retirement plan fees: best practices for plan sponsors

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©2003 – 2013 Multnomah Group, Inc. All Rights Reserved. Retirement Plan Fees Best Practices for Plan Sponsors

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Under ERISA Section 408(b)(2), retirement plan fees must be reasonable in light of the services being rendered. Retirement plan fees are also a hot target in the courts, most notably with last year's Tussey vs. ABB, Inc. decision. In this presentation, we discuss just what the reasonableness standard means for today's retirement plan sponsors, and an action plan for employers.

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Page 1: Retirement Plan Fees: Best Practices for Plan Sponsors

©2003 – 2013 Multnomah Group, Inc. All Rights Reserved.

Retirement Plan FeesBest Practices for Plan Sponsors

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John Chavez, MBAJohn is a Regional Director for the Multnomah Group responsible for client service and business development in Southern California. John works with a wide array of organizations, including colleges and universities, non-profit hospitals, and corporations. John consults with plan sponsors on fiduciary governance, plan design, vendor contract structure, vendor fees/services, and investment menu construction.

Prior to joining Multnomah Group in 2011, John served as a Director of Consultant Relations for the West Coast for a national retirement services firm specializing in healthcare, research and higher education organizations. Prior to that, John was Vice President of Business Development and Assistant Vice President of Client Services for several other retirement services firms.

John is involved in the Los Angeles Chapter of the Western Pension & Benefits Council and he is a member of the National Association of Governmental Defined Contribution Administrators. John holds a B.A. in Communications from California State University at Fullerton and a MBA from University of La Verne.

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Gina Gurgiolo, JD, LL.M

Retirement Plan Fees: Best Practices for Plan Sponsors

Gina Gurgiolo is a Senior Consultant for the Multnomah Group responsible for the firm’s ERISA technical and recordkeeping vendor search consulting services. Gina consults with plan sponsors on plan design, fiduciary governance, and vendor fees/services.

Prior to joining the Multnomah Group in 2010, Gina managed the product portfolio for a national retirement services firm and directed the firm’s plan administration unit serving its largest clients. Prior to that, Gina managed the retirement plan compliance and regulatory policy functions at another national retirement services firm. In all, Gina has over 13 years of holistic retirement plans experience.

Gina earned her JD from the University of Pittsburgh and her LL.M in Taxation with an emphasis in retirement plan and executive compensation law from the University of Denver. Gina is a member of the Portland Chapter of the Western Pension & Benefits Council, and has been a conference speaker at multiple industry events

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AgendaBuilding Foundation

Defining the Fee Universe

The Reasonableness Standard

Compliance Enforcement

Recent Trends

Observations on Fee Compression

Consequential Considerations

Roadmap to Reasonableness

Fee Reasonableness “To-dos”

Best Practices Checklist

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Building FoundationThree important questions all plan sponsors should know how to answer:

1. What fees apply under the plan?

2. How are the fees paid?

3. Are the fees reasonable in light of services rendered?

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The Fee UniverseAsset-based Fees

Calculated as a percentage of all or a portion of plan assets

Typically assessed through the investment product

Types:

Expense ratio (mutual funds, collective/commingled investments)

Market value adjustment (stable value products)

Variable (variable asset charge, mortality & expense, surrender)

Wrap (administration, education/communications, custodial)

Other (short-term trading/redemption, front-end, back-end, CDSC, put)

Revenue sharing:

Payment to selling agent/broker

Can include commissions, 12-b-1/marketing, shareholder servicing, sub-transfer agency fees

For services including recordkeeping/administration, education/communications, compliance

testing/reporting

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The Fee UniverseParticipant-based Fees

Calculated based on the number of participants in or eligible for the plan

Could be a base fee (example: $7,500 per year) or per-unit fee (example: $15 per active participant and $25 per terminated participant)

May be assessed to the plan sponsor or to plan assets/participants in addition to applicable asset-based fees

Services covered:

Education and communications

Participant statements

Participant website access

Call center availability

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The Fee Universe

Retirement Plan Fees: Best Practices for Plan Sponsors

Itemized Fees

Calculated on a per-instance/as-incurred basis for a particular service

Typically fixed

May be assessed to the plan sponsor or plan participants

Examples:

Contract implementation/termination fees

Ad hoc/special services fees, such as 5500/compliance testing, plan mergers, customized plan documents/amendments

Professional services, such as TPA, auditor, attorney, consultant, custodian/trustee

Transactional services, such as loans, distributions, QDROs

Optional participant services fees, such as brokerage window, managed accounts

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The Reasonableness StandardWhat is “reasonable?”

Agreeable to sound judgment or logic

That which is appropriate for a particular situation

Not excessive relative to circumstances

Under ERISA section 408(b)(2), retirement plan fees must be reasonable in light of the services being rendered

No specific codified definition of what constitutes fee reasonableness per se

Determining reasonableness requires comparison of alternatives and evaluation of processes used

Must know and understand applicable fees to determine reasonableness

Follow prudent process that contemplates alternatives

Where can plan sponsors find comprehensive fee information?

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The Reasonableness StandardRegulations under ERISA section 408(b)(2) require annual covered service provider-to-employer disclosure of fees

Intended to empower plan sponsors to better comply with the fee reasonableness standard under ERISA section 408(b)(2)

First-year deadline was July 1, 2012

Plan sponsors must terminate non-compliant covered service providers and have a duty to inspect the notice for accuracy and follow up accordingly

408(b)(2) notice information is needed to complete the plan’s Form 5500 Schedule C

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The Reasonableness StandardTussey, et al. v. ABB, Inc.

Federal district court in Missouri; appeal to Eighth Circuit Court of Appeals

Case originated in 2006 from 15 separate complaints filed by ABB, Inc. employees

Separate actions certified as a class in 2007 → first instance of a plan fee related class action suit

Plaintiffs awarded $37M because:

401(k) plan fees subsidize corporate services benefiting executives

A lower cost share class was available, but was not being used

Policies/process not being followed

Failure to pass excess investment revenue sharing back to the plan

Reaffirmed fee reasonableness standards under ERISA section 408(b)(2)

Similar litigation is looming

At issue is whether the plan fiduciary used a prudent reasonableness evaluation process, had the right level of expert assistance,

and/or documented the process steps

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The Reasonableness StandardSummary timeline:

1974: ERISA is enacted, including section 408(b)(2)

2007: Proposed fee disclosure regulations are issued

2009: Revised 2009 Form 5500 Schedule C requests more fee information reporting than ever before

2010-2012: Fee disclosure regulations are finalized and become effective; DOL

investigation and enforcement activity increases

2012: First retirement plan fee class action suit decided (Tussey, et al. v. ABB, Inc.); similar litigation looming

2013: DOL announced intention to propose regulations clarifying 408(b)(2) notices; initial proposed version expected in May

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Compliance EnforcementThe DOL has the responsibility to enforce ERISA’s standards, including ensuring fee reasonableness

DOL investigation/enforcement activity is on the rise since 408(b)(2) regulations were proposed and fee litigation trend began

How are plans are selected for investigation?

Randomly

For cause/“red flag”

5500 reports late deferral remittance

Independent auditor issues qualified report

Participant complaints

Up to 6-year investigation period

Penalty is commensurate with harm caused

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Compliance EnforcementWhat will DOL request?

1. Service provider information

Accountants, actuaries, administrators, attorneys, brokers, consultants, contract administrators, insurance companies, investment advisors, investment managers, recordkeepers, TPAs, valuation appraisers

2. Service agreements/contracts

Describing services, duties, obligations, responsibilities, fee/compensation/commission schedule

3. Service provider reports

Investment performance reports, audit reports, actuarial reports

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Compliance EnforcementWhat will DOL request?

4. Fee assessment and payment documents

Invoices, cancelled checks

5. Service provider selection documents

RFP, proposals, comparative evaluation analysis, negotiation communications, assessment of fees relative to quality of service

6. Investment documents

Revenue sharing information, share class identification, stable value fund illiquidity/redemption or surrender fees

Rebate information

12-b-1 fees, sub-transfer account fees, marketing/services fees, expense reimbursement account deposits

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Recent TrendsHottest trend:

Unmistakable recent recordkeeping fee compression in the marketplace

Provides current pricing renegotiation leverage

Focus on value and watch for service descoping/unbundled pricing

Expect heavier utilization of online service protocols

On the rise:

Fees-at-risk clauses in service agreements

ERISA or other expense reimbursement accounts funded with excess revenue sharing dollars

Service unbundling

Levelized per-participant pricing

Must be solved:

Plans with multiple vendors receive 408(b)(2) disclosures in different formats, which have proven difficult to understand or consider collectively

DOL will somehow address this in proposed regs expected May, 2013

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Roadmap to ReasonablenessBe able to answer our three foundational questions:

1. What fees apply under the plan?

Review service contracts, annuity contracts, fee agreements, investment fees

List all applicable fees in a Fee Policy Statement

Inspect vendor-to-sponsor fee disclosure notices and follow up as necessary

2. How are the fees paid?

Find fee allocation provisions in agreements, contracts

Make decisions within plan sponsor discretion

Memorialize allocation information in Fee Policy Statement

3. Are the fees reasonable in light of services rendered?

Compare your plan fees to the marketplace in some meaningful way

Renegotiate fees with vendors based on benchmarking/proposal results

Focus on value not the least expensive solution

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Best Practices Checklist

Maintain a Fee Policy Statement List applicable fees under the Plan

State whether the employer, forfeiture account, or participants pay the fees

State intent to ensure fee reasonableness

Timely receive and review/analyze annual covered service provider-to-employer fee disclosure notice

Know your plan’s fees and understand how they work

Follow-up with questions as needed

Benchmark recordkeeper’s fees to the market annually Plan is not required to select the recordkeeper with the lowest fees

Fees must be reasonable in light of services rendered

Negotiate incumbent recordkeeper’s fees if they are higher than benchmarked range

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Best Practices Checklist

Request lowest-cost share class of investment options Document the process and decision whether to implement

Issue request for bid or request for proposal to prequalified vendors every 5-6 years

Coincides with typical statutes of limitations

Document the process, evaluation criteria, resulting decisions and rationale

Gather appropriate documentation in preparation for DOL investigation Expect an audit and prepare/organize information to avoid scramble for

documents (typically, 15-day response period allowed)

Provide information requested in the event of an investigation

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DisclosuresMultnomah Group, Inc. is an Oregon corporation and SEC registered investment adviser.

Any information and materials contained herein or on our website are provided for general informational purposes only and are not intended to be comprehensive for any particular subject. Multnomah Group utilizes information from third party sources believed to be reliable but not guaranteed, and as a result, information is provided to you "as is." We do not represent, guarantee, or provide any warranties (either express or implied) regarding the completeness, accuracy, or currency of information or its suitability for any particular purpose. Multnomah Group shall not be liable to you or any third party resulting from any use or misuse of information provided.

Receipt of information or materials provided herein or on our website does not create an adviser-client relationship between Multnomah Group and you. Multnomah Group does not provide tax or legal advice or opinions. You should consult with your own tax or legal adviser for advice about your specific situation.