Marcia S. Wagner, Esq. PARTICIPANT ADVICE & THE BROKERAGE WINDOW

Introduction Hecker v. Deere ◦ 2,500 funds available through SBAs contribute to dismissal of excess fee lawsuits ◦ Window enabled choice of wide range of fees 2012 FAB ◦ Confirms that SBA investments are not DIAs ◦ SBA investments exempt form participant-level disclosure 2014 RFI ◦ Signal that new regulations in the offing requiring more fiduciary oversight ◦ Goal: protect participants using SBAs 2

Definition - Self Directed Brokerage Account SBA lets participants pick investments not on plan menu ◦ Unlimited stocks, ETFs and other securities, or ◦ Open mutual fund window, or ◦ Limited mutual fund window geared to particular vendor’s platform Motivation to offer SBA ◦ Employee pressure ◦ Employer policy ◦ Desire to avoid identifying core DIAs  For now, this avoids participant-level disclosure  DOL likely to close loophole 3

Disclosure Requirements - General SBA investments exempt from disclosure as DIAs ◦ No performance / benchmarking ◦ No fee information Disclosure required with respect to SBAs ◦ Description of how SBA works ◦ Investment instructions ◦ Account balance requirements ◦ Trading restrictions ◦ How SBA investments differ from DIAs ◦ Contact Information 4

Fee Disclosures General explanation to all participants ◦ Fees that may be charged against participant accounts on an individual basis for SBA use  Start-up fees  Maintenance / inactivity fees  Trading fees / commissions ◦ If fees unknown, notice must be provided of their existence ◦ Annual operating expenses of investment not covered by disclosure requirement (e.g.,12b-1 fees) Quarterly fee statement ◦ Dollar amounts charged to participant accounts ◦ Description of related services 5

Reporting Requirements Schedule H of Form 5500 allows optional reporting for SBA investments ◦ 1 Report individual SBA assets separately under each asset category listed on balance sheet and income statement, or ◦ 2 Report SBA assets as an aggregate amount under catch-all category Separate breakout required for certain SBA assets ◦ Loans, partnership interests, joint ventures, real property, employer securities, investments that can result in losses greater than account balance DOL RFI signals more detailed reporting likely 6

Fiduciary Duties Prudence standard applies to SBA selection ◦ Gather all relevant information ◦ Evaluate services, costs, etc. ◦ Document decision-making process Broker-dealer selection also subject to due diligence ◦ Confirm reasonableness of broker’s compensation No duty to monitor or supervise use of SBA by unsophisticated participants 7

Allocation of Expenses General rule: fiduciary has discretion to allocate plan expenses ◦ Pro-rata ◦ Per capita SBA expenses are generally allocated to the accounts of participants who use the SBA ◦ Danger of SBA subsidization by core plan investments ◦ Avoid removing SBA accounts from the general expense allocation process ◦ Paying service fees through revenue sharing skews allocation of expenses 8

Plan Document Authorization Plan fiduciaries must discharge duties in accordance with plan documents Authorization allowing participants to invest through SBA ◦ Explicit authorization in plan document, or ◦ Delegation of power to specified person or body to authorize the SBA Prototype adoption agreements frequently fail to address SBAs Communicate SBA to participants 9

Avoiding Discrimination SBAs must be available on a non- discriminatory basis ◦ Right to invest through an SBA is a plan benefit, right or feature ◦ Current availability – mathematical tests ◦ Effective availability – test looks at facts and circumstances  Example: Requirement of a minimum investment of $100,000 likely to be discriminatory, because low-paid participants will not qualify to invest through SBA 10

Best Practices SBA election form may contain protective language stating participant responsibility for investment results Plan sponsors should provide accurate SBA disclosures ◦ Advisers who assist sponsors should perform due diligence regarding information to be disclosed ◦ Adviser agreements should clearly state whether or not adviser has SBA responsibilities Plan sponsors responsible for monitoring SBA costs 11

Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, Massachusetts Tel: (617) Fax: (617) Website: A PPTX PARTICIPANT ADVICE & THE BROKERAGE WINDOW