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Sponsor News - August 2012

10 fee disclosure facts every plan sponsor should know

By Chris Carosa </author/chris-carosa>
December 16, 2011
Christmas may be upon us but this upcoming Easter might be the more important season for 401(k) plan sponsors and fiduciaries – assuming certain vested interests have their way again, but I get ahead of myself.

As of April 1, 2012, the Department of Labor’s new service provider Fee Disclosure Rule becomes effective. Originally published in July 2010 with an effective date 12 months later, this new rule requires “covered service providers of retirement plans to disclose comprehensive information about their fees and potential conflicts of interest to ERISA-covered plan fiduciaries.”

Assistant Secretary Phyllis C. Borzi has said, “Employers and workers will benefit from the increased transparency provided by these fee disclosure rules.”

Bowing to industry pressure, this past summer the DOL delayed the effective date of this rule to next spring. Apparently, employees did not need the benefits of increased transparency as soon as originally intended.

  1. There are three general types of disclosure requirements: Plan level (administration) expenses, participant-based expenses and investment-related data. The DOL provides a convenient page outlined 401(k) fees on its website <> . Information regarding investment-related data, as we shall see in the next two points, remains rather muddled.
  2. Some fees matter <> . When it comes to investment products, some fees have greater bearing than other fees. Fees related to marketing a particular mutual fund, like 12b-1 fees, can add to the costs of the plan without really providing any real value to plan participants. Fortunately, according to recent Investment Company Institute (“ICI”) data, very few plans continue to use mutual funds with 12b-1 fees.
  3. Some fees don’t matter <> . Folks of all types from kind-hearted regulators to unscrupulous salesmen want to include mutual fund expense ratios as part of your “fees.” Truth be told, the impact of mutual fund expense ratios already reflect in the performance data on that fund. The only time expense ratios really matter is when you compare similar types of index funds (e.g., “S&P 500” or “Russell 2000”). Worst, if all you really want is low fees, then buy a money market fund. Let us know how that worked out for growing your retirement assets in 30 years.
  4. Smaller plans, be prepared for surprises. You're probably using bundled service providers because you were afraid of paying higher fees. Guess what? Maybe you were all along. You would have been surprised if you were aware of any of the many benchmarking studies available to 401(k) plan sponsors <> .
  5. Larger plans, be prepared for surprises. If you’re using bundled services, you’re about to find out why you probably shouldn’t be. And here’s the bad news, a recent ICI study reveals <>  90 percent of 401(k) plans – including large ones – use bundled service providers.
  6. All plan sponsors will have greater fiduciary liabilities – they’re now responsible for collecting and presenting – this data. The DOL has a specific suggestion for how to present this data <> . The DOL wants fees to be openly disclosed because it’s worried too many people believe their 401(k) is free. Many participants, and unfortunately many plan sponsors, will experience “sticker shock” when they see the fees they’ve been paying.
  7. All vendors will have greater liabilities – they can’t hide fees anymore. You might think this will worry those vendors, and you’re right. What you might not think, and what they might not think either, is that this disclosure should worry plan sponsors, too <> .
  8. Performance data reporting requirements may actually mislead 401(k) investors. It’s important plan sponsors understand the limitations of the DOL’s sample Model Comparative Chart and how it might cause investors to make damaging decisions <> . Fortunately, plan sponsors are not required to use this sample and, instead, can rely on a better report.
  9. Participants will either respond with difficult questions or (more likely) won’t even read their statements. The chances for information overload is even greater now, but those employees that do read their statements now have more ammunition to question what their plan sponsor is doing with their retirement assets.
  10. Certain players in the industry – particularly bundled service providers like insurance companies and brokers – don't like this rule and have already successfully worked to delay its effective date. Don’t be surprised if they convince the DOL to do it again.

Unlike what a popular movie once implied, perhaps, after it’s all said and done, the end of the Mayan Calendar – the Year 2012 – will not mark the end of civilization as we know it. Maybe it just will just mark the beginning of the end of overpriced 401(k) service providers.

If Roth 401(k) were a human being, he would be going through an existential crisis.

Michael Wandelmaier
Employer adoption of the Roth feature to their 401(k) plans has been significant—37.4% of overall plans now have a Roth 401(k) feature, according to the 2011 PLANSPONSOR DC Survey. However, even as that number grows—and faster than the adoption of target-date funds—plan participants are not taking advantage of it. In fact, only 9% of employees who have a Roth 401(k) option have chosen it as a retirement savings vehicle, according to research from Vanguard.

It seems that, for many in the retirement plan industry, that mismatch isn’t cause for concern; making the unpopular Roth 401(k) more popular with participants is far from top of mind. The biggest problem, say advisers, is getting Americans to increase their savings to get them closer to a secure retirement. Anything else is secondary, and if it’s something that might distract the industry or the participants from solving the primary problem, such as education about the Roth savings options, then it should be placed on a back burner.

Is there merit in this argument? Americans are not saving enough; a recent survey from Allianz Life Insurance Company found that 30% of non-retirees either have decreased the amount they’ve been saving for retirement or have stopped saving all together since the recession began in 2008, and more than one-quarter (28%) have not started saving for retirement at all. Furthermore, data from Financial Finesse show that 14% of employees report they are on track to replace 80% of their income (or reach their specific goal) in retirement to achieve a comfortable standard of living. More than three-quarters (78%) of those that are not prepared have not run a retirement projection in order to determine how much they should save and how they should invest their savings.

Today’s mantras to participants from advisers, vendors, and sponsors, are to increase deferral rates; to analyze gap ratios; and to have a properly diversified portfolio to protect against market volatility (something that surely will catch a participant’s ear in today’s environment).
So, then, why does the Roth 401(k) exist? Is it worth it for plan sponsors to include in their plans if participants aren’t being educated about it? Why are advisers hesitant to broach the subject with participants?

The “Non-Problem” Problem
“[The] lack of savings by our population is going to be one of the biggest crises our country will face,” says Mark Ratay, financial adviser with The Ratay Group and Corporate Retirement Director of Morgan Stanley Smith Barney in Lisle, Illinois. “But when you go out there and start talking to the masses, all but the most sophisticated investors don’t get it. They’re already confused about saving in a 401(k). So, when you get into the Roth topic, you’re throwing one more thing up in the air to confuse them,” he says.

“Of all the issues that are out there, I’m not sure I would have this at the top of my list, since there are so many variables with Roth. We all know that [participants] are not saving enough, and the issue of lifetime income from a 401(k) account is taking up a good amount of education time,” says Sean Deviney, Financial Planner, Provenance Wealth Advisors in Fort Lauderdale, Florida, agreeing with Ratay’s sentiment.

“I do think the Roth is a great option, but it isn’t a ‘problem’; it just hasn’t been adopted as quickly as the industry thought it would be,” he says, adding that the Roth 401(k) option is more of a tax planning tool, not necessarily a better alternative than the traditional 401(k).
At the very least, advisers say, plan sponsors should have the Roth option in their 401(k)s.

“Plans should offer as many features as possible, including the Roth” says John Prichard, Senior Vice President, Heffernan Financial Services in San Francisco. “Participants who understand it, take it but it is not the most important thing by a long shot. Our whole tax structure right now is in flux; everything’s staying the same and everything’s changing. It’s a nice element, but it’s not the most important.”
Prichard says his firm does a “soft sell” of the Roth option. They advise sponsors to have it in the plan for those participants who want it, they inform participants that the option is there, but they do not spend time educating about it. “We don’t want to focus on it. What we’re seeing is, the participants who know about it, gravitate to it, and the vast majority doesn’t pay any attention to it. It’s a very small percentage using it and they tend to be the highly comped people. When we do employee education meetings, we include it in a slide, but we don’t make a big deal about it; that’s been our tactic.”

Other Approaches
Simply put, the Roth versus pre-tax decision can be thought of as the second step in a retirement planning discussion, says Maria Bruno, a Roth expert at Vanguard. “It’s part of the implementation—the where and how,” she says. The first step employees must take is deciding whether to participate in their work-sponsored plan. Once that decision is made, the next logical step is to decide whether they want a Roth or traditional plan. “It’s right up there with which investments to select,” she says.

Ratay’s colleague, Dan Peluse, Corporate Retirement Director at Morgan Stanley Smith Barney, contends that more participants would benefit from it if they understood it. “That’s where we’re missing the boat,” he says.

E. Thomas Foster, The Hartford’s national spokesperson for qualified retirement plans, agrees that education is key—and it’s not just important for participants.

“Advisers need to get the basic components across to participants. It’s their job and, if they don’t feel comfortable [with the task], they have experts to help them,” says Foster. “Don’t hold back on delivering a message just because you don’t feel comfortable with it. There are a lot of complex moving parts, but just focus on the basics.”

He added that many advisers don’t typically like to venture outside of their comfort zones and prefer to discuss matters they feel completely knowledgeable about, which might not include Roth plan features or benefits. “You need to understand where your resources are. If there’s something that might help a client, we should be using all tools available to us.”

If the nuts and bolts of a Roth 401(k) plan are described, and a participant is still confused, Foster suggests using tools. “There are several online tools that participants can use in order to see their options; advisers should have these tools with them when going into educational meetings.” Minds have a hard time grasping the mathematics, he says, but online calculator tools can be a big help.

“We don’t want to get involved in ‘paralysis by analysis,’ but at least give them the option. If you don’t educate them on the Roth option, you’ve taken away a choice that everyone in a 401(k) should have. It might be another level in need of explanation, but that’s our role,” says Foster.

Automatic Roth?
Maybe there is another way to look at the Roth option. Right now, it seems that the general consensus is to have it in the plan for those participants who already know about it and want it, and let everyone else stick with the status quo 401(k).

Ratay would remind advisers in this camp that there are people who would benefit from the Roth option, because if there weren’t any possible beneficiaries, it wouldn’t exist and no one would be using it. He believes that the problem is nailing down exactly who it is that can benefit the most from investing in a Roth 401(k) and building up from there.

“If there is a group that has easily recognizable benefits from a Roth, maybe we can auto-enroll them into it rather than the traditional?” Ratay asks. He says that, if a conclusive study were done that proved people younger than 30, for instance, are nearly guaranteed to benefit from a Roth, the industry would then boost its pitch of the Roth 401(k). As far as he knows, such a study has not been done, however.

“If you make it optional, you won’t get the people who would benefit. The best trends that have come out of the PPA of 2006 are automatic features. You don’t like forcing anyone into anything, but that’s the only way to drive results in participant-directed plans,” Peluse adds.

Whatever the approach, Foster believes that it will still take a while for the Roth option to gain popularity but, he says, as the tax debate in the U.S. continues to get more attention, more participants will start to see the possible implications of higher taxes in the future. —Nicole Bliman

5 more ongoing 401(k) plan myths debunked

By Brian H. Graff
February 17, 2012

ASPPA CEO and executive director Brian H. Graff's busy week also included a speech at the Congressional briefing on Fiscal Reform and the Future of Lifelong Savings, hosted by the Aspen Institute Initiative on Financial Security. Here are his thoughts on the five biggest myths facing retirement savings:

We all agree that our goal should be to increase the number of workers saving for retirement, and the amount these workers are saving. The question is how do we get there in the most efficient and effective way. An enhanced Saver’s Credit would help lower income workers already participating save more, but by itself it will not substantially benefit those workers who are not covered by a plan and not saving in the first place.

What we know works is automatic enrollment in a workplace retirement plan. Moderate income workers are fifteen times more likely to save when covered by a 401(k) plan then when their only option is to save on their own in an IRA. So the policy objective should be how to increase the availability of retirement savings plans at work.

The current tax incentives encourage employers to adopt a retirement plan such as a 401(k) plan and encourage employees to save in these plans. Congress saw fit to provide certainty about the availability of these tax incentives when it overwhelmingly passed the Pension Protection Act in 2006 with bipartisan support. These incentives have been extremely effective at providing retirement savings to tens of millions of American workers.

The first step in securing future retirement security is to do no harm to what has been working very well. Some proposals that have been raised in the context of deficit reduction or tax reform would seriously hurt coverage and reduce the level of retirement savings across income groups. Small businesses would be hurt the worst.

Proposals currently under discussion –whether slashing the contribution limits, reducing tax incentives, or turning the current year’s exclusion into a credit – would discourage small business owners from setting up or maintaining a workplace retirement plan. That’s the exact opposite of what needs to be done.

There are some persistent, in fact I would say dangerous, myths that fuel these misguided proposals.

Myth#1: Incentives for retirement savings are tax expenditures
Incentives for retirement savings do not belong in the same category as most other deductions or exclusions classified as “tax expenditures”. Unlike deductions for mortgage interest or charitable contributions, which are permanent deductions, the incentives for retirement savings are just a deferral. Contributions (and earnings) are taxed at ordinary income rates when distributed from the plan. By ignoring the present value of future taxes paid on those distributions, the revenue that appears to be gained in the budget window from cutting retirement savings incentives is an illusion.

In fact, a study by two former Joint Committee on Taxation staffers showed the true present value cost of 401(k) incentives to be close to a third of the cost reported by Treasury. Reduced contributions today mean lower revenue outside the budget window, when there will be less retirement savings to be withdrawn and taxed. In other words, bad math leads to bad retirement policy.

Myth #2: Current tax incentives have not worked to encourage workplace savings.
Coverage statistics based on all workers are used to allege that current tax incentives have failed, but the relevant facts show otherwise. The current incentives under the Code and ERISA are targeted at full-time workers, and have been very successful at extending coverage to the full-time workforce. Bureau of Labor Statistics data shows 78 percent of all full time workers have access to a workplace retirement plan, with 84 percent of those workers participating.

Current law provides for the exclusion of part-time workers and it is simply unfair to judge the 401(k) system for what current law provides. 80 percent coverage of full-time workers is a success story.

Myth #3: The current tax incentive is ‘upside down’.
This myth arises from a failure to understand how the incentives for workplace retirement plans really work. Nondiscrimination rules require plans to satisfy proportionality tests to make sure that retirement plan benefits don’t discriminate in favor of the highly paid. Further, current law already has a $250,000 cap on the amount of compensation that can be considered in determining benefits.
I am not suggesting that the mortgage deduction should only be available to highly compensated taxpayers if they can prove non-highly compensated people in their office also benefit. But that’s what would happen if you applied the same retirement plan nondiscrimination standards to those other tax incentives.

The result of these nondiscrimination rules is the current tax incentive for defined contribution plans is more progressive than the current income tax system itself. Based on an analysis by a former JCT economist, taxpayers making less than $50,000 pay only 8 percent of income taxes, but receive 30 percent of the tax incentives for defined contribution plans. Households making less than $100,000 pay 26 percent of income taxes, but get over 60 percent of the benefit of this tax incentive. By contrast, households making more than $200,000 pay 52 percent of all income taxes, but receive only 11 percent of retirement plan tax incentives.

Over 60percent of a tax incentive going to workers that pay less than 30 percent of income taxes is not up-side down. It is very much right-side up.

Myth #4: Small businesses will sponsor retirement plans without an appropriate tax incentive.
The current year’s tax savings is a critical factor – often the only factor – supporting a small business owner’s decision to put in a plan. That is not to say that small business owners are selfish, or don’t want to help their employees save for retirement. However, most small business owners are short on cash. To put in a plan, they need to figure out how to pay for it.

They especially these days use the savings generated from the retirement plan tax incentives to help pay for contributions required by the nondiscrimination rules like a match. Reducing the incentive literally reduces the cash the small business owner has to work with. Reduced incentives will mean fewer plans, and lower employer contributions for those plans remaining.

Myth #5: It doesn’t matter if a new tax structure causes employers to terminate plans, because “re-engineering the tax incentive will lead more workers to save on their own."

Truth is, the only way we have ever gotten working Americans to save for retirement is through employer-sponsored retirement plans. Over 70 percent of workers making $30,000 to $50,000 contribute when covered by a plan at work. By comparison, less than 5 percent of workers at the same income levels save on their own in an IRA when there is no workplace plan.

Changing the exclusion to a credit will never make up this dramatic difference in savings rates. Increasing plan coverage is a much simpler task with more certain results.

The key to promoting retirement security is expanded workplace savings. Reduced incentives for small business owners to sponsor retirement plans would be a big step in the wrong direction, and would not produce the long-term savings needed to balance the nation’s budget. We need to focus on proposals like the auto-IRA bill offered by Mr. Neal to bring workers into the workplace saving system. The deferral nature of the current tax incentives means today’s tax break is tomorrow’s tax revenue. Let’s build the system up – not tear it down.

Secret to a 401(k) Plan’s Success: The Income Replacement Ratio

Determine whether employees are on target to meet their retirement needs

Sponsors of defined contribution retirement plans often encounter the problem of how to measure the success of their plan in meeting the future needs of their employees. As part of offering a retirement plan, they need a gauge of results.

Many measurements can be used to give a plan sponsor some guidance:

  •  The most popular of these is probably participation rate, calculated by dividing the number of employees making payroll deduction contributions to the plan by the number of employees eligible to contribute. For example, if an employer has 100 eligible employees and 70 of them are making contributions to the plan from their paychecks, the plan’s participation rate is 70 percent.
  •  Another popular metric is average deferral rate. Based on participants who are making deferrals to the plan from their paychecks, this metric quantifies the average percentage of compensation that each person contributes.
  •  Yet another measure is designed to gauge participants' diversification among investment asset classes such as stocks, bonds and cash equivalents. By tracking the percentage of participants that are using more than three investment funds focused on distinct asset classes, or a balanced allocation fund (such as a lifestyle or target-date fund), the metric measures how well diversified the plan participants are as a group.

All these measurements provide some indication of how the plan is performing. In each case, the higher the percentage, the more advantageous it is for the plan and the participants. A greater percentage of employees contributing at higher deferral rates, and being well diversified among the investment offerings over the long term, should yield higher account balances at lower risk levels. In general, this should lead to better retirement outcomes.
owever, none of these metrics captures what most plan sponsors are trying to determine—what percentage of the employee population is on target to meet their retirement needs. This is a much more difficult number to assess, which is probably why many plans focus on the above statistics, which are relatively easily attained.

Income Replacement Ratio
There are a number of challenges in determining the percentage of participants who are on track for meeting their retirement savings goals. For instance, the savings goal for one person can be differ greatly from the goal of another. Clearly, the savings needed for a person who intends to retire early and travel the world are very different from those of a person who does not intend to ever fully retire.
Nevertheless, an important metric used to help determine if a person is on track for adequate retirement savings is the income replacement ratio.

Most retirement experts counsel their clients that a person needs to have income in retirement that replaces between 70 percent and 80 percent of their final year’s salary. This amount represents the income necessary to maintain the standard of living in retirement that they enjoyed while they were working. While it might not be true for all employees, it is assumed that a person will require less income in retirement than during employment. Daily commuting costs and other work-related expenses might be reduced, as might taxes and housing expenses.

Replacement income comes from many sources, including Social Security, the current retirement plan, retirement plans from previous employers and other savings. For the purpose of determining the percentage of employees who are on track with their retirement savings, targeting 75 percent of the person’s projected final year’s compensation as the replacement ratio is reasonable.

No plan sponsor, however, is able to capture all of the potential replacement income sources for all of its employee participants in the plan. For the purpose of measuring plan success in meeting participants’ targeted replacement ratio, the calculations focus on the accumulations from employer and employee contributions to the retirement plans offered by the plan sponsor as well as assumed Social Security payments.

How Are Calculations Performed?
The calculation of a participant’s replacement ratio requires some indicative census data (date of birth, annual compensation), some current plan data (account balance, deferral percentage, asset allocation) and some assumptions for the future (age at retirement, future increases to compensation, inflation rates, future returns on investments).

In most cases, these calculations can be provided by the plan recordkeeper. Many recordkeepers have systems to perform this computation and hold the current plan data. In addition, depending on the agreement with the plan sponsor, the recordkeeper might be receiving the necessary census information with each plan remittance. If not, the plan sponsor must produce a file with the census information in order for the recordkeeper to provide the projections. Using this data, along with an agreement on the assumptions to be used, the recordkeeper should be able to project a future account balance based on historic rates of return for the investments being used by each participant.
Because of the unpredictability of financial markets, a recordkeeper with a robust system will run multiple iterations of these projections. Different investment return scenarios (i.e., so-called "Monte Carlo simulations Provide a range of potential outcomes for each participant. Having performed these simulations, the recordkeeper will compute the percentage likelihood for each participant to meet his or her replacement ratio.

Translating that into a rate of participants on target for meeting their retirement savings needs, the recordkeeper typically will indicate what portion of the population has a 100 percent chance of reaching the 75 percent replacement income target. Although it is not used as standard industry term, this can be called the plan’s “success ratio.”

With this information as a baseline, the plan sponsor can set in motion steps to improve this metric. The plan sponsor might undertake an initiative to increase the participation rate or the average deferral percentage. Working with the recordkeeper, the plan advisor or both to design a campaign targeting specific groups of individuals who might not be participating or who might be contributing very small amounts, the plan sponsor might be able to enhance these statistics. An improvement in these numbers is likely to improve the plan’s success ratio.
In addition, plan sponsors who are considering an analysis of their plan’s success ratio must take into account which members of the employee population have the most critical need to meet the retirement targets. While ideally all employees will accomplish their retirement savings goals, plan sponsors might choose to focus more attention on the longest-tenured employees or the ones who will be longest-standing, assuming that they remain with the employer until retirement age. These will likely be the most loyal to the organization and those most likely to achieve their savings needs.

It is more challenging to design a retirement program to meet savings goals for an employee who will be employed by the organization for fewer than 10 years. These employees are likely to have savings in retirement plans from previous employers, which will add to their overall replacement income. As you review your plan success statistics, it is important to keep this in mind.

Next Steps
Plan sponsors should ask whether their plan recordkeeper can provide them with these plan statistics, particularly a calculation of the percentage of participants who are on track to meet their replacement ratio. While most have the capability to project an individual participant’s replacement ratio, they might not have the capability to aggregate the numbers on a planwide basis. But it is still worth asking.
Armed with this information, plan sponsors can be more aware of how well their plan will meet the needs of participants. They will have concrete information that can drive communication initiatives to improve the plan’s numbers and will be much better informed about the plan's overall success

Five steps that can improve monthly income in retirement

 Lisa Gillespie
April 18, 2012

Working A ericans households probably will experience a potential income drop of 28  i  retirement, and 38% retiree households report not having sufficient enough income to cover monthly expenses. This is according to new research from Fidelity today that shows retirement income gaps could force significant sacrifices among workers retiring tomorrow and in 50 years.

The Retirement Savings Assessment, the first industry analysis that provides actionable and quantifiable steps across three generations that quantifies the potential monetary benefits of five straight-forward steps — such as adjusting asset allocation and annuitizing retirement assets.

“While there is evidence that Americans are saving more for retirement, our analysis finds that they need to take additional steps to prepare for the future and take better control of their personal economy,” says Kathleen A. Murphy, president of personal investing, Fidelity Investments. “The study underscores the importance of early engagement in the retirement planning process and the potential impact these five actionable steps can have in helping address the retirement income gap that many Americans are facing today.”

  1. Adjusting asset allocation. Twenty-one percent of those surveyed are invested too conservatively with limited exposure to stocks, based on their current age and planned retirement date. This highlights how many investors have improperly allocated their assets and are losing the long-term earnings potential of stocks.’
  2. Increasing savings. It may sound like a no-brainer, but respondents indicate they saved an average of $3,500 in 2011, with most still not fully benefiting from the tax-advantaged/deferred savings potential of their workplace or individual retirement accounts. This is especially important for younger investors, who have a longer timeframe and more potential for their money to grow.
  3. Adjusting retirement date. The average planned retirement age is 65, but delaying full retirement by a couple of years or continuing to work part-time can help preserve assets so they have a better chance of lasting through retirement. This tactic can be especially powerful for boomers, many of whom Fidelity found are facing a potential drop in retirement income. Recent studies have shown this may already be happening.
  4. Annuitizing retirement assets. Fewer than one-fifth of retirees are using an annuity to create a guaranteed lifetime income stream to cover essential expenses, but it can be an important tool to help ensure savings last through retirement – particularly if a retiree lives beyond his or her mid-eighties.
  5. Tapping into home equity. Seventy-two percent of respondents own a home and one-third of homeowners have no mortgage. Through downsizing and expense reduction, this home equity could be harnessed to generate income in retirement.


Fee disclosure steps for plan sponsors

The July 1 deadline for 408(b)(2) disclosures for plan sponsors is now on the horizon; here are five ways to properly communicate, explain fees and meet participant deadlines

By Andy Stonehouse
April 10, 2012

The impending deadlines for plan sponsors to begin officially disclosing fees in the 401(k) space are approaching rapidly. America’s major retirement plan providers say they’ve been working on disclosure arrangements for years – evidenced by a litany of white papers and preparation guides available online. But are plan sponsors ready to meet the letter of the law for the July 1 408(b)(2) >  

1. Know who is providing services to the plan (who is a covered service provider), including a r cordkeeper, advisor, lawyer or auditor.
Andy Miller, assistant director of retirement and investor services at the Principal, says 408(b)(2) necessitates clarity on all the various parties involved, from third-party administrators to law firms. “We’re getting a lot of questions from financial professionals on these issues,” he notes. “But we as a company began getting this disclosure information together in November so I feel that for the most part, people are ready.”

Want the official version? EBSA’s Fact Sheet <>  is succinct on its statements on the scope of service providers, and the timing:

  • Information required to be disclosed by a covered service provider must be furnished in writing to a responsible plan fiduciary for the covered plan. The rule does not require a formal written contract delineating the disclosure obligations.
  • CSPs must describe the services to be provided and all direct and indirect compensation to be received by a CSP, its affiliates, or subcontractors.
  • "Direct compensation" is compensation received directly from the covered plan. "Indirect compensation" generally is compensation received from any source other than the plan sponsor, the CSP, an affiliate, or subcontractor.
  • In order to enable a responsible plan fiduciary to assess potential conflicts of interest, CSPs who disclose "indirect compensation" also must describe the arrangement between the payer and CSP pursuant to which indirect compensation is paid. CSPs must identify the sources for indirect compensation, plus services to which such compensation relates.
  • Compensation disclosures by CSPs will include allocations of compensation made among related parties (i.e., among a CSP's affiliates or subcontractors) when such allocations occur as a result of charges made against a plan's investment or are set on a transaction basis.
  • CSPs must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service "package" or contract.

2. Review your fees and services, document actions and decisions and keep in your fiduciary file.
“This is critical,” Miller says. “You have to look at questions such as, ‘are these fees reasonable for the services provided?”
Attorney Ary Rosenbaum, as part of a look at major misconceptions plan sponsors have about the regulations <> , noted: “Too many plan sponsors think that the fee disclosure form they get from their provider is a form they need to put in the back of the drawer. It doesn’t; it actually adds greater weight to the fiduciary responsibility.”
A useful overview of fees and documentation <>  has been collected by The Standard in its Plan Sponsor Fee Disclosure, which offers the following requirement suggestions:

  • Be provided in writing, but do not have to be in a written agreement
  • Include a description of the services provided
  • State whether services will be provided as a fiduciary, or as a registered investment advisor, if applicable
  • Describe the direct compensation the service provider expects to receive (in either dollar amount or as a formula) and the manner of receipt (billed or deducted from plan accounts or investments)
  • Include description from recordkeepers of various fees associated with the investment options, a requirement that may be satisfied by using fund prospectuses
  • Describe the indirect compensation the service provider expects to receive, the payer of the indirect compensation and the arrangement between the payer and the service provider
  • Describe any termination service charges
  • Reveal if service providers are providing recordkeeping services to the plan and the compensation attributable to such services, even if no explicit charge is identified for recordkeeping

3: Determine who you need to provide disclosure to
Then assess:
1.    How to communicate with each participant
2.    Do you meet electronic delivery rules or will you do hard-copy mailings?

Jim Douglas, an ERISA attorney with Transamerica Retirement Services, suggests paying careful attention to the DOL’s Technical Release 2011-03R , the most recent statement on electronic filing, but he also urges caution before embarking on a full electronic route.
“You definitely have to be able to show that the recipient has evident access to the details of the plan, be that an active e-mail account or access to a company intranet site,” he says. “You also need affirmative consent, so you’ve got to ask people which form they would prefer, or both.”

Douglas also suggests these upcoming transitional months may be a good educational opportunity for plan sponsor clients.
“In this day and age, many people are open to receiving these kinds of details in an e-mail, so ask them, ‘did you know this information is available through e-mail, which could be more easy for you?”

4. Understand how participants are paying fees:
Investment expense, deduction, asset charge or participant-level fees, such as loans

“These can also be tricky,” Miller notes. “Clarifying if those are per-head fees or asset-based fees will be important, as they’ll need to be reported on a quarterly basis. The individual participant-level fees, like loans from their accounts, also need to be made available.”

This is a portion where, depending on your company affiliation, a site such as the Principal’s Participant Disclosure Regulation Resource Center <>  can provide specific information. Miller mentions that the Principal have already ramped up their summary of fees with an online disclosure landing page where plan sponsors can find all that data, as well as videos and white papers: other providers such as Vanguard  and Securian have equally detailed information.

5. Know your deadline for participant disclosure
July 1: Deadline for plan sponsors to receive fee disclosure data from all covered service providers.
August 30: All 401(k) plan sponsors must disclose most plan facts and investment fees.
November 14: All 401(k) plan sponsors issue their first quarterly fee disclosure showing the fees deducted from individual participant accounts for the third quarter

6. Know what must be disclosed
It sounds like an no-brainer. But if plan sponsors are confident they know what must be disclosed, they can reiterate in plain language what participants can expect to see in their plan statements.
According to Drinker Biddle <> , a benefits and executive compensation law practice, there are three basic disclosure requirements: services, status, and compensation.

The first requirement is that the service provider provide a description of its services to the plan. The regulation requires that the disclosures be made to the “responsible plan fiduciary,” who is the person with the power to hire and fire the service provider on behalf of the plan. For small plans, that is typically the plan sponsor, often represented by the president of the company (or other key officers, or an owner or partner). For mid-sized and large plans, it is usually a plan committee. The description should have enough detail that you can determine if the provider is delivering the services you expect and need for your plan. If you need more information, ask for it. In the preamble to the regulation, the DOL makes a point of saying that fiduciaries are responsible for asking for additional information if they need it to properly evaluate the services and the compensation.

The second disclosure requirement is whether your service provider is serving as an ERISA fiduciary and/or as a registered investment advisor. If the service provider “reasonably expects” to be a fiduciary to your plan, it must affirmatively say that it is. For example, if an advisor is making recommendations regarding the selection and monitoring of the plan’s investments, it is most likely serving as a fiduciary to the plan and, under the 408(b)(2) regulation, must tell you in writing that he is.

On the other hand, if a service provider is not acting as a fiduciary, it is not required to state that. Thus, if a provider is silent on the issue, you can assume that it is not acting as a fiduciary. This raises an issue: if you believe that the advisor is a fiduciary, or if you expect the provider to serve the plan in that capacity, you should request written confirmation of fiduciary status. Similarly, if a provider is acting as an RIA (i.e., a registered investment adviser), the provider must affirmatively state that fact in writing.

The third disclosure is compensation. Compensation is defined very broadly. It is anything of monetary value, such as gifts, awards, trips, etc. (However, non-monetary compensation totaling $250 or less does not need to be reported to you.) It also includes certain payments to affiliates or subcontractors of your provider (that is, if the payments are transactional, like commissions, or if they are charged directly against the investments). In the preamble to the regulation, the DOL makes a point that, in addition to determining the reasonableness of compensation, those payments may indicate conflicts of interest that the fiduciaries must evaluate. Compensation is divided into four categories: direct, indirect, related parties and termination.