Examination and Opinion of the Reasonableness of Vendors Arrangements and Fees

Transcription

1 The Plan : Sample Co., Inc. 401(k) Plan Examination and Opinion of the Reasonableness of Vendors Arrangements and Fees Plan Contact Address: Robert Sample CFO SAMPLE CO., INC. 999 Any Street Any Town, USA THIS REPORT IS A SPECIMAN AND IS INTENDED FOR ILLUSTRATION PURPOSES ONLY Questions about the contents of this report may be directed to Roland Criss at Roland Criss Your partner in fiduciary excellence

2 TABLE OF CONTENTS Executive Summary... 3 Findings and Opinion... 4 Method of Examination... 7 Performance and Expense Comparison... 9 Service Category Benchmarking Summary Benchmarking Services Rendered Disclosures Copyright 2012 Roland Criss 2

3 EXECUTIVE SUMMARY In recent years, there have been a number of changes in the way services are provided to employee benefit plans and in the way service providers are compensated. Many of these changes may have improved efficiency and reduced the costs of administrative services and benefits for plans and their participants. The complexity resulting from these changes, however, also has made it more difficult for plan sponsors to understand what service providers actually are paid for the specific services rendered. Consequently, the U.S. Department of Labor commissioned a change to the Employee Retirement Income Security Act ( ERISA ) that requires much more disclosure about fees by vendors that serve ERISA retirement plans. That change is defined in Regulation 408(b)(2). The Plan Sponsor s Duty under Regulation 408(b)(2) Fiduciaries of retirement plans must evaluate the expenses paid by their plans for services and investments. In fact, it is both a fiduciary breach and a prohibited transaction to allow your plan to pay more than reasonable expenses. The preamble to Regulation 408(b)(2) states that once the responsible plan fiduciaries receive their vendors fee disclosures, they have a duty to evaluate them, assess their adequacy, and determine the reasonableness of the vendors arrangements and fees. The Supply Chain In effect, the Regulation is a supply chain management rule. The supply chain for ERISA retirement plans includes the vendor types shown in the image to the right. Not every ERISA plan hires and or even requires the services of all vendor types. For example, many plans are not served by an investment consultant or investment advisor for participants. Another example is actuaries that serve only defined benefit plans, not defined contribution plans like 401(k) and 403(b). This report reveals the findings of an independent examination of the Plan s vendors arrangements and fees they charge to your retirement plan. The report also contains Roland Criss opinion of whether the arrangements and fees are reasonable as required by the Regulation. Copyright 2012 Roland Criss 3

4 FINDINGS AND OPINION Key Criteria The key criteria used during the examination of the Plan s vendor arrangements and the vendors pricing are shown in the table to the right. The Plan s Vendor Categories Retirement plan sponsors are not required by federal pension law to hire the lowest cost service providers. There is, however, a catch. Irrespective of how high or low a vendor s fees might be the actual services it delivers must meet or exceed a commensurate level of quality. Consequently, service quality is an irreplaceable ingredient in determining if a vendor s arrangement and fees are reasonable. The fees that the Plan s vendors charge its participants are shown in the table to the right. EVALUATION CRITERIA The Plan The Plan s Peers No. of Peers Plan Type 401(k) Participants 40 < Assets in the Plan $1,000,000 $1mm $10mm 181 The Plan s Gross Fees Comparison Fees The Plan s Projected Annual SERVICE CATEGORIES VENDORS Total % $ Per Total % $ Per Total $ Investment Management Mutual Funds 0.47 $ $ $4, Custody/Trust Services XYZ Trust , Recordkeeping/Administration ABC, Inc , Advisor Services AnyAdvisor , Communication/Education Trainer Implementation/Termination N/A TOTAL 1.87% $ % $ $18, Uncovering Reasonableness If uncovering the reasonableness of vendor arrangements and fees could be performed by simply comparing the Plan s vendors gross fees to their competitors gross fees, then benchmarking would provide the answer. In order to comply with federal pension law, however, plan sponsors are required to assess the value of their vendors services, which, naturally, includes benchmarking vendors fees. The next page of this report shows the results of our assessment of the service quality that each of the Plan s vendors deliver in light of their arrangements and fees with the Plan. Copyright 2012 Roland Criss 4

5 FINDINGS AND OPINION Turning Apples into Oranges Comparing subjective items like service quality to objective items like dollars and cents can be like comparing apples to oranges. In order to make such a comparison more accurate, the Vendor Value Index converts the current status of the services the Plan receives from its vendors into a numeric value using in the calculations the dollars that the vendors were paid. The result can be used then to show if fees are appropriate in light of how well the actual level of services are being delivered. The Vendor Value Index produces a scoring scale that has a range of 1 to 5, with 5 the least desirable value. A vendor s arrangement and fees that are properly aligned would look like the chart to the right. Notice how the servicing values equal or exceed the fee values Administration Services (sample) Vendor Value Index TM What the Audit Revealed Fee Index Servicing Index During the audit, the Vendor Value Index system produced the scores shown below for each of the Plan s vendors by category and are reflected in the chart above. Current Year SERVICE CATEGORIES VVI Score Fee Index Servicing Index Investment Management Custody/Trust Services Recordkeeping/Administration Advisor Services Communication/Education Implementation/Termination VENDORS AVERAGE 1.2 Copyright 2012 Roland Criss 5

6 FINDINGS AND OPINION The Audit Report The auditor's report is a formal opinion, or denial thereof, issued by Roland Criss as an independent external auditor. The report may be subsequently provided to a user (such as an individual, a group of persons, a company, a government, or even the general public, among others) as an assurance service in order for the user to make decisions based on the results of the audit. The audit report is considered an essential tool for complying with ERISA, which requires that fees paid by a retirement plan to its vendors be tested to ensure that they are reasonable. Since the U.S. Department of Labor and the courts may prefer, or even may require such a test to be certified by an independent external auditor, many plan sponsors rely on their Fee Compliance Audit Report in order to satisfy regulators, upgrade their vendor relationships, defend legal challenges, and improve the appearance of prudence with their plans participants. Audit Report Types There are four common types of outcomes from a Roland Criss ERISA fee compliance audit, each one presenting a different situation encountered during the auditor s work. The four types are summarized and shown in the legend to the right of this paragraph. The Audit Opinion We have audited the arrangements and fees that the Plan pays to its service providers for the plan year ending December 31, 20XX. On the basis of the information provided by the Plan s Administrator and the disclosures made to the Plan by the Plan s vendors, it is Roland Criss unqualified opinion that the fees paid to the Plan s vendors are reasonable. AUDIT REPORT TYPES Unqualified Opinion An opinion is unqualified when the auditor concludes that a plan s fees are reasonable. This is a clean opinion that enables the plan sponsor s exemption from the prohibited transaction rule for parties in interest as described in ERISA Section 406(a). Qualified Opinion A nearly clean opinion that is subject to the correction of an exception in the plan s fee monitoring process. Adverse Opinion Issued when the auditor determines that a plan s fees cannot be substantiated by a level of service that complies with ERISA s guidelines. Denial of Opinion The auditor refuses to present an opinion because a conclusion could not be formed based on the information provided by the vendor and/or the plan s sponsor. Copyright 2012 Roland Criss 6

7 METHOD OF EXAMINATION Substantiating the Findings In the performance of the Regulation 408(b)(2) audit, we followed the guidelines set forth in the global ISO Standard. That Standard is an audit methodology that provides guidance on auditing management systems, including the principles of auditing, managing an audit program, and conducting management system audits, as well as guidance on the evaluation of the competence of individuals involved in the audit process. During the audit, we reviewed the following documents: the Plan Administrator s responses to our Vendor Status Questionnaire; the Plan s vendors service agreements; forms and/or reports used by the Plan s vendors to make their disclosures required by Regulation 408(b)(2); sampling of account statements; and vendors servicing tools including websites. The Vendor Value Index The Investment Fiduciary Leadership Council ( IFLC ), which is a not for profit developer of fiduciary standards, formed an ERISA plan sponsor task force in early The purpose of the task force was to identify the service quality factors that would allow plan fiduciaries to reliably conclude if their vendors fees are reasonable pursuant to Regulation 408(b)(2). The service quality factors that emerged from the work of IFLC s task force are key components of the methodology used in this audit and they include the following: demonstrated expertise; administration functionality; client support; participant communication; security; fiduciary status; and technology platform; general reputation in the marketplace. operating processes; Copyright 2012 Roland Criss 7

8 METHOD OF EXAMINATION In order to convert the subjective aspects of service quality into a quantitative value for testing purposes, we weighted IFLC s factors according to their relative strength by vendor categories. We then applied a rating to each factor based on our audit findings. The result is the servicing index. We then developed a fee index for each vendor, which is based on its historical rate of compensation from the Plan. Together, the servicing index and the fee index form each service provider s Vendor Value Index, which is a proprietary formula developed by Roland Criss. Key benefits of the Vendor Value Index for conducting a Regulation 408(b)(2) compliance audit include: converts hard to evaluate services into numeric values, based on unbiased and impartial analysis, exposes wrong pricing structures and shows where they need correction, makes apples to apples comparisons of vendors a reality, and eliminates confusing jargon. Copyright 2012 Roland Criss 8

9 PERFORMANCE AND EXPENSE COMPARISON Large Growth Fund Name Ticker Current Assets OER* Expense Analysis Total Returns Annualized Total Returns % Revenue Sharing 3 Mth YTD 1 Yr 3 Yr 5 Yr 10 Yr American Funds Growth Fund of Amer R5 RGAFX $75, % 0.05% 11.88% 5.20% 20.29% 1.50% 3.38% Large Blend Vanguard 500 Index Admiral VFIAX $125, % 0.00% 12.95% 5.87% 22.56% 2.25% 2.89% 2.60% Large Value American Beacon Lg Cap Value Inst AADEX $125, % 0.10% 13.47% 5.54% 20.28% 0.59% 2.17% 5.65% Mid Cap Growth Artisan Mid Cap Inv ARTMX $50, % 0.40% 10.08% 4.28% 37.05% 9.03% 7.91% 6.53% Mid Cap Value JPMorgan Mid Cap Value Instl FLMVX $45, % 0.38% 11.31% 4.77% 26.66% 5.90% 4.98% 9.81% Small Growth Wasatch Micro Cap Value WAMVX $25, % 0.40% 10.40% 2.60% 23.21% 7.35% 6.31% Small Value Allianz NFJ Small Cap Value PSVIX $75, % 0.10% 12.40% 6.23% 30.48% 8.41% 7.93% 12.54% Foreign Large Value Dodge & Cox International Stock DODFX $35, % 0.10% 11.74% 3.50% 23.20% 0.66% 4.71% Foreign Large Blend American Funds EuroPacific Gr R5 RERFX $125, % 0.05% 9.99% 3.07% 19.89% 0.46% 5.45% Copyright 2012 Roland Criss 9

10 PERFORMANCE AND EXPENSE COMPARISON Intermediate Term Bond Fund Name Ticker Current Assets Mapping Assets Expense Analysis Total Returns Annualized Total Returns % OER* Revenue Sharing 3 Mth YTD 1 Yr 3 Yr 5 Yr 10 Yr PIMCO Total Return Instl PTTRX $200, % 0.00% 0.28% 0.82% 7.31% 8.15% 8.12% 7.16% Inflation Protected Bond Vanguard Inflation Protected Secs Instl VIPIX $45, % 0.00% 0.72% 0.87% 6.83% 3.22% 5.39% Money Market Taxable Vanguard Prime Money Market Instl VMRXX $75, % 0.00% 0.05% 0.03% 0.20% 1.03% 2.68% 2.49% Total Assets $1,000,000 *OER reflects the prospectus Gross Expense Ratio Weighted Average % Total Cost Analysis Total Expense Revenue Sharing Net Investment Cost Current Porfolio $5, % $ % $4, % Limiting Conditions: 1. Roland Criss does not sell or offer investment advice, recordkeeping, TPA, custodian, or trustee services to ERISA plan sponsors. 2. Roland Criss has been retained to perform the audit described in this report. In such capacity, Roland Criss has acknowledged that it is a functional fiduciary to the Plan, as that term is defined in its service agreement with the Plan s sponsor, and was compensated for the audit at its standard billing rate. 3. Roland Criss has not and will not advise the Plan s sponsor regarding the selection of any investments. Consequently, the audit purposely did not evaluate the appropriateness for the Plan of the investments listed above. Copyright 2012 Roland Criss 10

11 SERVICE CATEGORY BENCHMARKING SUMMARY Your Plan of 40 participants is Benchmarked against 246 Plans within a participant count range of < 100 Current Plan High Low Mean Median SERVICE CATEGORIES Total % $ Per Head % $ Per Head % $ Per Head % $ Per Head % $ Per Head Investment Management 0.47% $ % $ % $ % $ % $ Custody/Trust Services 0.20% $ % $ % $ % $ % $97.03 Recordkeeping/Administration 0.45% $ % $3, % $ % $ % $ Advisory 0.75% $ % $1, % $ % $ % $ Communication/Education 0.00% $ % $ % $ % $ % $51.05 Implementation/Termination 0.00% $ % $ % $ % $ % $0.00 TOTAL 1.87% $ % $6, % $ % $ % $ Your Plan of $1,000,000 is Benchmarked against 181 Plans within a range of $1 million to $10million Current Plan High Low Mean Median SERVICE CATEGORIES Total % Total $ % Total $ % Total $ % Total $ % Total $ Investment Management 0.47% $4, % $54, % $9, % $23, % $21,700 Custody/Trust Services 0.20% $2, % $9, % $ % $1, % $1,300 Recordkeeping/Administration 0.45% $4, % $25, % $1, % $4, % $4,300 Advisory 0.75% $7, % $32, % $2, % $10, % $6,500 Communication/Education 0.00% $ % $1, % $1, % $1, % $1,700 Implementation/Termination 0.00% $ % $ % $ % $ % $0.00 TOTAL 1.87% $18, % $123, % $14, % $42, % $35,500 Copyright 2012 Roland Criss 11

12 BENCHMARKING SERVICES RENDERED Your Plan of $1,000,000 is Benchmarked against 181 Plans within a range of $1 million to $10 million Investment Management Revenue Captured Deducted from Assets % Cost $ Cost % Cost Conv Total % Cost Identifier High (%) Low (%) Mean (%) Median (%) Trading Costs No 0.00% $0 0.00% 0.00% 0.05% 0.02% 0.02% 0.02% Bid Ask Spreads No 0.00% $0 0.00% 0.00% 0.03% 0.03% 0.03% 0.03% Price Concessions No 0.00% $0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Commission Recapture No 0.00% $0 0.00% 0.00% 0.50% 0.50% 0.50% 0.50% Soft Dollar Costs No 0.00% $0 0.00% 0.00% 0.54% 0.54% 0.54% 0.54% Securities Lending No 0.00% $0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Group Annuity Contract No 0.00% $0 0.00% 0.00% 1.15% 0.00% 0.44% 0.35% Company Stock No 0.00% $0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Pure Investment Management Fee Yes No 0.00% $0 0.00% 0.47% 2.32% 0.13% 0.53% 0.60% Other No 0.00% $0 0.00% 0.00% 0.82% 0.10% 0.32% 0.13% TOTAL 0.47% 5.41% 1.32% 2.38% 2.17% Advisor Services Revenue Captured Deducted from Assets % Cost $ Cost % Cost Conv Total % Cost Identifier High (%) Low (%) Mean (%) Median (%) ERISA 3(21) Functional Fiduciary Yes Yes 0.00% $7, % 0.75% RIA Fee 2.50% 0.13% 0.47% 0.50% Investment Manager Search Yes No 0.00% $ % 0.00% Included 0.01% 0.01% 0.01% 0.01% Investment Menu Design Yes No 0.00% $ % 0.00% Included 0.01% 0.01% 0.01% 0.01% Investment Policy Statement Yes No 0.00% $ % 0.00% Included 0.07% 0.01% 0.02% 0.03% Asset Allocation Modeling Yes No 0.00% $ % 0.00% Included 0.01% 0.01% 0.01% 0.01% Investment Monitoring Yes No 0.00% $ % 0.00% Included 0.50% 0.01% 0.32% 0.01% Education Yes No 0.00% $ % 0.00% Included 0.01% 0.01% 0.01% 0.01% Expense Analysis Yes No 0.00% $ % 0.00% Included 0.01% 0.01% 0.01% 0.01% Other Services Yes No 0.00% $ % 0.00% Included 0.16% 0.05% 0.14% 0.06% TOTAL 0.00% $7, % 0.75% 3.28% 0.25% 1.00% 0.65% Copyright 2012 Roland Criss 12

13 BENCHMARKING SERVICES RENDERED Your Plan of 40 participants is Benchmarked against 246 Plans within a participant count range of < 100 Recordkeeping Services Revenue Captured Deducted from Assets % Cost $ Cost % Cost Conv Total % Cost Identifier High (%) Low (%) Mean (%) Median (%) Recordkeeping Yes No 0.00% $2, % 0.22% Included 1.38% 0.01% 0.22% 0.16% Processing Transactions Yes No 0.00% $ % 0.00% Included 0.03% 0.00% 0.00% 0.00% Process Payroll Deferrals Yes No 0.00% $ % 0.00% Included 0.03% 0.00% 0.00% 0.00% Participant Statements Yes No 0.00% $ % 0.00% Included 0.03% 0.00% 0.01% 0.01% Participant Support Yes No 0.00% $ % 0.00% Included 0.03% 0.03% 0.03% 0.03% TOTAL 0.00% $2, % 0.22% 1.50% 0.04% 0.26% 0.20% Administration Services Revenue Captured Deducted from Assets % Cost $ Cost % Cost Conv Total % Cost Identifier High (%) Low (%) Mean (%) Median (%) Administration Yes Yes 0.00% $2, % 0.23% RIA Fee 0.65% 0.01% 0.09% 0.09% Compliance Testing Yes No 0.00% $ % 0.00% Included 0.10% 0.03% 0.05% 0.04% 5500 Preparation Yes No 0.00% $ % 0.00% Included 0.03% 0.00% 0.02% 0.02% Plan Design Yes No 0.00% $ % 0.00% Included 0.24% 0.03% 0.07% 0.08% TOTAL 0.00% $2, % 0.23% 1.02% 0.07% 0.23% 0.23% Copyright 2012 Roland Criss 13

14 BENCHMARKING SERVICES RENDERED This specimen report is designed for illustration purposes only. For brevity sake, data about other typical vendors to retirement plans was purposely not modeled and is not shown in this version of the report. Copyright 2012 Roland Criss 14

15 DISCLOSURES This report is a specimen and is to be used for illustration purposes only. Since this specimen does not include benchmarked tables for all of the hypothetical plan s services and vendors, detail about the related fees is not shown (e.g., Communication/Education). An actual report would include all of a subject retirement plan s covered service providers as that term is defined in ERISA Section 408(b)(2). Past performance does not guarantee future results. The value of an investment will vary so that an investor's shares, when redeemed, may be worth less than their original value. Hyphens appear in data columns to indicate that data is not available. Separate Account data is a delayed import and will be available approximately 45 days after month end. Therefore, some of the Separate Account data may be empty or outdated until it is available. Peer groups are comprised of all of the funds that match an investment's category as classified by Morningstar. Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings over a three year period. Although the data contained within this report has been obtained from sources believed to be reliable, no third party associated with the development of this software or the importation of data guarantees the information contained herein is accurate, adequate, or complete. In addition, there are no warranties, conditions, guaranties or representations, whether express or implied, in law or in fact, oral or in writing as to the information contained herein by any third party. Each third party, their employees, affiliates, contractors, agents, or any other information provider expressly disclaim any condition of quality and any implied warranty of title, non infringement, merchantability or fitness for a particular purpose and under no circumstances will they be liable for any indirect, incidental, special or consequential damages or for any errors in the information contained in this report or for any actions taken in reliance thereon, including lost profits, regardless of whether such damages could have been foreseen or prevented. Information contained herein is subject to change without notice. Unless otherwise noted, market data 2009 Morningstar, Inc. All Rights Reserved. The information contained herein: 1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Roland Criss is a firm that conducts audits of organizations against relevant laws that govern their fiduciary responsibilities. In order to maintain strict independence, Roland Criss does not offer any investment, recordkeeping related, or custodian services to anyone. *** This investment does not have the performance history for the time frame selected. Therefore, the rate of return calculation and the accumulative value ignores this investment and its comparative. specmp v11 Copyright 2012 Roland Criss 15