1. Welcome to Today’s PresentationNew ERISA Disclosure Contracts Are Coming: What You Need to Know and Do Ian Kopelman Partner and Chair, Employee Benefits and Executive Compensation Group, DLA Piper USA LLP Phone: (312) 368-2161 Email: ian.kopelman@dlapiper.com James Scheinberg, CIMA® AIFA® Manager Partner, North Pier Fiduciary Management, LLC Phone: (800) 403-7065 Email: jim.scheinberg@npier.com
2. Information About Today’s Presentation All attendees’ lines are muted. Ask questions by typing them in the Questions pane on the Control panel. Questions you submit are not visible to other audience members. All attendees will receive a copy of the presentation after the webinar. If you are listening in over your computer and are having difficulty hearing, dial in on your phone to the number listed in the audio pane. Today’s session is being recorded.
3. Presentation Table of Contents Regulations, Requirements, Responsibilities and Deadlines Participant Disclosure Slide 4 Provider Disclosure Slide 14 What to Look For, What to do, Due Diligence & Negotiation Tips Provider Disclosure Slide 25 Participant Disclosure Slide 37
4. PARTICIPANT FEE DISCLOSUREA COMPLIANCE GUIDE FOR PLAN SPONSORS Ian S. Kopelman DLA Piper LLP (US) May 5, 2011
5. 5 Participant Fee Disclosure Rules DOL final regulations issued October 20, 2010, effective January 1, 2012 for calendar year plans Cover participant-directed individual account plans regardless of compliance with ERISA Section 404(c) Compliance with the regulations will satisfy the plan administrator’s fiduciary duty to disclose plan fees to participants and Section 404(c) disclosure requirements as long as the information used is complete and accurate
6. 6 Timing General rule for plan-related, administrative and individual expenses Disclosure on or before the first date a participant can direct investments and at least annually thereafter Description of any changes at least 30 but not more than 90 days before effective date, except for unforeseeable events or circumstances beyond the plan administrator’s control then as soon as reasonably practicable Transition rule – Initial disclosures must be provided to current participants within 60 days of effective date for the plan Certain information must be provided quarterly – can be included with participant statements
7. 7 Fiduciary Responsibility Disclosure is fiduciary responsibility of plan administrator Plan administrator means The person (individual, committee or entity) specifically designated by the terms of the plan If none designated, the plan sponsor If neither of the above, a person designated by the DOL Regular and periodic disclosures to make sure that participants are Aware of their rights and responsibilities regarding investments Provided sufficient information regarding the plan and investments, including fees and expenses, to make informed decisions
8. 8 General Plan-Related Information Explanation of investment instruction process When and how to give investment instructions Any restrictions on investments or transfers between funds Any plan provisions regarding voting, tender or similar rights Identification of designated investment alternatives and designated investment managers Description of any brokerage windows or similar arrangements
9. 9 Administrative Expenses General Description of fees and expenses for general plan administrative services (such as legal fees) that may be separately charged against individual accounts Explanation of fees and how they are allocated Quarterly statement Dollar amount of administrative fees and expenses actually charged to participant’s account during preceding quarter Description of the services to which charges relate If applicable, an explanation that some expenses were paid from annual operating expenses of investment alternative through revenue sharing or similar arrangements
10. 10 Individual Expenses Explanation of fees and expenses charged to individual accounts and not on plan wide basis such as fees for Processing plan loans or QDROs Investment advice Brokerage windows, commissions, or similar charges Quarterly statement with Dollar amount of the individual expenses that are actually charged during preceding quarter to the participant’s account Description of the services to which charges relate
11. 11 Investment Expenses Automatic disclosures must be provided on or before first date participant can direct investments and at least annually thereafter Information to be automatically disclosed Name, type of investment and performance data reflecting 1, 5 and 10 year annual returns Benchmark (broad-based market index) Fees charged directly against participant’s account and description of any restrictions Total annual operating expenses expressed as both percentage and dollar amount
12. 12 Investment Expenses Information to be automatically disclosed Statements regarding impact of fees and expenses on investment returns, general securities disclosures and directing participants to DOL website for more information Investment provider’s website Glossary of terms Limitations and fees on withdrawals, transfers or surrender Name of any annuity product with description of objectives and goals and benefits and factors that determine price of guaranteed income payments
13. 13 Investment Expenses Any materials relating to exercise of voting, tender or similar rights provided after investment Copies of prospectuses, financial statements or reports, statement of the value of a share or unit and list of portfolio assets provided upon participant’s request Investment information must be in a comparative format, prominently display the date and include Name, address and telephone number of the plan administrator or its designee Explanation of how to request and obtain additional information
14. 14 Disclosure Methods Plan-related and administrative expense information can be disclosed in SPD or benefit statements if distribution frequency requirements are met DOL electronic disclosure rules apply Regulations provide a model disclosure for investment expense information – use not required but will be deemed to have satisfied regulations
15. 15 Investments - DOL Model Disclosure Sample performance information Sample fees and expense information
16. 16 Complete and Accurate Information Plan administrator is not liable for completeness and accuracy of information if it relies reasonably and in good faith on information provided by service provider or investment fund provider Separate regulations impose disclosure requirements on plan service providers – but plan administrator is ultimately responsible for obtaining and disclosing information to participants
17. 17 Service Provider Disclosures DOL interim final regulations issued July 16, 2010, delayed effective date of January 1, 2012 Require covered service providers to disclose fee information to a responsible plan fiduciary Responsible plan fiduciary – has authority to cause plan to enter into, extend or review contracts Covered service provider – provides services to plan as a fiduciary or a registered investment advisor, provides recordkeeping or brokerage services or other otherwise receives indirect compensation
18. 18 Service Provider Disclosures Description of the services to be provided If applicable, Statement that service provider will provide services as a fiduciary Statement that service provider will provide services as a registered investment advisor Separate descriptions of direct and indirect compensation that service provider expects to receive Direct compensation -- fees charged directly to plan or participant accounts Indirect compensation -- fees which are not charged directly to plan or participant accounts, but received from other sources, including description of services and name of payer
19. 19 Service Provider Disclosures Description of compensation that will be paid among service provider and related parties, including services and names of payers and recipients Description of compensation that will be directly charged against the plan’s investments and reflected in the net value of the investments, including services and names of payers and recipients In advance of contract, description of compensation reasonably expected in connection with contract termination and how any prepaid amounts will be calculated and refunded
20. 20 Service Provider Disclosures Description of how compensation will be received, whether billed to plan or deducted directly from participant accounts or investments Compensation may be described as formula For recordkeeping services Description of any direct and indirect compensation service provider, any affiliate or any subcontractor expects to receive If services are to be provided without explicit compensation or compensation is offset or rebated based on other compensation received, a reasonable and good faith estimate of the cost of such services
21. 21 Service Provider Disclosures For services as fiduciary for an investment that holds plan assets description of Compensation that will be charged directly against amounts invested Investment’s annual operating expenses if return is not fixed Ongoing expenses in addition to annual operating expenses Generally disclosure must be made reasonably in advance of date the service contract is entered into, extended or renewed Changes in required information must be disclosed as soon as practicable, but not later than 60 days after service provider is informed of change except for extraordinary circumstances New investments must be disclosed as soon as practicable, but not later than date of designation
22. 22 Consequences of Failure to Comply If service provider fails to comply with regulations, contract is a prohibited transaction under ERISA Exemption applies if responsible plan fiduciary was reasonably unaware of failure and Reasonably believed that contract satisfied regulations Did not know or have reason to know that provider would fail to comply Immediately upon discovering failure, requested in writing that provider furnish missing information If provider fails to do so promptly, notifies DOL of failure If exemption requirements are met, only service provider is subject to penalties and excise taxes on prohibited transactions
23. 23 Information Sources Much of the information regarding investment funds, including performance and expenses, is included in prospectus or similar disclosure documents required by securities laws Service provider contracts with service providers will typically disclose direct compensation Plan administrator may have to specifically request information regarding Indirect compensation Compensation paid among related parties
24. New ERISA Disclosure Documents are Coming What You Need to Know and Do North Pier Fiduciary Management, LLC Jim Scheinberg CIMA ®, AIFA ® (800)403-7065 www.npier.com
25. 408(b)(2) Service Provider Disclosures - What to look for: Recordkeeper Disclosures All revenue Shelf space fees from fund companies (non-plan specific) Structural conflicts of interest (ownership) Recordkeeper Declarations Any fiduciary services
26. 408(b)(2) Service Provider Disclosures - What to look for: Advisor Disclosures All Compensation – Must be Disclosed 12b-1, Fees & Commissions Contingent Commissions Non-monetary Compensation Co-marketing Activities Research Arrangements Advisor Fiduciary Declarations What’s functions are included and what is omitted?
27. 408(b)(2) Service Provider Disclosures - What to look for: 4 Major Categories of Advisor Fiduciary Functions Investment Advisory 3(21) consulting or 3(38) discretionary? Investment Management Models / TDFs Fiduciary Processes ‘Friend of Court’ or Fiduciary? Employee Education and Advice
28. 408(b)(2) Service Provider Disclosures - What to look for: Difference Between ‘Friend of Court’ Service not outlined in service agreement and is tangential to primary agreement …and Advisor/Consultant as a Fiduciary Services are delineated in a service agreement and performed as a fiduciary to the plan - held to “fiduciary” standard
29. “Choices must be made for exclusive benefit of participants and their beneficiaries.” *ERISA 404(a)(1)(A)
30. 408(b)(2) Service Provider Disclosures - What to look for: Potential consulting (one time) functions that could be provided by a Fiduciary Plan Reviews One-time process or investment ‘audits’ Vendor Searches Fee Studies / Benchmarking Manager / Target Date Searches Fiduciary Processes Engagements
31. 408(b)(2) - Things to Do… Record Keeper Disclosures Armed with revenue disclosures: Benchmark to compare value Callan Study: 85% calculated plan fees within the past year and 84% of those benchmarked as a result of their findings. Renegotiate/restructure fee arrangement *Callan Associates’ 2011 DC Trends Survey, Defined Contribution Trends Survey: Positioning the DC Plan for the Future
32. 408(b)(2) - Things to Do… Advisor Disclosures Armed with disclosures: Benchmark to compare value Renegotiate/restructure fee arrangement For omitted services – consider ADDING specialist. Preform additional due diligence – as needed
33. 408(b)(2) - Things to Do… Due Diligence Don’t wait for your vendors & advisors to come to you. Preempt. Ask for your own disclosure format Plan a meeting to review issues Hire outside counsel to investigate/interpret for you
41. Tips For Renegotiating Negotiating on price vs. Restructuring Comparative Benchmarking (RFP-light) Forces competitive bid Affirms relationship Get Help! (using a third party advocate) Broader knowledge base You don’t have to be the bad-guy in a good relationship You get some Due Diligence included
42. Participant Fee DisclosuresWhat to look for… A review of what will be disclosed: Administrative Expenses Administrative fees include costs for general plan services such as recordkeeping, legal and accounting. Method (per participant or asset based) Investment Benchmarking Investment Turnover …the percentage a fund manager turns over their portfolio holdings each year
43. Participant Fee Disclosures Potential Challenges May shock participants with larger balances Sticker shock of seeing expenses May cause drop in participation Who will choose benchmarks? Reccordkeeper may conflict with those used by advisor.. Are you monitoring investment turnover? If not, perhaps you should start Not included in an investment’s expense ratio
44. Participant Fee Disclosures-Things to do… Get out ahead of the process. Ask for samples from vendors in advance If concerned, preempt employee questions/concerns with education With help of vendor Internally Consider restructuring fee methodology New disclosures may reveal inequitable pricing structure
45. Participant Fee Disclosures-Things to do… Example of Inequitable Pricing Manufacturing company with highly tenured workforce 2000 participants $50,000,000 in assets Asset based fee structure* Recordkeeper / Admin: 35bps Advisor: 10 bps Average cost per participant of recordkeeping, administration and advisory: $112.50 Many older workers with high balances *Fees are paid through revenue sharing from mutual fund expense ratio. An ERISA reimbursement account may or may not be used.
46. Participant Fee Disclosures-Things to do… Example of Inequitable Pricing Admin. & Advisory Paid by Participant Worker A: 25 y.o. with $4,000 in 401(k) Worker B: 60 y.o. with $300,000 in 401(k) Alternatives to asset based pricing (such per capita) can alleviate all or part of this type of imbalance. $18 / yr $1350 / yr
48. Thank You for Attending Today’s Presentation New ERISA Disclosure Contracts Are Coming: What You Need to Know and Do Speakers: Ian Kopelman Partner and Chair, Employee Benefits and Executive Compensation Group DLA Piper US LLP Phone: 312-368-2161 Email: ian.kopelman@dlapiper.com James Scheinberg Managing Partner North Pier Fiduciary Management, LLC Phone: (800) 403-7065 Email: jim.scheinberg@npier.com
Notas do Editor
If there is a pushback…a good answer would be we just looked at fees and….
