The XYZ Insurance Company
100 Center Street
Chicago, IL 60606
Dear Sir / Madam:
As you may be aware, ABC Company recently made a decision to transfer our
retirement plan from the XYZ Insurance Company to First National Bank and BPA. This
change is effective as of January 1, 2011. Upon beginning the conversion process, we
were informed by John Smith of your firm that our plan faces a contingent deferred
sales charge estimated at $11,050.67 which must be paid at the time of asset liquidation
or it will be assessed against plan assets. We were shocked to receive news of this fee,
and believe it is unreasonable and prohibitively high.
After conferring with our legal counsel, some significant concerns have been raised. The
purpose of this letter is to request your formal, written response to these matters no
later than October 15th, 2011.
Background information
As you may be aware, ERISA Section 408(b)(2) requires that retirement plan service
providers – including insurance companies – receive no more than “reasonable
compensation” for the services they render to qualified retirement plans. While a
provider is entitled to cover bona fide business costs in servicing retirement plans,
including a reasonable margin of profit and the ability to recoup legitimate business
acquisition costs, charging more than this amount or placing undue restrictions on a
plan’s ability to terminate services can be construed as unreasonable compensation or
as placing a penalty on an ERISA Plan (a prohibited transaction under ERISA). The
Department of Labor has clarified that a contract is not reasonable if its result is that the
plan sponsor cannot terminate services on reasonably short notice without a substantial
and adverse financial penalty. Such an arrangement would be a de facto violation of
ERISA since it essentially “locks the plan into” a disadvantageous financial arrangement.
In response to its concerns, our counsel has asked that you provide the following so
we can determine whether the exit penalty is proper and reasonable and if it was fully
disclosed to the plan sponsor and participants in a clear, unambiguous manner. Please
provide the following:
1. Supporting documentation that the GIC investments were clearly explained to
the Plan Sponsor, including the differences between these GICs and comparable
money market investments, and including a summary of which stable
investments would (and would not) involve exit penalties or restrictions.
2. Evidence that the plan sponsor affirmatively elected to include the GIC
investments within the plan, including a signed instrument with the name and
person from our firm who provided this written authorization.
3. Evidence that the GIC investments were fully explained to plan participants,
including the liquidation period and penalties applicable. Also, proof that you
informed our participants in writing about other money market or stable value
investments that were available which would not impose such exit penalties or
restrictions.
4. A written statement that was made to participants that if certain fund(s) were
chosen, they could later be subject to market value adjustments or financial
penalties if their employer chose to change service providers (an event entirely
outside of their control).
5. A summary of any costs incurred by your firm in acquiring our business (including
compensation paid to brokers, agents or other firms or individuals) and what
level of annual revenue was included in our fee schedule in order to recoup such
costs over the life of our relationship.
6. Any other material or information that would support the reasonableness of this
exit fee.
Please send this information directly to me at the address shown below via overnight or
certified mail no later than October 15th, 2011. After our counsel reviews the
information, we will be in touch to set up a conference call to discuss the matter with
your legal counsel. Please be aware that if we fail to have this matter adequately
resolved in way that is fair and consistent with the spirit of ERISA, we reserve the right
to refer this matter to the Department of Labor.
I may be reached at 312-888-0000 with any questions.
Best regards,
Jane R. Smith
Vice President/Human Resource Manager
ABC Company, Inc.
100 Main Street
Anytown, NY 10101