401(k) Fee Disclosure
Roberta J. Ufford
Groom Law Group, Chartered
April 7, 2008
1
Developing Litigation
Form 5500 Schedule C
Proposed 408(b)(2) Regulation
Proposed Legislation
2
Developing Litigation
Claims by Plan Participants
 Class actions by plan participants allege plan sponsor
fiduciaries imprudently allowed providers to receive
“revenue-sharing.” Plaintiffs allege plan fiduciaries –
Caused plans to enter arrangements in which participants
paid unreasonable, hidden and excessive fees.
Did not understand/recognize revenue sharing
arrangements. Did not disclose to participants in “proper
detail and clarity” the transactions, fees and expenses.
 E.g., Loomis v. Exelon Corp., Case No. 1:06-cv-04900 (filed Sept.
11, 2006 N.D. III). NOTE: Court dismissed claims for investment
issues; claims for excessive fees may proceed. (N.D. III. 2007).
3
Developing Litigation
Claims by Plan Participants
 Class actions by plan participants also may include
allegations that plan sponsor fiduciaries –
Should have selected lower cost separate accounts rather
than mutual funds.
Should have selected lower cost index funds.
Failed to capture for the plan’s benefit all sources of
revenue, such as float and securities lending income.
Improperly used “unitized administration” for company
stock, resulting in dilution of return and excessive fees.
4
Developing Litigation
Claims by Plan Participants
 Some actions by participants against sponsors include
claims against service providers. Complaints allege:
 Directed trustee/provider is a fiduciary based on (i) trustee
and/or investment manager status, and/or (ii) limits placed
on investments the plan may offer to participants (primarily
proprietary funds).
 Provider (and sponsor) did not disclose actual plan costs
to participants, including revenue sharing, and allowed
participants to pay excessive fees.
 Revenue sharing is “plan assets,” which should be
credited to participants; provider’s receipt of revenuesharing is a prohibited transaction.
 E.g., Hecker v. Deere & Co. v. Fidelity Management Trust Company,
et al., Case No. 06-C-0719-S (filed Dec. 8, 2006, D. Wisc.)
5
Developing Litigation
Preliminary Court Decisions
 Initial decisions are mixed:
Hecker v. Deere & Co. - District court dismissed all
claims against plan sponsor, trustee and recordkeeper.
Plaintiffs have appealed.
 See 2007 WL 1874367 (W.D. Wisc. 2007).
Tussey v. ABB, Inc. – District court held ABB was not
required to disclose revenue sharing to participants, but
denied motion to dismiss other claims. Court held that
Fidelity could be a plan fiduciary because of its role in
selecting plan investment options.
 See 2008 WL 379666 (W.D. Mo. 2008).
6
Developing Litigation
Claims by Sponsors Against Providers
 Class actions brought by plan sponsors/trustees allege,
first, that providers are “fiduciaries” because providers –
Determine what investments to offer on their platform
and/or retain discretion to add/delete fund options.
Encourage sponsors to rely on providers’ investment
expertise. For example, a provider may:
Hold out as a financial expert; advertise “complete”
plan investment and administrative services.
Offer asset allocation materials to participants.
 E.g., Ruppert v. Principal Life Ins. Co., Civ. No. 06-903-DRH (S.D. III); Phones Plus,
Inc. v. The Hartford Financial Services, Inc., Civ. No. 01835-AVC (D. Conn).
7
Developing Litigation
Claims by Sponsors Against Providers
 Additional New Cases:
Columbia Air Services, Inc. v. Fidelity Management
Trust Co. (D. Mass.)
Lawsuit alleges that Fidelity obtained revenue
sharing payments in addition to amount expressly
agreed as compensation without providing any
additional services.
Zang v. Paychex, Inc. (E.D. Mich.)
Lawsuit alleges that Paychex obtained revenue
sharing payments in addition to amount expressly
agreed as compensation. Lawsuit also challenges
the float that Paychex allegedly received from the
custodian, JP Morgan.
8
Developing Litigation
Preliminary Court Decisions
 Charters v. John Hancock Life Ins. Co. (D. Mass.) - Court
denied Hancock’s motion to dismiss, stating that a trier
of fact could reasonably determine that Hancock’s power
of fund substitution gives it discretionary control.
 Hartford v. Phones, Plus, Inc. - Court allowed claims
against insurance company provider to proceed based
on insurer authority to substitute funds. See 2007 WL
3124733 (D. Conn.).
See also Haddock v. Nationwide, 419 F. Supp. 2d 156
(D. Conn. 2006).
9
Developing Regulation
 DOL has three regulatory projects aimed at increasing
the disclosure of fees and service provider conflicts.
Final amendment of Form 5500 Schedule C requires
more disclosure to government, sponsors and
participants.
Proposed amendment of ERISA section 408(b)(2)
regulation will increase disclosure to plan sponsors.
Proposed to amendments to DOL regulations
governing disclosure to participants are expected.
10
Form 5500
Plan’s Annual Report
 Significant new Form 5500 package published
November 16, 2007
Generally effective for 2009 plan year filing.
Significant changes to Schedule C.
Affects both pension and welfare plans.
72 Fed. Reg. 64710 and 64731 (Nov. 16, 2007).
11
Schedule C
Service Provider Compensation
 Schedule C identifies the plan’s service providers and the
compensation they receive.
 For years, Schedule C instructions have required reporting
of “ indirect” compensation received by plan service
providers, such as “finder’s fees” received in connection with
plan transactions.
 But, these fees have typically not been reported and DOL
has not enforced this reporting rule.
 DOL’s explicit goal in revamping Schedule C is to expand
and clarify the reporting of indirect compensation.
12
Schedule C: Indirect Compensation
 Indirect compensation means payments from sources
other than the plan or plan sponsor that are “in
connection with services to the plan or the person’s
position with the plan.”
Include compensation received if the person’s
eligibility for the payment or the amount of the
payment is based, in whole or in part, on services
rendered to the plan or transaction(s) with the plan.
Don’t include compensation that would have been
received had the service not been provided or the
transaction had not taken place and that cannot be
allocated to services.
13
Schedule C: Indirect Compensation
 Examples provided by Schedule C:
Finder’s fees, float, brokerage commissions, soft
dollars and “other transaction-based fees” received in
connection with transactions or services involving the
plan.
Amount charged to the plan’s investments and
reflected in unit value.
14
Schedule C: Indirect Compensation
 Examples of Indirect Compensation – 401(k) Plans
Advisory fees paid by mutual funds to mutual fund
advisors.
Investment management fees paid from a bank
collective fund to managers and sub-advisors.
Commissions paid to a broker from a mutual fund,
bank collective fund, separate account.
12b-1 distribution fees paid from a mutual fund to the
plan’s recordkeeper.
15
Schedule C: Indirect Compensation
 The definition of indirect compensation may include
meals and entertainment of plan service providers.
 The Schedule C instructions provide that a plan
administrator need not report "insubstantial" nonmonetary compensation (e.g., "gifts and meals of
insubstantial value") if:
(1) the compensation is tax deductible to the payor and
excluded from taxable income for the recipient, and
(2) the gift is valued at under $50 and total gifts to the
recipient from the same source during the year do not
exceed $100.
16
Schedule C: Alternative Reporting

If a Service Provider receives “Eligible Indirect
Compensation” (EIC) and no other compensation in
connection with the plan, plan reporting is limited.

If Service Provider receives other compensation (direct
or ineligible indirect), this other compensation is
reported, but amount of the EIC need not be
reported.
17
Schedule C:
Eligible Indirect Compensation
Includes:
 Fees charged against investment funds, or
 Finder’s fees, float, brokerage commissions, soft dollars,
and other transaction-based fees paid for transaction or
services involving the plan.
Service Provider must disclose:
 The existence of indirect compensation, and services
provided or other purpose of payment.
 The amount of, or an estimate, or the formula to calculate,
the fee, and
 The identity of the parties paying and receiving the fee.
18
Schedule C: Bundled Arrangements
 A “bundled arrangement”
A service arrangement where the plan hires one
company to provide a range of services either directly
or indirectly from the company, through affiliates or
subcontractors, or through a combination, which are
priced to the plan as a single package rather than on
a service-by-service basis.
 Plan reports only its direct payments to the bundled
provider.
19
Schedule C: Bundled Arrangements
 Generally, a plan need not separately report how plan
payments are allocated among the bundled provider’s
affiliates or subcontractors, unless these amounts are –
Set on a per transaction basis (e.g., brokerage),
Fees charged against the value of the plan’s
investments (e.g., management fees), or
Finder’s fees, float, soft dollars, and non-monetary
compensation earned by certain providers (fiduciary,
investment manager or adviser, consultant,
recordkeeper, broker).
20
Schedule C:
Allocating Compensation
 Service providers must be reported on Schedule C if they
earn $5,000 or more in direct and/or indirect compensation
in connection with services to the plan.
 In figuring the total amount of reportable compensation on
Schedule C, service providers may allocate any
compensation received in connection with several plans,
following reasonable allocation methods disclosed to the
plan administrator.
21
Schedule C:
Service Provider Duties
 Plan administrators, not service providers, are obligated
to complete Form 5500.
 But, a new line on Schedule C requires the plan
administrator to report service providers who refuse to
provide necessary information following a request.
 Illustrates DOL’s intention to use to Form 5500 as an
enforcement tool.
22
Schedule C: Additional Guidance
 DOL is currently accepting questions on Schedule C and
other Form 5500 reporting issues.
 May provide more guidance before new Form 5500
requirements come into effect.
23
Proposed 408(b)(2) Regulation
 ERISA § 406(a)(1)(C) prohibits service arrangements
between a plan and a party in interest.
 ERISA § 408(b)(2) exempts arrangements for plan
services if:
arrangements are reasonable;
services are necessary for the establishment or
operation of the plan; and
the plan pays no more than reasonable compensation.
 Most service providers rely on the § 408(b)(2) exemption.
24
Proposed 408(b)(2) Regulation
 On December 13, 2007 the DOL published:
Proposed revisions to the ERISA § 408(b)(2) regulations
 72 Fed. Reg. 70988
A proposed prohibited transaction class exemption
 72 Fed. Reg. 70893
 As expected, the proposed 408(b)(2) regulations and
related class exemption closely track the finalized Form
5500 Schedule C instructions.
25
Proposed 408(b)(2) Regulation
Proposed new regulation would:
 Revise the “reasonable arrangement” standard by
adding new service provider disclosure and other
requirements.
 Require all service agreements to be in writing.
 Impose new service provider disclosure obligations,
before or at the time the plan enters a service
arrangement.
In comparison, Schedule C disclosure is required
after services are performed.
26
Proposed 408(b)(2) Regulation
 Would apply to 3 categories of service providers:
Service providers who are fiduciaries (under ERISA §
3(21) or under the Investment Advisers Act of 1940).
Service providers who provide or may provide banking,
consulting, custodial, insurance, investment advisory,
investment management, recordkeeping, securities or
other investment brokerage or other third party
administration services.
Service providers who receive or may receive indirect
compensation in connection with providing accounting,
actuarial, appraisal, auditing, legal or valuation services
to a plan pursuant to a contract.
27
Proposed 408(b)(2) Regulation
 Compensation defined as:
 “money or any other thing of monetary value (for example, gifts,
awards and trips) received, or to be received, directly from the plan
or plan sponsor or indirectly (i.e. from any source other than the
plan, the plan sponsor, or the service provider) by the service
provider or its affiliate in connection with the services to be provided
pursuant to the contract or arrangement or because of the service
provider’s or affiliate’s position with the plan.”
 Compare to Form 5500 “reportable compensation:”
 “For Schedule C purposes, reportable compensation includes
money and other thing of value (for example, gifts, awards, trips)
received by a person, directly or indirectly, from the plan (including
fees charged as a percentage of assets and deducted from
investment returns) in connection with services rendered to the
plan, or the person’s position with the plan.”
28
Proposed 408(b)(2) Regulation
 Compensation related disclosure: the proposed
regulations would require that service providers disclose
(before the parties enter an agreement for services):
All services to be provided under the arrangement.
The “compensation or fees” to be received by the
service provider with respect to each service.
The manner of receipt of compensation or fees.
29
Proposed 408(b)(2) Regulation
Bundled Services
 In a bundled services arrangement, the service provider
offering the bundle of services must disclose all the
services and the aggregate compensation or fees to be
received directly or indirectly by the service provider, any
affiliate or subcontractor, and any other person in
connection with the arrangement.
 The service provider must disclose the allocation of the
aggregate compensation with respect to:
Compensation or fees that are a separate charge
directly against the plan’s investment reflected in the net
value of the investment; or
Fees that are set on a transaction basis (such as
finder’s fees, brokerage commissions, and soft dollars).
30
Proposed 408(b)(2) Regulation
Conflicts Disclosure
 The proposed regulations also would require providers to
disclose (before the parties enter into a service agreement):
Whether the service provider will provide services as a
fiduciary.
Any participation or interest the service provider may
have in plan transactions.
Any material financial, referral or other relationship that
creates or may create a conflict of interest for the service
provider.
Whether the service provider will be able to affect its own
compensation without prior approval of the plan fiduciary.
Its policies or procedures to address potential conflicts of
interest.
31
Proposed 408(b)(2) Regulation
Contract Requirements
 In addition to the required disclosures, the written
contract must include:
Terms requiring the service provider to disclose any
material change to the disclosed information within 30
days of the date the service provider acquires
knowledge of the material change; and
Terms requiring that the service provider disclose all
information requested by the plan fiduciary or plan
administrator in order to comply with reporting
requirements (e.g., Form 5500).
32
Proposed Class Exemption
 According to DOL, if a service provider does not comply
with the proposed 408(b)(2) regulation, the services
arrangement will involve a prohibited transaction and the
service provider will be required to correct and pay excise
taxes.
 Plan fiduciaries also could be liable for a prohibited
transaction, even if unaware that the service provider did
not comply.
 A proposed class exemption would relieve a plan fiduciary
from liability for a prohibited transaction caused by a
service provider’s failure to disclose.
 No relief provided to a service provider.
33
Proposed Class Exemption
 Conditions of the proposed exemption:
The plan fiduciary entered into the arrangement with
a reasonable belief that the service provider met
disclosure requirements.
The fiduciary did not know, and did not have a reason
to know, of the failure to disclose.
Upon discovery that a service provider failed to
disclose, the fiduciary must:
Request the missing information in writing.
Evaluate whether to terminate or continue the
arrangement with the service provider.
Report to the DOL if the service provider does not
comply with the disclosure request.
34
Proposed 408(b)(2) Regulation
 Comments on Proposed Regulation were due Feb 11,
2008. Hundreds of comments were submitted. DOL has
scheduled hearings on March 20, 2008.
 Issues
What “services” and “service providers” are covered?
Application to IRAs
Technical considerations: disclosure formats, timing of
disclosure
Transition issues
35
Proposed Legislation
 The 401(k) Fair Disclosure For Retirement Security
Act of 2007, H.R. 3185 (The “Miller Bill”)
Would amend ERISA to impose new requirements
addressing disclosure of fees that plans pay for
services and other new standards for participant
directed plans.
New requirements would generally apply to qualifiedcash or deferred arrangements (i.e., 401(k) plans).
36
Proposed Legislation
 “Miller Bill” - Service Provider Disclosure
 would require that a Plan Administrator receive service
provider disclosure before entering any contract for
services for $1,000 or more.
 Identification of all parties that would be performing
services under the contract.
 Description of services and total cost.
 Itemized list of services and expenses (i.e., sales
commissions, expenses for investment advice).
 Disclosure of any conflicts of interest.
 If applicable, disclosure of impact of share classes and
certain free, discounted or rebated services.
37
Proposed Legislation
 “Miller Bill” (continued)
Notice of Investment Options: Require Plan
Administrators to provide participants with notice of
investment options, including:
 Detailed information about each investment option (i.e.,
investment objectives, level of risk, historical returns).
 A “Fee Menu” for all plan options, disclosing potential service
fees that could be assessed against participant accounts.
 Disclosure of potential conflicts of interest.
Participant Annual Benefit Statement: Require
Plan Administrators to provide participant-specific
benefit statements within 90 days of plan year close.
 Statement would disclose subcategories of fees assessed
from each participant’s account for each option selected.
38
Proposed Legislation
 Additional “Miller Bill” Requirements
Minimum Investment Option: Participant-directed plan
menu must include at least one nationally-recognized
index fund likely to meet retirement income needs at
adequate levels of contribution.
Enforcement: Direct to DOL to enforce new
requirements and create statutory penalties for failure to
comply.
Establish an Advisory Committee.
Create a penalty structure authorizing the DOL to assess a
penalty against Plan Administrators of up to $100 per day
for a failure.
Authorize DOL to publicly identify noncompliant providers.
39
What Are Plan Sponsors Doing?
 Reviewing Plan Arrangements:
 Identifying Providers’ direct/indirect compensation; negotiating for a
share.
 Better benchmarking on fees and performance.
 Evaluating share class, separate accounts and collective trust
alternatives.
 Considering alternatives to paying recordkeeper with asset based
revenue sharing payments.
 Reviewing fiduciary process for legal sufficiency
 Adequate due diligence?
 Documentation?
 Reviewing governance/fiduciary structure.
 Reviewing disclosure to participants about how plan fees are paid.
 Reviewing allocation of recordkeeping fees.
40
What Are Service Providers Doing?
 Improved disclosure to plan sponsors of direct/indirect
compensation, including range of fees and type of
payment by option.
 Considering disclosures to participants.
 Reviewing contractual authority and procedures for
making changes to “401(k) fund platform”.
 Reviewing contracts, marketing materials and marketing
practices to determine fiduciary status in fund selection.
41