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AdvisorNews - April, 2011




New Disclosure Regulations Under ERISA sections 408(b)(2) and 404(a)(1)


The Department of Labor provided two new final rules on retirement plan disclosures in the second half of 2010. The two regulations have different purposes and disclosures are made to different groups. We will discuss each regulation in detail below. First, regulations under ERISA section 408(b)(2) address fee disclosures to plan fiduciaries by service providers. Second, regulations under ERISA Section 404(a)(1) address fee disclosures to plan participants in participant-directed individual account plans.


The first set of regulations, under ERISA Section 408(b)(2) (published July 15th 2010), regulate disclosures from service providers to plan fiduciaries (fiduciaries are those with authority to arrange for services to the plan). No participant-level disclosures are required by the 408(b)(2) regulations. The interim final rule is effective July 16, 2011.

Under ERISA section 406(a)(1)(C), a contract or arrangement between a service provider ("party in interest") and a pension plan would normally be a prohibited transaction. ERISA section 408(b)(2) provides an exception to the prohibited transaction rule for 'reasonable' service provider contracts or arrangements. The regulations provide further clarification of what is required to have a "reasonable" service provider contract or arrangement. The regulations require "that certain service providers to employee pension benefit plans disclose information to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers' compensation and potential conflicts of interest that may affect the service providers' performance." The regulations do not currently affect welfare plans, IRAs, simplified employee pensions, or simple retirement accounts.

We expect that many of our plan document and administration software users are subject to the new reporting rules (although certainly not all). Rules apply to third party administrators, those providing recordkeeping or brokerage services, actuarial, consulting, legal, accounting, auditing and other similar services who have contracted with a pension plan and reasonably expect $1,000 or more in direct or indirect compensation paid by the plan.

If you currently provide your customers with a fee schedule that details expenses for your services paid by the plan, you may already meet most of the requirements under the new rule. The rule requires all of the following to be disclosed in writing "reasonably in advance of the date the [service provider] contract or arrangement is entered into":

  • a description of the services to be provided;
  • a statement, if applicable, that the services are provided by the service provider as a fiduciary or as a registered investment provider;
  • a description of all direct compensation reasonably expected to be received (paid directly by the plan);
  •  a description of all indirect compensation reasonably expected to be received (paid by sources other than the plan, the plan sponsor, the service provider/affiliate/subcontractor but ultimately paid by the plan);
  • a description of other compensation "paid among the covered service provider, an affiliate, or a subcontractor... if it is set on a transaction basis (e.g., commissions, soft dollars, finder's fees or other similar incentive compensation based on business placed or retained) or is charged directly against the covered plan's investment and reflected in the net value of the investment (e.g., Rule 12b-1 fees); including identification of the services for which such compensation will be paid and identification of the payers and recipients of such compensation"; and
  • a description of any compensation expected in connection with termination of the service provider contract/arrangement.

Additional disclosures are required for recordkeeping services, fiduciary services and recordkeeping and brokerage services. If the compensation arrangements change, generally an advance 60 notice of the changes is required.

Because the format and content of these disclosures will vary widely amongst our customers, we do not expect to provide sample disclosures.


The second set of regulations, under ERISA Section 404(a)(1) (published October 20, 2010), regulate disclosures to participants that are in participant-directed individual account plans. These regulations require participant-level notices and only apply to defined contribution plans with participant-directed investments (whether or not 404(c) applies). Notices are required for plan years beginning on or after November 1, 2011.

Looking at our defined contribution plan documents, this notice will apply if checklist item G.3 (Specify the extent to which the Plan permits Participant self direction...) is not "None" (checklist item G.2 in full scope, ERISA-covered 403(b) plans).

The regulations set out several different disclosure requirements:

  • Annual 'plan-related' information
    • circumstances under which participants may give investment instructions (and limitations on this ability)
    • description of plan provisions related to the exercise of voting (and any restrictions)
    • identification of designated investment managers
    • description of 'brokerage windows', 'self-directed brokerage accounts' or other similar options
    • explanation of any fees and expenses for general plan administrative services (legal, accounting, recordkeeping) that may be charged against individual accounts and are not reflected in total operating expenses of any designated investment alternative
    • explanation of any fees and expenses that may be charged against an individual account on an individual basis (fees for processing loans, QDROs, investment advice, brokerage windows, sales charges, redemption fees, etc.) and are not reflected in total operating expenses of any designated investment alternative.
  • Quarterly statements showing actual dollar amounts of fees and expenses charged to the Participant's account
  • Annual statements showing performance data, benchmarks and fees for each designated investment alternative offered under the plan.

We do expect to provide software (similar to our current annual notice for safe harbor plans) for customers to prepare the annual 'plan-related' information. Some data for the notices can be handled through the section J plan expenses information we currently have available. We expect that we will have to add a few more data-entry items to accommodate the notice. We do not intend to provide software for the remaining notice requirements as we assume the investment provider is better situated to provide this information.

If you have thoughts about how you would like our software to work for these notices, please let us know.


Five Common Myths about 401ks

Despite its wide usage as a primary savings vehicle for many working Americans, numerous myths exist about 401k plans.

Myth 1: The majority of lower-income employees don't participate in their 401k plan.

  • On the contrary, the majority (53%) of participants in 401k plans recordkept by Fidelity earning between $20,000 and $40,000 do participate, and 71 percent of participants earning $40,000 and $60,000 participate.

Myth 2: 401k participants don't take an interest in their retirement plans.

  • In reality, Fidelity found workplace participants are increasingly more engaged in their plans. In 2010, approximately three out of four active participants contacted Fidelity via the phone or over the Web. And more than 1.1 million workplace participants took advantage of Fidelity's online guidance tools.
  • Of those who used the savings tools, nearly half (47%) increased contributions to their 401ks by an average of three percentage points (from 4% to 7%).
  • When employees sought Fidelity's comprehensive guidance with their investment strategy, one in five made adjustments to their portfolio from suggestions based on their age and target retirement date.

Myth 3: Most employers suspended their company match during the recession and have not reinstated it.

  • Only 8 percent of Fidelity plan sponsors reduced or eliminated their employer contributions during the height of recession in 2008 and 2009. Since then, more than half (55%) have already or indicated they plan to reinstate this benefit within the next 12 months.
  • Larger companies (5,000+ employees) are at the forefront of this trend with 71 percent having already reinstated or planning to reinstate their employer contribution.
  • Overall, 80 percent of active participants within corporate defined contribution plans recordkept by Fidelity received employer contributions in 2010.

Myth 4: Most people take loans or cash out of their 401ks.

  • A loan from a 401ks is sometimes a necessity for a participant, however, nearly four out of five participants have rejected the urge to take out a loan.
  • Seven out of 10 participants opt not to cash out of their 401ks in the months following a separation from an employer, instead wisely electing to stay in-plan or rolling over into another qualified retirement account such as an IRA.

Myth 5: Roth 401ks are only for older, wealthy employees.

  • Not true. More than twice as many active participants in their 20s contribute to Roth 401ks than do those aged 50 and older (9% vs. 4% respectively).
  • Approximately half of Roth 401k contributors earn less than $75,000, and one in four earns less than $50,000.
  • One out of five Fidelity plan sponsors offers eligible employees a Roth 401k. Fidelity's largest plans (more than 25,000 participants) have adopted at the greatest rate with half offering the feature.

More than 51 million American workers take advantage of the convenience of automatic and tax-deferred savings, employer contributions where eligible, and the diversified investment options of workplace retirement plans. Employers understand the increasingly important role this key employee benefit plays in helping Americans prepare for their retirement years, and continue to offer workplace plans that help their workers build more secure futures.


Will New Rules Nudge Up 401(k) Costs?

A proposed law could trigger pass-through costs from plan providers to sponsors.

David McCann - | US

February 18, 2011

The cost of 401(k) plans could be poised for an uptick, thanks to proposed legislation in Congress that would require more disclosure from plan providers and sponsors.

Sponsored by three U.S. senators, the bill would require 401(k) plans to annually disclose an "annuity equivalent." This would show how much monthly income participants would receive upon reaching the plan's normal retirement age if they used their current account balance to buy a life annuity now.


The proposed legislation is in its third incarnation, having gone nowhere in 2007 and 2009. It may stand a better chance to pass now, however, given growing awareness of the need to help secure retirees' finances.

Mark Gutrich, CEO of ePlan Services, which administers 401(k) plans for small companies, says that if the bill becomes law, his costs might rise by at least 5% and plan sponsors' costs would go up, too. "It would be nice to say we could do that extra work for the same fees, but everyone has a profit margin," he says.

The additional cost would come on top of any cost impact from three new disclosure rules devised by the Department of Labor. One, which took effect last year, requires plan providers to disclose to the government more information on their direct and indirect compensation for administering plans. A second rule, which would be effective on January 1, 2012, mandates the disclosure of similar information to plan sponsors. The third rule, slated to kick in on November 1 of this year, requires plan participants to be informed of fees charged to them within the plan's investment options, and the historical performance and applicable benchmarks for every investment option.

Gutrich says the proposal to include annuity equivalents in benefit statements is particularly vexing. The bill seeks to mimic the annual disclosure of expected retirement benefits from the Social Security Administration, but the attempt makes no sense, Gutrich contends. Social Security, he points out, is a defined-benefit plan where participants have no control over investment of their account balances. Its benefit projections are based on defined, up-front assumptions about annual rate of return, participant salary level, hours worked, and quarters paid.

By contrast, 401(k) projections would involve far more guesswork, says Gutrich. They would require plan providers to make a number of assumptions for the future, about such things as contribution levels, allocation decisions, employer matches, financial-market gyrations, and inflation.

The proposed law would require the DoL, within a year of enactment, to prescribe assumptions that plan administrators could use in calculating annuity equivalents. But Gutrich doubts that all necessary assumptions will be addressed. Overall, he says, the bill is "very typical: politicians talking about complex things in very simplistic terms that resonate with the general public, without any concept of how to actually enact it."

However, the bill does acknowledge that making benefit projections is complicated. It instructs the DoL to issue a model disclosure that is understandable by the average person, explaining that "the actual annuity payments . . . will depend on numerous factors and may vary substantially from the annuity equivalent in the disclosures." It further provides that neither plan providers nor employers can be held liable for the accuracy of the annuity equivalents.

Alan Vorchheimer, a principal at Buck Consultants, says the bill's simplicity will make it less effective as a provider of useful information for plan participants. It's an example, he says, of politicians "pretending they're doing something by putting this out."

Participants are getting so many disclosures now, observes Vorchheimer, that "at a certain point, they're just going to get tossed in the trash. Anyone who works in plan communications knows there is a real limit to how much you can communicate to people now."


Investment strategies for cash balance plans - more risk than you thought

Executive summary. Cash balance plans are relatively common these days and may become even more so following the publication last Fall of IRS final regulations for hybrid plans (see Vanguard's Regulatory Brief: Final and proposed regulations affecting cash balance plans).


Plan sponsors often look to the cash balance design when the cost, and cost uncertainty of their traditional pension plan has become unsustainable. Compared with the liability associated with a traditional plan, the liability of a cash balance liability is more stable.


Sounds like a good thing, right? Well, not necessarily. The liability for a traditional defined benefit plan is easily matched by bond investments, making risk-reduction cheap and easy. This isn't the case for most cash balance plans.



IRS issues  final and proposed regulations for hybrid plans

Who's affected

These developments affect sponsors of and participants in hybrid plans, such as cash balance plans and pension equity plans. They also affect plan sponsors that are considering converting a traditional defined benefit plan to a hybrid plan design.

Background and summary

Hybrid plans, such as cash balance and pension equity plans, are common plan designs. A hybrid plan is a retirement plan that combines features of a defined contribution plan and a defined benefit plan.

The enactment of the Pension Protection Act of 2006 (PPA) into law on August 17, 2006, clarified the legal status of cash balance and other hybrid plan designs created after June 29, 2005, if they satisfy certain requirements. To assist plan sponsors in designing and administering these plans, the IRS issued Notice 2007-6 and proposed regulations in 2007.

Recently, the IRS issued final hybrid plan regulations to reflect the changes made by PPA. The final regulations incorporate the transitional guidance provided under Notice 2007-6 and generally adopt the provisions of the proposed rules. They offer guidance on a variety of issues regarding:


Age discrimination;

Conversions; and

Market rate of return.


At the same time, the IRS issued additional proposed regulations. These rules provide guidance on certain issues that are not addressed in the final regulations such as:

Interest crediting rates;

Changes in interest crediting basis; and

Additional conversion guidance.


Action and next steps

Sponsors of cash balance and pension equity plans should carefully read the information contained in this Pension Analyst. We encourage plan sponsors to discuss the contents of this publication with their legal counsel and their plan's enrolled actuary to determine how this most recent guidance impacts their plans. In some situations, plan amendments may be needed.

The final regulations generally apply to plan years beginning on or after January 1, 2011. The proposed regulations apply to plan years beginning on or after January 1, 2012, but may be relied upon until then.