1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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.

9. 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%

10. 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.

11. 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.

12. 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).

13. 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

14. 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

15. 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