ERISA Newsletter for Retirement Plan Service Providers February 2013

Transcription

1 ERISA Newsletter for Retirement Plan Service Providers February 2013 Dear Reader: This is the February 2013 edition of our newsletter for service providers to ERISA-governed retirement plans. The newsletter focuses on the legal issues that impact investment advisers, broker-dealers, recordkeepers, third party administrators, and bank and trust companies. However, it may also be interesting reading for plan sponsors and committee members because of the need to understand the issues facing their service providers. This year promises to be eventful for service providers. The DOL has already announced its regulatory agenda, and that includes the publication of guidance on: the projection of retirement income on participant benefit statements; the re-proposal of the fiduciary advice regulation, which would likely expand the definition of fiduciary activities; and a new 408(b)(2) requirement for a guide, or roadmap, to accompany the 408(b) (2) disclosures by covered service providers. Each of those, standing alone, is a significant development; in combination, they could cause major changes for service providers and ultimately for plans and participants. However, none of the regulations will likely become final in Instead, this year will mark the issuance of proposals, followed by comments and debate. Our objective in writing the articles in this newsletter is to provide service providers with information about interesting legal issues... and also about their practical consequences. I hope the articles are valuable to you. In This Issue Page Fred Reish Chair, Financial Services ERISA Team (310) Fred.Reish@dbr.com 2 Common 408(b)(2) Violations 3 Is Recommending Investment Managers Investment Advice? 4 The DOL s Regulatory Agenda 5 How the ERISA 408(b)(2) Disclosure Requirements Affect Plan Auditors: Problems and Practical Solutions 7 408(b)(2) Round Two Summary Disclosure 8 Shining a Light on DIM Status Qualifying as a Designated Investment Manager 10 Around the Firm Financial Services ERISA Team 1

2 Congress and the DOL: What s Next and What does it Mean? On February 26, 2013, listen to another live broadcast of Inside the Beltway as Fred Reish and Bradford Campbell host an interactive discussion on Congress and the DOL: What s Next and What does it Mean? This audiocast, third in an ongoing series, will provide insiders perspectives on potential consequences, where the budget talks may be going, and what it all means for retirement plan service providers and plan sponsors now that the DOL recently issued its regulatory agenda, and Congress focuses on balancing the budget. The audiocast will be recorded, and available for download. Click here to register or to request notification when the recording is available. Common 408 (b)(2) Violations By Bruce L. Ashton (310) Bruce.Ashton@dbr.com This article discusses common violations of the 408(b)(2) disclosure requirement. Why? Because you can only take steps to fix a problem when you know you have one i.e., if you are not aware you have violated the rule, you remain at risk. Hopefully, this list will help service providers assess whether they have a problem and take steps to correct it. Violation refers to the failure of a covered service provider to provide the required disclosures, or at least adequate disclosures. This failure makes the service arrangement with the plan a prohibited transaction, which can lead to severe consequences for the service provider, including excise taxes and loss of all compensation related to that plan until the failure is corrected. In talking about common violations, we do not necessarily mean widespread violations. We have been generally impressed by the effort expended by the service provider community to comply with the rules, even where the rules are confusing or incomplete. And to the extent we have seen violations, they seem to be inadvertent rather than intentional. Here are some examples: 1. Failure to disclose information in a way that enables the plan sponsor to evaluate it. For example, the Preamble to the final regulation permits compensation to be disclosed in the form of a reasonable known range. Violation example: the range is listed as zero to 150 basis points. This is so broad that it is difficult, if not impossible, for the plan sponsor to evaluate the reasonableness of the actual compensation the service provider expects to receive. 2. Failure to make disclosures because the service provider did not identify covered clients. This meant that the disclosures were not delivered to a group of clients because they were not properly identified. Violation examples: Broker-dealers that had difficulty in determining whether a client was or was not a covered plan; situations where covered plans were not identified because of a computer coding error. 3. Failure by certain types of service providers to understand they are subject to the rules. Violation examples: insurance brokers or small broker-dealers who are not aware of the rules at all; RIAs with only one or two plan clients, also not aware of the rules; some investment managers that did not understand that they were managing plan assets. 4. Failure by some providers to acknowledge fiduciary status because of a lack of understanding of the fiduciary definition under ERISA. Violation example: an RIA that identified itself as a consultant rather than an investment adviser and felt that this meant it was not a fiduciary. In our experience, it is difficult for an RIA to avoid fiduciary status under ERISA. 5. Failure to provide adequate disclosures, such as failing to identify all of the service provider s indirect compensation. Violation example: advisers receiving a solicitor fee for referring another service provider to the plan and failing to recognize this as disclosable indirect compensation. 6. Failure to understand the types of changes that require subsequent disclosures. Violation example: in one instance, a broker-dealer thought it had complied with the change requirement when it posted updated information about its commissions on its website. Unfortunately, the regulation requires delivery of the information; posting is not sufficient. Financial Services ERISA Team 2

3 The 408(b)(2) regulation is schizophrenic on one hand, it is not easy to understand, but this makes it easy to violate. What should service providers do? First, just as we urge plan sponsors, have a good checklist of the requirements and review your procedures and disclosures against it to make sure you comply. Second, if you find a violation, work with counsel to develop an immediate correction plan. Unfortunately, there is no formal self-correction program, though Fred Reish, Brad Campbell and I have asked the DOL to establish one. In the meantime, we urge service providers to correct the violation under the existing good faith provision of the regulation. Ignoring the problem will only make it get worse. Bruce Ashton is in the firm s Financial Services ERISA and Retirement Income Teams. Bruce s practice focuses on all aspects of employee benefits issues, especially representing plan service providers (including RIAs, independent recordkeepers, third party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA and in assisting service providers and plan sponsors in addressing the retirement income needs of participants. He is a wellknown speaker and author on employee benefits topics. Is Recommending Investment Managers Investment Advice? By Joseph C. Faucher (310) Joe.Faucher@dbr.com Typically, when we think of someone providing investment advice, we think of a recommendation that a plan purchase a particular investment or, in the context of a participant-directed employee benefit plan, a recommendation that the plan offer a particular investment like a mutual fund to the participants. One recent case shows that courts may not view investment advice so narrowly, and may find fiduciary status for referrals to an investment manager. (See, In re Beacon Associates Litigation, 745 F.Supp.2d 386 (S.D. N.Y. 2010).) To be liable for breach of fiduciary duty in an ERISA case, a person needs to be a fiduciary. One of the ways to establish that a person is a fiduciary is to show that the person provides investment advice for a fee or other compensation. A Department of Labor (DOL) regulation requires several factors to be present in order for investment advice to arise. Specifically, advice must relate to the value of, or advisability of, purchasing or selling securities or other property. And, the advice must be provided on a regular basis, pursuant to a mutual agreement, arrangement or understanding that the advice will serve as a primary basis for the plan s investment decisions. The advice must also be individualized to the plan and based on the plan s particular needs. The Beacon lawsuit arose in the wake of the Madoff Ponzi scheme scandal. For our purposes, the focus was on the role of Ivy Asset Management, LLC (Ivy). Ivy introduced feeder funds which consisted largely of employee benefit plan assets -- to Madoff. According to the complaint in the case, Ivy had suspicions about Madoff for nearly ten years before the Madoff scheme unraveled. The facts suggested that Ivy did not adequately articulate all of its concerns to its clients including the feeder funds. When the problems finally came to light, plan fiduciaries sued Ivy and others, claiming that they breached their fiduciary duties to their plans. Ivy argued that it was not a fiduciary to the plans, and therefore, that it could not be liable for a breach of fiduciary duty to them. First, Ivy argued that it only rendered advice to the feeder funds about investment managers (Madoff) and not about particular investments, and therefore, it did not provide investment advice. The court disagreed, noting it was undisputed that the entities that managed the feeder funds were themselves plan fiduciaries (and thus, that Ivy was providing its advice about managers to fiduciaries). The court also cited the preamble to a DOL regulation (since withdrawn) in which the DOL stated It has long been the view of the Department that the act of making individualized recommendations of particular investment managers to plan fiduciaries may constitute the provision of investment advice On this point, the court disagreed with a 2005 decision holding that the recommendation of investment advisors did not constitute investment advice. Cohrs v. Salomon Smith Barney, 2005 WL Financial Services ERISA Team 3

4 (D. Or. 2005). The judge in Cohrs went so far as to say that the investment advice regulation requires a recommendation that a plan buy or sell a particular investment in order to constitute investment advice. The Beacon court relied in part on the fact that the court in Cohrs did not cite to or consider the DOL s position as stated in the preamble to the regulation. Ivy also argued that its advice was not individualized as to any particular ERISA plan. The court again disagreed. It held that the DOL, in issuing the investment advice regulation, was trying to differentiate investment advice from the general promotion of a product or service. It concluded that the length and nature of the relationship between Ivy and the feeder funds warranted a finding that its advice was individualized to the plans. It is too soon to say whether the decision in Beacon will gain traction in other courts on the issue of whether recommending an investment manager may constitute fiduciary investment advice. But even if Beacon is a product of bad facts, the decision is out there. Moreover, the DOL is unlikely to change its position. It is reasonable to assume that when the DOL reissues proposed guidance on investment advice later in 2013, it will repeat its position that individualized recommendations of investment managers will constitute investment advice. In addition to handling an active litigation practice, Joe Faucher regularly consults with third party administrators, registered investment advisers and insurance carriers on ERISA and employee benefit matters and fiduciary liability insurance and ERISA bond issues. The DOL s Regulatory Agenda By Fred Reish (310) Fred.Reish@dbr.com The Department of Labor has issued its agenda for new guidance in the fiscal year. At least four regulatory projects will materially impact service providers. Those are: A re-proposal of a fiduciary advice regulation, including proposed prohibited transaction exemptions; A proposal to require a guide for 408(b)(2) disclosures; A proposal to require retirement income projections on participant benefit statements; and An amendment to require additional disclosures for target date funds under both the participant disclosure rules and the QDIA regulation. This article briefly discusses the first two projects. I will cover the last two in our next newsletter. Definition of Fiduciary What the DOL says: This rulemaking would amend the regulatory definition of the term fiduciary set forth at 29 CFR (c) to more broadly define as employee benefit plan fiduciaries persons who render investment advice to plans for a fee within the meaning of section 3(21) of the Employee Retirement Security Act (ERISA). The amendment would take into account current practices of investment advisers and the expectations of plan officials and participants who receive investment advice. What that Means: My expectation is that the reproposal will be similar to the proposed regulation that was withdrawn last year. However, I believe that some of the most objectionable provisions will be modified and other provisions will be clarified. Perhaps the most interesting changes will be found in the proposed prohibited transaction exemptions. Guide or Similar Requirement for Section 408(b)(2) Disclosures What the DOL says: Paragraph (c) of 29 CFR b- 2 requires covered service providers to make certain disclosures to responsible plan fiduciaries in order for contracts or arrangements between the parties to be considered reasonable under section 408(b) (2) of the Retirement Income Security Act (ERISA). This rulemaking would amend the disclosure provisions in paragraph (c) so that covered service providers may be required to furnish a guide or similar tool along with such disclosures. A guide or similar requirement may assist fiduciaries, especially fiduciaries to small and medium-sized plans, in identifying and understanding the potentially complex disclosure documents that are provided to them or if disclosures are located in multiple documents. Financial Services ERISA Team 4

5 What that Means: It appears that the DOL is concerned that some 408(b)(2) disclosures may be difficult for plan sponsors to understand because of the use of lengthy and/or multiple documents. The proposed solution will be a guide, or roadmap, to the specific disclosures: services; status and compensation. Don t confuse guide with a summary. Instead, think of an index, or table of contents, with specific references to section and/or page numbers. Most RIA and TPA disclosures are made in single, relatively short agreements. As a result, this potential change should have little impact on them. However, some but not all recordkeepers and broker-dealers use multiple and/ or lengthy disclosure documents. For those covered service providers, this could be a material change. (See more in-depth discussion in Brad Campbell s article.) Conclusion Both of these pieces of guidance will significantly impact at least part of the service provider community. Fortunately, the DOL will be issuing proposed rules and the private sector will be given the opportunity to comment. We anticipate filing comments on behalf of several of our clients. Fred Reish is chair of the Financial Services ERISA practice at Drinker, Biddle & Reath. Fred has been recognized as one of the Legends of the retirement industry by both PLANADVISER magazine and PLANSPONSOR magazine. He was recently selected as one of the top ten most influential individuals in the 401(k) industry by RIABiz. Fred has also received the IRS Commissioner s Award and the District Director s Award; the Eidson Founder s Award by the American Society of Professionals & Actuaries (ASPPA); the Institutional Investor and the PLANSPONSOR magazine Lifetime Achievement Award; and the ASPPA/Morningstar 401(k) Leadership Award. Introducing FredReish.com This site is designed to provide timely updates and insights on the retirement industry for service providers, plan sponsors and registered investment advisers. To visit Fred s site, please click here. Financial Services ERISA February 2013 How the ERISA 408(b)(2) Disclosure Requirements Affect Plan Auditors: Problems and Practical Solutions By Joshua J. Waldbeser (312) Joshua.Waldbeser@dbr.com For ERISA-covered retirement plans that are subject to the annual audit requirement (generally those with 100 or more participants), one of the auditor s functions is to identify non-exempt prohibited transactions for reporting purposes. Specifically, ERISA Section 103 requires that the auditor must first examine the plan s financial statements and schedules, which address party-in-interest transactions. Second, the auditor s opinion that is filed with the Plan s Form 5500 must certify whether the financials and schedules are presented accurately in accordance with GAAP standards. Likewise, it is the position of the Department of Labor ( DOL ) that an auditor s duties extend to ensuring that prohibited transactions are reported. This duty is not new for auditors. What has changed is that the disclosure requirements that apply to covered service providers 1 ( CSPs ) under the ERISA Section 408(b)(2) regulation 2 will substantially increase both the number and transparency of non-exempt prohibited transactions. If a CSP fails to furnish the responsible plan fiduciary with timely and complete disclosures, it has committed a reportable prohibited 1 Covered Service Providers include fiduciaries and registered investment advisers, brokers and recordkeepers for participant-directed defined contribution plans with designated investment alternatives, and most other providers if they receive revenue sharing or other indirect compensation from third parties CFR b-2. Financial Services ERISA Team 5

6 transaction regardless of any other factor. Also, as explained in the regulation s preamble, the responsible plan fiduciary will have participated in the prohibited transaction if it fails to form a reasonable belief that all the required disclosures have been made and they are consistent with the regulation s requirements. 3 In turn, this will raise the bar regarding auditors responsibilities - both in terms of the number of reportable transactions as well as the expectation that the auditor will detect them. Of course, an auditor cannot be expected to identify all prohibited transactions with respect to a plan. For example, if a service arrangement does not satisfy 408(b)(2) because is not commercially reasonable or it entitles the provider to compensation that is not supportable under industry standards, this is not a matter upon which an auditor can be expected to opine. However, a failure by a CSP to provide required 408(b)(2) disclosures triggers a prohibited transaction for which there is no subjectivity. A failure to address prohibited transactions that an auditor should reasonably be aware of has real consequences. The DOL has launched enforcement initiatives designed help ensure the quality of large plan audits. 4 It has noted specifically that one of the most common areas of deficiency is with respect to prohibited transactions, for which there is often no work performed or the work is inadequate (such as the auditor deeming the issue to be not applicable ). 5 In a case of deficient audit work, consequences imposed by the DOL may include An expanded review of the auditor s services to ERISA plans; Rejection of Form 5500 filings; and Referral to the American Institute of Certified Public Accountants Professional Ethics Division or state regulators. The challenge this creates for auditors is manifest: 3 If, pursuant to the responsible plan fiduciary s review, any disclosures are found to be missing or facially inadequate, the fiduciary can avoid being a party to the prohibited transaction if it requests the information in writing. If the information is not furnished within 90 days, the fiduciary must report the provider to the DOL and take steps to terminate the service arrangement. See 29 CFR b-2(c)(1)(ix). 4 For a general description of these initiatives, see Ian Dingwall, EBSA Update Chief Accountant, EBSA s Audit Inspection Program, p , at media/downloads/2010ebp/dol_update_outline.pdf. 5 Id. at 16. They will generally not be in a position to assess the adequacy or completeness of the 408(b)(2) disclosures furnished to their plan sponsor clients. Accordingly, before providing an unqualified opinion on a plan s financial statements, auditors should confirm that plan fiduciaries have followed a reasonable process to Determine that all required disclosures have been furnished and Compare the disclosures to the regulation s requirements to form the required reasonable belief that they are complete. One approach would be to furnish the fiduciaries with a questionnaire they are required to complete before an unqualified opinion can be issued. In addition to requiring the fiduciaries to certify the two issues above, the quality of the responses (and the auditor s reliance on them) can likely be further enhanced by including a brief description of the regulation s requirements, including an explanation of which providers are CSPs and what information the disclosures should contain. In short, by requiring the fiduciaries to make affirmative statements regarding the CSPs satisfaction of the 408(b) (2) disclosure requirements, the auditor can help enhance the quality of reporting and also protect itself from a possible due diligence failure that could arise if the Form 5500 schedules are not accurate with respect to prohibited transactions. In the event that a plan s fiduciaries do not have any reasonable procedure in place to review the disclosures, it will be necessary to engage ERISA counsel to help verify that all the required disclosures were provided and that they are adequate. In closing, it is the responsibility of the plan administrator to certify the veracity of its Form 5500 filing, and 408(b)(2) does not change this dynamic. However, in light of the increased number and transparency of prohibited transactions that are likely to result from the 408(b)(2) disclosure requirements, auditors would be justified in taking on a more proactive role to ensure proper reporting. Joshua has been in the Employee Benefits and Executive Compensation Practice Group at Drinker Biddle & Reath s Chicago office since Prior to this he worked for the U.S. Department of Labor, Employee Benefits Security Administration. Joshua s practice focuses on working with plan sponsors and service providers with respect to Title I of ERISA and the IRS qualification requirements for retirement plans. Financial Services ERISA Team 6

7 408(b)(2) Round Two Summary Disclosure By Bradford P. Campbell (202) While a new 408(b)(2) regulation may well be the last thing many of us want to think about after last year s scramble for compliance, there is one major loose end the Department of Labor has yet to tie up a summary disclosure document. Though originally contemplated as a new feature of the Final 408(b)(2) rule, DOL ultimately decided to tackle summary disclosure in a separate notice and comment rulemaking at a later date. According to DOL s newly released regulatory agenda, the target date for the proposed new rule is just a few months away, in May As this requirement would, if adopted, replace the current standard allowing disaggregated disclosure among many documents, it has the potential to significantly change current compliance practices, and should be of great interest to service providers and responsible plan fiduciaries. Why the Summary Requirement Was Not Included in the Final 408(b)(2) Rule: In the preamble to the Interim Final 408(b) (2) regulation published in 2010, DOL asked for comment on whether the Final Rule should require some kind of common summary or roadmap as part of the required initial disclosure, and on the benefits and burdens of such a requirement. Those commenting in favor of the summary disclosure argued that the current model does little to help lesssophisticated fiduciaries make sense of complex fee arrangements, and that the cost of a summary disclosure would be offset by better plan decision-making on fee issues. Those opposing the summary requirement pointed out the difficulty of developing a one-size-fits-all document that could adequately capture the wide variety of service arrangements used by all covered plans, and argued that the summaries would be extremely expensive. Financial Services ERISA February 2013 DOL decided that the issue was not ripe for resolution. It inserted a placeholder in the Final Regulation for a summary disclosure requirement, and announced its intention to address the issue through a separate notice and comment rulemaking process. In the interim, DOL provided a sample guide that service providers could elect to use as a summary document, but did not require its use. What Might DOL s Proposed Summary Document Look Like? While we don t know how much DOL s thinking might have changed since last February, DOL gave us several clues as to what kind of a summary disclosure document they might be considering in the Preamble to the Final 408(b)(2) rule. The Department offered two possible ideas for a summary disclosure, first writing: For example, a proposed provision could require that the covered service provider must separately furnish to the responsible plan fiduciary a guide that specifically identifies the document, section and page number where specified information, as applicable to the contract or arrangement, is located. Furnishing the guide as a separate document would ensure that the responsible plan fiduciary is aware of such document and can use it effectively in his or her review of the required disclosures. This index approach would conceivably require the service provider to identify page numbers across a wide range of documents from service contracts to investment prospectuses. It is not clear from this brief passage whether DOL would consider any alternative forms of summary disclosure complaint, or require such an index regardless of other information. The second option identified in the Preamble was a chart-based approach. DOL wrote: Alternatively, a regulatory provision could require some or all of the required disclosures to be included in a chart or similar summary format. This is the approach DOL took in the sample guide it published along with the Final 408(b)(2) rule. The guide s left hand column contains a brief description of each required element of disclosure (what services will be provided, fiduciary status, direct and indirect fees, etc.) and the right column provides a corresponding citation to the service agreement or other appropriate document. Financial Services ERISA Team 7

8 If this approach mandated all of the required disclosures be included in a chart format, that could be a very lengthy document for some service arrangements. What s Next? While we won t know the specifics of the DOL proposal until it is released in May (assuming the current timetable holds), service providers and responsible plan fiduciaries now have real-world experience with 408(b) (2). This background will be essential to evaluating the impact of the forthcoming proposal, and to providing the Department with meaningful comments on the feasibility and/or methodology of a summary disclosure document. What is certain, however, is that this regulation has the potential to significantly change the current 408(b)(2) disclosure procedures of nearly all service providers. Our attorneys will continue to monitor DOL s activities in this area, working with our clients to help ensure their interests are well represented. Bradford P. Campbell advises financial service providers and plan sponsors on ERISA Title I issues, including fiduciary conduct and prohibited transactions. ERISA s former top cop and primary regulator, he served as the U.S. Assistant Secretary of Labor for Employee Benefits, head of the Employee Benefits Security Administration. Mr. Campbell was listed as one of the 100 Most Influential Persons in Defined Contribution by 401kWire in Shining a Light on DIM Status Qualifying as a Designated Investment Manager By Joan M. Neri (973) Joan.Neri@dbr.com The issuance of the ERISA participant-disclosure rules has caused many RIAs to re-examine their asset allocation services to decide whether and to what extent the rules apply. As part of that process, RIAs need to consider the DOL s description of a designated investment manager or DIM. This is important because under the DOL guidance, if an RIA is a DIM, then the RIA s investment management strategies including asset allocations - are not subject to the detailed participant disclosure rules that apply to the Plan s designated investment alternatives (the DIAs ) e.g., expense ratios, performance history, portfolio turnover rates and so on. If an RIA is a DIM, the participant disclosure rules require only that the plan initially and annually provide to participants the identity of the RIA serving as a DIM and a description of the DIM service and fee. Also, the plan administrator must provide participants with a quarterly statement of the DIM fee charged against their individual account and a description of the DIM service. RIAs will likely want to coordinate this disclosure with the plan s recordkeeper or other service provider. The DOL guidance sets forth three principal requirements for qualifying as a DIM. They are that the RIA: serves as a 3(38) discretionary investment manager; be designated by the responsible plan fiduciary (e.g., the plan sponsor or plan committee) and made available to plan participants to manage their plan accounts; and employs the investment strategy on a participant-by-participant basis. Although the term participant-by-participant basis is not defined by the DOL, we believe it means that the participant s account must be managed in a manner that is appropriate for the particular participant, based on the information available to the DIM. The DOL lists several participant appropriate factors that the DIM can consider including age, time horizons, risk tolerance, current investments, sources of income and investment preferences. This list is not intended to be all-inclusive; other participant appropriate factors may be considered as well as long as they reflect at least some characteristics of the particular participant. Financial Services ERISA Team 8

9 From a practical standpoint, the DOL s description of a DIM raises some challenges for RIAs that provide asset allocation strategies to participants. One challenge is developing a process that evidences that the investment strategy is conducted on a participant-by-participant basis. Many RIAs do not currently have an adequate information collection process to demonstrate that the strategy recommended to a particular participant was based upon the RIA s consideration of characteristics personal to that participant. Some RIAs conduct a face-to-face participant meeting but may not adequately document the discussion or the recommended investment strategy. In other instances, the RIA may have participants complete a risk tolerance questionnaire, but there may be no documentation that reflects how those questionnaire responses will be applied to formulate the asset allocation strategy. Also, the RIA needs to examine its service agreements to make sure that the DIM service is adequately described in both the plan-level service agreement and the plan participant managed account agreement. Other documents, such as the IPS, the Form ADV and the RIA s marketing materials, may need to be revised to reflect the DIM service. I recently sent an on this topic to RIAs with whom I correspond about current issues. If you are interested in signing up for future s from me, please contact Liz.Jutila@dbr.com to be added to my mailing list. Joan Neri is in the firm s Financial Services ERISA Team. With more than 24 years of experience, Joan counsels clients on all aspects of ERISA compliance including fiduciary responsibility and plan operational issues. A part of Joan s practice includes representing registered investment advisors in fulfilling their obligations under ERISA. Joan is a frequent speaker throughout the country on legislative and regulatory developments impacting ERISA fiduciaries. Participant Disclosures about Brokerage Accounts By Fred Reish To keep our clients and industry contacts informed, I send short articles (like this one) by through my LinkedIn account on a monthly basis. If you are interested in receiving information by , please connect with me on LinkedIn, or subscribe to my blog, at fredreish.com. The DOL s 404a-5 regulation places a fiduciary obligation on plan sponsors in their roles as ERISA plan administrators to make certain disclosures to participants. In the rush to comply with the 408(b)(2) disclosures, some broker-dealers may have overlooked the participant disclosure guidance about brokerage accounts in Field Assistance Bulletin (FAB) While the legal obligation is imposed on plan sponsors, the obligation will, as a practical matter, be on broker-dealers, since plan sponsors do not have the information or capability of making these disclosures. As a result, they will turn to their broker-dealers to satisfy the compliance requirements. There are several questions and answers in the FAB about brokerage accounts, but for the moment, I want to focus on Q&A-13, which discusses the requirement for quarterly disclosures of dollar amounts to participants. Generally stated, the 404a-5 regulation requires that plan sponsors provide participants with statements of the dollar amounts of certain charges to their accounts during the preceding quarter. That requirement applies expenses to brokerage accounts, as well as for other costs. While most people think of the requirement in terms of a quarterly statement, the regulation permits compliance through interim statements, for example, confirmation statements or monthly statements. In addition to the dollar amount of the fees, the statement must also include a brief description of the services. The example given in Q&A-13 is: The description of the services must clearly explain the charges (e.g., $19.99 brokerage trades, $25 brokerage account minimum balance fee, $13 brokerage account wire transfer fee, $44 front-end sales load. As a result, broker-dealers need to determine if and how they can satisfy these disclosure requirements. For example, some of my clients have told me that it will be difficult for them to disclose the front-end sales loads for mutual funds as a dollar amount. Stated slightly differently, those broker-dealers are not providing the information in that form at this time and it will take some work to be able to do it. Unfortunately, the quarterly statement requirement applies beginning November 14 of this year. As a result, broker-dealers need to be focusing on this issue. Along with Bruce Ashton and Summer Conley, I recently wrote a more comprehensive Client Bulletin on this topic, which can be found at: Participants-?Section=Publications. Financial Services ERISA Team 9

10 Employee Benefits & Executive Compensation Around the Firm Financial Services ERISA February 2013 The second live broadcast of Inside the Beltway, Post-Election Insights, was presented on November 15, 2012 by Fred Reish and Bradford Campbell. The discussion revolved around the Presidential and Congressional election results and their implications from federal agency regulatory and enforcement priorities, as well as Congressional legislative and budgets on retirement policy. To listen to the recording from the November 15, 2012 audiocast, please click here. Howard Levine was a presenter for a co-hosted webcast on January 9, 2013 titled ERISA Fiduciary Checkup. The webcast featured the most common mistakes made by ERISA plan fiduciaries and lessons learned from recent litigation. Fred Reish and Bruce Ashton co-authored a white paper for TD Ameritrade titled, Fiduciary Considerations in Offering a Brokerage Window which was published in November The white paper discusses the fiduciary process, disclosure rule requirements and the implications in serving as an investment manager or advisor. Fred Reish was selected as one of the top ten most influential individuals in the 401(k) industry affecting RIAs in 2012, as announced by RIABiz on January 3, Fred was described as one of the most authoritative and knowledgeable leaders about any aspect of retirement plans. The article further recognizes that Fred has a unique way of describing these very complicated subjects from a layman s perspective when necessary. To see the full text of the article, please go to: a/ /10-most-influentialindividuals-in-the-401k-industryaffecting-rias-in-2012-part-1 On January 29, 2013, Fred Reish was a guest speaker at the FSI OneVoice Conference in San Diego on Supporting Fiduciary Advice. Bruce Ashton, Fred Reish and Josh Waldbeser co-authored an article titled Participant Disclosure Regulations: Challenges for Recordkeepers in the Winter 2013 issue of Plan Consultant (a publication of ASPPA). Fred Reish and Bradford Campbell were quoted in Investment News regarding investigative initiatives in an article titled, Getting a Second Wind, DOL Likely to Breathe Harder on ERISA Advisers in mid-november Bruce Ashton was quoted in Benefits Pro in early December 2012 on the subject of multiple employer plans (MEPs) and ERISA guidance that remains confusing in light of the conflict between DOL and IRS rules. Bradford Campbell was quoted on his thoughts regarding budget deficit and tax reform, and their effects on retirement programs, in Pensions & Investments in an article titled, November s Winners Face Pressing Retirement, Tax Issues. A January 2, 2013 article, A Steady Stream from PLANSPONSOR quoted from Fred Reish s Out of Reish column, Recipe for Success, published in the July 2012 PLANSPONSOR issue. Bradford Campbell was quoted in an Advisor One article on likely changes in the regulatory and legislative landscapes if there have been a change of administration after the November 2012 elections. Fred Reish was quoted in the November 2012 issue of PLANSPONSOR in an article titled, Retirement Distributions and Lifetime Income. The article notes Fred s message to attendees of the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. Fred Reish has accepted an invitation by the Insured Retirement Institute Board of Directors to serve on the IRI Government, Legal and Regulatory Conference 2013 Program Planning Committee. Future Events and Speaking Engagements: On February 28, 2013, Joan Neri will be a panelist at a briefing breakfast featuring insight on retirement plan trends. The event will be held at the Park Avenue Club in Florham Park, NJ. For more information XXXXX. Fred Reish and Dave Wolfe will be presenters at the NAPA/ASPPA 401k Summit to be held March 3-5, 2013 in Las Vegas, NV. Fred will be speaking on Life After Fee Disclosure The Aftermath and Dave will be presenting on ERISA Litigation-Who Wins, Who Loses and What Have We Learned. On March 19, 2013, Fred Reish will be speaking at the San Francisco Mid-Sized Conference on the In s and Out s of 401(k) Plans: Accumulation and Distribution of Benefits. Bradford Campbell will be presenting at the Investment Company Institute s 2013 Mutual Funds and Investment Management Conference in Palm Springs on March Brad will be speaking on Reading the ERISA Tea Leaves for Fund Lawyers. Financial Services ERISA Team 10

11 Financial Services ERISA Team Heather B. Abrigo (310) Gary D. Ammon (215) Bruce L. Ashton (310) Mark M. Brown (215) Bradford P. Campbell (202) Summer Conley (310) Joseph C. Faucher (310) Mona Ghude (215) Robert L. Jensen (215) Melissa R. Junge (312) Sharon L. Klingelsmith (215) Christine M. Kong (212) Howard J. Levine (312) Sarah Bassler Millar (312) Joan M. Neri (973) Fred Reish (310) Ryan C. Tzeng (310) Michael A. Vanic (310) Joshua J. Waldbeser (312) Employee Benefits & Executive Compensation Practice Group CALIFORNIA DELAWARE ILLINOIS NEW JERSEY NEW YORK PENNSYLVANIA WASHINGTON DC WISCONSIN 2013 Drinker Biddle & Reath LLP. All rights reserved. A Delaware limited liability partnership. Jonathan I. Epstein and Andrew B. Joseph, Partners in Charge of the Princeton and Florham Park, N.J., offices, respectively. This Drinker Biddle & Reath LLP communication is intended to inform our clients and friends of developments in the law and to provide information of general interest. It is not intended to constitute advice regarding any client s legal problems and should not be relied upon as such. Disclaimer Required by IRS Rules of Practice: Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.