Important Pension Changes From D.C. - What Do You Need to Know? Marcia S. Wagner, Esq. For Intermediary Use Only.  Not for Distribution to the General Public.

Priority Objectives from Washington Outlook on U.S. Private Retirement System Retirement security remains a major priority. Pushing for reform through Congress and DOL. White House Task Force on the Middle Class Newly created by President Obama in 2009. Chaired by Vice President Biden, and includes Secretaries of Labor and Treasury. Used to coordinate Administration’s agenda. Improving the DC Savings System Obama Administration’s proposals target 401(k) plans and providers. Blurring of lines between White House and DOL. Coordinated actions to improve retirement security.

1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. 408(b)(2) Disclosures 4. A Game Plan for Clients

ERISA and Conflicts Fiduciary standards under ERISA are the highest known to the law. Conflicts can not be mitigated through disclosure. Must eliminate conflict or meet conditions of a PTE. DOL’s current definition for investment advice is based on 5-factor test: 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.

Two Specific Changes Are Proposed DOL releases proposed reg’s on Oct. 21, 2010. Proposed reg’s broaden existing regulatory definition of “investment advice fiduciary.” Existing definition of investment advice requires: Mutual understanding or agreement that advice will serve as primary basis for plan investment decisions. Advice provided on regular basis. DOL proposal for new investment advice definition merely requires: Any understanding or agreement that advice may be considered for plan investment decisions. Advice no longer needs to be provided on regular basis.

Safe Harbor for Avoiding Fiduciary Status Proposed reg’s introduce new safe harbor. Non-fiduciary advisor must be able to demonstrate that plan client knows, or reasonably should know…. …that advice is being made by advisor in its capacity as purchaser or seller of securities, and… …that advisor is not providing impartial investment advice. 2 specific activities are exempted under safe harbor. Non-fiduciary “investment education” under DOL Interpretive Bulletin 96-1. Platform provider’s marketing of investment alternatives to plan (and providing related info) if it discloses that it is not providing impartial advice.

Potential Impact on Providers Financial advisors - brokers Brokers would need to change their service model and re-define their role. If serving non-fiduciary role, must disclose they are not providing impartial advice. If serving fiduciary role, must avoid variable compensation (and prohibited transactions). To eliminate conflict of interest, broker could dual-register as RIA and charge a level, asset-based fee. Other service providers Platform providers must disclose they do not provide impartial advice (to avoid fiduciary status). TPAs that provide advisory services in exchange for variable compensation must also provide disclaimer.

Outlook for DOL Proposed Reg’s Proposal is consistent with Administration’s aim to reduce conflicts. If adopted, many advisors would be forced to adopt fee-leveling or change nature of advisory services. Proposed reg’s expected to draw heavy comments. February 3, 2011 deadline for submitting written comments to DOL. Public hearing on March 1, 2011.

New Fiduciary Standards Under Dodd-Frank Act of 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Empowers SEC to impose fiduciary standard on brokers with respect to retail clients. After completing its study on standards of care for brokers and RIAs on Jan. 21, 2011, SEC staff’s report recommends uniform fiduciary standard. Financial advisors who are non-fiduciary brokers are currently subject to a duty of suitability only. SEC rulemaking may impose new disclosure obligations and fiduciary standards on brokers. SEC changes would be separate and in addition to DOL changes to ERISA “fiduciary” definition.

1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. 408(b)(2) Disclosures 4. A Game Plan for Clients

DOL Finalizes Participant Fee Disclosure Regulations DOL issues final reg’s on Oct. 14, 2010. Generally consistent with 2008 proposed reg’s. DOL press release explained that existing law did not require plans to provide necessary information. 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.

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.

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

Info that must be available upon request Other Requirements Info that must be available upon request Prospectuses, shareholder reports and financial statements provided to plan. Form of disclosure Separate or combined with SPD and/or statements. 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, 2011

Potential Impact on Providers Administrative service providers New reg’s will impact TPAs and bundled providers. Automatic delivery of fund prospectuses will no longer be required under ERISA 404(c). Financial advisors No special disclosure requirement for fees of brokers receiving indirect compensation only. RIA fees presumably must be disclosed on annual and quarterly basis as “general administrative” fee. Plan participants are likely to scrutinize plan’s investments and fees, impacting sponsors and advisors.

1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. 408(b)(2) Disclosures 4. A Game Plan for Clients

When Are Service Providers Conflicted? Plan sponsor is looking for provider of administrative services. Provider offers two options: Services ordered a la carte: $10,000.00 Pre-packaged services and menu: $ 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. Provider has incentive to steer uninformed clients to more profitable option.

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. Pushing to finalize DOL’s 2007 proposed reg’s this year. Rationale for proposed 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.

Covered Providers and Disclosures 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. Required to disclose compensation in writing. Disclosure must be provided before entering into contract. Formal contract and disclosure of conflicts not required. Indirect compensation requires more detailed disclosure. Service-by-service disclosure of fees is generally not required.

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.

Timing of Disclosures Under Interim 408(b)(2) Regulations Timing requirements for disclosures. Disclosure must be made reasonably in advance of entering into, extending or renewing services. Changes to information must be made no later than 60 days after provider becomes aware of change. Erroneous information will not result in a violation if provider has acted in good faith and with reasonable diligence. Errors and omissions must be disclosed within 30 days after coming to light.

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. No conflicts of interest for fiduciaries. 408(b)(2) disclosure does not cure self-dealing violations. Outlook Effective date delayed from Jul. 16, 2011 to Jan. 1, 2012, but further changes may be on horizon.

1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. 408(b)(2) Disclosures 4. A Game Plan for Clients

Final and Proposed Rules Will Impact Many Plan Clients 408(b)(2) Fee Disclosures Providers must furnish detailed fee disclosures by Jan. 1, 2012. Will also impact plan sponsors directly. 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.

Fee Disclosures to Participants Many participants may be caught off guard by fee disclosures under the new rules. New rules become effective January 1, 2012 for calendar year plans. 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.

Broader “Fiduciary” Definition DOL proposal likely to force many advisors to provide fiduciary services for level fees. Advisors unwilling to serve plan clients on these terms may be forced out of retirement space. Advisors, especially non-fiduciaries, should re-evaluate business model for plan clients. Explore working with recordkeeping platforms that have ability to offer level payouts. Explore use of ERISA fee recapture accounts to ensure advisor retains level fee only. Consider becoming “dual registrant” and charge level asset-based fee as RIA. No easy “one size fits all” solution for advisory firms.

Website: www.erisa-lawyers.com Important Pension Changes From D.C. - What Do You Need to Know? Marcia S. Wagner, Esq. 99 Summer Street, 13th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.erisa-lawyers.com marcia@wagnerlawgroup.com A0056016