1. §408(b)(2) – Fee Disclosure; Interim Final Rules Robert Goldberg, Associate Regional Director U.S. Department of Labor Employee Benefit Security Administration NY Regional Office Presentation to NY Metro Chapter of ISCEBS September21, 2010

2. §408(b)(2) – Fee Disclosure; Interim Final Rules Regulation effective July 16, 2011 Public comments were requested up through August 30, 2010 Only applies to pension plan service providers DOL currently has a separate regulatory project to determine disclosure requirements for welfare plan service providers

3. What does the new ERISA §408(b) regulation try to do? It amends the current §408(b) regulation to ensure that pension plan fiduciaries when selecting service providers have sufficient information to assess whether the terms of the service provider arrangement is reasonable, including the service provider’s compensation and any potential conflicts of interest that might affect the provider’s performance of its duties.

4. What does the new ERISA §408(b) regulation try to do? Recordkeepers and other service providers that provide services to the pension plans, specifically participant directed accounts including 401(k) plans, will have significant disclosure obligations.

5. Background - What is ERISA §408(b)(2)? It provides an exemption from ERISA’s prohibited transaction rules for “reasonable” service arrangements between plans and parties in interest to those plans.

6. Background - What is ERISA §408(b)(2) Continued? Under ERISA §3(14)(B), a person providing services to a plan is a party in interest to such plan. Provision of services between the plan and a party in interest usually violates ERISA §406(a)(1)(C) and (D) Unless, the arrangement complies with the following under the §408(b)(2) exemption: Services are necessary for the establishment or operation of the plan; No more than reasonable compensation is paid for the services, and The services are provided pursuant to a “reasonable contract arrangement”

7. Why is compliance with the new §408(b)(2) Regulation important? If service arrangement does not comply with new regulation, the plan fiduciary approving the service arrangement will have deemed to cause the plan to engage in a prohibited transaction, a violation of his or her duties. Service provider could be liable for plan losses (repay plan part or all of its compensation), excise taxes under IRC §4975 which imposes a liability on “disqualified persons” who engage in prohibited transactions with pension plans.

8. Overview of new §408(b)(2) Regulation The Regulation will help determine “reasonable arrangement”. Only applies to arrangements for services provided by “covered service providers” to “covered plans”.

9. Overview of new §408(b)(2) Regulation “Covered plans” - Only applies to DC and DB plans covered by ERISA Does not apply to IRA’s, SEP’s, SIMPLE’s, “top-hat” plans (and similar plans not subject to part 4 of Title I of ERISA) as well as welfare plans.

10. Overview of new §408(b)(2) Regulation “Covered Service Providers” – Generally, a covered service provider includes any service provider that reasonably expects to receive (together with its subcontractors and affiliates) $1,000 or more in direct or indirect compensation for providing services in one of the following three categories:

11. Overview of new §408(b)(2) Regulation A person who serves as a fiduciary or registered investment advisor under the Investment Advisors Act of 1940 or any State law (this includes a person that provides services to an investment contract, product, or entity that holds “plan assets” for ERISA purposes, and in which covered plans have direct equity investments)

12. Overview of new §408(b)(2) Regulation Recordkeeping and brokerage services provided to participant directed individual account plans, if one or more of the plan’s designated investment alternatives will be made available in connection with the service arrangement (through a platform or other mechanism)

13. Overview of new §408(b)(2) Regulation Other key services for which the service provider receives indirect compensation including: Accounting Auditing Actuarial Appraisal Banking Consulting Custodial Insurance Investment Advisory Legal Recordkeeping Securities or Investment Brokerage TPA Valuation Services

14. Overview of new §408(b)(2) Regulation Regulation will apply only to providers “dealing directly with covered plans”. No person is a covered service provider solely by providing services as an affiliate or subcontractor to a covered service provider. However, this exclusion does not mean that compensation received by affiliates and subcontractors regarding services performed for the plan are not disclosed under the Regulation. Covered service provider must separately disclose compensation if it is set on a transactional basis (e.g. commissions, soft dollars, finders fees or other incentive compensation based on business place or retained). Covered service provider must separately disclose compensation if it is directly charged against the covered plan’s investment or reflected in the net value of the investment.

15. Overview of new §408(b)(2) Regulation The regulation excludes most service providers to investment funds (i.e. investment contract, product, or entity) in which plans may invest, other than those covered service providers who are fiduciaries to an investment entity that holds plan assets and in which the plan invests directly. Which means that none of the following are covered service providers: Service providers performing non-fiduciary services to a “plan asset” vehicle. Service providers (other than fiduciaries) to an “underlying” investment entity in the case of a “fund of funds”. Service providers to an investment entity that do not hold plan assets, such as a mutual fund or a fund in which benefit plan investments are limited.

16. Required §408(b)(2) Disclosures Each covered service provider that provides services to a covered plan must provide certain information to the responsible plan fiduciary in writing “reasonably in advance” of the plan entering into the service arrangement. This information includes: Description of services Statement of fiduciary status Direct compensation (paid by the plan) Indirect compensation and description of services Compensation paid among related parties Termination compensation Manner of receipt

17. Required §408(b)(2) Disclosures If there are changes from the date of the agreement, the updated information generally must be disclosed to the plan fiduciary within 60 days from the date the covered service provider is informed of the change.

18. Additional Disclosures – Recordkeepers, Brokers and Investment Fiduciaries Fiduciaries to investment entities that hold plan assets, and recordkeepers or brokers that make investment vehicles available to participant-directed plans, must provide information about the fees and expenses related to the plan’s investment alternatives, including fees charged directly or indirectly against amounts invested in an investment entity.

19. Additional Disclosures – Recordkeepers, Brokers and Investment Fiduciaries Continued Recordkeepers must provide additional information about their fees for recordkeeping services, including in some circumstances, a reasonable and good faith estimate of the cost to the plan for the recordkeeping services.

20. Reporting and Disclosure Information Upon Request Upon the request of a plan fiduciary or the administrator of a covered plan, a covered service provider must provide any information relating to compensation received that is required for the covered plan to comply with the reporting and disclosure requirements under Title I of ERISA. (ex. Form 5500) Information requested by plan fiduciaries or administrators must generally be provided within 30 days of the request.

21. Inadvertent Errors In Disclosure The regulation requires disclosure of the direct and indirect compensation that a service provider “reasonable expects” to receive, so that a service provider that receives unexpected compensation will not fail to satisfy the conditions of the Regulation solely for that reason

22. Inadvertent Errors In Disclosure Continued Further, the new Regulation provides that a service arrangement will not fail to be “reasonable” solely because a service provider, acting in good faith and with reasonable diligence, makes an error or omission in its disclosure, so long as the service provider discloses the correct information as soon as practicable, but no later than 30 days from the date on which the service provider knows of the error or omission.

23. Class Exemption For Plan Fiduciaries A plan fiduciary can take advantage of a special “exemption within an exemption” where the plan fiduciary will not be deemed to have engaged in a prohibited transaction solely because a service provider failed to provide the disclosures otherwise required to rely on §408(b)(2). To take advantage of the special “exemption within an exemption”, the plan fiduciary must perform the following functions within certain timeframes: Make a special request to the service provider for any information that the fiduciary discovers has been omitted; Notify the DOL in writing if the provider fails to respond by the specified deadline; Determine whether to terminate or continue the service arrangement in light of a covered service provider’s failure to disclose the required information.

24. Class Exemption For Plan Fiduciaries Continued While a plan fiduciary who satisfies the exemption within the exemption will not be deemed to have breached its duties in entering into the service arrangement based on faulty disclosures, the service provider will still be liable for excise taxes for participating in the non-exempt prohibited transaction with the plan.

25. Comparison of §408(b)(2) Regulation and Form 5500 – Schedule C Reporting In November 2007, the DOL finalized changes to the Schedule C to require enhanced reporting with respect to “indirect compensation” received by plan service providers and other persons in connection with plan services. Effective with the 2009 plan filings.

26. Comparison of §408(b)(2) Regulation and Form 5500 – Schedule C Reporting Continued New service provider disclosure requirements imposed by the Regulation will be, to an extent, complimentary to the changes made to Schedule C. For example, both will use similar, but not identical, definitions of direct and indirect compensation The Regulation will require service providers to provide information to plan fiduciaries to assist them in completing the Schedule C Like the Schedule C, the Regulation includes, as part of the class exemption, a requirement that plan fiduciaries report to the DOL those plan service providers who have failed to provide the necessary disclosures

27. Comparison of §408(b)(2) Regulation and Form 5500 – Schedule C Reporting Continued Like the Schedule C, the Regulation includes the definition of “indirect compensation” non- monetary compensation, including meals, entertainment, and gifts. Like the Schedule C, the Regulation requires a covered service provider to disclose, prior to contracting with the plan, the persons from whom it reasonably expects to receive gifts and entertainment regarding plan services performed and the compensation amounts.

28. Comparison of §408(b)(2) Regulation and Form 5500 – Schedule C Reporting Continued Like the Schedule C, the Regulation contains a de minimis exception for gifts and entertainment. Specifically, a covered service provider is required to disclose gifts and entertainment only if the value is expected to exceed a total of $250 from a single source during the term of the arrangement. However, under Schedule C reporting, a covered service provider is required to disclose gifts and entertainment only if the value is expected to exceed a total of $100 from a single source annually.

29. Comparison of §408(b)(2) Regulation and Form 5500 – Schedule C Reporting Continued The Regulation and Schedule C differ in the following ways: The Regulation and Schedule C reporting will not necessarily apply to the same plans: Small pension plans (100 or fewer participants) are not required to complete the Schedule C; however, these small plans are “covered plans” under the Regulation. Large welfare plans, which may be required to complete Schedule C, are excluded, at this time, from the Regulation.

30. Comparison of §408(b)(2) Regulation and Form 5500 – Schedule C Reporting Continued Schedule C generally requires reporting of compensation received from a broader group of “service providers” than the more limited group of “covered service providers” subject to the Regulation. For example, a provider may be reported on Schedule C even if it has no direct relationship with a plan but receives compensation in connection with services it provides as a sub-contractor to a plan provider or because of a “position with the plan.” This type of provider would not be a covered service provider under the Regulation.

31. Comparison of §408(b)(2) Regulation and Form 5500 – Schedule C Reporting Continued The compensation thresholds under the two schemes are different ($1,000 in total under the Regulation in comparison to $5,000 per year for Schedule C purposes), so that in some instances, compensation received by a covered service provider (as defined under the regulation) would not be reported on Schedule C.

32. Requirements Of §408(b)(2) Regulation On Defined Contribution Plan Recordkeepers The Regulation requires that recordkeepers disclose specific information regarding the cost of recordkeeping services separately from the total amounts a plan may pay for a package of services including recordkeeping and other services such as trustee services and investment products.

33. Requirements Of §408(b)(2) Regulation On Defined Contribution Plan Recordkeepers Continued The Regulation provides that a provider of recordkeeping services (which includes plan administration services, services related to monitoring of plan and participant transactions, and maintenance of plan and participant accounts, records and statements) must disclose the following: A description of all direct and indirect compensation the recordkeeper (and its affiliates and contractors) reasonably expects to receive in connection with the recordkeeping service; and

34. Requirements Of §408(b)(2) Regulation On Defined Contribution Plan Recordkeepers Continued If a recordkeeper reasonably expects recordkeeping services to be provided, in whole or in part, without explicit compensation for such services, Or, when compensation for such services is offset or rebated based on other compensation received by the recordkeeper (or an affiliate or subcontractor), The recordkeeper must disclose a good faith estimate of the “cost to the covered plan” of the services, taking into account the rates that would be charged to (or paid by third parties for) the services, or prevailing market rates for a plan with similar characteristics.

35. Requirements Of §408(b)(2) Regulation On Defined Contribution Plan Recordkeepers Continued Under the Regulation, a recordkeeper who provides recordkeeping services to a plan and collects and retains fees from investment entities in which the plan invests (such as mutual funds) may be providing services without “explicit” compensation and would be required to disclose “a reasonable and good faith estimate of the cost to the covered plan of such recordkeeping services.” This would apply to revenue sharing, received by recordkeepers from affiliated and unaffiliated investment funds, even if there would otherwise be no explicit allocation of mutual fund revenue between the investment fund and the recordkeeper. The Regulation provides some guidance for developing a “reasonable and good faith estimate” by referring to the rates that the service provider would charge or would be paid by third parties, or prevailing market rates for plans with similar characteristics.

36. Requirements Of §408(b)(2) Regulation On Defined Contribution Plan Recordkeepers And Brokers Under the Regulation, recordkeepers and brokers will now have the duty to provide materials that describe the available investment alternatives Otherwise, they will risk participating in a non-exempt prohibited transaction if they fail to deliver this information.

37. Requirements Of §408(b)(2) Regulation On Defined Contribution Plan Recordkeepers And Brokers Continued The Regulation attempts to reduce the burden on the providers by permitting them to deliver disclosure materials issued by the investment alternative (such as a mutual fund prospectus), if: The issuer is not an affiliate of the recordkeeper; The materials are regulated by a state or federal agency; and The materials are not known to the recordkeeper or broker to be incomplete or inaccurate.

38. Requirements Of §408(b)(2) Regulation On Defined Contribution Plan Recordkeepers And Brokers Continued A recordkeeper or broker may not be able to rely on disclosures issued by sponsors of investment vehicles that are not mutual funds, such as bank collective investment funds and insurance company pooled separate accounts, because these materials may not be deemed “regulated” under state or federal law, as required by the Regulation. The Regulation imposes a duty to disclose information relating to plan investment options first on recordkeepers and brokers of participant-directed accounts, and then on fiduciaries to investment entities holding “plan assets” if the recordkeeper or broker does not provide this information.

39. Regulation’s Required Investment Disclosure For Recordkeepers and Brokers The Regulation imposes duties on recordkeepers and services providers that offer brokerage services to participant-directed plans to act as conduits of information about the investment funds that they make available to plans. Where the plan’s designated investment alternatives are made available in connection with the services offered by a recordkeeper or broker, the recordkeeper or broker must disclose with respect to each investment alternative designated by the fiduciary for the plan, the following: The amounts charged directly against investments in connection with sales, transfer of or withdrawals from the alternative (e.g. sales charges, redemption fees, exchange fees, etc…); The annual operating expenses of the alternative if the return is not fixed (e.g. the expense ratio); and Any additional ongoing expenses (e.g. wrap fees, expense fees).

40. Regulation’s Effect On Plan Service Providers Elimination of the written contract requirement and the narrative description of conflicts of interest; Limited to entities with a direct service relationship to the plan; Clearer guidelines about the compensation that must be disclosed to plan fiduciaries; An arrangement for services will not fail to be “reasonable” merely because of inadvertent errors or omissions in disclosure, provided corrective action is taken; Will have the flexibility to express compensation in terms of a formula, an estimate or other explanation that reasonable describes the nature of the compensation; and Regulation clarified that compensation paid by the plan sponsor is not subject to the Regulation’s requirements.

41. Regulation’s Effect On Plan Fiduciaries Plan fiduciaries should consider adopting procedures to ensure that each of the conditions of the Regulation is met in a timely manner, which might include the following: Identification of all “covered service providers” (For example, some potentially covered service providers such as individuals serving as plan trustee or some other fiduciary role for the plan, may not be aware that they may be covered service providers);

42. Regulation’s Effect On Plan Fiduciaries Continued Establish procedures for soliciting and reviewing the required provider disclosures, including: Reviewing existing agreements before the effective date of the Regulation Reviewing disclosures and arrangements before engaging new service providers and upon any contract extension or renewal Reviewing updated disclosures provided by current providers

43. Regulation’s Effect On Plan Fiduciaries Continued Should be a revision of the standard “requests for proposal” and contract terms to incorporate requirements that will support compliance with the Regulation; Establish a process to identify circumstances in which additional disclosure may be required, such as the addition of a new investment option under a participant-directed plan or a change in the “plan asset” status of an investment alternative; and Establish a process for complying with the requirements under the class exemption when a service provider fails to provide the required disclosures, including seeking information from the provider, notifying DOL as required, and timely reviewing whether to continue the services arrangement in light of the service provider’s failure to comply with the Regulation.