ERISA § 408(b)(2)
New Department of Labor Regulations and
Their Impact on Retirement Plan Sponsors
Todd Kading, CFP®, ChFC®, RF™
LeafHouse Financial Advisors
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Meet Our Speaker
Todd Kading
Managing Director
LeafHouse Financial Advisors
Prior to founding LeafHouse, Todd was a
partner in Austin-based Weaver, Kading
& Associates, one of the “Top 10 Most
Dependable Wealth Managers,”
according to Texas Monthly Magazine
Served on the Texas State University
Planned Giving Committee
One of only six Texas-based Registered
Fiduciaries™
Plan Sponsor Fee Disclosure Regulation
• Service providers will be now required to disclose to plan
fiduciaries detailed information about fees earned and
services provided
• Applies to new and existing contracts and arrangements
• Effective July 1, 2012
Why is Regulation Needed?
• DOL has described the market for retirement plan services as
“characterized by acute information asymmetry”
– ERISA Advisory Council found lack of transparency
makes it “extremely difficult” for plan sponsors to
determine absolute costs and flow of fees
– GAO stated that hidden fees may mask conflicts of interest
– SEC found that pension consultants typically do not
disclose conflicts of interest
• However, current ERISA rules hold plan sponsors, not vendors,
accountable for evaluating cost and quality of plan services
• Many defined contribution sponsors do not have a clear
understanding of total administration costs
What is a “Covered Plan?”
• ERISA covered defined contribution
and defined benefit plans, e.g. 401(k),
403(b), profit-sharing, pensions
• Does not apply to IRAs, SEPs or
individual retirement annuities
• Does not apply to government plans,
e.g. 457, state pensions
• Applies to welfare plans but they have
separate compliance dates yet to be
determined
Am I a Fiduciary?
• Plan Fiduciaries are responsible for “acting solely in the
interest of plan participants and their beneficiaries and
with the exclusive purpose of providing benefits to them”
• “Fiduciaries who do not follow the basic standards of conduct
may be personally liable to restore any losses to the plan”
• Examples of Fiduciaries include parties who:
– Are plan sponsors & administrators (always fiduciaries)
– Have control or discretion over the plan or its administration
– Are members of the benefits or investment committee
– Have influence in selecting committee members
– Sign the DOL Form 5500
What Are My Fiduciary Duties?
• Plan Sponsors & Administrators Should Regularly
– Submit Requests For Proposal to service providers
– Negotiate fees of providers
– Draft/revise the Investment Policy Statement
– Select & review investment choices
– Monitor & coordinate education
– Maintain a detailed compliance file
– Stay informed on evolving regulations
– Must always act in the best interests
of the plan and its participants
Who is a “Covered Service Provider?”
• A party who enters into an arrangement directly with the plan
to receive at least $1,000 in compensation for services such
as:
– Recordkeeping or brokerage services provider to
individual account plan, with one or more investment
options
– A Third Party Administrator or plan consultant
– ERISA Fiduciary or Registered Investment Advisor (RIA)
– Anyone on a list of services and receiving indirect
compensation
• Obligated to provide services to the plan, regardless of
whether they have hired an affiliate or subcontractor to
provide services on their behalf
Main Types of “Covered Service Providers”
• Recordkeeper
• Administrator
• Broker/Advisor
Types of “Covered Service Providers” cont.
• Recordkeeper
– Tracks contributions, amounts,
types, etc.
– Provides custodial services and
statement information
– Coordinates deposits from
payroll
Types of “Covered Service Providers” cont.
• Administrator
– Helps with daily admin functions
– Loans, hardship withdrawals
– Top heavy testing
– Plan design
Types of “Covered Service Providers” cont.
• Broker/Advisor
– Matches employer with plan
providers
– Facilitates the sales process
– Liaison between provider and
sponsor
Obligations of a “Covered Service Provider”
• Disclose certain information to “responsible plan fiduciary”
• Required to disclose on behalf of affiliates and subcontractors
providing services on behalf of the covered service provider
Form of Disclosure
• In writing
• No specific format
• Different documents from different sources are allowed but
they must contain all information
What Must Be Disclosed?
• Specific description of services to be
provided
• Status as a fiduciary (If yes, what scope?)
• Compensation
– Direct (generally billed to
company/organization)
– Indirect (generally deducted from plan
assets)
– Payments among related parties
Compensation Paid Among Related Parties
• Compensation set on a transaction basis
 commissions, soft dollars, finder’s fees
 similar incentive compensation based on
business placed or retained
• Compensation charged directly against the
plan’s investment and reflected in the net
value of the investment (e.g. 12b-1 fees)
• Identify specific services for which
compensation will be received
• Identify payer and recipient of compensation,
including the status of each as an affiliate or a
subcontractor
Fund Choice and Fee Transparency
Many plans use retail share classes that simply have one
all-encompassing fee. This makes benchmarking difficult
and negotiation impossible.
XYZ Large Cap Fund A
XYZ Large Cap Fund
Institutional
Recordkeeping
Admin
Brokerage
Fund Management
Institutionally priced shares make fee disclosure easier and
allow plan sponsors to negotiate lower costs.
Timing of Disclosure
• Initial disclosure
– Before the contract or
arrangement is entered into
• For changes to information in
initial disclosure, timing is
variable but generally must be:
– As soon as practicable
– No later than 60 days
Reasonableness
• After obtaining all fee data,
fiduciaries must determine whether
or not fees are “reasonable”
• The best way to do this is to
benchmark your plan to others
of similar size and features
• A regular Request For Proposal
process can continually assure that
fees are in line with the marketplace
Prohibited Transactions
• ERISA prohibits certain transactions
between a plan and third parties who
may be “parties-in-interest”
• Can result in both DOL fines and IRS
taxes and penalties
• Fiduciaries can be liable for making
the plan whole
• Common situations when a plan sponsor may be engaging in a
prohibited transaction:
– Discounts in payroll services in exchange for plan business
– Utilizing service providers who may be customers
– Using a relative or close friend as a service provider
Department of Labor Enforcement
• The Department of Labor enforces the
fiduciary duty provisions of ERISA
• Focus is on the process used by fiduciaries,
not necessarily the ultimate decision made
• Fiduciaries should
– Be aware of their roles
– Meet regularly
– Document meetings (i.e. dates, agendas)
• The DOL has been proactive in enforcing
ERISA fiduciary duty rules
Headlines
401(k) Pays Retail
Court Rules
401(k) Plan May Have Holes
Settles 401(k) Fee Lawsuit
employees suing Fidelity over 401(k) fees
agrees to pay $37.5 million to settle lawsuit over employee 401(k)
401(k) Excess Fee Suit Plaintiffs Allowed to Add Charges
Settles 401(k) Fee Case for $18.5M
404 (a)(5) Disclosure to Participants
• Fees must be disclosed to
participants in hard dollar figures on
a per-account basis
• Will be the first time that participants
find out how much they are paying
every quarter
• Compliance date 60 days after July
1st
Opportunities Created
• Gives the current Plan Sponsor and all Fiduciaries the
impetus to fully assess the reasonableness of costs and
benefits provided by all vendors
• Reinforces the fiduciary responsibility standard to Plan
Sponsors and other decision makers such as:
– Benefits committees
– Executive committees
– Human resource managers
– HR and benefits administrators
– CFOs
What is a Third Party Fiduciary?
• Third Party Fiduciary
– Performs RFP of service providers
– Negotiates fees of providers
– Drafts Investment Policy Statement
– Picks investment choices
– Conducts & coordinates education
– Continually stays abreast of evolving
regulations
– Must always act in the best interests
of the plan and its participants
Brokers vs. Fiduciaries
Who do they work for?
How do they make money?
Who regulates them?
Who can they work with?
What standard are they
held to?
Third Party
Fiduciary
Broker
Plan participants
Broker-Dealer
Delineated fee
Commissions, finders fees,
12b-1 & Sub-TA fees,
sales incentive trips
Government (SEC, State
Securities Board)
Self regulatory agencies
(FINRA, SIPC)
Whole Universe
Only pay-to-play providers
Sole best interest of client
Suitability
Who’s on your side?
What LeafHouse Offers
• At no cost LeafHouse Financial will:
– Perform an RFP by collecting bids from numerous
service providers
– Calculate your total plan costs, including hidden fees
– Evaluate the quality of your plan structure and design
• This can be accomplished by you with only a single email
• Hiring a third party fiduciary can:
– Lower your costs
– Increase the level of service you receive
– Provide fiduciary protection from DOL audits & lawsuits
– Decrease your workload
Don’t be that guy.
Questions?
You may contact Todd Kading directly at:
tkading@lhadv.com
(512) 879-1505
Valuable Resources
LeafHouse Financial Fiduciary Center
http://www.leafhousefinancial.com/Fiduciary-Center.16.htm
Department of Labor Interim Regulation Fact Sheet
http://www.dol.gov/ebsa/newsroom/fsimprovedfeedisclosure.html
Department of Labor Fiduciary Handbook
http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html
DOL: A Look at 401(k) Plan Fees
http://www.dol.gov/ebsa/publications/401k_employee.html