FEE DISCLOSURE Marcia S. Wagner, Esq.

(b)(2) Disclosures 2. Fee Disclosures to Participants

3 When Are Service Providers Conflicted? Plan sponsor is looking for provider of administrative services. Provider offers two options: ◦ Services ordered a la carte: $10, ◦ Pre-packaged services and menu: $ 4, Plan sponsor may incorrectly conclude pre-packaged option is best for participants. ◦ Doesn’t realize that provider receives “hidden” compensation from funds and fund managers. ◦ Full compensation may be more than $10,000. ◦ Hidden cost is actually shifted to participants. Provider has incentive to steer uninformed clients to more profitable option.

4 Retirement Security Initiative Improving transparency of 401(k) fees. ◦ Administration’s goal is to make sure workers and plan sponsors are getting services at a fair price. ◦ Final regulations issued February 2, ◦ Initial disclosures due July 2, Rationale for 408(b)(2) reg’s. ◦ DOL efforts to educate plan sponsors about 401(k) plan fees started with Nov’ 97 hearing. ◦ Plan sponsors still not asking the right questions. ◦ DOL will now require providers to furnish the fee info sponsors should be requesting.

5 Covered Plans All employee pension plans must receive fee information except: ◦ IRAs ◦ Simplified Employee Pensions ◦ SIMPLE accounts ◦ Legacy 403(b) (no employer contributions after 2008)

6 Covered Providers and Disclosures Covered Service Providers (compensation of $1,000 or more) ◦ Fiduciaries (including ERISA fiduciary, fiduciary of look- through investment, and RIA). ◦ Providers of recordkeeping and brokerage services. ◦ Providers of accounting, actuarial, legal and other professional services if they receive indirect fees. Required to disclose compensation in writing. ◦ Must be provided before entering into contract. ◦ Formal contract not required. ◦ Indirect compensation requires more detailed disclosure. ◦ Service-by-service disclosure of fees is generally not required.

7 Disclosure of Compensation Format and manner of disclosure ◦ Dollar amount, formula, percentage of plan assets, per capita charge, or any other reasonable method. ◦ Whether fees will be billed or deducted and any other manner of receipt must be disclosed. Compensation shared among related parties ◦ Generally, compensation paid to affiliates or subcontractors does not have to be disclosed. ◦ But must disclose if payment flows to related party on transactional basis (e.g., commissions, 12b-1 fees). Special Rules for Platform Providers ◦ Must provide basic fee information for each investment alternative. ◦ Requirement can be met by passing through fund prospectuses if issuer is regulated.

8 Form of Disclosures Disclosure may be provided through multiple documents. Likely format of Disclosure Summary to be required by DOL in future: ◦ 2 column chart ◦ Column 1: direct, indirect, shared compensation, fees and expenses relating to investments. ◦ Column 2: location of items listed in first column.

9 Timing of 408(b)(2) Disclosures Required Deadlines ◦ Disclosure must be made reasonably in advance of starting or renewing services. ◦ Changes to info must be made no later than 60 days after provider becomes aware of change. ◦ Final rule allows recordkeeping platforms and fiduciaries of look-through investments to report changes annually. ◦ Erroneous info will not result in violation if provider has acted in good faith and with diligence. ◦ Errors and omissions must be disclosed within 30 days after coming to light.

10 Prohibited Transactions and 408(b)(2) Regulations If provider fails to make disclosure, plan’s payment of fees is a prohibited transaction. ◦ Disclosure failures can be cured. ◦ Plan must make written request for information, and provider must respond within 90 days. ◦ Refusal or inability to comply with request requires plan fiduciary to notify DOL, and decide whether to terminate service arrangement. Outlook ◦ Effective date July 2, 2012.

11 408(b)(2) Disclosures Practical Implications Providers must furnish detailed fee disclosures by July 2, Vendors, including platform providers, are responding in different ways: ◦ Some are bundling all services (e.g., RIA and B-D), ◦ Some are merely disclosing their own fees, without reference to other providers. ◦ Some providers are subcontracting this disclosure responsibility. ◦ The FA should determine who is responsible for disclosure and who is making which disclosures. Financial advisors can add value by “quarterbacking” to make sure all providers know and make disclosures, and keep their plan sponsors informed as to what they will be receiving and from whom.

408(b)(2) Disclosures Practical Implications Plan sponsors have duty to ensure plan’s fees are reasonable under ERISA. Plans sponsors are likely to need assistance in light of complexity of plan arrangements. Advisors can assist with: ◦ Prudent evaluation of fees and services, ◦ Negotiating lower fees and/or expanded services, and ◦ Search for alternative arrangements, if necessary. Marketing Tip – reach out to prospects to determine if they received disclosures. ◦ If not, plan sponsor might have duty to terminate relationship. ◦ If so, analyze it for reasonableness and see if you can add value. 12

(b)(2) Disclosures 2. Fee Disclosures to Participants

14 DOL Finalizes Participant Fee Disclosure Regulations DOL issues final reg’s on Oct. 14, ◦ DOL press release explained that existing law did not require plans to provide necessary information. ◦ New rule requires comparison of plan’s investments. Types of plans covered ◦ New reg’s apply to DC plans with participant- directed investments. ◦ Covers plan even if not designed to comply with ERISA Section 404(c). Coverage of participants ◦ New reg’s apply to all eligible employees.

15 Annual and Quarterly Disclosure of Plan-Related Information Must disclose general info about plan. ◦ Must include explanation of general admin. service fees and individual expenses on annual basis. ◦ Must disclose dollar amount of fees/expenses charged to participant accounts on quarterly basis. Disclosure only required for fees/expenses not embedded in expenses of investments. ◦ If service provider only receives indirect compensation from investments, provider’s fees are not subject to this disclosure requirement. ◦ But must disclose that a portion of general admin. service fees is paid from expenses of investments.

16 Annual Disclosure of Investment-Related Information Must disclose fee and performance-related info for plan’s investment alternatives. ◦ This disclosure must be in comparative format. ◦ Must be provided on annual basis. Required information for disclosure in comparative format includes: ◦ Name and type of investment option ◦ Investment performance data ◦ Benchmark performance data ◦ Total annual operating expenses for each investment and any extra shareholder-type fees. ◦ Internet website address

17 Other Requirements Info that must be available upon request ◦ Prospectuses, shareholder reports and financial statements provided to plan. Form of disclosure ◦ Must be understood by average participant. Impact on sponsor’s other fiduciary duties ◦ No relief for duty to prudently select/monitor plan’s providers and investments. ◦ New reg’s modify ERISA 404(c) disclosures. Effective date ◦ Plan years beginning on or after Nov. 1, ◦ Initial disclosures due August 30, 2012 for calendar year plans.

Fee Disclosures to Participants Practical Implications Automatic delivery of fund prospectuses will no longer be required under ERISA 404(c). General administrative service fees must be explained but need not be itemized. Impact on Financial Advisors ◦ Brokers/RIAs – no reporting of annual and quarterly fees if compensation fully reflected in total annual operating expenses of plan investment. 18

Fee Disclosures to Participants Practical Implications Advisers can help sponsors prepare. Complete the investment portion of comparative table (e.g., investment and benchmark performance data). Discuss with plan’s recordkeeper the impact of the new rules on existing fee disclosures. Meet with participants and review investment and fee information through educational sessions. If plan sponsor has fee-related concerns, remind plan sponsor that its fiduciary review process can be enhanced. 19

20 FEE DISCLOSURE Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA Tel: (617) Fax: (617) Website: A