This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors

Retirement Plan Fee Disclosure Rules: Now What? Greg Ash, Esq. and Chadron Patton, Esq.

Presenters Greg Ash Partner gash@spencerfane.com 913.327.5115 Chadron Patton Associate cpatton@spencerfane.com 913.327.5137

Program Highlights Background – Focus on Fee Transparency Fee Disclosure Rules Service provider fee disclosures (disclosure to plan fiduciaries) Participant fee disclosures (disclosure by plan fiduciaries) Fiduciary Compliance Strategies Evaluating service provider disclosures Addressing participant fee disclosure inquiries

Focus on Fee Transparency Fees charged to/paid by DC plan participants can dramatically affect retirement income: “Let’s take a quick look at how fees can affect you: Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average return by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.” FAQs on Disclosures to Help Employees Understand Their Retirement Plan Fees, U.S. Dept. of Labor, Employee Benefits Security Administration

Participants in the Dark Although 401(k) and 403(b) plan fees can be significant, participants and employers often don’t know who pays them Participants pay 91% of fees (up from 78% in 2009) Median “all-in” fee for typical plan was 0.78% in a 2011 ICI survey, or about $248/participant But in a 2011 AARP study: 71% of U.S. employees believed they paid no 401(k) fees 6% were not sure

Call to Action DOL and media outlets are encouraging 401(k) plan activism “You could encourage your employer to shop around for other providers willing to offer the same services, but at a much lower cost. And, just so you know, the law is on your side: plan fiduciaries have an obligation to consider the fees and expenses paid by your plan – and to operate the plan in your interest.” DOL Fee Disclosure FAQs A July 2012 Consumer Reports article encouraged readers to “arm yourself with comparisons and join other plan participants” to “agitate” for change. Fees Skim Big Bucks from 401(k)s, Consumer Reports, July 2012, p. 7

Fee Litigation 30+ cases pending, challenging DC plan fee practices, beginning in 2006 Legal theory: Excessive and undisclosed fees diminish returns and are “unreasonable” Plans overpay when fiduciaries don’t understand fee structures Service providers are conflicted by revenue sharing

DOL Fee Initiatives

401(k) and 403(b) Fees Three general categories: Plan Administration Fees Individual Service Fees Investment Fees

Plan Administration Fees Recordkeeping Accounting Actuarial Appraisal Consulting Legal Third party administrator Trustee services

Individual Service Fees Loans Hardship withdrawals QDROs Distributions

Investment Fees Mutual funds Variable annuities Management fees Sales charges Rule 12b-1 fees Variable annuities Mortality expense charges Surrender and transfer charges

Mutual Fund Prospectus Annual fund operating expenses (deducted from fund assets) Class R-1 Class R-2 Class R-3 Class R-4 Class R-5 Management fees 0.27% Distribution and/or service (12b-1) fees 1.00 0.75 0.50 0.25 none Other expenses 0.16 0.40 0.19 0.11 Total annual fund operating expenses 1.43 1.42 0.96 0.68 0.38

Service Provider Fee Disclosure February 2, 2012 – DOL published final regulations under § 408(b)(2) of ERISA requiring disclosure of fees by covered service providers July 1, 2012 – deadline for covered service providers to provide written disclosures to the responsible plan fiduciary (e.g., plan sponsor)

408(b)(2) Background Payments to “parties-in-interest” (from plan assets) are generally prohibited transactions (under § 406) Constitutes “breach” of fiduciary duty 15% excise tax “Parties-in-interest” include service providers ERISA § 408(b)(2) is exception to rule

ERISA Section 408(b)(2) Statutory exemption from P/T rules for payments (from plan) to service providers, so long as: Services are “necessary” for establishment or operation of plan The contract/arrangement is “reasonable” No more than “reasonable compensation” is paid to service provider

“Reasonable” Contract Under the final regulations, a contract is not “reasonable” unless service provider discloses (in writing, in advance) the services it will provide and the direct and indirect compensation it will receive Failure to disclose = unreasonable contract = prohibited transaction = breach of fiduciary duty

408(b)(2) Consequences If service provider fails to disclose fees (or if plan pays unreasonable fees): Parties have committed a prohibited transaction under ERISA § 406 Plan fiduciary has breached its fiduciary duty – may be personally liable for loss Service provider is subject to a 15% excise tax (100% if P/T not corrected)

“Innocent” Fiduciary Rule Class exemption covers fiduciary who: Innocently enters into unreasonable arrangement (due to lack of disclosure) Makes formal demand for fee disclosure Notifies DOL if provider does not comply

Covered Plans ERISA-covered qualified plans – both DB and DC plans ERISA-covered 403(b) plans Covered plans do not include: Non-ERISA (govt. or church) plans Section 457(b) plans IRAs, SEPs, or SIMPLE plans Health/welfare plans (at least for now)

Covered Service Providers Disclosure requirements apply to those who provide “covered services” to a plan, which include: Services provided as a fiduciary or RIA Recordkeeping and brokerage services Other services if the provider received “indirect compensation” (i.e., compensation from sources other than the plan or employer)

Covered Service Providers Investment advisors for plan Recordkeepers Brokers Asset allocation model managers Managed account provider Custom target date/life cycle fund managers Commingled funds/collective trusts NOT most mutual funds

Covered Arrangements Contract/agreement to perform services for a covered plan Reasonably expects to receive (together with subcontractors and affiliates) at least $1,000 in direct or indirect compensation from the covered plan

Required Disclosures Description of services to be provided Statement regarding status of covered service providers Description of all direct, indirect, related-party, and termination compensation service provider is expected to receive Manner of receipt of compensation (e.g., billed separately or paid directly from plan assets)

Definition of Services Fiduciary services Any recordkeeping services All services that will be provided in connection with the arrangement (including services provided by an affiliate or subcontractor)

Direct Compensation Direct Compensation is compensation received directly from the plan Example: TPA charges each participant account $50/year (or 5 basis points) May be expressed as a dollar amount, percentage, formula, per-participant charge, or any other reasonable method

Indirect Compensation “Indirect Compensation” is compensation received from any source other than the plan or plan sponsor Example: TPA receives 20 bps “revenue sharing” from mutual fund company whose fund(s) are investment options under the plan

What is “Revenue Sharing”? #1 – Direct Fee Payments

What is “Revenue Sharing”? #2 – Indirect Fee Payments

Related Party Compensation Must describe compensation paid among related parties (including affiliates and subcontractors) to the covered service provider, if it is either: Set on a transaction basis (e.g., finder’s fee or commission); or Charged directly against the covered plan’s investments (e.g., Rule 12b-1 fees)

Termination Compensation Disclosure must describe any compensation that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the termination of its contract or arrangement with the covered plan

Recordkeepers and Brokers Must provide fee information for each designated investment alternative (other than brokerage window) that is made available to plan, including: Expense ratios Transaction fees Any other ongoing charges May use investment provider materials

Recordkeeping Services Paid Through Revenue Sharing If providing recordkeeping services without explicit compensation, recordkeeper must provide reasonable, good-faith estimate of cost of services including: Explanation of the methodology and assumptions used to prepare the estimate; and Detailed explanation of the recordkeeping services that will be provided to the covered plan

Format Disclosures must be written, but do not have to be part of services contract Service providers permitted to provide the required disclosures electronically, including by making information available on a secure website, if: Disclosure information on the website is readily accessible to responsible plan fiduciaries; and Responsible plan fiduciaries have clear notification on how to access this information

Timing Initial disclosure deadline was July 1, 2012 Changes to the following types of information must be disclosed as soon as practicable, but in no case later than 60 days after the covered service provider knows of the change: Services to be provided Status of the covered service provider, an affiliate, or a subcontractor as an ERISA fiduciary or registered investment advisor Compensation to be received Cost of recordkeeping services

Participant Fee Disclosures General: Plan administrator must disclose plan- and investment-related information to participants Disclosures required On participant’s initial eligibility Annual notice of general plan information Quarterly notice of actual fees/expenses

Covered Plans Applies to all participant-directed individual account plans subject to ERISA (e.g., 401(k), 403(b)) Excludes “old money” 403(b) contracts (pre-2009) Does not apply to IRAs, IRA annuities, SEPs, or SIMPLEs

Key Issues for Employers “Plan administrator” is responsible for compliance Compliance required to obtain § 404(c) protection Disclosures not optional, but are required as part of fiduciary duty under ERISA Violations risk fiduciary liability and litigation, not just sanctions and penalties (e.g., investment losses and excessive fees)

Who is Responsible? ERISA § 3(16) “plan administrator” Often, plan administrator is the employer Plans may contractually delegate this responsibility (e.g., to service provider) Relief for reasonable and good faith reliance on third parties Plan administrator not liable for “completeness and accuracy” of disclosures made by third parties But no relief from obligation to provide the notice

Content of Annual Notice Plan-Related Information General operational and identification How to give investment instructions Exercise of voting, tender, similar rights Designated investment alternatives Brokerage windows and self-directed accounts Associated fees and expenses Administrative expenses General explanation of fees for plan-level and individual administrative fees that may be charged (e.g., accounting, legal, QDROs, loans)

Content of Annual Notice Investment-Related Information Identifying information for investment funds (name, category, internet address for supplemental information) Performance data (1-, 5-, and 10-year returns) Special rules for fixed return funds (e.g., GICs) and employer stock Special rules for target-date funds TBA

Content of Annual Notice Investment-Related Information Benchmark information Fee and expense information Amount and description Description of limits on purchase, transfer, or withdrawal Total annual operating expenses as a percentage and per $1,000 invested Website information for investment funds Glossary of terms (sample at www.ici.org)

Format of Annual Notice Investment-related information must be presented in chart (or similar) format that facilitates comparison Chart must include: Date compiled Name and address of plan administrator How to obtain additional information DOL has published a model chart www.dol.gov/ebsa/participantfeerulemodelchart.doc

Model Chart − Returns

Model Chart − Fees

Content of Quarterly Notice Amount actually charged to participant accounts during prior quarter Plan-level charges Description of services to which charges relate No requirement to unbundle and report amounts included in investment fund operating expenses But, if applicable, explanation that some plan administrative expenses were paid from annual operating expenses of one or more investment funds (i.e., revenue sharing) Individual charges (e.g., for loans, QDROs, distributions, investment advice services)

To Whom? Annual and Quarterly Notice Any individual who is eligible to participate in plan Participants currently contributing Participants eligible but not contributing Term-vested with accounts Beneficiaries Alternate payees under QDROs

When? Annual Notice Initial Annual Notice – later of: 8/31/2012, or 60 days after 1st day of 1st plan year beginning on/after 11/1/2011 Subsequent Annual Notices – at least once in any 12-month period New employees – on or before first day eligible to participate in plan Updates – 60-90 days before effective date of change

When? Quarterly Notice Initial Quarterly Notice 45 days after end of calendar quarter in which Initial Annual Notice required For calendar year plans, 11/14/2012 Subsequent Quarterly Notices – at least once in any 3-month period

How? Service providers will take the laboring oar DOL reserved rules on method of distribution Generally: Stand-alone paper forms Quarterly statements SPD (if meet the frequency requirements) Electronic

Muted Reaction To Disclosures … So Far § 408(b)(2) Service Provider Disclosures Confusion from employers Fees still unclear What should we do with this information? But, DOL expanding examination and enforcement activities § 404a-5 Participant Disclosures Largely a non-event But, first quarterly statements still not out

Fiduciary Compliance Plan § 408(b)(2) Service Provider Disclosures Don’t just file them away! Make sure you have written agreements with all service providers Fiduciary duty to assess reasonableness of arrangement, and thus entitlement to prohibited transaction exemption Minutes of fiduciary committee meeting should reflect compliance process

408(b)(2) Disclosure Checklist

Fiduciary Compliance Plan § 404a-5 Participant Disclosures Make sure service providers will distribute the notices (Annual and Quarterly) Insist on contractual delegation of responsibility to service provider Review and understand the fee chart Prepare for questions from participants Decide who will answer questions (e.g., employer, service provider) Consider creating a Q&A template to keep answers consistent Create a complaint log and have fiduciaries review it

Fiduciary Compliance Plan § 404a-5 Participant Disclosures Be prepared for tough questions: Why didn’t you tell me about these fees before? What do these fees pay for? My neighbor pays less than $5 for every $1,000 invested. Why are we paying twice that? If I use a fund with a higher price, will I get more value? Did you stop deducting fees when my investments lost value?

§ 404a-5 Compliance Plan If service provider prepares Annual Notice, review plan-related disclosures for accuracy Consider supplementing disclosures that have already been distributed Benchmark fees Evaluate how fees are allocated Asset-based? Break point? Pro rata? Per capita? Compare fund benchmarks in disclosure with those in IPS Communicate value of plan before disclosures are made

Q & A

Thank You! Greg Ash Partner gash@spencerfane.com 913.327.5115 Chadron Patton Associate cpatton@spencerfane.com 913.327.5137