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Sponsor News - October 2012

Providing clarity to your 401(k) participants: A story of disclosure

By Andy Stonehouse
April 12, 2012

Ask parties on some different ends of the retirement industry food chain about fee disclosure regs and you’ll get some very different opinions – ranging from a sense of satisfaction to unfettered panic.

A common thread emerges, however: As the days get closer to the July 1 deadline for service providers to offer disclosures to plan sponsors and the Aug. 31 deadline for initial notices to plan participants, the pure efficiency of offering electronic options is still a hotly debated topic.

Chad Larsen, president of Moreton Retirement Partners in Denver, Colo., gets to confront the more challenging end of the spectrum, the small employers who have been left largely to their own devices to examine, synthesize and act on the EBSA regulations. Larsen handles both ERISA and non-ERISA plans with more than 100 small companies, and he’s working hard to minimize the chaos.

“I’m still amazed how many employers don’t have anything prepared,” Larsen notes. “Our firm has had about three years in preparation for this and we’ve spent a lot of time prepping our employers. Overall, I think the regulations will be very beneficial – we’ve always had our own written disclosure statements, and that’s really validated our agreements – but they’re also going to be very cumbersome.”

Larsen said the costs involved are a major part of the problem, but the biggest issue will be participants themselves, who will be loaded down with information they may not be able to process any more easily than the already complicated and sometimes disconnected relationship they have with their 401(k) accounts.

“I simply think most participants won’t understand it, and that’s where the disclosure regulations missed their mark,” he adds. “Just getting a 20-page disclosure document isn’t going to make you walk away any more informed. And it really is going to add costs to the administration of plans; I don’t think those expenses have been factored into the fees.”

Jim Douglas, ERISA attorney with Transamerica Retirement Services <> , says the move to more electronic communications is simply part of a broader move in the business, though it still will require a bit of a learning curve for many involved. As will the last stages of the disclosure process itself.

“For the independent advisor, I would say that you need to take some extra time to educate yourself before the deadlines approach,” he says. “While there are lots of resources available out there for advisors who are affiliated with firms, it’s certainly going to be tougher for those independents.”

He suggests independents talk with their recordkeepers and their TPAs to figure out the details and make an informed decision on the best way to present the required information.

“For plan sponsors, I don’t think it will be all that different than what we’ve been doing,” he adds. “Personally, we’re using the same documents and we haven’t had to disclose anything that we didn’t in the past. The industry always wanted to provide more information; I think it’s a good thing to have a consistent approach across the board.”

Participant Fee Disclosures for Brokerage Windows   

Final Rules – DOL Reg. § 2550.404a-5     Field Assistance Bulletin 2012-02, Q&A #13     

[§ 2550.404a-5(c)(3)(ii)]     General Plan Information – Initial/Annual Disclosure:
· Description of any brokerage window that enables participants to select investments other than DIAs, sufficient to enable individuals to understand how the brokerage window works, including:
o How/to whom to provide instructions.
o Account balance requirements.
o Restrictions/limitations on trading, if any.
o How brokerage window differs from DIAs.
o Contact information.
· Sufficiency of description depends on facts and circumstances.

Individual Expenses – Initial/Annual Disclosure:
· Explanation of any fees or expenses that may be charged against a participant’s account on an individual basis, including:
o Fees/expenses for starting, opening or initially accessing the brokerage window,
o Fees/expenses for stopping, closing or terminating access to the brokerage window,
o Ongoing fees/expenses necessary to maintain access to the brokerage window, including inactivity and minimum balance fees,
o Commissions/fees charged in connection with the purchase/sale of a security, including front or back-end sales loads.
· Does not include fees or expenses of the underlying investment selected by the participant (such as 12b-1 or similar fees included in the expense ratio of the investment).
· In the event fees or expenses are not known or readily ascertainable by the plan administrator, must provide:
o General statement that such fees exist and may be charged against the individual account,
o Directions as to how to obtain information about such fees in connection with any particular investment,
o Advise participants to ask the brokerage window provider about any fees (disclosed or undisclosed) associated with the purchase or sale of a particular investment.

Individual Expenses – Quarterly Disclosure:
Include a statement of the dollar amount of fees and
expenses actually charged during preceding quarter in connection with the brokerage window, including:
· Description of services,
· Clear explanation of charges (i.e., $19.00 brokerage trades, $25.00 minimum balance fee).

In addition, FAB 2012-02, Q&A # 30, added the new requirements for brokerage windows or similar arrangements where a large number of investment options are available to participants. The DOL asserts that plan fiduciaries must take steps to ensure that participants are made aware of their rights, responsibilities and applicable fees to be able to make informed decisions about the management of their individual plan accounts. Though plans are not required to have a particular number of DIAs, the DOL warned that failure to designate a manageable number of investment alternatives raises ERISA fiduciary questions.
FAB 2012-02, Q&A # 30, asserted that an ERISA fiduciary obligation arises if, through a brokerage window or similar arrangement, non-DIAs are selected by significant numbers of participants. According to the guidance, the plan fiduciary must examine these alternatives and determine whether one or more such alternatives should be treated as a DIA under the 404a-5 regulation. Until further notice, the DOL established the following rule for plan administrators where a plan’s investment platform holds more than 25 investment alternatives. All such alternatives are not required to be DIAs IF:
· Required disclosures are provided for at least 3 of the investment alternatives;
· The 3 investment alternatives meet the “broad range” requirements of the ERISA § 404(c) regulation; and
· Required disclosures are made with respect to all other investment alternatives in which the following number of participants are invested under the plan:
o At least 5 participants, or
o For plans with more than 500 participants, at least 1% of all participants

No doubt these “last minute” rules have surprised many plan administrators and service providers.‡ As compliant disclosures for brokerage window fees are being finalized, plan administrators and service providers should seek to demonstrate that initial disclosures have been prepared based on a reasonable interpretation of the 404a-5 regulations, consistent with the good faith standard included in FAB 2012-02, Q&A # 37.
    For more information about fee disclosure requirements, see our prior newsletters about retirement plan fee disclosures at

Retirement Plan Service Provider and Investment Fee Disclosures: More Work To Be Done

6/18/2012John H. McKendry </Professionals/Attorneys/John-H-McKendry>  

U.S. Department of Labor (DOL) regulations require that retirement plan service providers whose fees are paid directly or indirectly from a plan make disclosures of their fees by July 1, 2012. Then, plan sponsors must make disclosure of plan level and individual investment fees and performance to plan participants by August 30, 2012.

Evaluation of Service Provider Disclosures Required

Plan sponsors cannot simply review and file the provider disclosure. The prohibited transaction rules require that the fees be reasonable. In addition, the regulations require that the provider disclose its fiduciary status. To fulfill their duties, plan sponsors must perform at least the following four tasks:
1.    Confirm that all service providers have made the required disclosures. If a service provider that receives at least $1,000 in fees has not made a disclosure, the plan sponsor must demand a disclosure within 90 days and, if it is not provided, notify the DOL of the failure. The plan sponsor should also review the disclosure to confirm that it meets all of the regulatory requirements and provides sufficient information for the sponsor to determine if the fees are reasonable for the services provided. If it does not, the plan sponsor should request the items needed for complete disclosure. If the provider does not provide any requested disclosures, the sponsor may have to terminate the relationship.
2.    Determine the provider’s fiduciary status. Particularly if the provider is receiving fees related to investment advice, there is no legal or practical reason that the provider should not have acknowledged its status as a fiduciary. If the provider attempts to avoid that status, the plan sponsor should evaluate whether the relationship should continue.
3.    Compare the disclosed fees with contractual or promised fees. The fees should not be different from those disclosed in the provider’s service agreement or be used to secure the business. If the fees paid exceed the amount agreed upon, the plan sponsor should request a return of the excessive fees.
4.    Determine whether the fees are reasonable. The prohibited transaction rules require that a provider’s fees be reasonable for the services provided. The preferred method to make this determination is to engage an independent benchmarking service to compare the fees charged in light of the services provided against all plans of similar size and characteristics.

Unanticipated Disclosure Requirements for Brokerage Windows

The original investment fee disclosure requirements applied largely to “designated investment alternatives.” Many plans include an opportunity for participants to leave the designated investment menu and select individual investments through brokerage accounts. Most observers believed that the investment specific disclosure requirements did not apply to these brokerage windows.

The DOL turned these assumptions on their head in a series of Questions and Answers issued on May 5, 2012. Q&A 13 requires a general disclosure of basic information regarding the brokerage window – how the window works, to whom to give investment instructions, any account balance requirements, trading restrictions and whom to contact with questions.

At the fee level, the description must disclose: any start-up fee; ongoing fee or expense; and commissions charged for purchases and sales of securities including sales loads. The statement should advise participants to ask the provider about all investment related fees. Moreover, the participant must be provided a quarterly statement of fees actually charged against the account for the preceding quarter. Q&A 30 indicates that any window that offers more than 25 investment alternatives must provide the designated investment alternative fee information for: (1) at least three investment alternatives: equity, fixed income and balanced; and (2) every other investment in which at least the greater of five participants or 1% of all participants are invested.

Because these disclosures are required by August 30, 2012, plan sponsors should act immediately to:
1.    Identify any brokerage windows provided;
2.    Contact the broker that provides the window requesting the information necessary to meet the general disclosure requirements;
3.    Work with the broker to identify the three investment alternatives that will be utilized to meet the detailed fee disclosure requirements; and
4.    Work with the broker to identify those investments in which the greater of five participants or 1% of all participants were invested and to collect the information needed to satisfy the detailed fee disclosure requirements.

A failure to meet or review the disclosures not only risks a violation of the prohibited transaction requirements but also claims of a breach of fiduciary duties by the DOL and plan participants. A plan sponsor’s work must begin and be completed to mitigate these risks.


Requirements for Distributing Participant Disclosures

July 18, 2012
The purpose of this alert is to outline the required format and the allowable methods of delivery for the participant disclosures under ERISA section 404a-5.

Format of the Disclosures
In order to satisfy the requirements of 404a-5, the Plan Administrator must deliver a consolidated fee disclosure package to al  plan account holders and employees eligible to participate in the plan. As part of the disclosure package, the Plan Administrator must deliver a comparative chart of investments (see sample <> ) offered to participants (also known as “Designated Investment Alternatives” or “DIA”). If there are non-DIA investments offered in your plan, the Plan Administrator must include the additional investment information along with the fee disclosure package. For example, a plan offering several self-directed brokerage account options would need to collect information about each brokerage option and then include this information as part of their overall participant fee disclosure package.

Delivery Requirements – Paper or Electronic
The disclosures may be delivered either electronically or in paper form. In order for electronic delivery to comply with the DOL’s requirements, there are several conditions that must be met. In Technical Release 2011-03R the DOL provided clarification with regard to the requirements for electronic delivery of these disclosures. Despite some useful clarifications, the DOL rules are not as supportive of electronic disclosure as many had hoped.

In general, disclosures required under Title I of ERISA must be furnished using “measures reasonably calculated to ensure actual receipt of the material.” The safe harbor for electronically delivery is limited to individuals who:
*    Have the ability to effectively access documents furnished in electronic form at work and with respect to whom access to the employer’s electronic information system is an integral part of their duties.
*    Other participants (e.g., retirees, former employees, and active employees who do not use a computer as an integral part of their duties), beneficiaries (e.g., surviving spouse, alternate payees), and other persons entitled to disclosures under Title I of ERISA who affirmatively consent to receiving disclosures through electronic media in the manner prescribed by the regulation.

In order to satisfy the affirmative consent rule, the participant must voluntarily provide an email address in response to a written request from the employer. The request must include a notice specifying that disclosures will be made electronically, instructions on accessing the information, identification of the information provided, the right to opt out of electronic communications, and an explanation that paper copies will be provided free of charge if opting out. This notice will need to be provided on paper. In addition, the participant needs to receive, on paper, an annual notice regarding electronic communications from the plan.

The annual notice may be sent through email if the participants’ electronic interactions with the plan are tracked and the participant has interacted electronically with the plan during the last year by confirming or updating their email address.

If a plan has individual brokerage accounts as part of its investment offering, the Plan Administrator will need to collect information about each brokerage firm and their respective fee schedule in order to comply with 404a-5. If a company does not provide email addresses to all account holders and employees who are eligible for the plan and a means for them to access their email at work as part of their job duties, that company is left with two options to deliver fee disclosure:
*    Mail or hand-deliver notices to all account holders and employees who are eligible for the plan requesting affirmative consent to receive fee disclosures electronically and then email them the fee disclosures assuming you received consent; or
*    Mail or hand-deliver fee disclosures to account holders and employees eligible to participate in the plan.
Sentinel will be developing a fulfillment service for those employers who do not wish to send the notices on their own. We will provide details of our solution along with pricing in a communication to our clients next week. We will be hosting a webinar on Tuesday, July 31st to provide more information on the participant fee disclosure rules <> .

What Small Businesses Should Look for in a 401(k) Plan

6 Questions to Ask a 401(k) Plan Administrator
By Melissa Phipps, Guide

"I get all worked up about 401k fees," says Greg Carpenter, founder and CEO of a company called Employee Fiduciary. The company administers 401(k) plans for small businesses. They can work with companies with five to 25,000 employees but, on average, their clients have about 20 to 25 employees. Carpenter says his company has a reputation for being and attracting "white-collar cheapskates," which in this case means people who want 401(k) fees to be as low as possible and completely transparent. (Transparency is clarity; meaning you don't need to be a financial whiz to know exactly what you are paying for.) He says employers should demand nothing less from their own 401(k) administrators.

Understanding 401(k) Fee Disclosures
As of July 2012, a new Fee Disclosure Rule was put in place by the Department of Labor. Known as Rule 408(b)(2), it requires 401(k) plan administrators to fully disclose their fees in a way that makes it easier for the plan sponsors, or employers offering 401(k)s, to understand what they are paying for. It's a step in the right direction, says Carpenter, but not necessarily enough. Business owners, and especially small business owners who don't have the same leverage that larger companies have when dealing with 401(k) plan administrators, still need to ask more questions about exactly where each dollar goes.

That means digging into expense ratios, the fees that you pay for mutual funds. Who gets each dollar your employees pay? And what about the share class? Even if the mutual fund being offered is a good one, there might be a cheaper version of it in a different share class.
"Fees matter," Carpenter says. "Over a long period of time even a quarter of a percent or less makes a huge difference in the value of the investment at retirement. The plan sponsor who has his or her eye of the ball needs to know this so they can make the best decisions about the employee's money."

Six Other Questions to Ask a 401(k) Administrator
What else should small businesses look for? Carpenter offers the six questions you should ask when considering a 401(k) plan:

How does the payroll work? Your business will have to share its payroll information every pay period. How does the plan administrator do that? While some businesses may have excellent controllers or payroll administrators who can handle anything that comes at them, others may have a simplified system. For those companies, it may be worth it to pay more for extra help with payroll.

How are you going to test it? The IRS has compliance tests to ensure that a 401(k) plan does not favor certain employees over others. How does that work? What needs to be done on the part of the employer?

Who takes care of the paperwork? As a 401(k) plan sponsor, you'll be faced with some pretty hefty paperwork. Does the administrator file government forms on your behalf?.

How do I communicate how the plan works? Most people don't know how to talk about money. Will you be responsible for explaining the plan to your employees, or does the administrator do that? Some plan administrators excel at employee communications.

How are you going to help me design this plan? Should you offer an incentive match? Allow 401(k) loans? Accept catch-up contributions? What is profit sharing? There are a lot of elements to a 401(k) plan. Find out whether the administrator will help you design your own plan. "Some providers will say here are three choices, choose one. Others will say you can have whatever you want," says Carpenter. Decide which option works best for your company.

How do I get your money out? What happens when an employee retires is one question. But what about before then? Will there be loans, hardship withdrawals? How do you do a rollover if an employee leaves or retires? What if someone leaves with $500 in the plan? These details will come up, so find out how to deal with them at the outset.

Small business owners who approach a vendor with these six questions will have a good start on getting a handle on their plan. If the vendor can't provide answers, it probably isn't the best choice. Carpenter has a stake in the game, but he recommends that employers shop around. Get a variety of recommendations. Start with small local companies. Ask around. Does your payroll provider have a recommendation? Maybe Vanguard knows of a good firm. Interview a large plan provider like Fidelity. Interview a variety of different sources and you will have a better chance finding the right administrator for your plan, and the right plan for your employees.

DC Plan Sponsors Should Focus More on Deferral Rates

August 13, 2012 ( - Other factors are more important to defined contribution (DC) plan success than fund performance, according to recent research.

A Putnam Institute research paper, “Defined contribution plans: Missing the forest for the trees?”, shows a number of variables are at work in determining plan effectiveness, including deferral rates and plan design, asset allocation, rebalancing behavior, and individual fund performance. Putnam contends that the industry would do well to bear in mind this hierarchy when considering ways to boost retirement preparedness.

“As we look at the progress participants are making toward securing a better retirement savings outcome, deferral rates are one of the most important factors to stress, whether in communication to participants about how to accumulate more wealth or in restructuring DC plans for better saving and investing success,” W. Van Harlow, Ph.D., CFA, director of research at the Putnam Institute, wrote in the paper.

While it is not surprising that if a person saves and invests more, he might be more likely to accumulate greater wealth, but the study found the size of the difference in terminal wealth can be dramatic. As an individual’s contribution increases from 3% of income to 4%, 6%, and 8%, the final balance after 29 years jumps from $136,000 to $181,000, $272,000, and $334,000, respectively.

Even a 4% deferral—which represents a 1% increase that does not take advantage of the plan’s full matching contribution—would have a wealth accumulation impact 30% larger than the “crystal ball” fund selection strategy, nearly 100% larger than the growth allocation strategy, and approximately 2,000% larger than rebalancing. “Putting deferral rate changes in these terms, the performance of underlying funds and rebalancing, in particular, appear to become far less meaningful when compared with the impact of higher deferral rates,” Harlow noted.
The study data suggest that focusing on helping eligible employees enroll and/or increase their deferrals into their DC plan is an effective way to help boost wealth accumulation potential. Therefore, Putnam says services such as auto-enrollment and auto-deferral increases are two critical best practices that plan sponsors should consider implementing.

According to the paper, a qualified automatic contribution arrangement (QACA) that increases an individual participant’s deferral rates from 3% to 10% by one percentage point annually—and then maintains a 10% deferral rate thereafter—would have roughly the same impact as an 8% deferral rate over the 29-year time frame employed in the study. “Clearly, auto-escalation features can play a vital role in helping secure substantially higher savings for plan participants, particularly the majority of savers who have historically tended to participate passively in their plans,” Harlow said.

The research paper is available at

IRS Stops Forwarding Letters for Missing Participants

September 4, 2012 ( - The Internal Revenue Service (IRS) issued Revenue Procedure 2012-35, IRB 2012-37, revising the scope of the IRS letter-forwarding program.

Revenue Procedure 2012-35 provides that the IRS will no longer forward letters on behalf of plan sponsors or administrators of qualified retirement plans or qualified termination administrators (QTAs) of abandoned plans under the Department of Labor’s Abandoned Plan Program who are attempting to locate missing plan participants and beneficiaries.

The agency noted that since its letter-forwarding program began, numerous alternative missing person locator resources, including the Internet, have become available to assist a plan sponsor or plan administrator in locating a missing participant or beneficiary owed a retirement benefit, enabling the program change.

This change affects retirement plan sponsors and administrators who are searching for plan participants or beneficiaries in order to correct failures that require payment of additional benefits in accordance with the Employee Plans Compliance Resolution System (EPCRS), as described in Revenue Procedure 2008-50, 2008-35 IRB 464. Accordingly, in future guidance on EPCRS, the IRS intends to provide an extended correction period for plan sponsors and administrators affected by this change in the letter-forwarding program.

Revenue Procedure 2012-35 applies to requests postmarked on or after August 31, 2012. Requests that are postmarked prior to that date will continue to be processed pursuant to Revenue Procedure 94-22, 1994-1 CB 608.