Retirement Legal and Compliance Update

Transcription

1 DiMe Schneider & Assciates, L.L.C. VOLUME 3, NO. 1 Retirement Legal and Cmpliance Update DOL Field Assistance Bulletin N Participant Fee Disclsure Guidance IN THIS ISSUE: DOL Field Assistance Bulletin N Chart f Electrnic Disclsure Optins fr Participant-level Fee Disclsures Tussey v. ABB, Inc. (and Fidelity) Frequently Asked Questin: If emplyers pst required ntices such as summary plan descriptins (SPD), summary annual reprts (SAR) and quarterly benefit statements n an intranet r Internet site, have they satisfied the DOL s electrnic disclsure regulatins On May 7, 2012, the Emplyee Benefits Security Administratin (EBSA), a part f the U.S. Department f Labr (DOL) issued Field Assistance Bulletin (FAB) , which primarily supplements regulatin sectin 404a-5, therwise knwn as the participant disclsure regulatins. The fllwing are a few key takeaways frm the FAB: In the event a plan s are whlly, r partially, trustee-directed, they need nt prvide investment-related disclsures regarding any trustee-directed. In ther wrds, plans nly have t prvide investment-related disclsures fr thse in which participants may chse t invest their accunt balances. 403(b) plans must cmply with the disclsure rules unless they meet the fllwing requirements: Cntract/accunt issued prir t Jan. 1, 2009; Emplyer ceased making, and is n lnger bligated t make, cntributins prir t Jan. 1, 2009; Individual wner f cntract has all rights and benefits t enfrce cntract; and Individual wner is fully vested in cntract. Nn-ERISA 403(b)s need nt cmply with disclsure rules. Plan-related and investment-related infrmatin may be disclsed in a single dcument. Infrmatin cntained therein need nt be duplicative (i.e., listing designated investment alternatives). 500 West Madisn Street, Suite 1700 Chicag, IL

2 When fees fr a given service are knwn at the time f disclsure, the explanatin must clearly identify the service (e.g., recrdkeeping), the cst f the services (e.g., 0.12 percent f the participant s accunt balance r $25 per participant) and the plan s allcatin methd (e.g., pr rata). When fees fr a given service are nt knwn at the time f disclsure, the explanatin must take int accunt the knwn facts and circumstances. Example: If the plan incurs any legal expenses, such expenses will be paid frm the plan s assets and deducted frm individual plan accunts n a pr-rata basis. If revenue sharing reduces administrative csts, an explanatin f same shuld be prvided. Example: The plan incurs mnthly recrdkeeping expenses f up t 0.02 percent f the plan s assets. These expenses typically will be deducted frm yur accunt n a pr rata basis. Hwever, these mnthly expenses may be paid, in whle r in part, frm revenue-sharing payments that the plan receives frm plan investment ptins. In the past, these payments have cmpletely paid fr these recrdkeeping expenses in sme mnths. If revenue sharing payments are received, the plan will pay less than 0.02 percent f the plan s assets per mnth, and nly thse expenses nt ffset by any revenue sharing payments will be deducted frm yur accunt. If a plan dcument prvides that administrative fees are t be paid ut f frfeitures and nt individual participant accunts, thse fees need nt be disclsed. If the plan dcument prvides that the administratr has discretin t pay administrative fees 1) ut f frfeitures, 2) ut f the plan spnsr s general crprate accunt r 3) prprtinately frm individual participant accunts, but the administratr has never utilized the third ptin, the administrative expenses need nt be disclsed. If circumstances were t change, the plan wuld have t disclse the change. If the plan has a wrap r asset charge, it may nt include the cst f recrdkeeping expense in the ttal annual perating expenses f the plan s designated investment alternatives instead f as a separate administrative fee. The revenue-sharing explanatin required under the regulatins need nt itemize r identify the specific plan administrative expenses being paid frm the designated investment alternatives revenue sharing. Hwever, a statement that sme r all f the plan s administrative expenses are paid indirectly thrugh sme r all f the plan s designated investment alternatives must be prvided. If a plan ffers a brkerage windw r SDBA, the disclsures must cntain a general descriptin f the vehicle, including: Hw and t whm t give investment instructin; Accunt balance requirements (if any); Restrictins r limitatins n trading (if any); Hw the vehicle differs frm the plan s designated investment alternatives; Whm t cntact with questins; Explanatin f fees/expenses that may be charged against the individual accunt, including: Fees necessary t pen vehicle; Onging fees; and 500 West Madisn Street, Suite 1700 Chicag, IL

3 Cmmissins/fees charged in cnnectin with purchase/sale f security (including back-end sales lads if knwn). Statement f the dllar amunt f fees actually charged during the preceding quarter against their individual accunts in cnnectin with use f the vehicle (alng with a descriptin f the services t which these fees relate). fee disclsure infrmatin regarding a brkerage windw must be prvided t all participants, nt nly thse using the vehicle. All disclsures must be prvided fr any designated investment alternative, even if it s clsed t new. Use f a blended benchmark using mre than ne apprpriate brad-based securities market index is apprpriate fr disclsure rules cncerning target date funds if the blended benchmark is representative f the actual hldings f the designated investment alternative. If the plan spnsr is prviding multiple cmparative charts supplied by varius service prviders/investment issuers, they all need t be prvided t participants at the same time. Plans need nt furnish a new cmparative chart t participants if there is a change t a designated investment alternative fllwing the plan s furnishing f the annual disclsure. Hwever, the website, with supplemental infrmatin, shuld be updated. Neither a designated 3(38), nr the accunt r mdels he r she manages, is cnsidered a designated investment alternative. Hwever, the plan must still annually identify the 3(38) and prvide plan-level fee infrmatin fr the 3(38) service, and quarterly disclse the dllar amunt f fees actually charged against individual accunts with a descriptin f the service. If a mdel is unitized, it may be cnsidered a designated investment alternative fr purpses f the disclsure rules. When a mdel is merely a means f allcating accunt assets, the plan must explain hw it differs frm the designated investment alternatives. If a plan ffers nly mdels made up f, nt separately designated under the plan, the mdels have t be treated as designated investment alternatives and are gverned by the disclsure rules. If a plan ffers a brkerage windw, and a significant number f participants invest in a nn-designated investment alternative available therein, the plan fiduciary has an affirmative respnsibility t determine whether these shuld be treated as designated fr purpses f the disclsure rules. [Pending further guidance] When a plan ffers mre than 25 investment alternatives, the DOL will nt require that all alternatives be treated as designated investment alternatives if: Disclsures are made fr at least three alternatives that cllectively meet the brad range requirements f ERISA Sectin 404(c); and Disclsures are made fr all ther alternatives n the plan s menu in which at least five participants (r 1 percent fr plans with 500+ participants) are invested n a date nt mre than 90 days preceding the annual disclsure. A fund-f-funds, which is a designated investment alternative, must have the perating expenses f the underlying funds reflected in its ttal annual perating expenses. Fr separate accunts (unregistered designated investment alternatives), the plan s general administrative expenses must be reflected in the designated investment alternative s ttal annual perating expenses. 500 West Madisn Street, Suite 1700 Chicag, IL

4 The cst f insurance designed t smth the rate f return in a stable value fund must be included in the ttal annual perating expenses f the stable value fund. The DOL will take int accunt whether a cvered service prvider r plan administratr has acted in gd faith based n a reasnable interpretatin f the regulatins. Chart f Electrnic Disclsure Optins fr Participant-level Fee Disclsures Participant-level Fee Disclsure Type f Infrmatin Regulatin Frmat Timing f Initial Disclsures Timing f Onging Disclsures General Infrmatin General investment instructins and limitatins, including brkerage windws DOL Reg. 5(c)(1)(i) SPD r Benefit Statement On r befre Administrative Expenses Explanatin f fees and expenses fr services prvided n a plan-wide basis that may be charged t individual accunts DOL Reg. 5(c)(2)(i) SPD r Benefit Statement On r befre AND Changes, at least 30 days in advance (nt mre than 90) Individual Expenses Explanatin f fees and expenses fr services prvided n an individual basis that may be charged t individual accunts DOL Reg. 5(c)(3)(i). SPD r Benefit Statement On r befre AND Changes, at least 30 days in advance (nt mre than 90) Fees Actually Charged Dllar amunt and descriptin f administrative and individual fees and expenses actually charged t individual accunts DOL Reg. 5(c)(2)(ii) and 5(c)(3)(ii) Benefit Statement First quarterly benefit statement Quarterly 500 West Madisn Street, Suite 1700 Chicag, IL

5 Investmentrelated: Specifics fr Each Optin Specific identifying, perfrmance, fee and expense, and benchmark infrmatin fr each investment ptin DOL Reg. 5(d)(1)(i) (iv) Cmparative Frmat (Chart r Similar Frmat) On r befre Investmentrelated: Website and Glssary Website infrmatin fr each investment ptin and glssary f terms DOL Reg. 5(d)(1)(v) (vi) Website prviding access t specified infrmatin fr each investment ptin On r befre Tussey v. ABB, Inc. (and Fidelity) On March 31, 2012, the U.S. District Curt fr the Western District f Missuri Central Divisin ruled n the case f Tussey v. ABB, Inc., 2012 WL (W.D. M. Mar. 31, 2012), amended in part sub nm. Tussey v. ABB Inc., 2012 WL (W.D. M. June 21, 2012). This case has several rulings f interest t plan fiduciaries. The curt ruled that crprate plan fiduciaries (jint and severally) wed the plan a cmbined $35.2 millin in damages, that Fidelity wed the plan $1.7 millin in mistreatment f plan flat and that the plan had t be brught t market fr cmpetitive bid, alng with several ther prcedural requirements. A brief summary f the facts shws that ABB spnsred tw qualified plans. ABB utilized Fidelity fr recrdkeeping f tw qualified plans, a defined benefit plan, nnqualified plans, health and welfare plans, and fr prvisin f additinal crpratin services. Fidelity was riginally hired in a selective bidding prcess. Fidelity was riginally paid a per-participant hard-dllar fee, which shifted ver time t a revenuesharing arrangement. Fidelity s fee grew/shrank as the plans assets ebbed and flwed; hwever, Fidelity asked fr hard dllars t make up differences when revenue sharing declined (withut crrespnding rebate when revenue sharing increased). Brief Curt Hldings ABB vilated fiduciary duties in failure t mnitr recrdkeeping csts, failure t negtiate rebates, selectin f mre expensive share classes, and remval f Vanguard Wellingtn Fund and replacement with Fidelity Freedm Funds. ABB vilated fiduciary duties in agreeing t pay Fidelity amunt exceeding market csts fr plan service t subsidize crprate services prvided t ABB. Fidelity breached fiduciary duties t the plan in failure t distribute flat slely fr interest f plan. Fidelity breached fiduciary duties in transferring flat t plan s investment ptins instead f the plan. The curt rejected the plaintiff s glbal damages thery based n the assumptin that ABB s breaches infected all investment decisins. 500 West Madisn Street, Suite 1700 Chicag, IL

6 The Curt s Reasning and Analysis The plan s Investment Plicy Statement (IPS) states that at all times rebates will be used t ffset r reduce the cst[s]. The curt fcuses n ABB s failure t calculate the dllar amunt f the recrdkeeping fees and failure t leverage the plan s size t reduce csts. Als ABB never benchmarked the plan, even when an utside cnsulting firm indicated that the plan s verpayment seemed t subsidize Fidelity s crprate services t ABB. The curt ntes that the IPS requires the fiduciaries t examine three- and five-year perids f perfrmance, and if there are five years f underperfrmance, the fund is placed n a watch list. In deciding t remve the Vanguard Wellingtn Fund, the cmmittee did nt cnsider any three- r five-year perfrmance and never placed the fund n the watch list. In reviewing the fiduciaries selectin f the Vanguard s replacement (the Freedm Funds), the curt fcused n the IPS requirement fr a winnwing prcess and pricing implicatins f the change t the investment menu. The curt recgnized that the fiduciaries cnsidered three suites f funds, but pined that mre chices shuld have been cnsidered. The curt als states that it believes the Freedm Funds were chsen because f ABB s relatinship with Fidelity. Finally, the curt directly cmpared the perfrmance f the Vanguard Wellingtn Fund verses the perfrmance f the Freedm Funds and fund the latter underperfrming during the perid under cnsideratin. The curt als relied upn the underperfrmance and the fact that ther target date funds were less cstly, yet prvided better returns, than the Freedm Funds as evidence f imprudent prcess in the selectin f the Freedm Funds. The curt nted that when fund changes were t be made, the fiduciaries endeavred t make certain that changes wuld be revenue neutral. The curt stated that ABB did nt select ne investment ver anther slely because f a difference in their merit r value t the participants but nly because f the effect n ABB s methd f cmpensatin t Fidelity. Finally, upn the transfer f cntributins t the plan, r transfers f assets between within the plan, assets are prcessed thrugh a variety f accunts r prgrams that Fidelity versees. The curt fund this cnstituted discretinary cntrl ver plan assets. During the prcess, interest and incme (cllectively flat ) may be earned n assets prir t ultimate investment accrding t participant directin. Fidelity used the flat t pay bank expenses as well as recrdkeeping expenses. Remaining flat was then distributed amng the investment ptins that chse t receive it, thereby being distributed t all sharehlders f the, nt just thse plan participants wh generated the flat. The curt determined this t be cntrary t the trust agreement and cntrary t Fidelity s fiduciary respnsibilities. Frequently Asked Questin If emplyers pst required ntices such as summary plan descriptins (SPD), summary annual reprts (SAR) and quarterly benefit statements n an intranet r Internet site, have they satisfied the DOL s electrnic disclsure regulatins? N. If the emplyer is nly prviding a link t the investment cmpany s website, and frm there the participant has t search t lcate the SPD, SAR r quarterly benefit statement, this wuld nt meet the requirements under the U.S. Department f Labr s (DOL) electrnic disclsure regulatins, because it des nt result in actual receipt. The crrect apprach wuld be ntifying participants that the link exists n the website and explaining where n the website it is, hw t find it and what infrmatin is available n the website. 500 West Madisn Street, Suite 1700 Chicag, IL

7 The preamble t the DOL regulatin n the use f electrnic media t meet the varius ntice requirements prvides examples f what apprpriate and necessary measures an administratr wuld need t take t ensure furnishing dcuments results in actual receipt. These steps might include: The website hme page shuld cntain a prminent link t the website sectins that cntain infrmatin abut the plan. The website shuld include directins n hw t btain a replacement fr a lst r frgtten passwrd t the extent ne is needed. Disclsure dcuments shuld remain n the website fr a reasnable perid f time after participants and beneficiaries are ntified f their availability. Different rules fr distributin als apply, depending n whether the recipient has wrk-related cmputer access. The first step is t identify which emplyees have wrk-related cmputer access and which d nt. If the emplyees have wrk-related cmputer access, the emplyer may prvide the SPD, SAR and quarterly benefit statements t plan participants via a wrk address, r ntify them at that wrk address f the availability f the dcument n the website. The shuld include a statement indicating the significance f the dcument, that a paper versin f the ntice is available and hw t btain ne. These steps are all necessary t ensure furnishing the dcuments results in actual receipt. If an emplyee des nt have access t wrk as a part f their regular wrk duties, the emplyer may still the ntice t them, but certain cnditins must be met first: The individual must ntify the emplyer that he r she has adequate electrnic access, prvide the emplyer with a valid address and send an t the emplyer cnsenting t the electrnic ntificatin. The emplyer must ntify the individual f his r her right t a paper versin f the ntice, hw t cancel his r her cnsent, hw t revise an address and any hardware/sftware requirements. A hand-delivered cpy is nt recmmended as a primary methd f distributin. Fr thse individuals wh d nt receive the ntice electrnically, first-class mail wuld be the next preferred methd f delivery. In all cases, an emplyer shuld maintain a lg dcumenting the methd used and date distributed in the event f an audit. This material is intended fr the exclusive use f clients f DiMe Schneider & Assciates L.L.C. Cntent and frmat are privileged and cnfidential. Any disseminatin r distributin f this material is strictly prhibited. Infrmatin is btained frm a variety f surces which are believed but nt guaranteed t be accurate. It is nt intended t prvide specific legal, tax r ther prfessinal advice. The services f an apprpriate prfessinal shuld be sught regarding yur individual situatin. DiMe Schneider & Assciates LLC des nt ffer legal r tax services. 500 West Madisn Street, Suite 1700 Chicag, IL