408b2 Poses Concerns For B-Ds and Small-Plan Advisers

There will be many service providers looking for ways around the new fee disclosures rules in order to take advantage of plan sponsors and participants. This is unfortunate since the reason for the regualtions is to improve the quality of retirement plans offered to employers. If the retirement plan is to survive in the private sector the interest of plan participant must come first above all else.

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Roberta Ufford, principal at Groom Law Firm, said she agrees brokers must be cautious if they elect to state a range of fees. Ranges rather than specifics make sense for brokerage windows because so many compensation arrangements are possible, but broker/dealers must ensure their range numbers are realistic and standard for the industry.”When you use a range, it should be appropriate for the circumstance, she said. “[The] DoL intended to provide flexibility [by allowing ranges]  when more specific disclosure would be difficult to provide, and that can be a great thing, but if you’re trying to get a specific answer for when it’s OK to use a range instead of more specific information, there is no specific answer. So you really have to use a good-faith effort here.”

Ufford thinks the real problem could arise with small-plan advisers who may not have been disclosing detailed information about compensation. Many recordkeepers and other plan services providers already have systems in place to disclose specific indirect compensation because of Schedule C on Form 5500, which has required plan sponsors and administrators to report service provider fees and compensation for plan years beginning in 2009 (see “EBSA Issues Schedule C Fee Disclosure Guidance“).

There will continue to be confusion on fee disclosure, particularly when there is a brokerage window within the plan. Plan sponsors will never really know there fee disclosure information is complete or realistic when working with a broker dealer.

Please comment or call to discuss how this affect you and your plan.

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DOL Cracks Down on Retirement Plan Advisors for Fiduciary Negligence

Most retirement plan advisors in the small to mid market use the 401(k) as a lead generation tool. Once sold to the employer the broker sells high commissioned products to plan participants. Most of these advisers are unaware of their fiduciary responsibilities. This will change will new regulations. The 401(k0 model must change to more of a employee benefit, striving to rreplace the participants income at retirement. This measurement has been largely ignored.

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Columbia Management Learning Center warned plan sponsors in a recent white paper that they have a “fiduciary responsibilityto keep their plan in compliance with DOL rules and regulations at all times.”Because of the increased number of DOL enforcement staff, “the chance that the DOL could audit your plan is increasing,” the white paper warns. “There is every indication the DOL is escalating audits of small plans,” the paper says.

The paper also notes that during 2010, the DOL audited more than 3,100 plans and found that:

  • More than 73% of the plans were required to restore losses to the plan or take another type of corrective action to correct plan deficiencies.
  • 96 individuals (e.g., plan officials, corporate officers and service providers) were indicted for offenses related to their plans.
  • From the audits, we can conclude that a very small percentage of plans have true “bad guy situations”; the majority of violations generally come from oversight, errors and omissions by plan sponsors.

Many advisers and plan sponsors are unaware that the Department of Labor has jurisdiction over them. When the new fiduciary standard is implemented very soon those advisers affiliated with broker dealers may cease to advise plan participants. The need for advisers following the fiduciary standard will grow dramatically.

Please comment or call to discuss how this affects you and your company sponsored retirement plan.

  • Majority of Retirement Plan Sponsors Do Not Feel Prepared for New Fee Disclosure Rules (401kplanadvisors.com)
  • Fee disclosure facts every plan sponsor should know (401kplanadvisors.com)
  • New Survey Reveals How 401k Plan Sponsors Rank 8 Hot Topics (401kplanadvisors.com)
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Are You Committing a Prohibited Transaction?

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Many business deals are done with a “wink..wink”. These deals can result in prohibited transactions and perhaps criminal charges. In these cases the plan sponsor (employer) stand alone with the liability. Remember plan sponsors must act for the sole benefit of the plan participants and their beneficiaries. The current adminsitration has ramped up the audit teams for retirement plans.

Take, for example, a sales rep which has no service agreement with a plan and who is compensated solely by commissions. Let us say this rep gets word that a 401(k) client is considering moving its business to a different vendor (and a different sales rep). The rep approaches the clients and offers to pick the TPA fees of the plan if the plan continues to purchase the investment productsthrough him.  It is clear that this kind of arrangement can be sound when it is made properly part of a negotiated service agreement with a plan vendor.  But with a sales rep without a service agreement- a problem?Another example could be “tying” arrangements, where a bank has a client’s 401(k) plan as well as holding a corporate loan with the plan sponsor.  The plan sponsor notifies the bank that it is moving its 401(k) to another institution. The bank responds by threatening to call the loan, or not to extend any future credit if the 401(k) plan is moved- a problem?

This is a criminal statute. Unlike the “civil law” ERISA prohibited transaction rules where “intent” doesn’t matter,  “scienter” (that is, intent) is still a critical element.  But still the word is caution.  Compliant compensation schemes are difficult enough to design, given the prohibited transaction rules and the forthcoming 408(b)(2) regs. But don’t forget about the non-ERISA criminal rules when addressing these issues.

Many plan sponsors are unaware of the prohibited transactions they are committing when dealing with plan providers. All it takes is one employee complaining to the Department of Labor and the plan sponsor will be liable.

Please comment or call to discuss how this affects you and your company.

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The Difference an Adviser Can Make

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The qualified retirement plan industry has been taken over by salespeople. This must stop if we want our employees to successfully retire. Your employees look to you for guidance, like it or not it is your resonsibility to guide them to a successful retirement. Your company retirement plan should be treated like a pension fund like plan not a lead generation tool for financial salespeople.

Partnering with a professional retirement plan adviser offers benefits for plan sponsors, according to a study for the Retirement Advisor Council.  —

However, only 25% of 401(k) and 403(b) plan sponsors, with 100 or more employees and plan assets between $5 million and $500 million, partner with a professional retirement plan adviser. Most of the others do business with a generalist adviser; some do not use an adviser or consultant at all. Laura White, vice president at Diversified, a partner in the research, told PLANADVISER, historically, advisers other than professional retirement plan advisers have held a larger share of the not-for-profit market, but Diversified expects the gap will close with time.

Half of respondents who use a professional retirement plan adviser say it is a necessity to retain the advisers’ services for their plans. Forty-four percent say retaining the services is very beneficial to their plans. In addition, 16% of respondents with no adviser said retaining one is a necessity and 59% said retaining a professional retirement plan adviser would be very beneficial.

Overall, 46% of plan sponsors have measured the retirement readiness of their participant population more than once. Clients of professionals are unique in that 75% monitor year-over-year changes and 31% say more than 70% of their participants are on-track to achieve a successful retirement. These superior outcomes may be the result of plan designs that encourage saving. Another contributing factor could be new ideas that clients of professionals adopt more readily than other plan sponsors.

More than any other category of plan sponsors, clients of professionals rely on a retirement plan committee that meets regularly to make plan decisions. White said 74% with a professional retirement plan adviser state a committee who meets at regular intervals makes decisions regarding the design of the plan or array of investment options. In addition, 70% complete an investment review at least twice a year; 40% twice a quarter.

Only 41% of those with another adviser type complete a periodic review of investment options with their adviser as compared to 79% with a professional retirement plan adviser; 73% of those with a professional retirement plan adviser state it’s absolutely critical to review investment options periodically, White said.

A professional retirement plan adviser dedicated to your company plan will lead to improved results and less burden on your staff. Many advisers use the 401(k) plan as a lead generation tool to sell ‘product’ to your employees. This concept can lead to disgruntled employees if the products don’t work out.

Please comment or call to discuss how this can affect you and your company.

  • Majority of Retirement Plan Sponsors Do Not Feel Prepared for New Fee Disclosure Rules (401kplanadvisors.com)
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Discretionary Trustees vs. Directed Trustees

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Plan sponsors need to understand that their service provider does not, ordinarily, assume any fiducisry liability. Many service providers use a marketing gimmick to sell plans by making empty promises. If you read the fine print a ‘fiduciary warranty’ offers virtually no protection.

Perceptions and Reality
A directed trustee is the most common kind of trustee associated with plan assets. The functions assigned to the trustee in most standardized plan documents and trust agreements such as prototype plans are those of a directed trustee. In many cases, a directed trustee is a trust company that provides an asset custody service as part of a mutual fund family that offers bundled record-keeping services such as the case with Fidelity Management Trust Company and the Fidelity investment arm in DeFelice, and Merrill Lynch Trust Company and the Merrill Lynch investment arm in WorldCom.The perception that trust companies and other such entities ordinarily provide legal protection to plan sponsors for the selection, monitoring, and replacement of plan assets is wrong. While the custodial and trustee services offered by trust companies and other such entities are valuable, even a directed trustee under ERISA, such as a trust company, cannot offer plan sponsors legal cover simply because their agreements with these sponsors make sure that the sponsors–not the directed trustee–remain ultimately liable for plan assets, in accordance with the law of ERISA.

As I’ve noted in previous columns, mother always said to read the fine print. So once again, I’ll remind advisors to remind their fiduciary clients to read their agreements with trust companies and other such entities because it is usually these documents that will govern the ultimate legal liability of their clients, not oral sales representations or written sales brochures.

Plan sponsors need to understand the difference between marketing gimmicks and actual transfer of risk.

Please comment or call to discuss how this affects you and your company retirement plan.

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Three sure-fire 401(k) predictions for 2012

When the new fee disclosure regualtions become effective this year, 2012, many plan participants will be unpleasantly surprised. Many will begin the ask questions about the fees they are paying and why. Plan sponsors can be proactive by having an independent benchma

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rk analysis done on their plan.

2) April’s implementationof the DOL’s new Fee Disclosure Rule will create a bigger headache for 401(k) plan sponsors than for 401(k) service providers. Of course, the implied prediction here – that self-serving 401(k)  service providers won’t yet again convince the DOL to defer implementation of this rule – stands as the bolder prophecy. Still, assuming 401(k)  investors start seeing the actual fees they pay sometime in the second quarter, expect to witness the greatest case of collective sticker shock ever. And who will they turn to with their complaints? Their 401(k)  plan sponsor’s friendly HR department. When in doubt, shoot the messenger. And who will the messenger shoot?3) By the end of the year, bundled service providers’ fees will be dropping dramatically. But it may be too late for them. After decades of hidden fees and avoiding the “fiduciary” label, 2012 finally catches up to them and exposes the self-dealing behind the curtain. Lowering fees can’t make up for the loss of trust and reputation, as 401(k)  plan sponsors move en mass away from the bundled model and adopt a “best of breed” approach.

The day of the bundled provider is quickly ending. Plan sponsors need to get out of the way of this tsunami.

Please comment or call to discuss how this affects you and your organization.

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New 401(k) Revenue Sharing and Fee Disclosures Could Re-Shape DC Plans

There is no such thing as a free lunch. The 401(k) has been marketed to plan sponsors with no administration costs. Plan participants will learn how much ‘free’ costs when the new fee disclosure regulations become effective later this year.

“Plan sponsor’s awareness of fiduciary responsibilityand risk, especially as it pertains to fee oversight, is at an all-time high,” according to Bill McClain, a principal in Mercer’s Seattle office.  These new fee disclosure regulations will give participants “sticker shock,” McClain said.In his new paper, “Fee Allocation: Trends and Strategy,” released December 2011, McClain

Bill McClain of Mercer

noted that the new DOL fee and revenue sharing disclosures have created two developing trends,  One is fostering an alternative method for calculating administrative fees to a per-participant approach versus the second, older method of basing fees on plan assets.

Traditionally, plan sponsors did not focus on administrative fees since the revenue sharing payments made by the mutual funds or plan recordkeepers, which administered the plans, were applied to cover administrative expenses.  But this practice is now being scrutinized, McClain said.

“Plan sponsors are openly asking whether a participant with a $400,000 401(k) balance should pay ten times more in administrative fees than another participant with a $40,000 balance in the same plan,” he said.  This does not make sense since it costs the same to administer both accounts, regardless of their account balances.

Fees….Fees are not created equally. This issue will become center stage for all 401(k) plans.

Please comment or call to discuss how this affects you and your company.

  • Spotlight on 401(k) fees may help many saving for retirement (401kplanadvisors.com)
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Fee disclosure facts every plan sponsor should know

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The new fee disclosure regulations will take center stage early in 2012. Plan sponsors are required to know and understand the fees in their compnay sponsored retirement plan. If plan sponsors do not address this, their employees will bring it to their attention very soon.

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.

Fees that do not add value to the retirement plan must be eliminated. These fees reduce returns and delay the ability to retire.

Please comment or call to discuss how this affects your company.

  • The 401(k) regulatory tsunami (401kplanadvisors.com)
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New Survey Reveals How 401k Plan Sponsors Rank 8 Hot Topics

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Most small to mid sized employers are ill prepared to deal with the complexities of their company sponsored retirement plan. This lack of attention reduces their competitiveness for talented employees. If these employers lack the expertise and/or resources they should seek outside help.

(Weighted Rank: 3.99) Improving understanding of (and potentially reducing) plan expenses.Again, this topic is similar to the topic ranked immediately below it (#4 above). Here’s the unexplained irony of this survey (and what may reveal the very real likelihood for sticker shock once 408(b)(2) kicks in): 84% of those surveyed feel their fees are competitive yet fully 76% admit to being in a bundled relationship. Bundled relationships often feature higher fees.#2 (Weighted Rank: 4.08) Reducing plan risk and potential fiduciary responsibility. One might read into this topic “reducing potential fiduciary liability.” Many might feel this topic ranking a clear #2 might be surprising, especially since the plan sponsor cohort has been mysteriously silent on the whole issue of the DOL’s proposed new definition of fiduciary. That this topic ranks so high could be a signal they’re listening. The question is: Does the DOL recognize plan sponsors are listening?

#1) (Weighted Rank: 4.33) Providing the right investment to help participants achieve retirement goals. This topic is related to the #6 ranked topic (retirement readiness of active participants). Given the nature and purpose of retirement plans, this should always rank as the top priority for plan sponsors and fiduciaries. That it has received so little treatment from the 401k media of late might be what is really surprising. There’s been a large body of research, particularly in the area of behavioral finance, addressed this issue on point (see “3 Ways 401k Plan Sponsors Can Help Employees Make Better Investment Decisions,” “3 More Ways 401k Plan Sponsors Can Help Employees Make Better Investment Decisions” and “Avoiding Decision Paralysis: How to Create the Ideal 401k Plan Option Menu.”

Plan sponsors and their employees will benefit from a thorough analysis of their qualified retirement plan. Addressing the concerns above will make your competitive in the market for talented employees. No business is too small to benefit.

Please comment or call to discuss how this will benefit you and your company.

  • 401k Sponsors Increasing Focus on Investments (401kplanadvisors.com)
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The Future after Fee Disclosure and the Crystal Ball

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Clarity of fees will help all involved in the end product of retirement plans. This will insure all those getting paid by the plan are adding value to plan participants and beneficiaries.

A plan sponsor who fulfills their role as a plan fiduciary by shopping around to determine whether their fees pay are reasonable, are a threat to only those providers that may unreasonable fees.While there is this mentality that fee disclosure will simply create a race to the bottom to find the lowest fees, I still don’t buy that. The reason I don’t buy that is that many low cost providers aren’t very good whether it comes to day to day  plan administration.  The other reason is that again I don’t see most plan sponsors doing the due diligence in finding what the cost of plan services are in the marketplace.  The third reason is I don’t see plan services as being a service where price is the most important consideration. While I often fault plan providers in not stressing their value as plan providers, I don’t believe that someone who wants to be the Wal-Mart of plan services will do very well because I don’t see it as a business where price has been the overall consideration. It never has been and I don’t think it ever will. Like other professional service like law, medicine, and accounting, advertising that you have the lowest fees isn’t going to be the best selling point. At least that is my opinion.

Great insight into what plan sponsors should be concerned with and are not . And plan providers who would prefer to keep fees hidden.

Please comment or call to discuss how this affects your company retirement plan.

  • Smart Investor – Why Fees Matter for 401(k) Plan Fiduciaries, But Not Defined Benefit Pension Plans (401kplanadvisors.com)
  • You Pay More for Your 401(k) (401kplanadvisors.com)
  • Things employers should tell employees about their retirement plan as new participant fee disclosure rules come into effect (401kplanadvisors.com)
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