New 408(b)(2) Regulations Released

In February of 2009 we sent out to you a notification (see below) regarding the White House’s decision to put on hold on all proposed regulations while the administrations were in transition. As you are aware, one of those regulations was the proposed 408(b)(2) amendments dealing with Fee Disclosure, Conflicts of Interest and Prohibited Transactions. In case you were not yet aware, this past Friday, July 16, 2010 the DOL released an “interim final regulation” under ERISA Section 408(b)(2) which will be effective on July 16, 2011.

After reviewing this new “Interim Final regulation”, in my view, these are some of the more important points.

1.) Written Disclosure instead of formal written contract or arrangement. This means that for all plans, the contracts in place now will not have to be amended or re-written, but rather a written notice should be sufficient.

2.) Clarified what it covers – Covers All Qualified DC/DB Pension Plans.

a. ERISA 403(b), 401(k), DB and Profit Sharing Plans are included.
b. SIMPLE IRAs, SEPs, IRAs, Non-ERISA 403(b), 457(b) and 457(f) are not included.

3.) There are now ‘Out Clauses’.
a. There is now a De minimis exemption for provider’s whose annual compensation is less than $1,000
b. There is also a “good faith” exception for providers who make a disclosure error as long as it acted in good faith and corrects the issue within 30 days of discovery.

4.) Conflict of Interest disclosures have been substantially reduced. The prior rule required explicit identification of all conflicts of interest. Instead, the DOL is relying on the compensation disclosure rules to address the issue. In other words, it is on the Plan Sponsor to identify the conflict based on following the money trail…..

5.) Fiduciary Status Disclosure – the new rule requires that only one reasonably expecting to be serving as a fiduciary or RIA clearly says so. The old rule required you to state in writing if you were or a fiduciary or were a not a fiduciary. This brings up the old issue of functional fiduciaries whose Broker Dealers do not allow them to serve as fiduciaries, thus the conduct of the rep is in conflict with their contract with the plan. Under these new rules, the registered rep must state if they are a fiduciary, and if their contract with the plan states otherwise, is that contract reasonable? This could be interpreted as a Rule 4975 Prohibited Transaction. See this article on The Broker’s Dilemma from 2008, for the full issue at hand.

For a complete interpretation of the new regulation and the practical impact of it, please link to the article by Pete Swisher entitled, ‘What the DOL’s New 408b-2 Rule Means”.

If you are looking for a more concise view of the main differences between what the previously proposed rules were vs. the important changes, please see this Bulletin published by Fred Reish and Bruce Ashton of Reish & Reicher by clicking here.

Unified Trust in HR Magazine

Unified Trust's Founder and Chief Executive, Greg Kasten, is a board certified anesthesiologist. In the mid-1980s, he brought the doctor-patient mindset to the realm of investment management with the purpose of providing high level fiduciary services to individuals and plan participants. He and Unified Trust, were recently featured in an article by HR Magazine, entitled, "A Higher Standard of Care". Click here to view the article.

IRS Is Auditing Retirement Plans Remotely (Sort of)

A quick client service tip, FYI:

On May 17, 2010, IRS sent questionnaires to 1200 plan sponsors. The questions cover the same ground IRS covers in an audit, but not comprehensively. If one of your clients receives one of the questionnaires, be aware of the following:

• This is not an audit, but it can lead to one.

• One risk to the sponsor is that an answer might lead to an audit, and once a plan is under audit it is no longer available for the self-correction or voluntary compliance programs (SCP and VCP, part of EPCRS, the Employee Plans Compliance Resolution System). They could be forced instead into Audit CAP, the penalties for which are much more serious. For this reason, it is best to treat the Questionnaire as an audit even though IRS says it’s not one.

• Clients will want help with these. If a Unified Trust client gets a questionnaire, we will complete it for them except for any information we do not have.

Here’s a link to the IRS overview of the project: http://www.irs.gov/retirement/article/0,,id=223440,00.html

Here also are some of IRS’s FAQ answers:

What is the 401(k) Compliance Check Questionnaire Project?

The 401(k) Compliance Check Questionnaire Project is a compliance check project being administered by the Employee Plans Compliance Unit (EPCU). This project is designed to be a comprehensive look into 401(k) plans to determine potential compliance issues, gain a better understanding of the reasons for noncompliance and determine any potential plan operational issues. This project will also assist us in developing additional education and outreach materials to improve future compliance and help us determine where best to focus our enforcement efforts.

Why was my plan selected?

The 1,200 plans selected to receive this compliance check were selected at random from 401(k) plans that filed a Form 5500 for the 2007 plan year.

Is this an audit?

This is a compliance check, which is neither an audit nor an investigation under IRC section 7605(b) nor an audit under section 530 of the Revenue Act of 1978. This is not a review of an organization’s books and records.

What is a compliance check?

A compliance check is a review by the IRS to determine adherence to certain compliance requirements under the Internal Revenue Code.

Am I required to respond to this compliance check?

Yes, a compliance check is an enforcement action which you must respond to. Failure to respond, or to provide complete information will result in further enforcement actions which may include an examination of your plan.

Hodge Podge, Loose Ends and Good Ideas....

Over the past few months there have been a lot of topics being discussed as various bills get proposed, some get passed, many sunset and others get extended. Some of the topics that have been written about repeatedly include “Roth or Not Roth”, the issues of the proposed participant-level advice regulations, the old argument of passive vs. active and even a resurgence in the question of which is better Collective Trusts or Mutual Funds. Each one of these could render itself to lively debate on its own. Instead, what we thought we’d do is put together a few different, smaller thoughts, in one place that on their own aren’t enough to make a full discussion. Here goes:

Idea #1: For those of us operating in environments where we are fiduciaries or permitted to act as fiduciaries, a good idea is to create a value statement that acts as a good faith agreement. This idea was cited recently online called a Fiduciary Oath. This type of statement, signed by you and by the client is a great way to cement expectations. Click here to view a sample of what that could look like.

Idea #2: Preaching process and procedure to Plan Sponsors is a great idea. Giving them a process and procedure is a better idea. Performing the process and procedure for them is the best idea. Click here to access a guide to good Plan Sponsor health and a list of best practices from which every plan can benefit.

Idea #3: Little known or discussed, but very important is ERISA §411 which discusses the limitations imposed by the code on who may or may not serve as a fiduciary to an ERISA plan. Most plan sponsors do not routinely perform background checks on providers they hire to perform services to their company, while they do when hiring someone internally. Coaching plan sponsors and providing them a mechanism to ensure that ERISA §411 is adhered to is a value-add service that also helps in cementing the trust relationship. Click here to view a form for this use.

I'm a Fiduciary, What Are You?

It’s interesting to observe how trends affect one’s life from time to time. Ordinarily when one thinks of trends, they think of it in the context of the social side of life. For example, trends in music, fashion, television, etc. Every now and then trends start to appear in the professional world as well. One emerged trend of the last several years in the 401(k)/Pension business is the trend towards offering fiduciary services. Of course with this comes the inevitable misusage of the term fiduciary and a variety of marketing terms and sales gimmicks intended to take advantage of the trend without actually providing anything in return. Through the course of travel my coworkers and I often get many of the same questions surrounding ‘fiduciary’. Confusion in this area isn’t surprising as there is a lot of market noise, from the marketing terms like Co-Fiduciary or the sales tools like Fiduciary Warrantees to the newest trend, the selling of specific code sections as the different flavors of fiduciary.

We’ve all seen the various new categories of advisor; ERISA §3(38) Investment Manager, Full-Scope §3(21), Limited-Scope §3(21) and so on. On Linked-In there are lively discussions about it, articles are being published on it on Morningstar.com and an unfortunate result is some general confusion from a lot of Advisors of ERISA plans on what all of this is and what they should or should not be calling themselves or doing, not to mention what they’re allowed to do or not allowed to do under their Broker/Dealer contract if they are a registered rep. For that reason, we have created a new piece as an attempt to simplify and consolidate the most recent array of terminology.

Select the following link to view the complete document – Fiduciary…A Different "F" Word.

What Drives ERISA Plan Service Provider Changes Now

The article recently published in PlanSponsor Magazine, entitled, "After the Storm: A year after the market meltdown, a new provider landscape emerges" elaborates on those factors now contributing to plan service provider changes within the ERISA clientbase. Some of the factors are highlighted below:

-“Flight to Quality” -- dependable partner
-Institutional credibility
-Committed to the business and demonstrating organizational strength and stability
-Most employers focusing intensely on their core business = less RFPs
-Fee benchmarking currently motivates many sponsors to begin a review
-Reluctance to jump ship just because of bad investment performance
-Personalize service delivery to participants
-Ease of doing business for sponsors and participants
-Fiduciary support and risk management
-Ensuring adequate investment monitoring

Lifetime Income Disclosure Act, UTC on Track

Recently (specifically, November 2009), the Lifetime Income Disclosure Act was introduced by Senators Jeff Bingaman, Herb Kohl and Johnny Isakson. This bill would require that 401(k) providers inform participants of the monthly income they would expect at retirement. This projection is intended to be modeled after the existing Social Security statements that Americans presently receive annually. The bill is intended to help the average worker to understand their present financial vulnerability. Click here for a copy of the bill.

Obviously, this is a new introduction to the Senate and will be placed on what seems to be a an ever-growing stack of proposed Retirement Plan legislation which may or may not get passed. However, this one is interesting as it supports many notions that we, at Unified Trust, have been talking about for years. Specifically, it mentions that the average American is on path to a substantial shortfall. We usually quote 80% of workers covered do not have adequate retirement savings in today’s dollars. What also is interesting is that this new type of disclosure is aimed at converting consumer (participants) thoughts from the traditional “investment account” approach to a new “benefit account” approach. I.E. Is the 401(k) actually providing me with adequate income replacement?

This is exactly what we are doing with our new service, The unifiedPLAN®. In fact, each participant enrolled in The unifiedPLAN® will be presented with a mathematically sound Success Analysis at the initial enrollment meeting and each quarter thereafter. Click here to view a sample report. This analysis will show them in today’s dollars what their projected surplus or shortfall is and offer suggestions on how to improve the outcome. In addition, based on this projection a custom tailored model portfolio will be established for the participant and adjust automatically as the math changes from quarter to quarter. This established glide path will improve outcomes for virtually all participants.