(2) Fee Disclosures

Report
Plan Fees and Fiduciary Responsibilities
- Preparing for the New Rules
Marcia S. Wagner, Esq.
Transforming the Retirement System
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Regulatory landscape is changing.

DOL is rolling out new rules for 2012.
◦ Fee disclosures for plan sponsors
◦ Participant-level fee disclosures
◦ Participant investment advice
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Proposed Rulemaking
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DOL Interaction with White House
◦ Working with White House’s Middle Class Task Force
◦ Coordinated actions to improve retirement security
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401(k) Fiduciary Toolkit

Plan sponsors need to understand their
current and new fiduciary responsibilities.
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Advisors can help plan clients navigate the
changing regulatory landscape.
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Topics covered by Fiduciary Toolkit
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Plan Fees
Fiduciary Status
Fiduciary Liability
Rollover Assets
Investment Duties
Investment Menu
Due Diligence
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Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
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DOL Finalizes Participant
Fee Disclosure Regulations

DOL issues final reg’s on Oct. 14, 2010.
◦ 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 participantdirected investments.
◦ Covers plan even if not designed to comply with
ERISA Section 404(c).
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Coverage of participants
◦ New reg’s apply to all eligible employees.
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Annual and Quarterly Disclosure
of Plan-Related Information
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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.
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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.
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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.
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Required information for disclosure in
comparative format includes:
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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
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Other Requirements
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Info that must be available upon request
◦ Prospectuses, shareholder reports and financial
statements provided to plan.
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Form of disclosure
◦ Must be understood by average participant.
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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.
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Effective date
◦ Plan years beginning on or after Nov. 1, 2011.
◦ Initial disclosures due May 31, 2012 for calendar
year plans.
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Potential Impact
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Automatic delivery of fund prospectuses will
no longer be required under ERISA 404(c).
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RIA fees presumably must be disclosed on
annual and quarterly basis as “general
administrative” fee.
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Plan participants are likely to scrutinize
plan’s investments and fees, impacting
sponsors and advisors.
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Educate your plan participants before
disclosure.
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4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
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How Can Inv. Advice Be Conflicted?

Non-fiduciary provider receives variable
compensation from plan’s investments.
◦ Broker-dealer receives different 12b-1 fees.
◦ Fund platform offers proprietary funds to plan clients.
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Provider has incentive to steer participants.
◦ Can not provide fiduciary advice to participants.
◦ Conflicted advice triggers prohibited transaction (PT).
◦ PT occurs even if advice provided in good faith.
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DOL Final Rules for Participant Advice
 Pension Protection Act included statutory
exemption for participant-level advice.
◦ Fiduciary Adviser must be RIA, bank, insurer or brokerdealer.
◦ Eligible Investment Advice Arrangement must have:
(1) Fee-Leveling (Fiduciary Adviser’s fees do not vary)
(2) Computer Model certified by expert.
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Other conditions for exemption.
◦ Authorization from separate plan fiduciary.
◦ Annual review by independent auditor.
◦ Advance notice to participants with disclosures for
fees and material affiliations of parties (i.e., conflicts).
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Fee-Leveling Arrangement
 Fiduciary Adviser’s fee must not vary.
◦ Fiduciary Adviser’s employee/rep must receive level
compensation.
◦ Fiduciary Adviser’s affiliate may receive variable
compensation.
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Example: ABC Fund Platform for Plan Clients
◦ Plan invests in ABC Funds and third party funds.
◦ ABC Fund Manager cannot give participant advice
(due to incentive to steer participants to ABC Funds).
◦ New affiliate, ABC Fiduciary Adviser, is created to
provide advice to participants.
◦ DOL imposes fee-leveling on ABC Fiduciary Adviser.
◦ But ABC Fund Manager can earn compensation that
varies with participants’ allocation decisions.
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Computer Model Arrangement
 Advice must be from computer model.
◦ Model must be certified by investment expert.
◦ Must consider participant’s personal info.
◦ Fiduciary Adviser may receive variable compensation.
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Does DOL favor index funds?
◦ Proposed rules suggested that model should favor
cheapest menu option in each asset class.
◦ Fortunately, DOL backed away from this approach.
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Can a Computer Model be used for IRAs?
◦ DOL permits it.
◦ But are Computer Models capable of advising IRA
owners?
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DOL rules become effective on Dec. 27, 2011.
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3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
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When Are Service Providers Conflicted?
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Plan sponsor is looking for provider of
administrative services.
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Provider offers two options:
◦ Services ordered a la carte:
◦ Pre-packaged services and menu:
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$10,000.00
$ 4,000.00
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.
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Provider has incentive to steer uninformed clients
to more profitable option.
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Retirement Security Initiative
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Improving transparency of 401(k) fees.
◦ Administration’s goal is to make sure workers and plan
sponsors are getting services at a fair price.
◦ Pushing to “finalize” interim final reg’s this year.
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Rationale for interim 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.
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Covered Providers and Disclosures
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Covered Service Providers
◦ Fiduciaries (including ERISA fiduciary or RIA).
◦ Providers of recordkeeping and brokerage services.
◦ Providers of accounting, actuarial, legal and other
professional services if they receive indirect fees.
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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.
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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.
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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).
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Special Rules for Platform Providers
◦ Must provide fee info for each investment alternative.
◦ Requirement can be met by passing through fund
prospectuses.
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Timing for 408(b)(2) Disclosures
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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.
◦ 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.
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Prohibited Transactions and
Interim 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.
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No fiduciary conflicts permitted.
◦ 408(b)(2) disclosure does not cure self-dealing
violations.
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Outlook
◦ Effective date delayed from July 16, 2011 to
April 1, 2012.
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2.
3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
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DOL’s Campaign to Expose Conflicts

DOL Strategy
◦ Roll out new fee disclosure rules.
◦ Impose fiduciary status on more providers.
◦ Force non-fiduciary advisors to make disclaimers.
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DOL releases proposed reg’s on Oct. 21, 2010.
◦ Broadens “investment advice fiduciary” definition.
◦ Withdrawn on September 19, 2011.
◦ To be re-proposed with more input from public.
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Overview of Existing Definition
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If you provide investment advice, you are
automatically deemed a fiduciary.
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DOL’s current definition for investment advice
is based on 5-factor test:
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Advice on value or advisability of investments,
that is provided on a regular basis,
pursuant to a mutual agreement or understanding,
that such services will serve as a primary basis for
investment decisions, and
◦ that individualized advice will be based on the
particular needs of the plan.
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Overview of DOL’s Initial Proposal
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Existing Definition
◦ Advice may be investment advice if it is primary
basis for plan decisions and given on regular basis.
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DOL’s Initial Proposal
◦ Include any advice that may be considered by plan.
◦ May include casual advice or one-time advice.
◦ Non-fiduciary advisors must make disclaimer:
(1) advisor is acting as seller of securities.
(2) advisor’s interests are adverse to client.
(3) advice is not impartial.
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Potential Impact on Providers
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Non-Fiduciary Advisors
◦ Would need to change service model.
◦ Must disclose they are not providing impartial
advice.
◦ Or they could accept fiduciary status and become
subject to ERISA.
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Re-proposed Rule in 2012
◦ New definition to include individualized advice only.
◦ Will be similar in approach to DOL’s initial proposal.
◦ DOL is coordinating with SEC.
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1.
2.
3.
4.
5.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Strategy and Fiduciary Pointers
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Final and Proposed Rules
Will Impact Many Plan Clients

408(b)(2) Fee Disclosures
◦ Providers must furnish detailed fee disclosures by
April 1, 2012.
◦ Will also impact plan sponsors directly.
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Plan sponsors have duty to ensure plan’s fees are
reasonable under ERISA.
◦ Duty will extend to fee information included in
providers’ 408(b)(2) disclosures.
◦ Sponsors are likely to need assistance in light of
complexity of plan arrangements.
◦ Advisors can assist in prudent evaluation of fees and,
if necessary, in search for alternative arrangements.
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Fee Disclosures to Participants

Many participants may be caught off guard
by fee disclosures under the new rules.
◦ New rules become effective May 31, 2012 for
calendar year plans.
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Advisors can help plan sponsors prepare.
◦ Discuss with plan’s recordkeeper and determine
impact of new rules on existing fee disclosures.
◦ Meet with participants and review fee information
through educational sessions.
◦ If sponsor has fee-related concerns, remind sponsor
that its fiduciary review process can be enhanced.
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Additional Fiduciary Pointers

Be proactive in management and review of
plan’s menu (including investment fees).
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Develop separate guidelines for fiduciary review
of investment fees and administrative fees.
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Investment duties under ERISA are procedural,
so be sure to follow a deliberate process.
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Plan sponsors and fiduciaries should investigate
their liability protection (bonding, indemnity).
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401(k) Fiduciary Toolkit
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Plan Fees and Fiduciary Responsibilities
- Preparing for the New Rules
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
[email protected]
A0064301
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