Managing Employer Fiduciary Issues for 401(k) and 403(b) Plan Sponsors in 2013

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1 Managing Employer Fiduciary Issues for 401(k) and 403(b) Plan Sponsors in 2013 Presented by: Rose Panico-Marino, AIF, ERPA, QPA Senior Vice President January 30, 2013

2 Learning Objectives Review specific areas of fiduciary responsibility, including: Required plan amendment/restatement Small plan audit exception Participant enrollment and benefits Plan expense allocations New participant disclosures Reasonable plan fees 2

3 #10--Plan Document Amendment/Restatement Plan documents must be timely amended for law changes All individually designed plans must be restated every five years. Imminent Restatement deadline of January 31, 2013 if Plan sponsor s EIN ends in 2 or 7, or Plan is multiple employer plan Next restatement deadline is January 31, 2014 if Plan sponsor s EIN 3 or 8, or Plan is a governmental plan 3

4 #10--Plan Amendments What if the plan misses an amendment deadline? Amend plan as soon as possible and submit to IRS to avoid plan disqualification or sanctions IRS user fee is based upon number of participants Ranges from $750 to $25, (b) Plans that did not have written document in place timely may pay reduced fee (50%) if submitted by 12/31/2013 4

5 #10--Plan Amendments What if the plan misses an amendment deadline? Fee is reduced by 50% if submitted within one year of original amendment due date Amendments adopted within three months of original amendment due date eligible for reduced fee of $500 Interim amendments reduced fee of $375 if submitted to IRS and original amendment deadline is within current restatement cycle 5

6 #9 Independent Auditor Requirements Which plans must be audited? Plan with more than 100 participants on the first day of the initial plan year. Plan which has passed 120 participants on the first day of any plan year Plan with fewer than 100 participants that does not satisfy the exemption from the small plan audit Plans holding hard to value assets that do not have sufficient bonding. 6

7 #9 Independent Auditor Requirements Requirements for the audit waiver for small plans? As of the last day of the preceding plan year at least 95% of a small pension plan s assets must be qualifying plan assets or, if less than 95% are qualifying plan assets, then any person who handles assets of a plan that do not constitute qualifying plan assets must be bonded in an amount that is at least equal to the value of the non-qualifying plan assets he or she handles. The plan must include certain information in the Summary Annual Report (SAR) furnished to participants and beneficiaries in addition to the information ordinarily required. 7

8 #9 Independent Auditor Requirements Qualifying plan assets include: Any asset held by certain regulated financial institutions Shares issued by an investment company registered under the Investment Company Act of 1940 (e.g. mutual fund shares); Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state; In the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control and with respect to which the participant or beneficiary is furnished, at least annually, a statement from a regulated financial institution describing the plan assets held or issued by the institution and the amount of such assets; Qualifying employer securities, as defined in ERISA section 407(d)(5); and Participant loans meeting the requirements of ERISA section 408(b)(1), whether or not they have been deemed distributed. 8

9 #9 Independent Auditor Requirements Who is counted as a participant for audit purposes? Actively employed and participating Actively employed and eligible, but not participating All others having an account balance Determined as of the first day of the plan year 9

10 #9 Independent Auditor Requirements Possible Issues with Auditor s Report Lack of auditor expertise could raise questions about fiduciary prudence Certification does not apply to contributions or distributions Limited scope audits under scrutiny for lack of detail 10

11 #8 Form 5500 Timely Filing Form 5500 must be filed by last day of 7 th month following end of plan year. May be extended 2 ½ months Return must be complete to be considered timely Large plans must include independent auditor s opinion Requires coordination between plan sponsor, auditor and service providers Possible penalties of $1,125 per day for late filings 11

12 #8 Form 5500 Timely Filing What should you expect if you file an incomplete return? Electronic filing has shortened timing of notices considerably for delinquent and incomplete returns First notice is 45-day notice Respond timely Call the agent and follow up in writing Second notice is 35-day notice of intent to levy penalties Respond timely 12

13 #7 Participant Enrollment Eligible employees must enter the Plan timely Three types of common errors: Failure to provide enrollment materials Failure to implement participant election Failure to enroll pursuant to plan s automatic enrollment provisions Failures create missed deferral opportunities in 401(k) and 403(b) plans 13

14 #7 Participant Enrollment When eligible employees do not enter the Plan timely Employer will be liable for missed deferral opportunity and employer contributions (including earnings) Errors often occur when past service is credited to employees, such as, Acquisitions and mergers Rehired employees Errors occur due to turnover of staff responsible for enrollment, such as HR, Benefits, and Payroll 14

15 #6 Timely Deposits to Plan Plan Sponsors must deposit funds as soon as possible after receipt or deduction from payroll. Funds include: employee deferrals, loan repayments, and after-tax contributions DOL considers as soon as possible to be based upon facts and circumstances. Generally, Large plans within 3 business days (may be sooner) Small plans within 7 business days (regulatory safe harbor) Non-ERISA plans 403(b) plans 15 business days after end of month in which withheld or received 15

16 #6 Timely Deposits to Plan Employers who fail to make timely deposits must make plan whole for improper use of funds. Greater of: Restoration of Profits or Lost Earnings Restoration of profits occurs when funds were used for specific purpose in which profit is identifiable Lost earnings is most commonly applicable DOL has on-line calculator for corrections being submitted to them Employers must pay excise tax to IRS on improper use of funds Excise tax may be waived in certain cases if submitted to DOL Excise tax is calculated on interest, using IRS underpayment rate Be aware compounding in future years until fully corrected 16

17 #5 Plan Compensation Retirement plan documents contain specific definitions of Compensation for plan purposes. Using incorrect compensation affects many areas: Employee deferrals withheld from payroll Employer contribution calculations Annual compliance testing 17

18 #5 Plan Compensation Examples of common compensation errors include: Failing to withhold 401(k) deferrals on bonuses, fringe benefits, and non-cash compensation included in Plan definition Using total gross wages to calculate employer contributions when the plan excludes certain compensation (i.e. fringe benefits, etc.) Failing to make contributions on Third Party Sick Pay when the document does not exclude welfare benefits Employers must correct under/over-contributions created by using incorrect compensation 18

19 #4 Using Temporary / Leased Workers In many cases, employers must credit employees with service performed through a temporary staffing or leasing arrangement when later hired as employee. Service is credited for Eligibility, Benefits, and Vesting Must insure temporary staffing agency will provide necessary information to properly credit service by individual: Dates of birth Hours worked for employer Compensation for services to employer 19

20 #4 Using Temporary / Leased Workers If individual worked through temporary or leased arrangement and met following criteria, service must be credited when this individual is hired as an employee: Agreement between Employer and Agency to supply temporary / leased worker (agreement may be written or oral) Individual was common law employee of the Agency providing the temporary / leased worker Individual performed services under the Employer s primary direction or control 20

21 #3 Participant Fee and Investment Disclosures Defined contribution plans allowing participant investment direction must provide specific disclosures to participants. All Eligible Participants and Beneficiaries who have the right to direct the investment of their account Eligible employees who are not participating Beneficiaries of deceased participants with account in plan The disclosures fall into two basic categories: Plan related information Investment related information 21

22 #3 Participant Fee and Investment Disclosures Plan Related Information General Plan and Expense Information Investment Procedures and Expenses which may be charged Initial and annual disclosures Periodic disclosures must be provided 30 to 90 days in advance of material changes Actual expenses charged against participant accounts Quarterly disclosures Typically on participant statement 22

23 #3 Participant Fee and Investment Disclosures Plan Related Information Expense Information Includes Administrative Expenses: Legal, accounting, recordkeeping, etc. Explanation of allocation method among participants Pro-rata, per capita, etc. Individual Expenses: Loan fees, distribution fees, QDRO fees, etc. 23

24 #3 Participant Fee and Investment Disclosures Plan Related Information - Brokerage Accounts Disclosure should include how to give investment instructions, account balance requirements, restrictions on trading, how the window is different from the plan s designated investment alternatives, and a contact for questions. An explanation of fees and expenses that may be charged against the account of a participant on an individual basis, such as fees for investing in or liquidating an investment or failing to maintain a minimum account balance although plan administrators get a break from disclosing fees associated with investments available through the brokerage window. Plan administrators may use a general statement, stating that such investments may charge their own fees and expenses. 24

25 #3 Participant Fee and Investment Disclosures Investment Related Information Investment information must be provided in comparative format Initial and annual disclosures Other information following investment or upon request Periodic disclosures must be provided 30 to 90 days in advance of a fund change Does not apply to self-directed brokerage accounts or similar arrangements but such accounts are being scrutinized May apply to investment models, depending upon whether participant may override elections 25

26 #3 Participant Fee and Investment Disclosures Investment Related Information Provide upon initial enrollment and annually thereafter Must provide the following in comparative format for each designated investment alternative Investment name and category Average annual return--1, 5, 10 calendar year periods Fixed rate of return and period for applicable investments Benchmarks Fee and expense information Internet Web site address for investment info 26

27 #3 Participant Fee and Investment Disclosures Investment Related Information Provide after initial investment in designated investment alternative Voting, tender, and similar rights IF these rights are passed through to participant 27

28 #3 Participant Fee and Investment Disclosures Investment Related Information Provide upon participant request Investment prospectus or similar documents for non-registered investments Financial reports to the extent provided to plan Value of each designated investment share or unit and date the value was determined List of assets in portfolio of each designated investment alternative 28

29 #3 Participant Fee and Investment Disclosures Changes to Investments and/or Fees For any changes made to the Plan expenses or investment options, notice must be provided at least 30 to 90 days in advance of the change. The employer elects to start deducting fees from participant accounts when it had not done so previously and the fees were not included on a prior disclosure. A new investment is added or removed from the fund line-up. The administrative or individual fees are being changed. 29

30 #2 Plan Sponsor Fee Disclosure and Analysis Fiduciary Responsibility Related to Plan Fees ERISA requires plan fiduciaries to pay no more than reasonable fees for services rendered to plan First step in determining reasonableness of fees is to quantify the fees Indirect fees deducted directly from investments have made this step difficult for plan fiduciaries Many service providers promote services as free when they are receiving considerable amounts of indirect compensation related to those services 30

31 #2 Plan Sponsor Fee Disclosure and Analysis Required fee disclosures was effective July 1, 2012 Proposed regulations issued December 2007 Final regulations issued January 25, 2012 Applies to all retirement plans, except: SEPs SIMPLE IRAs Governmental plans Non-ERISA 403(b) plans Owner-only plans Nonqualified deferred compensation plans 31

32 #2 Plan Sponsor Fee Disclosure and Analysis Covered service providers Covered service provider must provide disclosures to responsible plan fiduciary within reasonable time prior to entering into contract Changes to non-investment disclosures must be provided to plan fiduciary within 60 days of service provider being made aware Investment information changes must be disclosed annually Disclosures address: Covered services Compensation received Relationships among affiliates and subcontractors Investment information 32

33 #2 Plan Sponsor Fee Disclosure and Analysis Covered service providers Covered service provider is a service provider who reasonably expects to receive $1,000 or more in direct and/or indirect compensation for services to plan Covered Services Services provided directly to plan as Fiduciary Services as a Fiduciary provided to plan investment Services directly to plan as an RIA Recordkeeping or brokerage services to self-directed defined contribution plan Other services, IF any indirect compensation is expected 33

34 #2 Plan Sponsor Fee Disclosure and Analysis Service Disclosure Must provide basic description necessary for fiduciaries to make informed decisions regarding costs and conflicts Plan fiduciaries must take care when assessing service providers that they understand all services offered versus services needed for their plan If the service provider is performing any services as a Fiduciary or an RIA under either Investment Advisors Act of 1940 or State law, a statement disclosing this status must be included 34

35 #2 Plan Sponsor Fee Disclosure and Analysis Compensation Disclosure Direct compensation Explicit fees to be paid directly from plan Indirect compensation, a.k.a. invisible comp Compensation expected to be received by a Covered Service Provider, Affiliate or Subcontractor from third parties for services provided to the plan Description of arrangement under which indirect comp is paid and service(s) provided in exchange for such compensation Normally highest plan expense 35

36 #2 Plan Sponsor Fee Disclosure and Analysis Compensation Disclosure Indirect compensation expected to be received by Covered Service Provider, Affiliate or Subcontractor May be provided as: Dollar amount Formula Percentage of plan assets Per capita charge Other reasonable method Good faith estimate with assumptions 36

37 #2 Plan Sponsor Fee Disclosure and Analysis Compensation Disclosure Compensation to be paid between related parties must be disclosed along with a description of the service, the payer and the recipient Compensation expected upon contract termination How any prepaid amounts will be calculated and refunded Manner in which compensation will be received by service provider Direct bill Deduction from participant accounts Charged against plan investments 37

38 #2 Plan Sponsor Fee Disclosure and Analysis Recordkeeping Disclosure Recordkeepers for participant-directed defined contribution plans must provide estimate of recordkeeping costs if Any portion of recordkeeping services is not covered by explicit compensation Estimate must take into account the fees they would charge third parties for similar services or prevailing market rates for similar services to a plan of similar type and size Must include explanation of methodology and assumptions used in estimate 38

39 #2 Plan Sponsor Fee Disclosure and Analysis Investment Disclosure Recordkeepers and brokers who make available designated investment alternatives on a platform must disclose: Any compensation charged directly against the investment in connection with its sale or acquisition Loads, commissions, surrender fees, etc. Annual operating expense if return is not fixed Expenses in addition to annual operating expense Wrap fees, mortality and expense fees 39

40 #2 Plan Sponsor Fee Disclosure and Analysis Investment Disclosure Recordkeepers and brokers who make available designated investment alternatives on a platform must disclose: Any other information that is reasonably available and required under participant disclosure rules Brokerage accounts excluded from specific investment disclosure requirements Model portfolios need clarification Automated participant election versus actively managed portfolio 40

41 #2 Plan Sponsor Fee Disclosure and Analysis Disclosure Analysis To be exempt from the prohibited transaction rules, Plan fiduciaries must take reasonable steps to insure they receive all disclosures They must request in writing any omitted disclosures If the service provider fails to respond within 90 days, the responsible fiduciary must notify the DOL Depending upon the failure, the responsible fiduciary may be required to terminate the contract 41

42 #2 Plan Sponsor Fee Disclosure and Analysis Disclosure Analysis Next step is to analyze total cost for services provided Method used to report compensation likely will vary among service providers, requiring close attention when comparing providers Care should be taken to review the whole picture Services provided Investment quality Total Expenses 42

43 #2 Plan Sponsor Fee Disclosure and Analysis Fund Name Assets Expense Ratio Asset Cost Fund A $ % $ Fund B $ % $ Fund C $ % $ Fund D $ % $ Fund E $ % $ Fund F $ % $ Total $ $ (Excluding Participant Loans) Fee Summary Per Particpant % Cost Total Cost Asset Cost $ % $ Recordkeeping Fees $ % $ Trustee/Custodial Fees $ % $ Revenue Sharing Credit $ % $ Subtotal: $ % $ Investment Advisory Fees $ % $ Total Plan Cost $ % $ 2012 Verisight, Inc. 43

44 #1 Plan Expense Allocations In addition to paying only reasonable fees for services provided, plan fiduciaries must insure all expenses are allocated among participants using a reasonable allocation method Expenses normally are categorized as: Explicit fees Indirect or invisible fees Both categories should be reviewed for reasonableness Document your decisions in Plan Expense Allocation Policy 44

45 #1 Plan Expense Allocations Explicit fees include: Plan level fees such as, Recordkeeping, annual audit costs, investment advisory costs, etc. Individual level fees, such as, Loan origination, QDRO, distribution, brokerage account access, etc. 45

46 #1 Plan Expense Allocations Allocation method should agree with method used to determine fees. For example: Recordkeeping based upon number of participants Allocate costs per participant Advisor fees based upon asset value Allocate by account balance 46

47 #1 Plan Expense Allocations Indirect (invisible) fees include: Investment subsidies (aka shareholder serving fees), 12b-1 fees, load fees, etc. Are these fees consistent among investment offerings? If not, some participants may be paying disproportionately If consistent, are the fees reasonable? Should you eliminate indirect fees? 47

48 Thank You For questions or more information contact: Rose Panico-Marino (312) Please join us for our the next web seminar Power of Plan Design & Maximizing Retirement Plan Contributions for Business Owners Visit the events section of the Plan Sponsor and Advisor login pages at to register. 1 48