Retirement Plans, a Legal Update:

Litigation against Wall Street Retirement Plans, Revenue Sharing and the ERISA Fiduciary

June 2017

TOPICS for TODAY:1. Employees at brokerage firms and

mutual fund families are suing over their own 401k plans.

2. One item that business owners, including law firms, can address to manage conflicts of interest in retirement plans: decode revenue sharing.

3. Status update on the Department of Labor’s Fiduciary Rule; plus, what ERISA requires.

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• American Century

• Ameriprise

• Edward Jones

• Fidelity

• Franklin Templeton

• Mass Mutual

• Morgan Stanley

• New York Life/Mainstay

• PIMCO

• Principal

• Putnam

• TIAA-CREF

• Transamerica

• Wells Fargo

NUMEROUS LAWSUITS HAVE BEEN FILED AGAINST RETIREMENT PLANS AT BROKERAGE

FIRMS AND MUTUAL FUND COMPANIES – BY THEIR OWN EMPLOYEES1:

21 OF THESE ‘WALL STREET’ RETIREMENT PLAN SUITS WERE FILED IN 2015 AND 2016, WITH 12 FILED IN 2016. IN 2017, BLACKROCK, CHARLES SCHWAB, J.P. MORGAN AND T.ROWE PRICE HAVE BEEN SERVED WITH CLASS

ACTION COMPLAINTS REGARDING THEIR RETIREMENT PLANS.2

1: http://www.groom.com/media/publication/1626_Proprietary_Funds_Litigation_Chart__August_2016_.pdf; and http://www.investmentnews.com/article/20160629/free/160629895/transamerica-settles-401-k-excessive-fee-lawsuit-with-its-employees.2: https://www.bna.com/charles-schwab-seeks-n57982086519/

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✓ Plaintiffs at these brokerage firms and mutual fund companies are claiming that their own retirement plans are riddled with conflicts of interest – those charged with plan oversight have breached their fiduciary duties.

✓ Since 2006, seven Wall Street Retirement Plan cases have settled for just over $130,000,0001.

✓ In late 2014, Fidelity2 settled a lawsuit with current and former employees for $12,000,000 (details on next slide). They also agreed to provide employees access to non-Fidelity funds.

✓ In November 2015, Principal3 settled – it paid $3,000,000 and agreed to reduce its plan expenses.

✓ Last June, Transamerica4 settled for nearly $4,000,000 and agreed to provide record keeping services, to its own plan through its own record keeper, at no cost.

WHAT IS HAPPENING WITH THESE LAWSUITS?

1: http://www.groom.com/media/publication/1626_Proprietary_Funds_Litigation_Chart__Au:gust_2016_.pdf2: Bilewicz et al. v. FMR LLC et al., Case 1:13-cv-10636-DJC (D. Mass. Jul 3, 2014)3: Anderson et al. v. Principal Life Insurance Co. et al., Case 4:15-cv-00119-JAJ-HCA (S.D. Iowa Nov. 18, 2015) 4: Dennard et al. v. Transamerica Corporation et al., Case 1:15-cv-00030-EJM (N.D. Iowa Jun. 24, 2016)

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✓ In this class action, the plaintiffs alleged that Fidelity breached its fiduciary duties under ERISA in offering only Fidelity investments–so called “Proprietary Funds”.

✓ The plaintiffs also claimed that Fidelity overwhelmed its employees in offering 160 different fund choices (again, only Fidelity funds).

✓ Moreover, in exclusively offering the Proprietary Funds, Fidelity denied their employees prudent choices relative to outside money managers, while leaving no choice but the (expensive) Proprietary Funds.

✓ Plaintiffs argued that Fidelity was lining its pockets from its own employees.

THE CLAIMS IN THE FIDELITY CASE1

1: Bilewicz et al. v. FMR LLC et al., Case 1:13-cv-10636-DJC (D. Mass. Jul 3, 2014)

➢ERISA prohibits a fiduciary from using its position vis-à-vis a retirement

plan for financial gain: a fiduciary must avoid conflicts of interest.

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1. When Wall Street insiders are suing their own retirement plans, Main Street businesses should take note.

2. Does the retirement plan offer investments from more than one mutual fund company?

3. Is the retirement plan bundled, meaning the same business takes care of all aspects of the plan: a) administration, b) investments and c) advice?

4. Has the business retained an outside fiduciary, legally required to act in the best interest of the plan and its participants, providing advice?

LESSONS FROM LITIGATION

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In May 2015, the United States Supreme Court ruled in a case that concerned breach of fiduciary duty under ERISA, related to a 401k retirement plan.1

TIBBLE V. EDISON INTERNATIONAL

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1: 135 S. Ct. 1823 (May 18, 2015).

✓ The key for the Tibble plaintiffs: Edison used more expensive funds to cover the cost of their retirement plan’s administration.

✓ Edison International paid less and their employees paid more.

✓ The additional cost was relatively complicated to see, as it was paid through higher revenue sharing or “Rebates”.

✓ This case law gives plaintiffs lawyers Supreme Court precedent for attacking the cost of investments and at least implicitly: Rebates.

TIBBLE ANALYSIS

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“REBATES” HAVE MANY NAMES:

Plaintiff’s Lawyers claim they are: “Kickbacks” and “pay-to-play schemes”.1

1: Rosen v. Prudential et al. Case: 3:15-cv-01839-VAB (D. Conn. Filed: Dec. 18, 2015).

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Finders Fees Administrative Reimbursements

Revenue Sharing Record Keeping or “RK” Fees

12b-1 Fees Shareholder Service Fees

Distribution Payments Fee Off-Set

Marketing Support Profit Sharing

Subtransfer Agency or “SubTA” Fees Legitimate Profits of the Investment Advisor

Rebates can substantially impact a retirement plan’s cost and the

employees’ ability to save.

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Let’s take a look inside a popular mutual fund to learn more about Rebates and the large numbers in

asset management.

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• One of the largest mutual funds in the United States with $142.6 billion in assets, as of July 1, 2016.

• The DSF generates approximately $951,000,000 in revenue each year.

• Foreign Success Fund, holds $123 billion in shareholder investments; in total, Dominion manages $1.287 trillion in mutual fund assets.

• Using the 2015 SEC disclosures, DSF’s average charge calculates to be 0.68%.

ESTIMATED TOTAL ANNUAL REVENUE for DOMINION:

RENAMED THE DOMINION SUCCESS FUND OR “DSF”

MANAGED BY ‘DOMINION CAPITAL’

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Share Class Total Expense 12b-1

Rebate to

Record

Keeper

“NET” to

Dominion

A 0.65% 0.25% 0.05%^ 0.35%

R-1 1.42% 1.00% 0.10% 0.32%

R-2 1.42% 0.75% 0.25% 0.42%

R-2E 1.07% 0.60% .0.10% 0.37%

R-3 0.98% 0.50% 0.10% 0.38%

R-4 0.67% 0.25% 0.10% 0.32%

R-5E 0.49% 0.00% tbd tbd

R-5 0.38% 0.00% 0.05% 0.33%

R-6 0.33% 0.00% 0.00% 0.33%

Expense structure and Rebates for share classes used in retirement plans.

SHARE CLASSES OF THE “DOMINION SUCCESS FUND”

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^Some recordkeepers may also receive per account (or “per head”) fees.

Rebates can be negotiated: what if a Plan increases its payout on Rebates from 0.05% to 0.25%?

WHAT’S THE POTENTIAL IMPACT FOR A RETIREMENT PLAN?

Assetsin the Plan

Current Rate%

Current Rebate in $$

Increased Rate%

New Rebate in $$

Client ABC $ 14,000,000 0.05% $ 7,000 0.25% $ 35,000

This results in savings of Where did this money come from?

Answer: the Asset Manager’s pocket

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Does Really Matter?Answer: Yes – the Key with Retirement Plans Is Compounding:

Let’s Use 6%.

Accumulation without Negotiated Rebates

(at 6%*)Amount of Increased Rebates

Accumulation with Increased Rebates

(at 6%*)

Client ABC $14,000,000 $28,000 $14,028,000

End of Year 1 $14,840,000 $28,000 $14,869,680

End of Year 20 $44,889,897 $560,000 $45,991,693

Additional $$$ from Rebate & Returns: $1,091,796

*These examples are hypothetical and for illustrative purposes only. The rates of return do not represent any actual investment and cannot be guaranteed.

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THREE QUESTIONS

➢ What fund share classes are we utilizing within our retirement plan? {Details like “A”, “D”, “R1”, “R2”, “R3” & “T” matter.}

➢ Why were those classes selected & who receives compensation from our funds?

➢ Has all revenue sharing been measured, fully disclosed and aggressively negotiated?

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The Cost of Advice

Administrative Expense

Investment Expense

Learn How to Value, Segment, and Analyze Retirement Plan Expenses in 3 Distinct Components:

TOTAL RETIREMENT PLAN COST17

Retirement Plan Sponsors Need to Understand Total Retirement Plan Cost and Rebates.

Key question: is the cost of retirement plan administration hidden in the plan’s investments?

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In February 2016, the White House announced its support for the Department

of Labor’s pending “Fiduciary Rule”.

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THE DEPARTMENT OF LABORANNOUNCED THE FINAL VERSION OF ITS FIDUCIARY RULE ON APRIL 6, 2016.

▪ The initial compliance date for the Fiduciary Rule was announced as April 10, 2017.

▪ On April 4, 2017, however Department action delayed the initial compliance date to June 9, 2017.

▪ Key change: the Department has expanded the definition of fiduciary and increased obligations related to Retirement Plans and IRA’s.

“While many advisers do act in their customers' best interest, not everyone is legally obligated to do so, and some do not.”

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Discussion: the Department’s Fiduciary Rule

▪ Collecting commissions related to a retirement plan may become considered prohibited transactions, under ERISA. In general, fee structures will be required to become “fee for service” and transparent.

▪ The Department however authorized the best interest contract exemption (or the “BIC”), which provides relief from prohibited transaction consequences, if certain requirements are met.

▪ While the BIC can be used to continue receipt of commissions, many traditional retirement plan advisers will be required to take on a new fiduciary role.

▪ Even those receiving compensation under the BIC will be required to adhere to standards aimed at ensuring that their advice is impartial and in the best interest of their customers; consequently, some brokers and insurance agents may need to substantial change their business models.

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▪ The Department has set a line of demarcation for larger retirement plans: “[those] who manage plan assets of $50+ million [. . .] [exercise] independent judgment and [are] capable of evaluating investment risks.”

▪ That means, employers with larger plans may continue work with firms that do not take on fiduciary liability for their recommendations; this approach however leaves the employer, or the named fiduciaries, exclusively liable, under ERISA, for looking after the best interest of the plan’s participants.

▪ If a retirement plan has less than $50 million (so called “Retail Plans”), the financial representative must become a fiduciary.

▪ Fiduciaries overseeing Retail Plans should ask questions about their relationships with retirement plan service providers and how revenue is generated from their plan.

▪ And fiduciaries for larger plans should be on notice: caveat emptor.

Discussion: Fiduciary Rule – Plan Size

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▪ Expanding the scope of fiduciary protection, the Department includes recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether to make them, how much and destination of the transferred monies, as covered investment advice, subject to the new rules.

▪ If a retirement plan service provider, that is the record keeper or brokerage firm, recommends that a retirement plan participant transfer assets from a plan, rolling proceeds into an IRA, that recommendation will be considered a fiduciary act.

▪ Service providers may argue that they merely ‘educate’ about choices.

▪ Depending upon incentives, that recommendation may be very cagey or even aggressive, creating a fine line between educating and making a recommendation.

▪ Discussion of the rollover question with service providers is prudent.

Discussion: Fiduciary Rule – IRA’s

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IN SUMMARY, PLAN SPONSORS SHOULD NOTE THAT THE

NEW FIDUCIARY RULES SUBSTANTIALLY IMPACT BOTH:

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AND

✓ On Friday, January 20th, Reince Priebus sent a memorandum ordering Federal agencies to freeze regulations not yet published in the Federal Register and to delay the effective date of those already published by 60 days.

✓ On Friday, February 3rd, President Trump issued a memorandum in which he instructed the Department to revisit the Fiduciary Rule. It failed to include a specific instruction to delay the first April 10, 2017 ‘compliance’ date.

✓ On March 1st, the Department published a proposed rule to delay the applicability (or compliance) date of the Fiduciary Rule from April 10 2017 to June 9, 2017.

✓ On April 4th, the Department announced its proposed rule effective, which implemented the delay. In particular, who is considered a “fiduciary” under Fiduciary Rule requirements and various exemptions, including the BIC, are deferred.

Regulatory Activity, Since January 20:

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❖ In some regard, the final outcome of the regulation may be lessened, as the word “fiduciary” and this question, “Are you required to always act in the best interest of the retirement plan and its savers?”, has become more established in the retirement plan conversation.

❖ On April 17, in discussing the status of the Fiduciary Rule, Pensions & Investments (“P&I”) stated: “The DOL decision to push back the rule's April 10 start date instead of holding up the rule indefinitely to address a White House call for wholesale review also has dimmed prospects for major changes in the future.” P&I reported that there were 178,000 comments against the delay and 15,000 in favor.1

The Fiduciary Rule: Where are we heading?

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1: http://www.pionline.com/article/20170417/PRINT/304179991/delay-seen-as-making-dol-fiduciary-rule-more-likely

“Seems like maybe our broker has a problem with this Fiduciary Rule, but I’m not certain how it

impacts our business or, even, me.”

NOTE: Someone or several persons at each organization have fiduciary responsibility for the retirement plan, particularly if there’s no outside fiduciary relationship.

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1. Designated as such in plan documents (“named fiduciary” or “plan administrator”)

2. Discretionary authority or control over management of the plan, including disposition of plan assets

3. Providing investment advice for compensation

4. Discretionary authority or responsibility over plan administration, including whether to deny benefits

Who is Fiduciary?

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ERISA Section 404(a) states: “[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of participants and beneficiaries.” This is often called the Duty of Loyalty.

There are 4 subsections, that detail the Exclusive purpose rule, the Prudent man rule, Diversificationand Compliance with plan documents:

▪ (1)(A) adds: “[F]or the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan”;

▪ (1)(B) adds: “[W]ith the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use[…]”;

▪ (1)(C) adds: “[B]y diversifying the investments of the plan so as to minimize the risk of large losses, unless […] prudent not to do so”;

▪ (1)(D) concludes with: “[I]n accordance with the documents and instruments governing the plan […]”

ERISA Requirements for Retirement Plan Fiduciaries:

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Tibble v. Edison?

One More ERISA Requirement: the Duty to Monitor

In Tibble, the Supreme Court ruled: “A trustee has a continuing duty–separate and apart from the duty to exercise prudence in selecting investments at the outset–to monitor, and remove imprudent, trust investments.”1

The Department suggests these items2:

1. Evaluate notices from service providers;

2. Review their performance;

3. Read their reports;

4. Check actual fees charged;

5. Ask about policies and practices;

6. Follow up on complaints.

Why so many ERISA

lawyers?

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1: 135 S. Ct. 1823 (May 18, 2015)2: U.S. Department of Labor. (2012, February). Meeting Your Fiduciary Responsibilities.

Non-Fiduciary(broker or agent)

ERISA 3(21) AdvisorERISA 3(38) Manager

CharacteristicsGenerally: collects commissions

from investments & provides suitable (or appropriate) advice

Must agree to provide advice that’s in the best interest of

the plan and participants

Responsible for the prudent selection of investments (in

writing); must be a bank, insurance company or registered investment

advisor

Services and Duties

Will likely suggest investments; may be limited to ‘approved’ or

proprietary funds

Suggests a list of investments; plan sponsor retains duty to

chose

Full discretion over investment selection, monitoring and

replacement; obligated to adhere to ERISA

Obligations that Plan Sponsor

Retains

Initial selection of investments; monitor; remove & replace

imprudent investments

Initial selection of investments; monitor;

remove & replace imprudent investments

Monitor the fiduciary manager

ERISA Fiduciary Liability

Plan sponsorPlan sponsor – 3(21) Advisor

acts as “co-fiduciary”3(38) Manager – Plan sponsor

must prudently monitor

Fiduciary Duties – Understanding Duties

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Common Fiduciary Considerations for Retirement Plans*➢ When did you last benchmark the plan?

• Periodically. Most firms examine their health insurance on an annual basis.

• Do you know your plan’s participation rate? What about average contribution percentage?

• Consider features like: auto-enrollment & auto-escalation.

• Does your plan match or make profit sharing contributions? Do your employees truly understand and value this benefit? Can they quantify the last employer contribution?

• Has testing been an issue? Does a safe-harbor mechanism make sense?

• What about a Roth savings (after-tax) provision?

➢ Does your plan have an investment committee?

➢ Does your plan follow an investment policy statement (“IPS”)?

➢ What are the consequences of naming the employer as the plan’s fiduciary?

➢ Would a “non-board” committee be a more effective fiduciary?

➢ Does your team understand the difference between settlor functions and plan fiduciary functions?

➢ Does your team use an outside third party, legally obligated to provide advice in the best interest of your plan and its participants?

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*Note: These questions are for example purposes only; please consult with your financial advisor, legal counsel or other professional.

1. How does the Department of Labor’s Fiduciary Rule impact the retirement plan?

2. Who is currently acting as our retirement plan’s fiduciaries, and do they understand the legal requirements?

3. Is there a third party acting as a fiduciary advisor, under ERISA, for the retirement plan?

4. Is that fiduciary status stated in writing?

5. Will individuals at my firm face increased liability for acts of a vendor or broker, in particular for IRA rollovers?

QUESTIONS for CONSIDERATION:

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TODAY’S TOPICS

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• Offering investments from a single asset manager is a strategy that appears to be suspect and will likely need supporting evidence to be prudent, under ERISA’s requirements.

• More might be less when it comes to retirement plans (give careful thought to selecting the number of plan investments, recalling the 160 funds in Fidelity’s plan).

• Using a single business to provide all aspects of managing the retirement plan can make conflicts of interest harder to identify.

REVIEW TOPIC #1: WHAT CAN WE LEARN FROM THE LAWSUITS AGAINST ‘WALL STREET’ RETIREMENT PLANS?

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• Understand each component of expense in the retirement plan: 1) administration, 2) investments and 3) advice.

• Scrutinize investment cost for embedded Rebates: revenue sharing, 12b-1 fees, RK fees, et cetera.

• When Rebates remain an aspect of the retirement plan they should be measured and aggressively negotiated.

• Utilize an independent 3rd party with deep technical expertise for benchmarking all three expenses.

REVIEW TOPIC #2: HOW TO BEST MANAGE “REBATES”?

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• Secure a written statement explaining the nature of the service provider’s relationship. “Are you a fiduciary?”

• Require all retirement plan providers to disclose and discuss their compensation structures and ask about conflicts of interest.

• Ask questions. If concerns persist, seek trusted counsel that has knowledge of ERISA and retirement plan experience.

• Think twice if a vendor or a representative reports: “The retirement plan, or any aspect of it, is free.”

REVIEW TOPIC #3: HOW TO SET A STRONG FIDUCIARY FOUNDATION IN THE CURRENT ENVIRONMENT?

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THANK YOU!

Securities offered through Cambridge Investment Research, Inc. "Cambridge", a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Lawing Financial, Inc. "Lawing Financial", a Registered Investment Adviser. Lawing Financial doing

business as Qualified Plan Advisors "QPA", 6201 College Blvd., 7th Floor | Overland Park, KS 66211 | 913.491.6226 | Fax: 913.491.3214 | www.lawingfinancial.com | Cambridge and Lawing Financial are not affiliated. Cambridge and Lawing Financial, Inc

do not provide tax advice. Please see your tax professional for additional information.

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A Department of Labor resource: The Department’s “Meeting Your Fiduciary Responsibilities” Booklet.

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/meetingyourfiduciaryresponsibilities.pdf

WHO IS A FIDUCIARY? “Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.

A plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation.”1

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1: U.S. Department of Labor. (2012, February). Meeting Your Fiduciary Responsibilities.

Qualified Plan Advisors – Overland Park, KSQualified Plan Advisors (“QPA”) - Established 1984

Servicing Retirement Plan Clients Nationwide

Federally Registered Investment Advisor

Firm is Comprised of over 100 Team Members, including:

ERISA and Benefit Attorneys Investment Advisor Representatives

Plan Design Specialists Certified Financial Planners®

Participant Enrollment Specialists Certified Public Accountants

Accredited Investment Fiduciaries® Chartered Financial Consultants®

Securities Registered Support Staff

Internal Trustee / Plan Sponsor Teams

Internal and External Trustee Service Teams

Internal and External Participant Services Teams

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• Michael joined Lawing Financial in 2015 as an attorney with a specific focus on ERISA services that are provided through Qualified Plan Advisors. Prior to Lawing, he provided legal and consulting services to retirement plan sponsors as the Managing Director of an Overland Park, Kansas based Registered Investment Advisory firm.

• From 2006 to 2013, he was a Vice President with one of the nation’s largest record keeping organizations, which served over 1 million participants and administered $100+ billion in retirement plan assets. His responsibilities included negotiating agreements with mutual fund managers and increasing revenue sharing payments. He helped established a process to review each mutual fund on the platform for total cost, as well as the applicable rebate–used to offset administrative expenses. As a member of the finance team, he reviewed hundreds of retirement plans ranging in size from $10 million to $20 billion, relative to market price, profitability, operational efficiency and risk.

• Contact Information:msmoots@lawingfinancial.com(800) 493-6226(913) 491-6226

MICHAEL SMOOTS: BIO

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This presentation is provided only as general information, for

educational purposes. It is not intended to be used as

consulting, investment, legal or tax advice. Please confer

with a licensed professional concerning questions about your

specific situation; it may differ from the circumstances

described herein. Your accountant, attorney, fiduciary advisor

or other professional may provide answers to your questions.

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