Plan Fees and Fiduciary Responsibilities - Preparing for the New Rules Marcia S. Wagner, Esq.

2 Transforming the Retirement System Regulatory landscape is changing. DOL is rolling out new rules for ◦ Fee disclosures for plan sponsors ◦ Participant-level fee disclosures ◦ Participant investment advice Proposed Rulemaking DOL Interaction with White House ◦ Working with White House’s Middle Class Task Force ◦ Coordinated actions to improve retirement security

3 401(k) Fiduciary Toolkit Plan sponsors need to understand their current and new fiduciary responsibilities. Advisors can help plan clients navigate the changing regulatory landscape. Topics covered by Fiduciary Toolkit ◦ Plan Fees ◦ Fiduciary Status ◦ Fiduciary Liability ◦ Rollover Assets ◦ Investment Duties ◦ Investment Menu ◦ Due Diligence

4 1. Fee Disclosures to Participants 2. Participant Investment Advice (b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Strategy and Fiduciary Pointers

5 DOL Finalizes Participant Fee Disclosure Regulations DOL issues final reg’s on Oct. 14, ◦ 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 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.

6 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.

7 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

8 Other Requirements Info that must be available upon request ◦ Prospectuses, shareholder reports and financial statements provided to plan. Form of disclosure ◦ 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, ◦ Initial disclosures due May 31, 2012 for calendar year plans.

9 Potential Impact Automatic delivery of fund prospectuses will no longer be required under ERISA 404(c). 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. Educate your plan participants before disclosure.

10 1. Fee Disclosures to Participants 2. Participant Investment Advice (b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Strategy and Fiduciary Pointers

11 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. 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.

12 DOL Final Rules for Participant Advice Pension Protection Act included statutory exemption for participant-level advice. ◦ Fiduciary Adviser must be RIA, bank, insurer or broker- dealer. ◦ Eligible Investment Advice Arrangement must have: (1) Fee-Leveling (Fiduciary Adviser’s fees do not vary) (2) Computer Model certified by expert. 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).

13 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. 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.

14 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. 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. Can a Computer Model be used for IRAs? ◦ DOL permits it. ◦ But are Computer Models capable of advising IRA owners? DOL rules become effective on Dec. 27, 2011.

15 1. Fee Disclosures to Participants 2. Participant Investment Advice (b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Strategy and Fiduciary Pointers

16 When Are Service Providers Conflicted? Plan sponsor is looking for provider of administrative services. Provider offers two options: ◦ Services ordered a la carte: $10, ◦ Pre-packaged services and menu: $ 4, 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.

17 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” interim final reg’s this year. 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.

18 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. ◦ 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.

19 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 fee info for each investment alternative. ◦ Requirement can be met by passing through fund prospectuses.

20 Timing for 408(b)(2) Disclosures 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.

21 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 fiduciary conflicts permitted. ◦ 408(b)(2) disclosure does not cure self-dealing violations. Outlook ◦ Effective date delayed from July 16, 2011 to April 1, 2012.

22 1. Fee Disclosures to Participants 2. Participant Investment Advice (b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Strategy and Fiduciary Pointers

23 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. DOL releases proposed reg’s on Oct. 21, ◦ Broadens “investment advice fiduciary” definition. ◦ Withdrawn on September 19, ◦ To be re-proposed with more input from public.

24 Overview of Existing Definition If you provide investment advice, you are automatically deemed a fiduciary. 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.

25 Overview of DOL’s Initial Proposal Existing Definition ◦ Advice may be investment advice if it is primary basis for plan decisions and given on regular basis. 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.

26 Potential Impact on Providers 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. 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.

27 1. Fee Disclosures to Participants 2. Participant Investment Advice (b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Strategy and Fiduciary Pointers

28 Final and Proposed Rules Will Impact Many Plan Clients 408(b)(2) Fee Disclosures ◦ Providers must furnish detailed fee disclosures by April 1, ◦ 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.

29 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. 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.

30 Additional Fiduciary Pointers Be proactive in management and review of plan’s menu (including investment fees). Develop separate guidelines for fiduciary review of investment fees and administrative fees. Investment duties under ERISA are procedural, so be sure to follow a deliberate process. Plan sponsors and fiduciaries should investigate their liability protection (bonding, indemnity). 401(k) Fiduciary Toolkit

31 Plan Fees and Fiduciary Responsibilities - Preparing for the New Rules Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA Tel: (617) Fax: (617) Website: A