retirement plan investment fee disclosure
DESCRIPTION
Information on the new retirement plan fee disclosure rule and how it will impact nonprofit organizations offering 403(b) and other retirement plan solutions - Tate & Tryon - Nonprofit CPA FirmTRANSCRIPT
Retirement Plan Investment Fee Disclosures and Employer Responsibilities
Tuesday, October 16, 2012
Speakers: John Kubichek, CPA, CFE
Michael Aylward, CEBS, CRPS Guest:
David J. Moore
Agenda
Introduction Fee Disclosures – from Covered Service
Providers (CSPs) to Plans Fee Disclosures – from Plans to Participants Potential non-compliance and its
consequences Conclusions and Q&A
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Introduction
Roles of DOL and IRS Background of prior regulations
Reasonableness of fees (and all services) is not a new requirement
Form 5500, Schedule C disclosures began 2009 General plan fiduciary responsibilities The need for new regulations
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Introduction – Fees do matter
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Fee Disclosures – CSPs to Plans
ERISA§408(b)(2) Plan Sponsors and other fiduciaries must be
provided with information concerning fees and other compensation received by “Covered Service Providers” for their plans as well as potential conflicts of interest.
Effective July 1, 2012 for ERISA plans (excludes government, church, nonqualified deferred compensation plans and health and welfare plans)
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Fee Disclosures – CSPs to Plans
CSPs include registered investment advisors, record-keepers, brokers who make designated investment alternatives available to the plan, and other service providers receiving indirect compensation expected to receive $1,000 or more in direct or indirect compensation over the cumulative term of their contracts.
Certain service providers are exempted from the definition of CSP, including service providers who are paid by the plan sponsor or by direct compensation (e.g. legal counsel, accountants, auditors, etc.) and providers of certain annuity contracts held within 403(b) plans. www.tatetryon.com 5
Fee Disclosures – CSPs to Plans
Direct compensation is paid directly from the plan assets of the covered plan
Indirect compensation is not paid from the plan, but is paid from one service provider to another. Examples include commissions, finder’s fees, 12b-1 fees, termination fees, marketing allowances and other types of revenue sharing arrangements. www.tatetryon.com 6
Fee Disclosures – CSPs to Plans
Compensation can be disclosed in total dollar amount; as a percentage of assets; as a per participant charge, or via a formula that would allow the Plan Sponsor to calculate with reasonable certainty the amount of compensation being paid.
Initial disclosures were to be made by July 1, 2012, and any changes to information disclosed must be made as soon as practicable, but no later than 60 days from the date of which the CSP is informed of the change.
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Fee Disclosures – CSPs to Plans
Format for disclosure: The regulations do not require a specific format for
disclosure.
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Fee Disclosures – CSPs to Plans
Assessment of “reasonableness” of fees The regulations do not define “reasonable” fees
Suggested approaches: 1. Benchmarking 2. Request for Proposal (RFP) bidding process 3. Others
Reminder: consider the total value of the services received
Document in writing
Complete at least annually
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Fee Disclosures – from Plans to Participants
ERISA §404(a)(5) Plans must provide investment-related
information in a format that permits workers to comparison shop among investment options
Effective August 30, 2012 for calendar year ERISA plans for annual disclosures (if fiscal year, effective date is the later of 60 days after the beginning of the plan year or 8/30/12). Quarterly disclosures to participants are due 45 days after the quarter end – generally by November 14, 2012
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Fee Disclosures – from Plans to Participants
Applies to participant-directed individual plans, such as 401(k) and 403(b)
Disclosures are to be made to all plan participants, including eligible employees who are not participating in the plan and terminated employees with balances in the plan Plan sponsor is responsible for ensuring that all plan-
eligible employees receive the disclosures.
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Fee Disclosures – from Plans to Participants
Annual disclosures: General plan information, including investment
instructions, investment options, and information about permitted investments outside those designated by the plan, if permitted by the plan
Administrative expense information, including general plan administrative fees and expenses that may be charged to or deducted from individual participant accounts, such as legal, accounting, and recordkeeping services
Individual expense information, including fees and expenses that may be charged to or deducted from the individual account of a specific participant based on the actions taken by that person, such as fees for plan loans, distributions, and for processing qualified domestic relations orders
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Fee Disclosures – from Plans to Participants
Quarterly disclosures: Quarterly statements showing dollar amount of plan fees
and expenses deducted from accounts Description of services to which the fees relate Performance data, including 1, 5, and 10 year returns for
funds that do not have a fixed rate of return Annual rates of return for fixed rate investments Benchmark data, including 1, 5, and 10 year returns for
relevant benchmark indexes. Plan fiduciaries should ensure that these
quarterly disclosures are being made. They most often will be made on the participants’ quarterly investment statement.
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Fee Disclosures – from Plans to Participants
If the Plan has multiple CSPs, the disclosures need to account for this
The DOL has provided model charts CSPs may have enhanced or added to the
chart The following are samples of the DOL’s
Model Comparative Chart, which may be found at www.dol.gov/ebsa/participantfeerulemodelchart.doc www.tatetryon.com 14
Fee Disclosures – from Plans to Participants
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Table 1—Variable Return Investments
Name/ Type of Option
Average Annual Total Return
as of 12/31/XX 1yr. 5yr. 10yr. Since
Inception
Benchmark
1yr. 5yr. 10yr. Since
Inception
Equity Funds A Index Fund/ S&P
500 www. website
address
26.5% .34% -1.03% 9.25%
26.46% .42% -.95% 9.30% S&P 500
B Fund/ Large Cap www. website
address
27.6% .99% N/A 2.26%
27.80% 1.02% N/A 2.77% US Prime Market 750 Index
C Fund/ Int’l Stock www. website
address
36.73% 5.26% 2.29% 9.37%
40.40% 5.40% 2.40% 12.09% MSCI EAFE
Bond Funds E Fund/ Bond Index
www. website address
6.45% 4.43% 6.08% 7.08%
5.93% 4.97% 6.33% 7.01% Barclays Cap. Aggr. Bd.
Other F Fund/ GICs
www. website address
.72% 3.36% 3.11% 5.56%
1.8% 3.1% 3.3% 5.75% 3-month US T-Bill Index
G Fund/ Stable Value www. website
address
4.36% 4.64% 5.07% 3.75%
1.8% 3.1% 3.3% 4.99% 3-month US T-Bill Index
Generations 2020/ Lifecycle Fund www. website
address
27.94% N/A N/A 2.45%
26.46% N/A N/A 3.09% S&P 500
23.95% N/A N/A 3.74%
Generations 2020 Composite Index*
Fee Disclosures – from Plans to Participants
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Table 2—Fixed Return Investments Name/
Type of Option Return Term Other
H 200X/ GIC www. website address
4% 2 Yr. The rate of return does not change during the stated term.
I LIBOR Plus/ Fixed-Type Investment
Account www. website
address
LIBOR +2%
Quarterly The rate of return on 12/31/xx was 2.45%. This rate is fixed quarterly, but will never fall below a guaranteed minimum rate of 2%. Current rate of return information is available on the option’s Web site or at 1-800-yyy-zzzz.
J Financial Services Co./ Fixed Account
Investment www. website
address
3.75% 6 Mos. The rate of return on 12/31/xx was 3.75%. This rate of return is fixed for six months. Current rate of return information is available on the option’s Web site or at 1-800-yyy-zzzz.
Fee Disclosures – from Plans to Participants
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Table 3—Fees and Expenses
Name / Type of Option
Total Annual
Operating Expenses
As a %
Per $1000
Shareholder-Type Fees
Equity Funds A Index Fund/
S&P 500 0.18% $1.80
$20 annual service charge subtracted from investments held in this option if valued at less than $10,000.
B Fund/ Large Cap 2.45% $24.50
2.25% deferred sales charge subtracted from amounts withdrawn within 12 months of purchase.
C Fund/ International Stock 0.79% $7.90
5.75% sales charge subtracted from amounts invested.
D Fund/ Mid Cap ETF 0.20% $2.00
4.25% sales charge subtracted from amounts withdrawn.
Bond Funds E Fund/
Bond Index 0.50% $5.00
N/A
Other F Fund/
GICs 0.46% $4.60
10% charge subtracted from amounts withdrawn within 18 months of initial investment.
Fee Disclosures – from Plans to Participants
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Table 4—Annuity Options Name Objectives / Goals Pricing Factors Restrictions / Fees
Lifetime Income Option
www. website
address
To provide a guaranteed stream of income for your life, based on shares you acquire while you work. At age 65, you will receive monthly payments of $10 for each share you own, for your life. For example, if you own 30 shares at age 65, you will receive $300 per month over your life.
The cost of each share depends on your age and interest rates when you buy it. Ordinarily the closer you are to retirement, the more it will cost you to buy a share. The cost includes a guaranteed death benefit payable to a spouse or beneficiary if you die before payments begin. The death benefit is the total amount of your contributions, less any withdrawals.
Payment amounts are based on your life expectancy only and would be reduced if you choose a spousal joint and survivor benefit. You will pay a 25% surrender charge for any amount you withdraw before annuity payments begin. If your income payments are less than $50 per month, the option’s issuer may combine payments and pay you less frequently, or return to you the larger of your net contributions or the cash-out value of your income shares.
Consequences of non-compliance
Plan Sponsor is ultimately responsible for compliance as the fiduciary
If CSP does not provide fee disclosures: Request the missing information from the CSP in
writing Duty to fire CSP if information not still not provided Notify DOL in writing Sample Notice at
http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc
Potential prohibited transaction www.tatetryon.com 19
Consequences of non-compliance
Under IRS rules, the service provider would become a “disqualified person” and there could be excise tax
Potential for lawsuits against the plan for excessive investment fees
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Conclusions
Heightened focus on fees impact:1
Equity mutual fund average total expense ratio: 0.99% in 2000 and reduced to 0.79% in 2011
Bond mutual fund average total expense ratio: 0.76% in 2000 and reduced to 0.62% in 2011
Money market fund average total expense ratio: 0.49% in 2000 and reduced to 0.21% in 2011
1 Investment Company Institute’s ICI Research Perspective, April 2012.
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Comments or Questions?
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Speaker Biography
John Kubichek, is a manager in Tate & Tryon’s Audit and Assurance Services department with more than 14 years of public accounting experience working with a variety of nonprofit and for profit clients. Over the past decade, Mr. Kubichek has managed a variety of employee benefit plan audits, including 401(k), 403(b), multi-employer and defined benefit plan audits. He is currently the chair of Tate & Tryon’s Employee Benefit Plan Audit committee. Mr. Kubichek’s emphasis on nonprofit organizations serviced include multiple trade associations, charitable foundations, and healthcare facilities. The size of clients has varied from $100K to over $200M in annual revenues. He also has considerable experience with OMB Circular A-133 and in forensic accounting engagements. John is a Certified Public Accountant and Certified Fraud Examiner. He received a Bachelor of Science degree in accounting from Geneva College. He is active in the community by serving on a local church committee dedicated to hunger relief.
John Kubichek, CPA, CFE Audit Manager Tate & Tryon Direct: 202-419-5149 [email protected]
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Speaker Biography
Michael Aylward is a partner in The KLA Group at RBC Wealth Management. He provides comprehensive investment management and retirement planning services for associations, non-profit organizations and corporations, as well as individual investors and their families. He has worked for more than 25 years in financial services and business management industry. He has served in executive positions with USTrust, Bank Boston and Ruesch International. Additionally, he was a division Vice President with a major Washington DC trade group representing small to medium sized businesses. Mike is a Certified Employee Benefits Specialist through the Wharton School and the International Foundation of Employee Benefit Plans. Additionally, he is a Chartered Retirement Plans Specialist through the College for Financial Planning. He received a Bachelor of Arts degree in management and a Masters of Business Administration degree in finance from Boston College. Mike served in the Military Police Corps - United States Army.
Michael G. Aylward, CEBS, CRPS Vice President - Financial Advisor, Consulting Group RBC Wealth Management Direct:703-342-1188 [email protected]
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Guest Biography
David Moore is a Vice President, Managing Director in Fidelity’s Tax-Exempt Market relationship management team. He joins us today as a guest to provide Fidelity’s perspective on how they have helped their clients comply with the new disclosure requirements. David joined Fidelity in 1999 and overall has 17 years of industry experience in the design, operation, and administration of defined contribution and equity compensation plans. He previously managed a team of project managers in Fidelity’s large corporate implementation group where he was responsible for managing new client conversions such as Cardinal Health, Texas Instruments, Cap Gemini and Cablevision, as well as corporate actions for existing clients such as Verizon, Microsoft, Hewlett- Packard and Novartis. Before joining Fidelity, David was a Client Relationship Manager for Scudder Kemper Investments, where his client list included the University of Minnesota, West Virginia University and The Conference Board. David received a Bachelor of Arts degree in Finance from the University of Massachusetts – Lowell and a Masters of Business Administration degree in Finance from Bentley University. David also holds FINRA Series 7 and 63 licenses.
David J. Moore Vice President, Managing Director Fidelity Investments Direct: 617-563-0260 [email protected]
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