What Plan Committees Must Do with the 408(b)(2) Disclosures Presented by The Standard FRED REISH, ESQ. Fred.Reish@dbr.com www.linkedin.com/in/fredreish What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012 0

Plan Expenses: Prohibited Transactions Under section 408(b)(2) of ERISA, the prohibited transaction rules permit: “Contracting or making reasonable arrangements with a party in interest for . . . services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.” What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Reasonable Contract or Arrangement The rule: An arrangement for services between a “covered plan” and a “covered service provider” is not reasonable unless the 408(b)(2) regulation is satisfied. Effective date: arrangements; arrangements. July 1, reasonably 2012 for the in advance existing for new Consequence of failure: covered provider. plan sponsor (responsible plan fiduciary). What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Covered Service Provider Y The primary types of covered service providers are: Recordkeepers Investment advisers (RIAs) Broker-dealers (“financial advisers”) What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Disclosures The following disclosures responsible plan fiduciary: must be made to the Y Services Y Status Y Compensation Y Investment information What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Disclosure of Compensation “Compensation” may be described or estimated as a monetary amount, formula, percentage of assets, or a per capita charge or, if the compensation cannot reasonably be expressed in such terms, by any other reasonable method. Any description or estimate must contain sufficient information to permit evaluation of the reasonableness of the compensation. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

408(b)(2): Prohibited Transaction Issues The failure to provide the disclosures results in the arrangement becoming a prohibited transaction for the adviser (or other covered service provider). The failure to receive the disclosures will also result in a prohibited transaction for the plan fiduciaries unless they take specified steps. See Drinker Biddle bulletin, “ERISA Service Provider Disclosures: What Plan Sponsors Need to Do Now,” www.drinkerbiddle.com/resources/publications/ 2012/ERISA-Newsletter-for-Retirement-Service-Providers. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

408(b)(2): Prohibited Transactions The steps are: Determine if any “covered” service providers failed to deliver the disclosures. Determine if the disclosures were “adequate.” Request in writing that any missing or inadequate disclosures be made. If the covered service provider refuses to provide the disclosures or does not provide them in 90 days, terminate the service provider and report to the DOL. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Prohibited Transaction The preamble to the final regulation explains the DOL view: “The Department does not believe that responsible plan fiduciaries should be entitled to relief . . . absent a reasonable belief that disclosures required to be provided to the covered plan are complete . . . Fiduciaries should be able to, at a minimum, compare the disclosures they receive from a covered service provider to the requirements of the regulation and form a reasonable belief that the required disclosures have been made.” Note: The role of the adviser. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Fiduciary Review In addition to the prohibited transaction “duty,” there is fiduciary duty to evaluate the services, status and compensation of the service providers: “The Department believes that plan fiduciaries need this information, when service providers, to selecting satisfy and their monitoring fiduciary obligations under ERISA section 404(a)(1) to act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.” Preamble to final 408(b)(2) regulation. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

408(b)(2): Fiduciary Issues The fiduciary concerns: Y Is the compensation reasonable? Y Are the services adequate/appropriate? Y Are the conflicts manageable? Plan committees must engage in a prudent process to evaluate these issues. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Understanding Disclosures In the preamble to the final regulation, explained: the DOL “This regulation requires that responsible plan fiduciaries receive the basic information needed to make informed decisions about service costs and potential conflicts of interest. If responsible understanding plan fiduciaries need assistance in any information furnished by the service provider, as a matter of prudence, they should request assistance, either from the service provider or elsewhere.” What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Risk Management Considerations for evaluating service providers: Y Evaluate Request for proposals Benchmarking Evidence Y Consider nature, quality and quantity of services Y Negotiate costs and compensation Share classes Expense recapture accounts What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

The Role of the Adviser Y Since many plan sponsors are not aware of their prohibited transaction and fiduciary duties, advisers should educate plan sponsors about these issues. Y Since most plan sponsors do not have access to market data to evaluate the compensation of the service providers, advisers should offer evaluation services. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

The Role of the Adviser Y Is it a conflict of interest for advisers to assist in the evaluation of the advisers’ compensation? Y Advisers should consider the value of their services and the presentation of that value. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Reader's Guide and Benchmark Group WHAT IS THIS REPORT? This Fiduciary Benchmarks Fees, Plan Design, and Participant Success Measures Report provides comprehensive "apples-to- apples" comparisons of a plan's fees, design, and participant success measures to those of a Benchmark Group of 53 similar plans. Note: Your report does not include performance evaluations HOW WAS THE BENCHMARK GROUP DETERMINED? We considered 9 relevant sort factors to identify the 53 similar plans that comprise the Benchmark Group. Benchmark Group Sort Factors Plan Assets Number of Participants This Plan $10,000,000 155 Benchmark Group $8mm - $12mm 105 to 195 of the plan's investment options. This important information Last Year You Bid or Reviewed Your Plan 2011 Last 3 years is beyond the scope of this report. Company Industry Computer and Electronic Product Manufacturing All WHY IS IT IMPORTANT? Department of Labor regulations under ERISA and, specifically, section 408(b)(2) require that all fees be "reasonable" for services being provided. The information in this report can help in working with service providers to meet this requirement and improve the plan. Plan Type Uses Auto-Enrollment Has Employer Match % of Plan Assets in Index Funds % of Plan Assets in Managed Accounts 401(k) For New Hires Yes 10% 5% Defined Contribution 13% 81% 0% to 45% 0% to 5% THIS PLAN'S SERVICE PROVIDERS HOW WAS THIS REPORT BUILT? We used a four-step process to build the report: Service Providers Used Across the Benchmark Group % of Benchmark Group This Plan's Specific Service Provider Type Using Service Provider Type Service Providers Recordkeeper 100% Yamane Plan Services Advisor / Consultant 81% ACME Consulting Third-Party Administrator 19% WT Benefits, LLC Other Service Providers 9% None We identified 53 similar plans for comparison (Benchmark Group). We summarized fees being paid for the plan based on the information provided by the plan sponsor and the plan's service providers. We examined the plan's design and associated complexity. We examined 10 participant success measures that indicate how well plan participants are preparing for retirement. HOW IS THIS REPORT BEST USED? FBi Reports are a key element in an annual plan review process. Maximum value is achieved when the plan's sponsor, its advisor or consultant, recordkeeper and other plan service providers participate. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012 15 16

Service Providers' Fee Disclosure This page summarizes the fees paid to the plan's primary service providers. It's important to consider plan services when assessing whether fees are reasonable. Please note that self directed account and participant level activity fees are not included in the information below. ADVISOR/CONSULTANT INVESTMENT MANAGERS Disclosure of Advisor/Consultant Fees Plan Fee in Dollars % of Total Fee Disclosure of Investment Manager Fees Plan Fee in Dollars % of Total Fee Investment Fees - 0% $49,871 100% Commissions Total Fees Finders' Fees Other Fees $20,000 Advisor/Consultant's Fees vs. Benchmark Group in percent Investment Manager's Fees vs. Benchmark Group in percent HOW DO THE PLAN FEES COMPARE to the average in the Benchmark Group? HOW DO THE PLAN FEES COMPARE to the average in the Benchmark Group? this plan's advisor/consultant fees are approximately 0.20% per year this plan's investment manager fees are approximately 0.50% per year this is 0.03% less per year this is equal to $3,000 less per year this is $19 less per participant per year this is 0.07% more per year this is equal to $7,000 more per year this is $45 more per participant per year What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012 16 17

Duty to Monitor The preamble to the DOL’s proposed regulation under ERISA §408(b)(2) states: “Finally, although this proposal looks to disclosures made at the time a service contract or arrangement is entered into or fiduciaries must arrangements and providers .” renewed, responsible continue to monitor plan service service the performance of Note: Other than changes, 408(b)(2) disclosures are only required at the inception of the arrangement. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Subsequent Disclosures Y Change to disclosed information: Within 60 days of covered service provider being informed of change. Annually for investment disclosures. Y Disclosure errors: Can be corrected within 30 days of knowledge of error made in good faith and with reasonable diligence. What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

Questions? What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

FRED REISH, ESQ. 1800 Century Park East, Suite 1400 Los Angeles, CA 90067 (310) 203-4047 (310) 229-1285 [fax] Fred.Reish@DBR.com ● www.linkedin.com/in/fredreish www.drinkerbiddle.com CALIFORNIA | DELAWARE | ILLINOIS | NEW JERSEY NEW YORK | PENNSYLVANIA | WASHINGTON DC | WISCONSIN © 2012 Drinker Biddle & Reath LLP | All rights reserved. A Delaware limited liability partnership What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012

What Plan Committees Must Do with the 408(b)(2) Disclosures | December 6, 2012