The "Retirement Plan Industry" (chuckling) is Against Fee Clarity???!!!

Many times over the years in the course of writing this blog, speaking on this topic or consulting clients around it, we've taken the position (to us obvious) that certain sectors of the retirement plan industry are very much against fee clarity and in favor of fee opaqueness.  In general, we've assumed that those players are from the insurance side of the business or the investment side having long standing distribution relationships where fee clarity has not been an overarching priority. 

In this context it is not surprising that when the DOL calls the industry out for not adhering to the spirit of the fee disclosure rules, i.e. not promoting fee clarity, that these sections of the market react aggressively to it. Several months back, the DOL specifically has called for comments on future proposed rule making calling for a necessary "Fee Disclosure Guide".  We wrote about it a few months back, linked here;

http://the401kplanblog.blogspot.com/2014/03/dol-service-provider-fee-guides.html

In general, for a change, we actually agreed with the DOL's position that a large number of the 408(b)-2 disclosures that we've reviewed are not clear, they are difficult to understand and in many cases misleading.  While we'd never accuse a specific provider of being intentionally deceitful, we are skeptical and wouldn't be surprised if that was the intent.

In the below article, certain members of the retirement plan industry, namely The American Banker's Association (ABA), The American Council of Life Insurers (ACLI), the Investment Company Institute (ICI), the Securities Industry and Financial Markets Association (SIFMA) and the SPARK Institute Inc., all sent in a letter (Link to Letter Here) to the OMB Desk Officer for DOL essentially crying "unfair".  I want to be clear that while this article linked below on planadviser.com is titled

"Industry Criticizes DOL’s Call for Fee Guides"

this group is really more representative of the business interests of the Banking, Insurance and Investment industry and not the retirement plan industry as a whole. As a vocal member of the retirement plan and pension industry, I want to go on record (again) and say that I think that the DOL Guide is a good idea, but one that shouldn't have been necessary if the industry would simply be transparent about the true revenue streams, despite how complex they make it or think it is. 

DOL - Service Provider Fee Guides

"..We are particularly concerned that some employers, particularly small employers, may not be reaping the full benefits of the fee disclosure regulation.." - Phyllis Borzi

 http://www.planadviser.com/DOL_Proposes_Service_Provider_Fee_Guides.aspx
 http://www.pionline.com/article/20140311/ONLINE/140319966/dol-proposes-401k-plan-fee-disclosure-guide

This story was all over the place yesterday, I think I received six or seven separate emails on this topic.  Above are a couple of the links to the main story.  In essence, what happened was Phyllis Borzi stated on a national conference call that the Department of Labor (DOL) was very concerned about the fee disclosure documents provided by retirement plan service providers resulting from last year's 408(b)(2) rule change.  As a result they would be furnishing a new format for a fee disclosure guide that would be required explaining how to read the disclosures.  See the above links for the details.

My thoughts: 

This does not come as a surprise.  Between myself and several others at my firm, we've reviewed numerous fee disclosure documents, probably 15-20 from different service providers in addition to furnishing our own and what we've observed is essentially what we thought would happen.  The disclosures are mainly very complex, we believe intentionally so.  Our thought, and I'm sure this is going into the DOL's thinking on the matter is that the service providers will comply with the letter of the law, but not the spirit.  In other words, they will provide the bear minimum to meet the legal requirement, but make the disclosures so complicated that they would be extremely difficult to actually figure out what the plan expenses were.  Here are two examples (provider's name left out).

1.) One client received a disclosure from their service provider who was providing recordkeeping, third party administration, trust/custody and the investment platform.  I.E. it was all bundled.  Our firm acts as the plan's retirement plan and fiduciary consultant and as its' investment manager.  As part of our service we agreed to review and interpret the 408(b)(2) disclosure.  It was 82 PAGES!  It could have been done in three sentences, but it was 82 pages!!!  

2.) This example is another client of ours that we took over from a competing service provider last year, one of the larger insurance company platforms in a group annuity format.  The plan was a "small market" plan, under $5m in plan assets.  The 408(b)(2) disclosure was provided to us prior to our appointment.  It wasn't an 82 page situation, it was a different tactic altogether.  In this case, upon an initial glance by us, the plan's advisor, and the client, it appeared that the plan was only paying investment expenses which amounted to approximately 75-85 basis points or 0.75-0.85%.  If that were the actual expenses it would be extremely price competitive in the small plan marketplace.  However, after reading through it and digging through the fine print and following the instructions on where to look on different pages that explained how to perform some of their fee calculations, the plan expenses fell in at 2.28%, that's 228 basis points, a whopping 1.5% more expensive than the client thought they were paying.

What these two cases illustrate are two separate tactics, both of which are deceptive in my opinion, of service providers complying with the letter of the law but ignoring the spirit of the law which, simply put, was fee CLARITY.  After all, we, as experts were able to figure out the plan's true costs, but in both cases the client would not have been able to on their own.  

Good to see that the DOL is going to do something about this.  Remember, having an inexpensive plan isn't an ERISA mandate, but understanding fees and services and validating that they are reasonable is.      

DOL - the 2014 Pipeline!

In case you missed it, recently the DOL published a list of initiatives for 2014.  It was written about in an article from Plan Adviser magazine, linked here.

http://www.planadviser.com/DOL_Issues_2014_Retirement_Plan_Pipeline.aspx

As a summary of this, here are the eight items on the DOL’s published agenda for 2014 that impact ERISA Retirement Plans (as opposed to IRAs, Health Plans, 457 plans or non-ERISA 403(b)s).

1.) Fiduciary Re-Definition – Targeting August 2014 – This will continue to be an argument.  NAPA and ASPPA are against fiduciary standard in its current form, which has (in their opinion) too many exceptions resulting in a “non-uniform, uniform fiduciary standard”.  An article on NAPA.net today indicates that the DOL is lobbying pretty hard to get this done this year.  Time will tell.  Article linked here:

http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/perez-lobbying-congress-on-fiduciary-rule/?id=6661&tkn=940127217506af86e247cd&mqsc=E3713559&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily

  

2.) Lifetime Income Illustrations – Targeting August 2014 – DOL is still interpreting comments.  Seems like this idea has legs behind it despite some of the obvious deficiencies in the accuracy of calculations.

3.)  Review use of Brokerage Windows in Partic. Directed plans – This could be a big deal, and will be the one that I’m most interested in.  As many of us in the industry know and agree, the use of individual brokerage in plans has a TON of problems, hopefully they’ll make this restrictive enough that they will mainly go away.

a.       Explore whether and to what extent regulatory guidance on fiduciary requirements and safeguards for such arrangements are appropriate (b/c they could be problematic) – RFI expected in April of 2014

4.)  408(b)(2) amendments coming requiring providers to provide a guide to understanding or a similar tool to help sponsors, especially small ones to understand this guidance – notice of proposed rule making (NPRM) in January – Great idea, but I suspect that the tools created will be too difficult for clients to use, or some other such problem so that most providers can continue to hoodwink the clients on what they are truly paying

5.)    Reduction in Safe Harbor afforded to selection of Annuity option in individual account plans to only cover the idea that the provider has the ability to make lifetime payments (not as to quality of annuity or provider) – October 2014

6.)    DB funding notice finalizing – March 2014

7.)    Amendment to Participant Disclosures surrounding Qualifed Default Investment Alternatives and Target Date funds under 404a-5 – looking for more specificity – March 2014 – More written disclosure that will go unread and not understood by participants.  This is a huge waste of energy and resources.

8.)    QTA – Qualified Termination Administrator – Looking to create to deal w. issue of abandoned plans, similar to using a bankruptcy trustee – April 2014 for final rule
 

Excessive Fee Case: Mass Mutual is on the Defense.

This is a great case, thanks to FRA Plan Tools for the link below describing the circumstances of the suit.

http://blog.fraplantools.com/new-excessive-fee-case-filed-by-massmutual-employees/

The complaint from the plaintiffs allege a variety of improper or missing fiduciary process' costing the plan and its participants millions of dollars over the years.

I echo the conclusions drawn by FRA re posted below. 

So what does this mean for plans that use MassMutual as a provider or advisors who recommend MassMutual services and products? It means that you should use this as an opportunity to review your plan’s relationship with MassMutual. This is only a complaint and no one can predict with any certainty how it will turn out. But that being said, if any of the specific allegations found in the complaint could apply to your plan, you have now been put on notice to investigate. This can include asking for more information, re-reviewing your 408(b)(2) disclosures and agreements, or benchmarking your plan’s fees. These tasks should obviously focus on analyzing any investments in your plan and ensuring that any fees paid are reasonable and necessary.

Fee Disclosure: Enforcement Coming, no surprise

Fee Disclosure has been discussed ad nauseum on this blog in past entries.  Here we are on the approximate one-year anniversary of 408(b)-2 and an article comes out discussing how the DOL intends to make a concerted effort to enforce excessive fee cases, using the disclosures as the primary supporting documentation.  See below for the full article.


http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/philadelphia-region-of-the-ebsa-to-focus-on-fees-in-401k-plan-audits/?id=4553&tkn=375651996506af1d83e2f5&mqsc=E3576487&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily

And they were kind enough to supply a link to the list of items required in the event of a DOL audit.

http://www.asppa.org/document-vault/pdfs/GAC/2013/dolreq.aspx

My thoughts are that the full impact of the fee disclosure rules from last year have yet to be felt, perhaps this is a sign of that impact en route.

Podcast - 401(k) Alphabet Soup, me and Chuck Hammond

New media for me, enjoy!

http://www.blogtalkradio.com/the401kstudygroup/2013/03/15/the-alphabet-soup-of-the-401k-industry

Thanks for 2012 and The Big Five in 2013

To all the readers of this blog, I wanted to say thank you for your previous and continued interest.  2012 was a very important and, frankly, a big year for us.  We've gotten more attention then ever and have more hits per day and then ever before.  Looking forward to continuing the dialogue in 2013 and working with each of you to try and fine ways to better improve the delivery of good Retirement Plan Consulting.  That said, here's what we have to look forward to in 2013 in the Retirement Plan Industry.

1. Threats to DC plan tax incentives coming from two continuing debates on Capitol Hill — over the nation’s debt limit and about tax reform.  This is a very real potential threat that we've discussed previously leading to 'Save My 401k' campaign.  I'm told that 55,000 citizens have submitted letters to their congress people to date and more are doing so every day.  We are getting their attention.

2. Fee disclosure is not over. We expect DOL regulators to look at advisor fees again in 2013, focusing on critical questions about how fees are paid.  This is going to be interesting.  As it unfolds, I expect to see enforcement of last year's 408(b)-2 regulations and my opinion is that Plan Sponsors will be held accountable for compliance leading them to ask a lot of questions to their advisors about advisory fees.  Could get uncomfortable for some.

3. The definition of a fiduciary and what the advisor’s role in that is. Expect to see a proposed rule from DOL in the second quarter of the year.  This debate roles on.  Some of us involved in the industry and with the National Association of Plan Advisors will likely have a chance to weigh in on this issue.

4. Lifetime benefits. We know that this issue is an area of great interest to the DOL. We’re moving toward a requirement in this area; probably by March we’ll see a proposed regulation on providing lifetime income estimates on participant statements.  This is a great idea.  However, there are a lot of great ideas that lead to extremely poor execution.  A great example is the next item.  The idea of a glide path where people start out more aggressively invested and get more conservative as they age is a great idea.  The industry's deliverable on that, the Target Date Mutual Fund, was a poorly executed result (at least from the investors point of view....actually a great deal for those fund companies).

5. Reevaluation of target date funds — in particular, regarding their usage as QDIAs.  I'm crossing my finger's that eyes will be open as to the major flaws that exist with the current availability and structure of these funds and hope that the QDIA definition will eliminate these as an option......

Keep your eyes open, as there will surely be more to come.

Best - Jason

"Plain English" in 408(b)-2 disclosures, hah, I've got a bridge I can sell you too!!!!

Every once in a while, someone else does my job for me.  In this case, I'll give the credit to the Wall Street Journal for saying in writing what many of us have been saying in person for quite some time now.  The attached article highlights a problem with the recent 408(b)-2 disclosures mandated to be distributed to Plan Sponsors (employers) earlier this year. 

http://professional.wsj.com/article/SB10000872396390444024204578044422783570446.html?mod=djemITP_h&mg=reno64-wsj

The gist of the article is this.  Many of the industry service providers weren't explicitedly clear in the way they disclosed their fees on the mandated 408(b)-2 disclosures despite that the rules have been very clear that they are to be written in "Plain English".  What a Shock!!! 

The article points towards Wall Street for burying the Plan Sponsors under a mountain of fine print, which is more of the same from what they've always done as the provider referenced in the article estutely points out.  However, to be fair, this wasn't really Wall Street as a whole.  There's probably less than 100 major retirement plan service providers out there and most are insurance companies, mutual fund companies or independent recordkeepers.  Let's keep the blame pointed squarely where it belongs. 

To expect an industry comprised of asset gatherers to be forthright in telling their clients they've been overcharging them for years unapologetically would be counterproductive to their goal, gathering assets.  It is very unsurprising to this author, that vendors are doing as little as possible to make fee clarity just that, clear. 

Kudos for WSJ for writing what a lot of us have been thinking.

Self Directed Brokerage Window Brou Ha Ha!

Well,

It took a few weeks, but the industry made enough noise about FAQ 30 from the DOL's May 7th release of FAQ's pertaining to Fee Disclosure.  This author posted on June 6th that our interpretation of this FAQ is that it made it effectively impractical for Self Directed Brokerage Accounts to exist in plans of any real size.  Phyllis C. Borzi, assistant secretary of labor for DOL's Employee Benefits Security Administration (EBSA), said June 18 at the SPARK National Conference that a second set of FAQ's will be forthcoming after July 1st some time.


At the same conference, she did discuss FAQ 30 and basically stated that the industry was overreacting to it and that the spirt of it is that plan fiduciaries must have policies in place to monitor investments and ensure prudence.  See below for an article that discusses the dialogue.

http://www.bna.com/borzi-addresses-concerns-n12884910110/

Our interpretation of the FAQ remains the same.  Ms. Borzi's comments simply reiterate what we feel which is that Self Directed Accounts can still be used in plans, but from a practical perspective can become a very difficult investment choice because of the need to monitor the underlying holdings.  When these brokerage accounts are not in a vendor window, but rather are scattered among various/many brokers it can be a near impossible task for any plan with a substantial number of brokerage accounts.

Fee Disclosure FAQ's, some thoughts on Fee Disclosure - Are Brokerage Accounts on Death's Doorstep?

O.k., so if you're in the Retirement Plan business, you are aware that in a few weeks (July 1st) all the new Fee Disclosure Rules will be in effect.  In early May, the DOL published Field Assistance Bulletin 2012-2 (FAB 2012-2) which is intended to be an FAQ document to aide with all the specific situations that may come up regarding complying with 408(b)-2 and 404a-5.....at least all the situations that they could come up with at this time...LOL.  Below is a link to the bulletin.

http://www.dol.gov/ebsa/pdf/fab2012-2.pdf

Among the more interesting of these FAQ's are Questions 29 and 30 which deal with Brokerage Windows and Self Directed Brokerage Accounts (SDA) in plans.  Specifically, in relationship to Participant-Level Fee Disclosure what is asked is whether Brokerage Windows and Accounts are covered under the regulation.  The short answer to this is yes, they are covered under this regulation. 

However, in my best layman's terminology, what it says is that the SDA window must properly provide disclosure of all potential fees that may exist in that investment structure, but NOT the underlying investments held inside the account.  I.E. The SDA is not considered a Designated Investment Alternative (DIA)

Ex.) If there is an Administrative Fee - like $1000/year or if there are transaction fees, those must be made available for the participants, but if the participant invests in a mutual fund inside the window, that mutual fund doesn't necessarily need to separately comply with the disclosure rules.

Seemingly, this could create a loophole of sorts.  Like having a plan exclusively investing in SDAs and then investing in securities within those windows without any fee disclosure compliance for those securities.....not so fast!!!

In Q30 of this bulletin, what it says is that if a "significant number of participants and beneficiaries" invest in the same underlying security within the brokerage window, that this security would be considered a DIA and be subjected to the 404a-5 Fee Disclosure rules.  So this begs the question, what is the definition of "significant number"?  Later on this bulletin they reference 5 participants or at least 1% of the participants (for plans w. more than 500 participants) as that number.

Based on this stipulation, it led me to consider the following questions.

Q1.) If the uptake at the participant level for the brokerage window is 4 participants or fewer, are we to assume that the DIA questions in the SDA would be a moot point b/c of the reference to five participants or more?


A1.) More or less, yes, although not necessarily moot.  A Plan Sponsor will still need to monitor this and ensure that it is less than five and that in general Prohited Transactions are still being prevented.

Q2.) If the answer to the first question is yes, only worry at five or more, what type of SDA examination procedures needs to be put in place to ascertain whether commonality of holdings exceeds the 5 participant or more threshold? If it does, how does a Plan Sponsor gain proper 404a-5 coverage if that holding is an individual security?

A2.) Theoretically, procedures could be established to monitor these accounts looking for and observing any commonality of holdings.  However, from a practical perspective who is really going to do this?  Certainly not most Plan Sponsors, and it seems a daunting task for any administrative professional to do it either.  It would seem especially difficult in scenarios where the participants aren't in a window, but rather are using their own brokers at different broker dealers. 

DOES THIS MEAN THAT SDAs ARE EFFECTIVELY......DEAD MAN WALKING??  Time will tell, but our interpretation is that yes, for any plan of size with many SDAs, they are no longer practical to have.

Q3.) If the Plan Sponsor does have that policy in palce to properly monitor these (LOL), what happens when the security is an individual stock or bond (ex., Facebook Stock).  How does the stock provide a 404a-5 disclosure? 

A3.) Not likely to happen or be done correctly. 

Q4.) If this 5 or more rule is a rule, what can a firm do to put a policy in place to keep it at five or less without bumping against Non-Discrim. Issues?

A4.) There really is no way to put a restrictive policy in place without potentially running into Benefits, Rights, Features issues, i.e. Discrimination.


So that was a long way to go for this author to conclude the following opinion.  The new Participant Fee Disclosure rules, Rule 404a-5, has effectively mitigated the usefulness of the Brokerage Window in ERISA plans. 

Personally, that makes me happy on some level.  Now we'll see if this is what actually happens over time.

Final 408(b)(2) Regulations - Final is Final....about time!

Well, today is the day that the Interim tag was taken off the 408(b)(2) regulations and they have become final. In my first perusal of the rules, the biggest change seems to be the timing. The Interim rule was to be effective April 1, 2012 and that has been pushed back to July 1, 2012. The 404(a)(5) disclosures, i.e. participant fee disclosures, was also tied to this effective date so those are also pushed to July 1, 2012. Everyone gets a little more breathing room.


Other major changes I've observed is the exclusion of certain 403(b) Annuity Contracts and custodial accounts, an expansion of the information required to be disclosed and updates to how disclosure of changes are to be made.


Attached is the actual regulation and the DOL's fact sheet on the guidance.


Full Rule

http://www.ofr.gov/(X(1)S(q03r5lzzov2yvhmrvo4qlk5m))/OFRUpload/OFRData/2012-02262_PI.pdf



DOL Fact Sheet

http://www.dol.gov/ebsa/pdf/fs408b2finalreg.pdf

An Oldie but a Goodie - Criminal Rule, listen up Bank Lenders!

This is an oldie but a goodie. The story goes like this, Plan Sponsor of a 401(k) Plan receives a call from their Bank. Specifically, it is from their lender. The Loan Officer, subtley or maybe not so subtley, tells the client that their credit is at risk if they don't put more assets with the bank. Subsequently, a broker (bank registered rep) is introduced and a few short months later the 401(k) Plan is moved to the bank or a different spin where the credit isn't at risk, instead the client is told that their rate will be reduced in exchange for the plan.

For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/

To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that

Whoever being—
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan

receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.

Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......

Thanks Linked-In and thanks Mr. Toth for the good intelligence.

What!!! For a change, apparently No Delay on Fee Disclosure

In a shocking move by the DOL, they've actually held firm on the Fee Disclosure Deadline!

http://www.benefitspro.com/2012/01/06/dol-says-no-extension-on-fee-disclosure-deadline

This is despite that fact that with approx. 3 months to go they still have not issued the final guidance needed for the variety of different service providers to all comply.

In this author's experience, this is typical. The Fee Disclosure rules, both 408(b)(2) and 404(a)(5) have been around for several years now and it would seem to me that all of the relevant issues have been discussed and vetted ad nauseum, so one would think that final guidance would have been here long before now. But, that is the problem with the regulating bodies. They claim to be sympathetic to industry concerns, but alas not so concerned that they would give industry enough time to implement changes to be in compliance.

Ethically/Morally, we've always been in favor of Fee Disclosure (see former blog posts on the subject) but we remain skeptical that the newly "informed" consumer, i.e. the Plan Sponsor and Participants will either be better off with this new information or outraged by it. Frankly, we believe it very possible that harm will be caused in the form of fewer participants saving money and more plans becoming out of compliance.

In fact, we think it is likely that a whole bunch of Plans that were previously in compliance with ERISA (teh heh....) will now be out of compliance and in many cases be engaging in Prohibited Transactions unknowingly. What remains to be seen is whether or not any of this will actually be enforced. In the meantime, as Samuel Jackson once said in the movie Jurassic Park.... "Hold onto your Butts!"