new rules.
◦ New rules become effective May 31, 2012 for
calendar year plans.

Advisors can help plan sponsors prepare.
◦ Discuss with plan’s recordkeeper and determine
impact of new rules on existing fee disclosures.
◦ Meet with participants and review fee information
through educational sessions.
◦ If sponsor has fee-related concerns, remind sponsor
that its fiduciary review process can be enhanced.
29
Additional Fiduciary Pointers

Be proactive in management and review of
plan’s menu (including investment fees).

Develop separate guidelines for fiduciary review
of investment fees and administrative fees.

Investment duties under ERISA are procedural,
so be sure to follow a deliberate process.

Plan sponsors and fiduciaries should investigate
their liability protection (bonding, indemnity).

401(k) Fiduciary Toolkit
30
Plan Fees and Fiduciary Responsibilities
- Preparing for the New Rules
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
marcia@wagnerlawgroup.com
A0064301
31