retirement plan investment fee disclosure

Retirement Plan Investment Fee Disclosures and Employer Responsibilities

Tuesday, October 16, 2012

Speakers: John Kubichek, CPA, CFE

Michael Aylward, CEBS, CRPS Guest:

David J. Moore

Agenda

Introduction Fee Disclosures – from Covered Service

Providers (CSPs) to Plans Fee Disclosures – from Plans to Participants Potential non-compliance and its

consequences Conclusions and Q&A

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Introduction

Roles of DOL and IRS Background of prior regulations

Reasonableness of fees (and all services) is not a new requirement

Form 5500, Schedule C disclosures began 2009 General plan fiduciary responsibilities The need for new regulations

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Introduction – Fees do matter

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Fee Disclosures – CSPs to Plans

ERISA§408(b)(2) Plan Sponsors and other fiduciaries must be

provided with information concerning fees and other compensation received by “Covered Service Providers” for their plans as well as potential conflicts of interest.

Effective July 1, 2012 for ERISA plans (excludes government, church, nonqualified deferred compensation plans and health and welfare plans)

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CSPs include registered investment advisors, record-keepers, brokers who make designated investment alternatives available to the plan, and other service providers receiving indirect compensation expected to receive $1,000 or more in direct or indirect compensation over the cumulative term of their contracts.

Certain service providers are exempted from the definition of CSP, including service providers who are paid by the plan sponsor or by direct compensation (e.g. legal counsel, accountants, auditors, etc.) and providers of certain annuity contracts held within 403(b) plans. www.tatetryon.com 5


Direct compensation is paid directly from the plan assets of the covered plan

Indirect compensation is not paid from the plan, but is paid from one service provider to another. Examples include commissions, finder’s fees, 12b-1 fees, termination fees, marketing allowances and other types of revenue sharing arrangements. www.tatetryon.com 6


Compensation can be disclosed in total dollar amount; as a percentage of assets; as a per participant charge, or via a formula that would allow the Plan Sponsor to calculate with reasonable certainty the amount of compensation being paid.

Initial disclosures were to be made by July 1, 2012, and any changes to information disclosed must be made as soon as practicable, but no later than 60 days from the date of which the CSP is informed of the change.

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Format for disclosure: The regulations do not require a specific format for

disclosure.

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Assessment of “reasonableness” of fees The regulations do not define “reasonable” fees

Suggested approaches: 1. Benchmarking 2. Request for Proposal (RFP) bidding process 3. Others

Reminder: consider the total value of the services received

Document in writing

Complete at least annually

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Fee Disclosures – from Plans to Participants

ERISA §404(a)(5) Plans must provide investment-related

information in a format that permits workers to comparison shop among investment options

Effective August 30, 2012 for calendar year ERISA plans for annual disclosures (if fiscal year, effective date is the later of 60 days after the beginning of the plan year or 8/30/12). Quarterly disclosures to participants are due 45 days after the quarter end – generally by November 14, 2012

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Applies to participant-directed individual plans, such as 401(k) and 403(b)

Disclosures are to be made to all plan participants, including eligible employees who are not participating in the plan and terminated employees with balances in the plan Plan sponsor is responsible for ensuring that all plan-

eligible employees receive the disclosures.



Annual disclosures: General plan information, including investment

instructions, investment options, and information about permitted investments outside those designated by the plan, if permitted by the plan

Administrative expense information, including general plan administrative fees and expenses that may be charged to or deducted from individual participant accounts, such as legal, accounting, and recordkeeping services

Individual expense information, including fees and expenses that may be charged to or deducted from the individual account of a specific participant based on the actions taken by that person, such as fees for plan loans, distributions, and for processing qualified domestic relations orders



Quarterly disclosures: Quarterly statements showing dollar amount of plan fees

and expenses deducted from accounts Description of services to which the fees relate Performance data, including 1, 5, and 10 year returns for

funds that do not have a fixed rate of return Annual rates of return for fixed rate investments Benchmark data, including 1, 5, and 10 year returns for

relevant benchmark indexes. Plan fiduciaries should ensure that these

quarterly disclosures are being made. They most often will be made on the participants’ quarterly investment statement.



If the Plan has multiple CSPs, the disclosures need to account for this

The DOL has provided model charts CSPs may have enhanced or added to the

chart The following are samples of the DOL’s

Model Comparative Chart, which may be found at www.dol.gov/ebsa/participantfeerulemodelchart.doc www.tatetryon.com 14

http://www.dol.gov/ebsa/participantfeerulemodelchart.doc�

http://www.dol.gov/ebsa/participantfeerulemodelchart.doc�



Table 1—Variable Return Investments

Name/ Type of Option

Average Annual Total Return

as of 12/31/XX 1yr. 5yr. 10yr. Since

Inception

Benchmark

1yr. 5yr. 10yr. Since

Inception

Equity Funds A Index Fund/ S&P

500 www. website

address

26.5% .34% -1.03% 9.25%

26.46% .42% -.95% 9.30% S&P 500

B Fund/ Large Cap www. website

address

27.6% .99% N/A 2.26%

27.80% 1.02% N/A 2.77% US Prime Market 750 Index

C Fund/ Int’l Stock www. website

address

36.73% 5.26% 2.29% 9.37%

40.40% 5.40% 2.40% 12.09% MSCI EAFE

Bond Funds E Fund/ Bond Index

www. website address

6.45% 4.43% 6.08% 7.08%

5.93% 4.97% 6.33% 7.01% Barclays Cap. Aggr. Bd.

Other F Fund/ GICs

www. website address

.72% 3.36% 3.11% 5.56%

1.8% 3.1% 3.3% 5.75% 3-month US T-Bill Index

G Fund/ Stable Value www. website

address

4.36% 4.64% 5.07% 3.75%

1.8% 3.1% 3.3% 4.99% 3-month US T-Bill Index

Generations 2020/ Lifecycle Fund www. website

address

27.94% N/A N/A 2.45%

26.46% N/A N/A 3.09% S&P 500

23.95% N/A N/A 3.74%

Generations 2020 Composite Index*



Table 2—Fixed Return Investments Name/

Type of Option Return Term Other

H 200X/ GIC www. website address

4% 2 Yr. The rate of return does not change during the stated term.

I LIBOR Plus/ Fixed-Type Investment

Account www. website

address

LIBOR +2%

Quarterly The rate of return on 12/31/xx was 2.45%. This rate is fixed quarterly, but will never fall below a guaranteed minimum rate of 2%. Current rate of return information is available on the option’s Web site or at 1-800-yyy-zzzz.

J Financial Services Co./ Fixed Account

Investment www. website

address

3.75% 6 Mos. The rate of return on 12/31/xx was 3.75%. This rate of return is fixed for six months. Current rate of return information is available on the option’s Web site or at 1-800-yyy-zzzz.



Table 3—Fees and Expenses

Name / Type of Option

Total Annual

Operating Expenses

As a %

Per $1000

Shareholder-Type Fees

Equity Funds A Index Fund/

S&P 500 0.18% $1.80

$20 annual service charge subtracted from investments held in this option if valued at less than $10,000.

B Fund/ Large Cap 2.45% $24.50

2.25% deferred sales charge subtracted from amounts withdrawn within 12 months of purchase.

C Fund/ International Stock 0.79% $7.90

5.75% sales charge subtracted from amounts invested.

D Fund/ Mid Cap ETF 0.20% $2.00

4.25% sales charge subtracted from amounts withdrawn.

Bond Funds E Fund/

Bond Index 0.50% $5.00

N/A

Other F Fund/

GICs 0.46% $4.60

10% charge subtracted from amounts withdrawn within 18 months of initial investment.



Table 4—Annuity Options Name Objectives / Goals Pricing Factors Restrictions / Fees

Lifetime Income Option

www. website

address

To provide a guaranteed stream of income for your life, based on shares you acquire while you work. At age 65, you will receive monthly payments of $10 for each share you own, for your life. For example, if you own 30 shares at age 65, you will receive $300 per month over your life.

The cost of each share depends on your age and interest rates when you buy it. Ordinarily the closer you are to retirement, the more it will cost you to buy a share. The cost includes a guaranteed death benefit payable to a spouse or beneficiary if you die before payments begin. The death benefit is the total amount of your contributions, less any withdrawals.

Payment amounts are based on your life expectancy only and would be reduced if you choose a spousal joint and survivor benefit. You will pay a 25% surrender charge for any amount you withdraw before annuity payments begin. If your income payments are less than $50 per month, the option’s issuer may combine payments and pay you less frequently, or return to you the larger of your net contributions or the cash-out value of your income shares.

Consequences of non-compliance

Plan Sponsor is ultimately responsible for compliance as the fiduciary

If CSP does not provide fee disclosures: Request the missing information from the CSP in

writing Duty to fire CSP if information not still not provided Notify DOL in writing Sample Notice at

http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc

Potential prohibited transaction www.tatetryon.com 19

http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc�

http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc�

Consequences of non-compliance

Under IRS rules, the service provider would become a “disqualified person” and there could be excise tax

Potential for lawsuits against the plan for excessive investment fees


Conclusions

Heightened focus on fees impact:1

Equity mutual fund average total expense ratio: 0.99% in 2000 and reduced to 0.79% in 2011

Bond mutual fund average total expense ratio: 0.76% in 2000 and reduced to 0.62% in 2011

Money market fund average total expense ratio: 0.49% in 2000 and reduced to 0.21% in 2011

1 Investment Company Institute’s ICI Research Perspective, April 2012.


Comments or Questions?

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Speaker Biography

John Kubichek, is a manager in Tate & Tryon’s Audit and Assurance Services department with more than 14 years of public accounting experience working with a variety of nonprofit and for profit clients. Over the past decade, Mr. Kubichek has managed a variety of employee benefit plan audits, including 401(k), 403(b), multi-employer and defined benefit plan audits. He is currently the chair of Tate & Tryon’s Employee Benefit Plan Audit committee. Mr. Kubichek’s emphasis on nonprofit organizations serviced include multiple trade associations, charitable foundations, and healthcare facilities. The size of clients has varied from $100K to over $200M in annual revenues. He also has considerable experience with OMB Circular A-133 and in forensic accounting engagements. John is a Certified Public Accountant and Certified Fraud Examiner. He received a Bachelor of Science degree in accounting from Geneva College. He is active in the community by serving on a local church committee dedicated to hunger relief.

John Kubichek, CPA, CFE Audit Manager Tate & Tryon Direct: 202-419-5149 [email protected]


mailto:[email protected]�

Speaker Biography

Michael Aylward is a partner in The KLA Group at RBC Wealth Management. He provides comprehensive investment management and retirement planning services for associations, non-profit organizations and corporations, as well as individual investors and their families. He has worked for more than 25 years in financial services and business management industry. He has served in executive positions with USTrust, Bank Boston and Ruesch International. Additionally, he was a division Vice President with a major Washington DC trade group representing small to medium sized businesses. Mike is a Certified Employee Benefits Specialist through the Wharton School and the International Foundation of Employee Benefit Plans. Additionally, he is a Chartered Retirement Plans Specialist through the College for Financial Planning. He received a Bachelor of Arts degree in management and a Masters of Business Administration degree in finance from Boston College. Mike served in the Military Police Corps - United States Army.

Michael G. Aylward, CEBS, CRPS Vice President - Financial Advisor, Consulting Group RBC Wealth Management Direct:703-342-1188 [email protected]


Guest Biography

David Moore is a Vice President, Managing Director in Fidelity’s Tax-Exempt Market relationship management team. He joins us today as a guest to provide Fidelity’s perspective on how they have helped their clients comply with the new disclosure requirements. David joined Fidelity in 1999 and overall has 17 years of industry experience in the design, operation, and administration of defined contribution and equity compensation plans. He previously managed a team of project managers in Fidelity’s large corporate implementation group where he was responsible for managing new client conversions such as Cardinal Health, Texas Instruments, Cap Gemini and Cablevision, as well as corporate actions for existing clients such as Verizon, Microsoft, Hewlett- Packard and Novartis. Before joining Fidelity, David was a Client Relationship Manager for Scudder Kemper Investments, where his client list included the University of Minnesota, West Virginia University and The Conference Board. David received a Bachelor of Arts degree in Finance from the University of Massachusetts – Lowell and a Masters of Business Administration degree in Finance from Bentley University. David also holds FINRA Series 7 and 63 licenses.

David J. Moore Vice President, Managing Director Fidelity Investments Direct: 617-563-0260 [email protected]
