Presenting a live 90-minute webinar with interactive Q&A DOL Retirement Plan Fee and Expense Disclosures: Tackling Complex 408(b)(2) Questions WEDNESDAY, SEPTEMBER 12, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Sarah E. Downie, Partner, Orrick Herrington & Sutcliffe , New York Jeffrey Lieberman, Partner, Clifford Chance , New York Adrienne A. Scerbak, Of Counsel, Winston & Strawn , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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LOOK-BACK AT THE FIRST ROUND OF 408(b)(2) DISCLOSURES AND RELATED RULES Sarah E. Downie Jeffrey Lieberman Adrienne Ann Scerbak 5
Introduction • Brief Recap of DOL’s disclosure scheme • Section 408(b)(2) Disclosures • The Obligations of Responsible Plan Fiduciaries after July 1 • Benchmarking Considerations • Disclosure Issues 6
Recap of DOL Disclosure Scheme • DOL’s intent has been to increase transparency regarding the fees that plans (or participants and beneficiaries) pay for management of plan assets and the provision of services by various service providers • First foray into new disclosure requirements – 2009 – first year amended Form 5500 Schedule C issued – Requires reporting of “direct and indirect” compensation received by service providers – Only specific obligation on Plan administrators is to include disclosure (and in certain circumstances to inform government if provider refused to give information) 7
Recap of DOL Disclosure Scheme • Second piece of disclosure requirements – issuance of regulations under ERISA Section 408(b)(2) – The prohibited transaction rules of 408(b)(2) permit: “Contracting or making reasonable arrangements with a party in interest for . . . services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor .” – Also, see DOL Advisory Opinions 97-15A and 97-16A – Regulations regard disclosure as integral to determining if fee is reasonable • Third disclosure requirements – issuance of ERISA Section 404(a) regulations requiring disclosures to plan participants and beneficiaries when plan allocates investment responsibilities to participants or beneficiaries, the plan administrator is responsible for providing information to participants regarding the plan's investment options, including fee and expense information. 8
Section 408(b)(2) Disclosures • Section 408(b)(2) regulations provide detailed guidance on how a “responsible plan fiduciary” (“ RPF ”) can fulfill its statutory duty • Initial disclosures from covered service providers (“ CSP ”) to responsible plan fiduciaries were due July 1, 2012 • The preamble to the regulation notes: – The availability of information sufficient to enable the plan fiduciary to make informed decisions about the costs of recordkeeping is fundamental to a responsible plan fiduciary’s ability to satisfy its ERISA obligations. 9
Section 408(b)(2) Disclosures • Who are primary CSPs to plans? – Fiduciaries, investment advisers, recordkeepers, and broker-dealers to individual account plans, third party administrators and certain other service providers if receiving indirect compensation 10
Section 408(b)(2) Disclosures • What type of information must CSPs provide? • Disclosure of Compensation – “Compensation” may be described or estimated as a monetary amount, formula, percentage of assets, or a per capita charge or, if the compensation cannot reasonably be expressed in such terms, by any other reasonable method. Any description or estimate must contain sufficient information to permit evaluation of the reasonableness of the compensation. 11
Section 408(b)(2) Disclosures • Compensation • Direct vs. Indirect Compensation: • 408(b)(2) Regulations generally define indirect compensation as paid from a person or entity other than the plan or the plan sponsor • Disclosure of compensation to be paid among related parties (subcontractors) • Termination compensation 12
Section 408(b)(2) Disclosures • Disclosure of services to be provided • Express statement if a fiduciary or registered investment advisor 13
Recordkeeper Disclosures • Under the 408(b)(2) Regulations, recordkeepers must disclose: – All revenue sharing amounts received (credits or use of proprietary investment options); and – The charges that recordkeepers make to the plan for recordkeeping services (direct charges) 14
After July 1 – Responsible Plan Fiduciary Responsibilities • RPFs must engage in prudent process to evaluate reasonableness of fees and conflicts of interest highlighted in the disclosures • Establish a process. Who is primarily responsible for review? Who has needed skills? • Engage consultant and other service providers to provide analysis? • Need to review and ask questions. • Contact service providers for additional information. 15
After July 1 – Responsible Plan Fiduciary Responsibilities cont’d • Questions to consider: – Are the services provided appropriate? – Are the services provided adequate to meet plan needs? – Is the compensation for the services reasonable? How is this determined? – Are the expenses reasonable? – Are there any conflicts of interest? Are they manageable? – Are there termination costs? – Do the disclosures conform to existing agreements with service providers? – Are the disclosures in correct or incomplete? • In the first round of disclosures, some RPFs may not have been prepared because they do not understand the importance of hiring an outside consultant and/or benchmarker – if they do not understand the materials, RPFs may be in a position of not being able to correctly complete the participant disclosures or identify 408(b)(2) disclosures that are incorrect or incomplete 16
Concerns of Responsible Plan Fiduciaries • Prudent Process may include: – Allocate costs to compensation – Calculate dollar amounts – Benchmark amounts – Potentially need to negotiate/renegotiate based on benchmarking • 408(b)(2) Regulations expressly do not override 404(a) fiduciary responsibilities; prudence rules continue to apply 17
Benchmarking • Why Benchmark? – Benchmarking may provide RPF with competitive pricing information to help determine reasonableness of fees and expenses as compared to the market – Help RPF find all plan fees, including indirect compensation that may be “hidden” – Provide RPF with monitoring tool to use on ongoing basis as part of ordinary prudent review process 18
Benchmarking cont’d • Can RPF do Benchmarking itself? – ERISA’s prudent expert rule effectively requires that where fiduciaries are unsure of their expertise, prudence calls for the fiduciary to seek the advice of experts – If RPF is not expert in benchmarking, it should hire an outside expert 19
Benchmarking cont’d • How should RPF choose benchmarking expert? • Choosing benchmarking experts presents various challenges • If not independent, raises issue of whether plan fiduciary has met obligation to plan • can be significant variations in scope, cost and quality of benchmarking reports 20
Benchmarking – Scope of Analysis • What should benchmarking report/analysis look like? – Should look at and benchmark fees, including plan design input and participant success measures • success measures are statistics that measure how well a plan helps participants prepare for retirement and include: – participation rate – number of participants maximizing match – number of participants using plan advice program • success measures provide perspective on fees – are participants getting the most out of what they pay for the plan? 21
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