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. 

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.

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!"

DOL Officially extends fee disclosure....again....

In a notice on its website, the U.S. Department of Labor announced the extension of the applicability date of the fiduciary-level fee disclosure regulation issued under ERISA section 408(b)(2) until April 1, 2012. The Department had previously proposed to extend the applicability date only until January 1, 2012.

The DOL also announced an amendment to the applicability date of the participant-level fee disclosure regulation. Initial participant-level disclosures must now be made no later than 60 days after the first day of the plan year beginning after November 1, 2011; or if later, 60 days after the effective date of the fiduciary-level fee disclosure regulation.

Previously, the Department had proposed a 120-day transition period to provide the initial participant disclosures. The final rule is available here. http://www.dol.gov/ebsa/pdf/extensionofapplicabilitydatesfinalrule.pdf

and a fact sheet for it here. http://www.dol.gov/ebsa/newsroom/fsimprovedfeedisclosure.html

This delay doesn't change our views on the matter. Ultimately consumers should know what they pay for all goods and services and Plan Sponsors who are engaged in a trust arrangement, which all Qualified Plans are, further have an obligation to determine the reasonableness of a contract or arrangement.

In the absense of knowing all compensation arrangements, how can one determine that an arrangement is reasonable? The delays, nonetheless, are frustrating, another small win for the lobbyists.

Surprise! Another Delay - Fee Disclosure Revisited....again...

Over the last year or so, we’ve been keeping tabs on the rules surrounding fee disclosure in all of its forms current and newly proposed. Specifically, the new proposals are the final 408(b)(2) disclosures and the Participant fee disclosure rules under ERISA §404(a)(5). The 408(b)(2) rules have been delayed twice and are currently due to come into effect on January 1st, 2012. In a filing just published at the Federal Register, the U.S. Department of Labor has officially proposed the previously discussed extension for those 408(b)(2) regulations. The Federal Register filing formally effectuates that intent.

The new announcement in this filing is that the DOL stated it would propose an amendment to the participant level fee disclosure regulation which would provide a 120-day transition period (instead of 60 days) to provide the initial participant disclosures. However, it does not appear there will be any extension provided for quarterly expense disclosures. According to the DOL release , a calendar year plan would have to furnish the initial participant disclosures no later than April 30, 2012. The quarterly expense disclosures required by paragraphs (c)(2)(ii) and (c)(3)(ii) of the regulation (e.g., quarterly statement of fees/expenses actually deducted) would have to be furnished no later than May 15, 2012.

In essence, this gives the service providers an extra quarter to get into compliance. Not a big deal, but worth noting as in previous posts we referenced Q4, 2011 and now it will be Q1, 2012.

Strong Words from EBSA Regarding 408(b)(2) Compliance

Fil Williams of the DOL's EBSA recently stated at the Mid-Atlantic Benefit Conference on May 5, 2011: “…for those employers to whom the new Section 408(b)(2) rules do apply, responsible plan fiduciaries ultimately will be obligated to terminate contracts or arrangements with service providers that do not comply.”

Even though the DOL has aready postponed the final 408(b)(2) regulations once, they are scheduled to become effective January 1, 2012. This along with the new participant disclosure regulation (effective in November 2011) will make for a busy Thanksgiving, end of year, for retirement plan services providers.

An associate of ours at Unified Trust, Pete Swisher, recently published a column in the ASPPA Summit Newsletter addressing the regulations and six ways to prepare your practice by November. It is available by clicking here.

Coming Soon.....Participant Fee Disclosure!!!! Get your helmets on....

What exactly is it that get’s Retirement Plan Professionals, advisors and service providers alike, so worried about when it comes to Fee Disclosure? That’s a bit rhetorical, as I suspect the answer is mostly obvious for those who read this blog. In the last year or two, the anxiety level regarding fee disclosure has been quite apparent. As a clarifying point for those who are unaware, there are TWO sets of fee disclosure rules. The implementation date of one of these, commonly referred to as the 408(b)(2) fee disclosure rules, has been postponed to 01/01/12 (at the time of this writing), and perhaps will be again. The other set of rules are the new rules under ERISA §404(a)(5), commonly referred to as ‘Participant Disclosure’. These rules are going to be effective for the 4th Qtr. of 2011, right around the corner. Surprisingly and confusing to me, even though these are the more difficult set of rules, these seem to be the one’s that fewer practitioners are worried about.

The 408(b)(2) rules are getting a lot more industry attention, perhaps this is due to how much the industry has historically done to disguise fees, that it is going to be incredibly difficult to accurately show clients how to follow the money trail. Perhaps it is because this is the rule that makes Broker/Dealers and Insurance Company’s a little squirmy due to that little requirement where the service providers have to declare if their acting as a fiduciary or not. Whatever the reason is, the practical reality is that some difficult discussions (and maybe decisions) will happen between service providers and clients. But this is a difficult business, and I believe that ultimately most of the good practitioners will get through it with most of their client relationships intact.

However, participant disclosure……that’s a whole other scenario, and it’s happening first!!!! This article, by David McCann from CFO Magazine does a good job of thousand footing the situation.
http://www.cfo.com/article.cfm/14570384/c_14570395

I, and most practitioners I know believe that the majority of participants have no idea what the retirement plan costs are and many think that they are getting a free benefit, that they pay nothing for their 401(k). This is a systemic issue. Most 401(k) mouse traps in the market, historically, have been designed to disguise fees from the participants. The group annuities (and Collective Funds) unitize the investments and thus are embedding fees into the unit prices. Many mutual fund platforms are often registered rep distributed, and their compensation is in the expense ratio, but also built into share prices, not to mention implicit revenue sharing arrangements. Even environments where the fees are deducted as line item expenses from participant accounts will often not be explicitly disclosed. For the participant to discover these charges, they will have to search for these deductions online in the form of a customized transaction report.

As a result, the new participant disclosure rules will 100% create a HUGE amount of phone calls, complaints to everyone and anyone associated with creating and managing their plan. Frankly, I think, it will cause a large quantity of plans, big and small, to search out new providers. For proactive practitioners, this is absolutely an opportunity. Advisors who aren’t in front of this are going to have to back pedal as the business owners and CFOs start getting questioned by staff. As Mr. McCann says in his article……..consider yourself warned!

Final 408(b)(2) Regulations postponed......briefly

Just last week, February 11 to be exact, the Department of Labor announced that it intends to extend the applicability date for service-provider fee disclosure rules under section 408(b)(2) of ERISA. Disclosure requirements will now apply to contracts or arrangements in existence on or after January 1, 2012, rather than July 16, 2011.

At this point, nothing other than the effective date has changed. All covered service providers will still be required to provide extensive disclosures about their services and the compensation they expect to receive as well as identifying their fiduciary status.

This delay was made solely so that The Department of Labor can review the public comments that they requested previously in connection with the interim final rule, including comments on the types of service providers who should be covered and on whether the required disclosures should be presented in a standard format or not, and subsequently to allow time for implementation of any changes made based on those comments.

While this extension is sure to be welcomed by certain service providers, it isn't likely to provide any type of reprieve. For those hoping for the "good old days" to come back,.....well there's always hope.

IRS Raises Fees for Most Determination Letters

Fees.....where do we begin? Obviously, the burden of determining if fees are fair, reasonable and necessary is a daunting challenge even for professional fiduciaries. Very few practitioners enjoy going through a fee discussion with clients, the industry has been hiding fees and selling "free" plans for 35 years, necesitating the quite robust set of new rules forthcoming later this year. In many cases, it is hard to get clients to understand all of the moving parts and mechanics of Retirement Plan fees, even harder in some cases to get them to not pass them along to their participants. Of course, in difficult economic times like the present this task becomes even more unplesaant. With that stated, see the below list of IRS imposed fee increases, some of which are 250% increases.....gotta love the timing.

Effective Feb. 1, 2011, The Internal Revenue Service (IRS) has raised the fees for determination letters and advisory letters sought by qualified retirement plans.

These increases will be for almost every type of determination letter request, as follows:

(1) For a plan intending to satisfy a design-based or nondesign-based safe harbor, or a plan not seeking a determination letter with respect to any of the general tests, and the plan is not seeking a determination letter with respect to the average benefits test:

The single employer Form 5300 determination letter fee is increased from $1,000 to $2,500;
The single employer Form 5310 determination letter fee is increased from $1,000 to $2,000;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

• 2 to 10 employers from $1,500 to $3,000
• 11 to 99 employers from $1,500 to $3,000
• 100 to 499 employers from $10,000 to $15,000
• Over 499 employers from $10,000 to $15,000

Average Benefit Test Or General Tests

(2) For a plan seeking a determination letter with respect to the average benefit test and/or any of the general tests:

The single employer Form 5300 determination letter fee is increased from $1,800 to $4,500;
The single employer Form 5310 determination letter fee is increased from $1,800 to $4,000;
Adopters of a Master or Prototype Plan or a Volume Submitter Plan will pay a fee that is increased from $1,000 to $1,800;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

• 2 to 10 employers from $2,300 to $5,000
• 11 to 99 employers from $2,300 to $5,000
• 100 to 499 employers from $15,000 to $25,000
• Over 499 employers from $15,000 to $25,000

(3) For group trust submissions under Rev. Rul. 81-100, C.B. 1981-1, 326; Rev. Rul. 2004-67, C.B. 2004-2, 28, and Rev. Rul. 2011-1, I.R.B. 2011-2, the fee has been increased from $750 to $1,000. Form 5316 to be used for group trust submissions will be available soon, according to the IRS.

For the complete (260 pages) rule please view IRS Revenue Procedure 2011-8 ---> http://irs%20revenue%20procedure%202011-8%20---%3e%20http//www.irs.gov/pub/irs-irbs/irb11-01.pdf

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.

Law Suits - Coming Down Market

We invariably have discussions surrounding Discretionary Trustee Services, Fiduciary Services, Fiduciary Responsibility and Liability that lead to the following inevitable question. What is the real risk of all of this stuff? The question is clearly pointed at challenging whether or not the risks are real risks or simply overzealous rule following. This is especially important as the spate of law suits that are publicized in this area are always with very large plans (Deere, Ford, etc.) and their providers, again mostly very large companies. That contrasts to Unified Trust’s typical market, where we partner with Advisors, which we would define at the Under $100m space. We believe that the risk question misses the point. Liability relief is important and useful to a Plan Sponsor who has concerns in this area, however, the point is that the rules under ERISA are written the way they are because they create a path to follow that mandates ‘Best Practices’. If followed absolutely, they should generally lead plans to be more successful at providing adequate benefits to the participants in a fair way than when they aren’t followed. Obviously, we are a true proponent of ‘best in process, best in outcomes’ based approach to Retirement Plan Management. This applies to both Defined Contribution and Defined Benefit Plans.

That said, it should come as no surprise to anyone reading this that the quantity of law suits in the Retirement Plan industry has increased dramatically since the end of 2007. No one worries when the market is going up if their robust returns are slightly lower due to excessive fees, but in a down market even the slightest hint of excessive fees can bring participants and Plan Sponsor’s blood to boil. We have always stated that it would only be a matter of time before we were hearing about fee-driven law suits in the small plan space and that engaging in ‘Best Practices’ is a good way to avoid risk regardless of market cycles or client size.

In the latest edition of Investment News (July 20, 2009), there is an article that discusses a plan of approximately $2m in assets that is suing its Investment Advisor, Custodian and Recordkeeper. To read the full article, click here.

Interesting to us is that the suit is regarding fee disclosure, revenue sharing and hidden fees. We have written on this subject before in published papers and prior emails. I can forward them to anyone interested. The bottom line is that a fee-based environment (as opposed to commission based) where all fees are known, accounted for and disclosed is the only environment appropriate for Retirement Plan Sponsors. That’s appropriate whether using the Suitability Standard or the Fiduciary Standard.

The following are articles by Unified Trust that discuss fee disclosure, what’s broken and how it works and how it should work.

Ethics of 401(k) Revenue Sharing and Disclosure — Full Article
Revenue Sharing For Qualified Plans — Full Article