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

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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. DOL Fee Initiatives

10. 401(k) and 403(b) Fees Three general categories:
Plan Administration Fees
Individual Service Fees
Investment Fees

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

12. Individual Service Fees
Loans
Hardship withdrawals
QDROs
Distributions

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

14. 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

15. 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)

16. 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

17. 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

18. “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

19. 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)

20. “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

21. 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)

22. 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)

23. 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

24. 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

25. 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)

26. 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)

27. 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

28. 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

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

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

31. 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)

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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)

40. 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

41. 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)

42. 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

43. 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

44. 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

45. Model Chart − Returns

46. Model Chart − Fees

47. 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)

48. 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

49. 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 – days before effective date of change

50. 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

51. 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

52. 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

53. 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

54. 408(b)(2) Disclosure Checklist

55. 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

56. 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?

57. § 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

58. Q & A

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