THE NEW FEE DISCLOSURE RULES Much to Do Before the Effective Date - - PowerPoint PPT Presentation

THE NEW FEE DISCLOSURE RULES

Much to Do Before the Effective Date

February 7, 2012

Participant-Level Fee Disclosures



New Department of Labor regulations require plans to periodically provide participant notices about fees paid by the plan

• Applies to participant-directed individual account plans, such

as 401(k) plans

• For calendar-year plans, the first participant notice is due by

August 30, 2012

3

Overview



Most of the new disclosures are required

• For calendar year plans, first notice is required by August 30,

2012,

• For any new participants, when they enter the plan, AND
• Annually thereafter

In addition, some types of changes to the annual disclosures require an interim notice 30-90 days before the change is effective



Other disclosures are required quarterly

• For calendar year plans, first quarterly notice is required by

November 14, 2012

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Timing



Participant fee disclosures may be distributed electronically under the general electronic delivery rules

• Work-related computer access, or
• Consent to electronic delivery



New electronic disclosure rules for participant benefit statements may be used for certain fee disclosure information

• Benefit statement may be made available through a secure,

continuous access website

• Participants must be provided with a notice that describes



The availability of the statements,



How the statements can be accessed, and



That participants can request a paper statement free of charge

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Electronic Delivery



Annually

• Identification of investment options, category of each investment, and

designated investment managers

• Detailed explanation of fees and expenses that may be charged
• Historical performance
• Appropriate benchmark comparisons
• Limitations on transfers into or out of each fund
• Directions to a website with access to more information
• Glossary of investment terms



Quarterly

• Dollar amount of fees actually charged other than through expense

ratios, with explanation of services provided

• Explanation that some fees were paid through revenue sharing

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Examples of Required Information

Annual Disclosures

• Plan-related information
• Expense
• Administrative (fee schedule)
• Individual (fee schedule if related information)
• Investment information

Annual Notice Disclosures

• Expense details
• Administrative (actual)
• Individual (actual)
• Plan administrator or administrator’s designee
• Notice can be provided via SPD and/or benefits statements

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DISCLOSURE CONTENT OVERVIEW

Quarterly Disclosures Who Provides Disclosure

Annual Notice

• Plan’s investment options
• Description of brokerage windows or other arrangements outside

the plan’s designated investments

• Any designated investment managers
• Procedures for participant-directed investment instructions
• Restrictions on transfers or changing investment elections
• Voting and tender rights associated with the investment options

(e.g., trustee will exercise all)

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REQUIRED INFORMATION

• A. Plan-level Information

Annual Notice

• Plan must give information on plan-level administrative expenses

and individual expenses

• Possible charges
• How allocated (pro rata, per capita, etc.)
• These are expenses paid directly by the plan/participant
• Do not include expenses “reflected in annual operating expenses
• f designated investment alternative”
• If fees are partially paid by revenue sharing, a statement to that

effect

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REQUIRED INFORMATION

• B. Expense Information

Annual Notice

• Fees for plan administration
• Legal
• Accounting
• Recordkeeping
• All fees that may be charged

to plan

• Amount of fees charged against

individual account (rather than to a plan as a whole) for . . .

• Plan loan
• QDRO
• Investment advice
• Brokerage windows
• Shareholder-type fees for

designated investment alternatives (loads, sales charges, redemption fee, etc.)

Individual

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Administrative

REQUIRED INFORMATION

• B. Expense Information

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Annual Notice

• Covered plan must provide investment disclosures to

participants if the plan has one or more designated investment alternatives

• Disclosures limited to designated investment alternatives
• Don’t include brokerage windows or investments purchased

through brokerage windows

• No requirement for mid-year update if information

changes

REQUIRED INFORMATION

• C. Investment Information (if required)

Annual Notice

• Must be furnished in a comparative format (DOL-provided mode is safe

harbor)

• The following information must be provided for each investment
• 1. Name of each investment option
• 2. Type or category of investment (e.g., balanced fund)
• 3. Performance data (calendar-year returns for 1-yr, 5-yr and 10-yr)
• 4. Comparison of returns to an appropriate benchmark over the same periods
• 5. Statement that past performance is not necessarily an indication of future

performance

• 6. Amount and description of shareholder-type fees (e.g., sales loads, surrender fees)

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REQUIRED INFORMATION

• C. Investment Information (if required)

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Annual Notice

• The following information must be provided for each

investment

8. Operating expenses as a percentage (e.g., expense ratio) 9. Operating expenses as a dollar amount per $1,000 investment

• 10. Purchase or withdrawal restrictions (e.g., round trip, equity wash)
• 11. Internet website address for specific investment information
• 12. Statement that fees and expenses are only one of several factors to consider
• 13. Statement that cumulative fees can substantially reduce growth of account
• 14. A general glossary of investment terms and website address providing the glossary

REQUIRED INFORMATION

• C. Investment Information (if required)

Annual Notice – Investment Details

• Fixed or stated return: Return and Term
• Statement if adjustment may occur
• Other
• 1-, 5- and 10-year average total return (or life of investment,

if shorter) ending on most recently completed calendar year

• Benchmark and 1-, 5- and 10-year performance

♦ Appropriate broad-based securities market index over the 1-year, 5-year

and 10-year periods

♦ Best practice: Use a widely recognized benchmark 14

PERFORMANCE DATA / BENCHMARKS

Annual Notice – Investment Details

• Special rules for employer stock, fixed-income

investment and annuities

• Money market funds and stable value funds are not

considered fixed-income investments

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PERFORMANCE DATA / BENCHMARKS

Annual Notice – Investment Details

• Fixed return investments
• Amount and description of any shareholder-type fees
• For each investment without fixed return
• Amount and description of each shareholder-type fee

and

• Total annual operating expenses of the investment

expressed as a percentage (e.g., expense ratio) and a $ amount per $1,000 investment

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INVESTMENT FEE INFORMATION

Annual Notice – Investment Details

• Fees charged directly against investment,

such as . . .

• Commissions
• Sales loads
• Sales charges
• Deferred sales charges
• Redemption fees
• Surrender charges
• Exchange fees
• Account fees
• Purchase fees
• Not included in fund’s annual operating expenses

17

INVESTMENT FEE INFORMATION

Annual Notice – Investment Details

• Different requirements for annuities and fixed income
• Glossary of terms, if not outlined on annual notice

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WEBSITE FOR ADDITIONAL INFORMATION

Quarterly Disclosures

At least quarterly, participants must receive a statement showing . . .

• Administrative expenses
• Dollar amount actually charged during the preceding quarter to participant’s account

for administrative services (various payees, trust, legal, etc., can be reported as one number)

• General description of services provided to participant or beneficiary for such amount
• If applicable, an explanation that some administrative expenses were paid from
• perating expenses of one or more designated investment alternatives (e.g., revenue

sharing)

• Individual expenses
• Dollar amount actually charged during the preceding quarter to participant’s

account for individual services (does not include charges allocated to whole plan)

• Description of services provided to participant or beneficiary for such amount

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EXPENSE DETAILS

Service Provider Fee Disclosures



Certain transactions involving a qualified retirement plan are explicitly “prohibited,” even if fair or favorable to the plan, unless there is an exemption



The DOL has issued new regulations making it a prohibited transaction for plan fiduciaries to enter into agreements with certain service providers without receiving sufficient disclosures

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Prohibited Transactions



Service providers are covered if they expect to receive $1,000 in compensation, and are:

• Investment manager or advisor,
• Recordkeeper or broker, or
• Other service provider who receives indirect compensation



Information to be disclosed in writing:

• Services provided,
• Compensation to be received,
• Capacity of fiduciary or not, and
• Plan investments and investment options

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New Disclosures by Service Providers



Timing

• Before contracts entered into,
• Within 60 days of being informed of a change, and
• Upon request



Effective Date

• First disclosure due no later than July 1, 2012
• Under best practices, the Committee should obtain a report

periodically (at least annually)

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When the Plan Should Receive the New Disclosures



Enhanced Ability to Comply

• Fiduciaries have always been responsible for evaluating and

monitoring plan fees

• The new disclosures provide enhanced transparency from

service providers and additional tools to assist fiduciaries in meeting their responsibilities

 Plan fiduciaries

• Must make sure each service provider provides a disclosure,

and report noncompliant service providers to the Department

• f Labor
• Do not have to confirm the accuracy of the disclosures they

receive

24

Effect of the New Disclosures on Plan Fiduciaries

Industry Observations

25

Many Vendors are ready & have had Client meetings

Consultant & Broker/Advisor Comp

26

If paid via “indirect” compensation, must disclose:

 Services  Compensation, and  Person or entity paying the fee

Consultant & Broker/Advisor Comp

27

Challenge for Broker/Dealers & affiliated firms:

 Need to identify all ERISA accounts  Description of services now necessary, and  Revenue sharing requires clear disclosure

Participant Disclosure

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Recordkeepers are helping Plan Sponsors by:

 Including a cover letter with explanation to

participants

 Adding additional call center staff in

anticipation of call volume



Electronic delivery based on DOL guidance (with participant consent)

Note: be aware...some Vendors are charging for significant mailing expenses

Challenges Remain…

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

Collection of data on non-mutual fund products (Separate Accounts, Collective Trusts, etc.)

 Lifestyle Funds subject to same participant fee

disclosure requirements

 Company Stock? Plan Sponsors need to

determine reasonable benchmark (S&P 500)

Additional Facts…

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

Insurance Companies are not required to report General Account fees although some are choosing to comply

 Fees relating to brokerage accounts/windows

do not require disclosure

Understanding Fees

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

70% of 401(k) investors think they don’t pay any fees for the plan*



37.5% utilizing excess revenue sharing do not know how it works**

 19.4% that have funds with revenue sharing do

not know the proportion of funds that that pay**

 16.1% uncertain if Plan offers an ERISA

(expense reimbursement) account**

* Barrons/AARP ** Callan 2012 Defined Contribution Trends Survey

Disclosures Are Not Enough

32



Must also determine if fees are reasonable - Paying excessive Plan expenses is a breach of a Fiduciary’s duty of prudence



How? RFI/Benchmarking using a retirement plan consultant, ERISA attorney, or going solo and contacting competing vendors on your own



Result: increased interest/use of passive/index

• ptions to answer potential participant fee disclosure

questions

Recent Plan Sponsor Actions

33

Focused on risk and fund management:



53% hired a third party to monitor or review fund

• ptions*



36% have lowered costs by changing some or all funds to Institutional funds/share class*

* Hewitt 2012 Hot Topics in Retirement

New Disclosures by Service Providers

34



Effective date extended to July 1, 2012



Providers NOT required to provide summary of disclosures



Arrangements between covered service provider and payer of indirect compensation MUST be disclosed



Disclosures can be distributed electronically



Plan Sponsors can terminate relationships with service providers if provider fails or refuses disclosure



Brokerage accounts and similar arrangements only

• ffered limited relief