What is the DOL Watching The Financial Planning Association Are You a Target for 401(k)/403(b) Litigation What is the DOL Watching Presented To The Financial Planning Association of Long Island October 10, 2017

Participant Disclosure Covered Service Providers (CSP) Guide (ERISA §408(b)(2) Who is a CSP: - ERISA fiduciary - Investment advisor - Record keeper - Brokers - Receiving more than $1,000 in compensation The Guide must include: - Contact information - Index - Status of CSP, e.g. 3(21), RIA - Compensation received - Termination charge - Recordkeeping fees - Fund information CSP is charged 15% excise tax for non compliance

Participant Disclosure Quarterly Fee Statement: Nature of service - Record keeping - Investment advisory - Loan processing Cost of service - Percent of assets e.g. Investment advisory service - Flat dollar amount e.g. Loan processing Allocation method - Annual - Quarterly

Participant Disclosure Designated Investment Alternatives (DIA), ERISA §404(a)-5 - How to give investment directions - Who is the contact - What are the fees - Quarterly fee statement (prior slide) A Brokerage Window (BW) IS NOT a DIA - The plan fiduciary is responsible for the choice of provider - The plan fiduciary is responsible for the quality of the product - If there is no DIA the BW can be viewed as a means to avoid disclosures - Monitor appropriate investments - Monitor charges to transactions

Participant Disclosure Statistical Data Annually: Performance - One, five, ten, and inception Benchmark - Same as above Operating Expenses - As percent of assets - Per $1000 Any Additional Fees - Surrender charges - Early transfer URL For Prospectus

Benchmarking Fees Plan Sponsors are responsible to determine reasonableness of fees Benchmarking is not only about fees Must take into consideration value and services provided - Educational meetings - Enrollment meetings - Participant advisory services - Fiduciary services Document results to be accessible for a DOL audit What is usual and customary DOL does not provide definition of reasonable Benchmarking is part of the DOL 401(k) fee disclosure rules issued by DOL in 2012

Revenue Sharing Sub TA Fees Also referred to as “Shareholder Servicing” Paid by mutual funds Paid to record keepers, e.g. Nationwide, Principal 12b-1 Fees Paid to commission based advisors Paid to the record keeper if the advisor is fee based Must be used for the benefit of the participants Reduce record keeping fees charged to participants Reduce advisory fees charged to participants Reduce administration fees charged to participants Asset based fees vs. flat dollar fees

Who Pays the Fees The plan assets, i.e. the participants accounts, can be used to pay administration fees, e.g. TPA, record keeping fees, investment advisory fees, and fiduciary consulting fees. Plan assets can also be used to pay for fiduciary compliance assessment. Review benchmarking of fund fees Review timely remittance of deferrals Review benchmarking of service fees Review benchmarking of TPA fees The plan assets cannot be used to pay fees to establish the plan or terminate the plan. Fees charged to the participants must be identified quarterly to disclose the purpose of the fee, and the basis for the amount, e.g. percent of assets or a flat dollar amount, e.g. loan processing.

Benchmarking Fees Average Range Assets Low High Less than $1m 1.89% 1.42% 2.30% $1m to $10m 1.27% 0.87% 1.62% $10m to $100m 0.78% 0.61% 1.30% $100m to $500m 0.35% 1.09% More than $500m 0.41% 0.14% Participants Less than 100 2.03% 100 to 999 0.89% 1,000 to 4,999 0.84% 5,000 to 9,999 0.65% More than 10,000 0.48%

Investment Policy Statement The purpose of an Investment Policy Statement (IPS) is to assist the Client in effectively supervising, monitoring and evaluating the Client's investment Portfolio. The client's investment program is defined in the various sections of an IPS by: 1. Stating in a written document the Client(s)'s attitudes, expectations, objectives and guidelines for the investment of all of the Client's assets. 2. Encouraging effective communications between the Client(s) and all parties involved with the investment management decisions. 3. Establishing formal criteria to select, monitor, evaluate and compare the performance results achieved by each investment option on a regular basis. 4. Complying with all applicable fiduciary, prudence and due diligence requirements experienced investment professionals would utilize, and with all applicable laws, rules and regulations from various local, state, federal and international political entities that may impact the Client.

Case Studies Henderson v. Emory University - Used retail funds identical to institutional funds but with higher fees - Offered only actively managed funds - Charged fees that benefited TIAA - Retained underperforming funds - Improperly used revenue sharing - Used three record keepers significantly increasing fees (Fidelity, TIAA, and Vanguard) - Did not use competitive bidding for record keeper services - Forced the use of the CREF stock account and money market Scott v. Aon Hewitt Financial - Engaged “Financial Engines” to provide investment advice to plan participants while Hewitt tok 20% to 25% as a kickback from Financial Engines and did not disclose that to participants, and in fact established a sister company to hide the fact that they were taking a kickback. - The fee for this service was asset based even though the services do not increase with the growth of the account. - Financial Engines has been challenged in relation to litigation involving Xerox HR Solutions and Voya.

Litigation Summary T. Rowe Price plan for employees The plan offered more than 80 proprietary funds calculated to incur higher costs of approximately $27 million and loss or earnings compared to other comparable funds of $123 million. Delta Airlines v. Fidelity The plan offered a brokerage window with excessive fees and higher expense ratio funds. In addition Fidelity was receiving kickbacks from the investment advisor Financial Engines. Fidelity settled the suit for $12 million. Nestle USA v. Voya Voya collected investment advice fees of 0.50% for no additional services, the advice was provided by a third party. Wells Fargo plan for employees The plan used proprietary target date funds while less costly funds were readily available. The HR committee chose all Wells Fargo funds and used Wells Fargo funds for the Qualified Default Investment Alternative (QDIA).

Qualified Default Investment Alternative (QDIA) Guidelines After employees have been given opportunity to make investment election Provide a description of the QDIA including risk/return characteristics, fees and expenses Notice to employees within “reasonable time” before executing transaction - at least 30 days before eligibility - to all employees annually at least 30 days before beginning of plan year Notice to employees within “reasonable time” after transaction to transfer from QDIA Applies to 401(k), 403(b), and 457 plans Applies to auto enroll plans - Auto escalation Applies to employees who do not make investment choices

QDIA Alternatives Target Date Funds - Does not consider employees other investments - Based on employee’s age or retirement age Managed Accounts - Managed by a professional money manager - Developed specifically for the account owner - Uses funds available on the plan’s fund list Balanced Funds - Managed based on the entire employee group not the individual account owner - Allocation between equity and fixed income Capital Preservation - For first 120 days for ease of transfer by the employee

Timely Deposit of Employee Deferrals Original Rule 15th business day of the month following the withholding of the deferral OR The earliest date the deferrals can reasonably segregated from the employer’s general assets Safe Harbor Effective January 14, 2010 For plans with less than 100 participants within 7 business days of deferral Prohibited transaction - Disqualified person dealing with plan assets for their own benefit Must make employee whole if the deadline is missed or if deferrals are inadvertently overlooked