ABC OF GATEWAY ST. LOUIS

Transcription

1 ABC OF GATEWAY ST. LOUIS Presentation by Richard A. Hochman McKay Hochman Co., Inc. September 19, 2012 Chapter One 2012 Legislative and Regulatory Update 1

2 Agenda Guidance We Hope to See in 2012 Quality Assurance Bulletin Update on Correction for Ineligible Employee by Plan Amendment Under EPCRS Forfeitures and Qualified Contributions ERISA Fiduciary Definition Washington Update Plan Loan Issues 3 Guidance We Hope to See in

3 Guidance We Hope to See in 2012 from the Treasury/IRS EPCRS 403(b) Preapproved Plan Rev. Proc. and LRMs Stopping/suspending 401(k) safe harbor NEC mid-year Final Regulations Streamlined interim amendment procedure Guidance on a Delinquent Filer Program for Form 5500-EZ 5 Guidance We Hope to See in 2012 from the DOL/EBSA New Electronic Communication Disclosure Proposed Regulations Target Date Fund Final Regulations QDIA Final Regulations A Wish List Item 6 3

4 Quality Assurance Bulletin Quality Assurance Bulletin On October 24, 2011, the IRS issued Quality Assurance Bulletin (QAB ), 1) "Verification of Prior Plan Documents in the Absence of a Determination Letter," Addresses procedures an IRS determinations specialist must use when reviewing a plan that does not have its own determination letter for the previous submission cycle 8 4

5 Quality Assurance Bulletin Generally, the scope of review in the absence of a determination letter should include verification of compliance with the (amendment) cycle immediately preceding the current cycle in which the application was submitted. However, if the specialist determines that the application warrants verification of compliance for additional laws based on the facts of the application, the specialist must secure managerial approval to expand the inquiry. 9 Quality Assurance Bulletin This was cited by a representative of the IRS at the ASPPA conference as the rule for plans with opinion or advisory letters (that did not get their own determination letter) as the limit of review for preapproved plans. 10 5

6 Update on Correction for Ineligible Employee by Plan Amendment Under EPCRS Correction for Ineligible Employee by Plan Amendment Under EPCRS An interesting issue has recently been brought to our attention. ti In a hypothetical case, an employer erroneously allows employees to enter into the plan, before satisfying the plan s eligibility requirements. What are the potential remedies? 12 6

7 Correction for Ineligible Employee by Plan Amendment Under EPCRS The last guidance issued under the EPCRS Program was Rev. Proc Updated guidance has been on its way ever since. Under , the employer could retroactively amend the plan under the Self Correction Program (SCP) and then would be required to file for a Determination Letter as part of the correction procedure 13 Correction for Ineligible Employee by Plan Amendment Under EPCRS BUT!! As (we will discuss more later), preapproved plans will be unable to submit for a Determination Letter on Form 5307 as of May 1, What to do? In exchanges with EPCRS folks, we have been advised that the employer can merely amend retroactively under SCP and then rely on the underlying Opinion or Advisory Letter. 14 7

8 Correction for Ineligible Employee by Plan Amendment Under EPCRS No need to submit or use VCP with its fees. We love this answer and have confirmed it with s. Maybe there is something positive about not being able to submit on Form Correction for Ineligible Employee by Plan Amendment Under EPCRS The IRS cites the following sections of EPCRS, i.e. Rev. Proc as support: Section 4.03 of RP in part provides: Favorable Letter requirement. The provisions of SCP relating to significant Operational Failures (see section 9) are available for a Qualified Plan only if the plan is the subject of a Favorable Letter. 16 8

9 Correction for Ineligible Employee by Plan Amendment Under EPCRS Favorable Letter is Defined in section 5.01(4) of RP , which in part provides: The term "Favorable Letter" means, in the case of a Qualified Plan, a current favorable determination letter for an individually designed plan (including a volume submitter plan that is not identical to an approved volume submitter plan), 17 Correction for Ineligible Employee by Plan Amendment Under EPCRS a current favorable opinion letter for a Plan Sponsor that has adopted a master or prototype plan, (standardized or nonstandardized), or a current favorable advisory letter and certification that the Plan Sponsor has adopted a plan that is identical to an approved volume submitter plan. So, if a plan has a current favorable opinion or advisory letter, the Favorable Letter requirement for SCP is satisfied 18 9

10 Forfeitures and Qualified Contributions Forfeitures and Qualified Contributions In 2011 ASPPA annual, the question from 2010 arose again. The use of forfeiture funds to make QNEC contributions is not permitted. Forfeitures may not be used to fund QNECs for failed ADP/ACP tests Traditional safe harbor contributions Exception for QACA with a vesting schedule 20 10

11 Forfeitures and Qualified Contributions ADP Failure The concern with using forfeitures arises from Treas. Reg. Section 1.401(k)-6 which defines a proper QNEC as being 100% vested and nonforfeitable and subject to the 401(k) distribution restrictions at the time of contribution. 21 Forfeitures and Qualified Contributions The IRS has placed this rule in the LRMs for the PPA document At the 2011 ASPPA conference, the IRS stated that if language permitting forfeitures to be used for failed tests or to reduce employer safe harbor contributions is in the EGTRRA document, the document may be followed until the employer restates onto the PPA document

12 ERISA Fiduciary Definition Fiduciary Proposed Regulations Pulled In a news release dated September 19, 2011 the EBSA announced that it would re-propose its rule on the definition of a fiduciary. The decision to re-propose is in part a response to requests from the public, including members of Congress, that the agency allow an opportunity for more input on the rule. The new proposed rule is expected to be issued in Stay Tuned! 24 12

13 WASHINGTON UPDATE WASHINGTON UPDATE Regardless of who wins the White House in November, budget and deficit dfiitissues will likely l impact the current employer provided retirement plan system over the coming years. One key factor is if nothing is done the socalled Bush Tax Cuts will expire. They were extended for two years at the end of

14 WASHINGTON UPDATE There is a strong feeling in Washington that major changes may happen during the lame duck Congressional Session. In addition to the President s proposals other proposals are also on the table. The President s s proposal would limit 401(k) contribution deductions for those taxpayers earning over $250, WASHINGTON UPDATE In essence, those earning over that threshold would not be able to fully deduct d their 401(k) elective deferrals, but would nonetheless still have to include the full amount in income at distribution resulting in double taxation. The President s budget proposal p would also eliminate RMD requirements for participants with account balances of less than $75,

15 SEAL ACT Savings Enhancement by Alleviating Leakage in 401(k) Savings ( SEAL) Act of 2011 (S. 1121) Co sponsored by Senators Kohl (D WI) and Enzi (R WY) The SEAL Act would do the following: Prohibit credit debit card 401(k) plan loans; Allow repayment/rollover of loan offset amounts into an IRA rollover account as late as the due date of the tax return for year of distribution; and Direct the IRS to rewrite their regulations to not require a 6 month suspension after a 401(k) hardship distribution. 29 HOME ACT Hardship Outlays to protect Mortgagee Equity (HOME) Act of 2011 (S. 1656/H.R. 3104) Co introduced in the Senate and House by Senator Johnny Isakson (R GA), and Representative Tom Graves (R GA) The HOME Act would do the following Waive the IRC 72(t) 10% excise tax generally applicable to distributions made before a participant attains age 59½ for Qualified Principal Residence Loans (i.e. to make mortgagepayments toward a principal residence w/in 120 days) Cap of ½ the account at the beginning of the tax year Lifetime plan limit of $50,

16 RETIREMENT PLAN SIMPLIFICATION AND ENHANCEMENT ACT The Retirement Plan Simplification and Enhancement Act of 2012 (H.R. 4050) was recently introduced dby Congressman Richard Neal (D Mass). The legislation has a number of changes. Some of the more important ones include: New electronic disclosure rules that would make it much easier to provide notices electronically to participants and beneficiaries; The maximum eligibility requirements for 401(k) plans would be reduced to the lesser of one year of service or three consecutive years of at least 500 hours of service; For purposes of the top heavy rules, part time employees who satisfy the eligibility requirements under the 3 year rule may be excluded if the plan can meet coverage through disaggregation; 31 RETIREMENT PLAN SIMPLIFICATION AND ENHANCEMENT ACT Select provisions in the Retirement Simplification Act of 2012 cont d: The 10% maximum automatic enrollment cap for a QACA safe harbor plan would be eliminated and the Treasury Department would be given the authority to increase the 3% initial enrollment percentage; The IRS would be directed to expand EPCRS to allow for more self correction for things such as loan failures; Permit the use of forfeitures to fund safe harbor contributions; Except from the RMD rules, participants with account balances of less than $100,000; and Direct the DOL and Treasury Department to issue regulation that would allow consolidation of various required notifications into the SPD or SMM

17 CBO REVENUE OPTION Eliminate all catch up contributions Reduce 401(k) type contribution limit to $14,850 Single limit for all employment based plans, including 457(b) Reduce IRA limit to $4,500 Suspend indexing for 5 years Raises $46 billion over 10 year window 33 WASHINGTON UPDATE It is quite likely that everything will be on the table bl that t can include overall plan limits it or deductions. One of the things talked about in Washington is the desire to flatten the tax base with lower rates but fewer deductions. We as an industry may have to decide what we dislike the least rather than what we favor

18 PLAN LOAN ISSUES PLAN LOAN ISSUES In the Winter edition of Retirement News For Employers, the IRS seems to have hd had a change of heart as to the proper rate for a participant loan. Historically they have always accepted for even looked for Prime +2. They are now quoting the DOL

19 PLAN LOAN ISSUES When a retirement plan allows participant loans, that t loan is an investment tof plan assets and must bear a reasonable rate of interest. According to the Department of Labor, a plan s loan interest rate is reasonable if it is equal to commercial lending interest rates under similar circumstances 37 PLAN LOAN ISSUES In follow up discussions with other industry professionals I have hd had a lot of kick back k kon this discussion. First, there is the question if this is a secured or unsecured loan. Since the lender will likely not suffer a loss, most practitioners feel lone is a secured loan, but is it? 38 19

20 PLAN LOAN ISSUES It is important to remember that prior to when the regulations lti were rewritten in 1989, a participant could only borrow 50% of their vested account balance (with a $50,000 limit), but could pledge their entire account balance as collateral. With the rewrite of the regulation no more than 50% of the account balance could be pledged as collateral, but that same 50% could still be borrowed. 39 PLAN LOAN ISSUES Thus, the promissory note signed by the participant i t became the collateral l for the loan. Example Participant with $100,000 vested account balance and no prior loans. Maximum loan is $50,000. After loan is granted, tdthere is a promissory note for $50,000 and $50,000 in other assets. What is the collateral for the loan? 40 20

21 PLAN LOAN ISSUES The Regulations require that the retirement benefit be first and foremost under the plan and that all other benefits be incidental. If involve more than 50% of the account value in the loan transaction, the loan becomes more than incidental and violates the rule. Thus, it is the promissory note and not the other assets that are the collateral for the loan. Commercial lenders would call this unsecured! 41 Example 2 PLAN LOAN ISSUES Participant i trequests a hardship hi withdrawal. Plan administrator declines saying that the participant must first take a loan, as available under the plan. Participant takes the maximum loan and gives a promissory note in exchange. Then hardship withdraws the remaining balance. (No problem with the 50% rule, which is based on date the loan is granted.) 42 21

22 PLAN LOAN ISSUES However, once again have a fact set that the only asset remaining in the plan is the promissory note that was signed by the participant. Again, would not qualify as collateral for commercial lending purposes. Are there fact sets where it could be secured? Yes! Participant ii with ih$ $100, account balance pledges $50,000 as collateral, but only borrows $25, PLAN LOAN ISSUES It is important to remember that when the DOL released dtheir loan regulations in 1989, they specifically said that a rate referencing the prime rate was not a reasonable rate. The IRS gave specific examples, that we are not listing here, but they can be found on the IRS website

23 PLAN LOAN ISSUES To determine if a participant loan interest rate is reasonable, ask these questions: What current rates are local banks charging for similar loans (amount and duration) to individuals with similar creditworthiness and collateral? Is the plan rate consistent with the local rates? 45 PLAN LOAN ISSUES When has a plan ever looked at the creditworthiness thi of a participant, i t unless they have previously defaulted on a plan loan? Likely, never. Is this something that a plan really wants to start getting involved with? What are you doing at this point? If contact local lending institutions, can you get a comparable rate? 46 23

24 PLAN LOAN ISSUES Many banks are not currently issuing personal loans other than mortgages (where the house is collateral) or passbook loans (again secured). More interesting issue is what will the IRS be enforcing on audits in light of its change of position? Stay tuned! 47 PLAN LOAN ISSUES One last point is that it is not an issue that the trust t won t be hurt tif the participant i t defaults df (unless it is a pooled account). When making a loan to a participant the trustee must evaluate whether the loan is a proper investment as compared to the alternatives available. Unless we are dealing with a down market, giving a loan at a sub market rate is a problem for the trustee

25 QUESTIONS! 49 Chapter 2 Disclosure 25

26 CHAPTER 2 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Following the release of the Interim Final we now have the Final, Final Section 408(b)(2) Regulations. The DOL missed their target date of the end of January, but did get the guidance out February 2 nd. As discussed later in this presentation, the effective date of the regulations was also extended

27 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) The final regulations like the prior regulations require covered service providers (CSPs) to provide responsible plan fiduciaries (RPFs) with certain disclosures prior to entering into service arrangements in order for plan fiduciaries to have the necessary information for determining whether the arrangements with 53 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) their service providers are reasonable and that the total remuneration received by the service providers is also reasonable. Fiduciaries must act with the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. Thus, plan fiduciaries must ensure that arrangements with their service providers are "reasonable" and that only "reasonable" 54 27

28 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) compensation is paid for services. Fundamental to a plan fiduciary s ability to make these decisions is the availability of information sufficient to enable the plan fiduciary to make informed decisions s about the services, the costs, and the service provider. This will highlight the changes made in finalizing the regulations. 55 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) The effective date of the final 408(b)(2) regulations has been extended d from April 1, 2012 to July 1, This impacts the effective date of the participant disclosure regulations as well. Participant disclosure has three parts, initial, annual thereafter and quarterly

29 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) The effective date for the ERISA 404(a)(5) initial participant disclosure for a calendar year plan is 60 days after the service provider must provide their disclosure to the plan fiduciary. Thus the initial disclosure must be provided by August 30, DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) The first quarterly fee and expense statement t t showing actual reductions to participant accounts must be provided by November 14, Strangely, the issue that will cause confusion is when will the annual updated disclosure have to be provided? 58 29

30 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) We currently believe that it will be November 1, 2012 for the 2013 year. To wait for November 2013, could mean that the data was not the most current available. The question that needs to be answered is whether the DOL will allow the August 30, 2012 date to satisfy the requirements for both 2012 and Stay tuned! 59 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Certain 403(b) Contracts/Accounts Excluded. d (Parallel l to exclusion under FAB and ). 403(b) annuity contracts and custodial accounts that meet the following criteria are excluded from the types of plans covered by the final 408(b)(2) regulations: 60 30

31 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Contracts/accounts issued to current or former employees prior to January 1, 2009 for which no contributions have been made to those contracts/accounts for taxable years beginning with January 1, 2009; All of the rights and/or benefits under the contract/account are enforceable against the insurer or custodian by the individual owner of the contract/account without employer involvement; and 61 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) The individual owner is fully vested in the contract or account. Initial Disclosure Requirements Indirect Compensation Additional Requirement In addition to identifying payers of indirect compensation, covered service providers will also be required to describe the arrangement between the payer and the covered service 62 31

32 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) provider, an affiliate, or a subcontractor pursuant to which the indirect compensation is paid. Requiring the covered service provider to describe the arrangement will assist plan fiduciaries with uncovering possible conflicts of interest. Question: Will this negatively impact revenue sharing agreements as they currently work. 63 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Investment-related Disclosures; Fiduciary Services Total Operating Expenses. The final regulation requires the disclosure of the total annual operating expenses for designated investment alternatives (DIA) to be expressed as a percentage and calculated in accordance with the DOL participant-directed disclosure regulations

33 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Also added to this section (as revised #3) is that the disclosure must include for an investment contract, product, or entity that is a Designated Investment Alternative (DIA), any other information or data about the DIA that is within the control of, or reasonably available to, the covered service provider and that is required for the covered plan administrator to comply with the ERISA 404(a)(5) participant disclosure requirements. 65 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Investment-related Disclosures, Record-keeping/Brokerage k Services. Investment-related pass-through current disclosure material of the investment issuer, or information replicated from such materials may be used under the final regulations for DIAs

34 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) To do so, the issuer of the DIA must be one of the following entities: Registered investment company (i.e., mutual fund) Insurance company qualified to do business in a State Issuer of a publicly-traded security, or Financial institution supervised by a State or Federal agency 67 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) The focus is now on whether the institution issuing the DIA materials is regulated rather than whether the DIA s disclosure is regulated. In addition, the CSP must act in good faith, must not know that the materials are incomplete or inaccurate, and must state t that t it makes no representations ti as to the completeness or accuracy of such materials

35 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Guide to Initial Disclosures. The DOL noted in the preamble of the final regulation that they intend to publish a proposed regulation that will require a covered service provider to separately furnish a guide to assist a responsible plan fiduciary with locating compensation information that is disclosed in the various documents they are furnishing to the responsible plan fiduciary. 69 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Question is whether it will be available a reasonable time before the July 1 st effective date. In the meantime, Appendix A at the end of the regulations (Federal Register February 3, 2012, page 5659) contains a sample guide to assist the responsible plan fiduciary with reviewing the required disclosures

36 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Timing of Providing Changes to Investment- Related Information in the Initial Disclosures Changed The deadline for providing changes to investment-related information has been lengthened from within 60 days to at least annually. " Changes to information in the initial disclosure, other than investment-related information, must still be disclosed within 60 days. 71 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Written Request to CSP for Reporting and ddisclosure Information; Timing i The deadline for providing requested reporting and disclosure information to a responsible plan fiduciary has changed: From: 72 36

37 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) not later than 30 days following receipt of a written request from the responsible plan fiduciary or covered plan administrator, unless such disclosure is precluded due to extraordinary circumstances beyond the covered service provider's control, in which case the information must be disclosed as soon as practicable. 73 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) To: reasonably in advance of the date upon which such responsible plan fiduciary or covered plan administrator states that it must comply with the applicable reporting or disclosure requirement, unless such disclosure is precluded due to extraordinary circumstances beyond the covered service provider's control, in which case the information must be disclosed as soon as practicable

38 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) This change was made due to comments on the interim i final regulations that t requested the deadline be aligned with current reporting and disclosure standards as opposed to being based on the request date of a responsible plan fiduciary. 75 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Correction of an Error Made in the Disclosure of a Change to the Initial Disclosure. The final regulation clarifies that if a disclosure of a change is being made to an original disclosure and the disclosure of change also contains an error or omission, then, the covered service provider has 30 days from when he/she learned of the change disclosure s error or omission to disclose that correction

39 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Compensation Definition Expanded to Include Reasonable and Good Faith Estimate The definition of compensation under the final regulation has been modified to add a reasonable and good faith estimate concept. 77 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) A description of compensation or cost may be expressed as a monetary amount, formula, percentage of the covered plan's assets, or a per capita charge for each participant or beneficiary or, if the compensation or cost cannot reasonably be expressed in such terms, by any other reasonable method; 78 39

40 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) the description may include a reasonable and good faith estimate if the covered service provider cannot otherwise readily describe compensation or cost and the covered service provider explains the methodology and assumptions used to prepare such estimate. 79 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Any description, including any estimate of recordkeeping cost under paragraph (c)(1)(iv)(d), must contain sufficient information to permit evaluation of the reasonableness of the compensation or cost. Note: Employer/ fiduciary will need to understand enough of the details to make a judgment

41 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Exemption for Responsible Plan Fiduciary i Now Includes a Requirement to Terminate the Service Arrangement When There Is a Failure to Provide the Disclosure Not enough to notify the DOL anymore. 81 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) The final regulations set a deadline for when a responsible plan fiduciary must terminate a service arrangement with a covered service provider that fails to disclose required information. In order to qualify for relief under a prohibited class exemption the responsible plan fiduciary must terminate services with the covered service provider as expeditiously as possible after the 90-day written request is made

42 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) If the covered service provider fails to comply with the written request for the disclosure from the responsible plan fiduciary within 90 days of such request, the responsible plan fiduciary shall determine whether to terminate or continue the contract or arrangement consistent with its duty of prudence under ERISA section DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) If the requested information relates to future services and is not disclosed d promptly after the end of the 90-day period, then the responsible plan fiduciary shall terminate the contract or arrangement as expeditiously as possible, consistent with such duty of prudence

43 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Electronic Communication of Covered Service Provider Disclosure Addressed Following is a quote from the preamble on this subject: Specifically, several commenters asked the Department to affirm that covered service providers could furnish the required disclosures electronically, including by making information available on a secure 85 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Web site if responsible plan fiduciaries are notified as to how to access such information. These commenters argued that electronic delivery enables more costeffective compliance, permits easy confirmation of delivery, and enables service providers to create and use tools that can enhance the review of information by responsible plan fiduciaries

44 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) Consistent with the views expressed in the 2007 proposed rule, there is nothing in the regulation that limits the ability of covered service providers to furnish information required by the regulation to responsible plan fiduciaries via electronic media. 87 DOL FINAL REGULATIONS ON ERISA SECTION 408(b)(2) However, unless the covered service provider s disclosure information on a Web site is readily accessible to responsible plan fiduciaries, and fiduciaries have clear notification on how to gain such access, the information on the Web site may not be regarded as furnished within the meaning of the regulation." 88 44

45 02 This Bulletin supplements the participant- level disclosure regulation by providing guidance on some of the most frequently asked questions concerning the participant-level disclosure regulation and how it may be implemented. The guidance in this Bulletin also serves as guidance concerning that specific requirement of the 408(b)(2) regulation

46 Q-1: A plan has both participant-directed and trustee-directed investments. Participants have the right to make investment decisions with respect to the portion of their accounts attributable to employee contributions. The plan s trustee directs the investment of the remainder of their accounts (e.g., employer contributions). Is this plan covered by the regulation? 91 A-1 Yes, this plan is a covered individual account plan under paragraph p (b)(2) ) of the regulation. This means the plan administrator must comply with the plan-related disclosures in paragraph (c) and the investment-related disclosures in paragraph (d). However, the plan administrator is not required to provide the investment-related information required under paragraph (d) of the regulation for the trustee-directed investments. Rather, the plan administrator s obligation under paragraph (d) is limited to the plan s designated investment alternatives

47 Q-2: Does the regulation cover tax-sheltered annuity programs under section 403(b) of the Internal Revenue Code ( 403(b) plans ) that are ERISA-covered plans? A-2: Yes. Pursuant to section 401 of ERISA, the regulation covers 403(b) plans established or maintained by tax-exempt organizations. The regulation does not apply to tax-sheltered annuities that are not ERISA-covered plans. 93 However, consistent with Department s Field Assistance Bulletins and , 02, the Department will not take enforcement action against any plan administrator who reasonably determines it would be impracticable, or impossible, to obtain the information necessary to meet the disclosure requirements under paragraph (d) of the regulation with respect to any designated investment alternative that is an annuity contract or custodial account described in section 403(b) of the Internal Revenue Code if: 94 47

48 (1) the contract or account was issued to a current or former employee before January 1, 2009; (2) the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account for periods before January 1, 2009; (3) all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and (4) the individual id owner is fully vested in the contract t or account. These are the same rules that exempt the information having to be reported on form In general, a plan s election of the transitional relief provided in the Field Assistance Bulletins as well as the applicability of the exemption in (c)(1)(ii) are evidence of the impracticability of obtaining the information required under paragraph (d) of the regulation. Thus, if a plan is already taking advantage of the rules to avoid Form 5500 reporting they also get a pass here

49 Q-3: If a plan administrator furnishes plan-related l and investment-related t t information together in a single document, must the plan administrator separately identify any designated investment alternatives (as required by paragraph (c)(1)(i)(d)) and also name each designated investment alternative (as required by paragraph (d)(1)(i)(a))? 97 A-3: No. The rule does not require that the same information be disclosed twice when plan-related and investment-related disclosures are furnished in a single document. The Department wants to ensure that, regardless of how the disclosures are furnished, participants and beneficiaries obtain the information necessary to make informed decisions related to their plan accounts. However, the Department does not intend that plan administrators provide unnecessarily duplicative information when disclosures are furnished in a single document

50 Q-4: The regulations require identification of any designated d investment alternatives under the plan and identification of any designated investment managers[.] For purposes of this regulation, what is a designated investment manager, as distinguished from a designated investment alternative? 99 A-4: A designated investment manager ( DIM ) (DIM) is a section 3(38) investment manager that is designated by a plan fiduciary and made available to participants and beneficiaries to manage all or a portion of the assets held in, or contributed to, their individual accounts. When participants appoint a DIM to manage all or a portion of their individual accounts, the DIM becomes responsible for investing their accounts on a participant-by-participant basis

51 The regulation does not impose any limitations it ti on the investment t alternatives ti that a DIM may use for investing participants and beneficiaries accounts. However, a plan may impose limitations by its terms or in its agreement with the DIM (e.g., the DIM may only invest in a plan s designated investment alternatives). 101 Q-5: The regulation requires an explanation of any fees and expenses for general plan administrative services which may be charged against participants and beneficiaries accounts and the basis on which such charges will be allocated. How specific does this explanation have to be in order to comply with this requirement?

52 A-5: The regulation states that [e]xcept as otherwise explicitly required herein, fees and expenses may be expressed in terms of a monetary amount, formula, percentage of assets, or a per capita charge. Paragraph (e)(5) also requires that [t]he information required to be prepared by the plan administrator for disclosure under this section shall be written in a manner calculated to be understood by the average plan participant. 103 The necessary level of detail for any particular explanation, and whether it is written in a manner calculated to be understood by the average plan participant, will depend on the specific facts and circumstances of the particular service and the particular fee or expense

53 Thus, when fees for a given service are known at the time of the disclosure, the explanation must clearly identify the service (e.g., recordkeeping), the cost of the services (e.g.,.12% of the participant s account balance or $25 per participant), and the plan s allocation method (e.g., pro rata). The bulletin provides other examples of acceptable language. 105 On the other hand, when services, fees, or both are not known at the time of the disclosure, the explanation required under paragraph (c)(2)(i)(a) must reasonably take into account the known facts and circumstances

54 For example, if a plan administrator reasonably expects the plan to incur legal fees in the upcoming year, such as for legal compliance services, but does not know the precise amount of such fees at the time of the disclosure, an identification of the services that are expected to be performed and the allocation method ordinarily used would be sufficient for purposes of this disclosure. 107 The following example is consistent with these principles: i If the plan incurs any legal expenses, such expenses will be paid from the plan s assets and deducted from individual plan accounts on a pro-rata basis. An estimate is not required under the regulation

55 Q-6: Pursuant to a plan s existing contract with its recordkeeper at the time of the disclosure required by paragraph (c)(2)(i)(a), the plan agrees to pay a monthly recordkeeping fee not to exceed 2 basis points of the plan s assets, reduced by any revenue sharing payments received from the plan s designated investment alternatives. Historically, these revenue sharing gpayments have exceeded the monthly fee in some, but not all, months. How do the principles in the answer to question 5, above, apply to this situation? 109 A-6: Despite the fact that revenue sharing (or similar) payments, if any, reduce the gross fee amount (2 basis points monthly of the plan s assets, 24 basis points annually), this situation should be treated as if the recordkeeping fees are known at the time of the disclosure. Thus, the explanation must clearly identify the service, the amount or cost of the service, and the plan s allocation method

56 The following explanation is consistent with these principles. The plan incurs monthly recordkeeping expenses of up to.02% of the plan s assets. These expenses typically will be deducted from your account on a pro rata basis. However, these monthly expenses may be paid, in whole or in part, from revenue sharing payments that the plan receives from plan investment options. 111 In the past, these payments have completely l paid for these recordkeeping expenses in some months. If revenue sharing payments are received, the plan will pay less than.02% of the plan s assets per month, and only those expenses not offset by any revenue sharing payments will be deducted from your account

57 Q-7: The plan document provides for the payment of administrative expenses of the plan either from amounts forfeited under the terms of the plan or from the general assets of the employer sponsoring the plan. The plan document does not allow payment of administrative expenses from the individual accounts of plan participants or beneficiaries. Accordingly, the responsible plan fiduciary pays administrative expenses from forfeited amounts held by the plan. 113 When expenses exceed plan forfeitures, f the responsible plan fiduciary forwards the service provider s invoice to the plan sponsor, who pays the service provider from the sponsor s general assets. Must this plan's administrative expenses be disclosed under the regulation?

58 A-7: No. The regulation requires an explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping), which may be charged against the individual accounts of participants and beneficiaries and are not reflected in the total annual operating expenses of any designated investment alternative... [.]" 115 The administrative expenses in this example are not charged against participant and beneficiary individual accounts and also are not reflected in the total annual operating expenses of designated investment alternatives; instead, they are paid either from the plan s assets that have been forfeited or from the general assets of the employer sponsoring the plan. Accordingly, these fees are not required to be disclosed under the regulation

59 Question! If the employer is paying plan expenses may it want to disclose that fact to the participants? We have heard about any number of plans where the employer has said that the employees are not paying the expenses, but they really were. In this case, wouldn t the employer want the employees to know that it was covering all or a portion of the fee load? 117 Q-8: The plan document provides that administrative expenses shall be paid from the following sources at the discretion of the plan administrator: (1) proportionately from each individual account, (2) from amounts forfeited under the terms of the plan, or (3) from the general assets of the employer sponsoring the plan. The plan s administrative expenses have always been paid either from the plan s forfeiture account or from the general assets of the employer sponsoring the plan

60 The plan administrator has never charged the individual accounts of participants and beneficiaries and does not intend to do so in the foreseeable future. In fact, the plan has a written commitment from the employer that it will pay administrative expenses not covered by forfeitures. Must the plan s administrative expenses be disclosed under paragraph (c)(2)(i)(a) of the regulation in these circumstances? 119 A-8: No. The regulation requires a plan administrator to provide participants p and beneficiaries with an explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping), which may be charged against the individual accounts of participants and beneficiaries and are not reflected in the total annual expenses of any designated investment alternative, as well as the basis on which such charges will be allocated (e.g., pro rata, per capita) to, or affect the balance of, each individual account

61 Although administrative expenses could be charged against individual accounts if the employer fails to pay them, the fact that the employer has undertaken this obligation relieves the plan of having to disclose the explanation of these expenses. The disclosure required by the regulation is not likely to be a helpful piece of information to participants and beneficiaries if it describes fees and expenses that, in fact, have never been assessed against participants and beneficiaries accounts in the past and probably never will be assessed in the future. It may even be confusing to them. 121 In any event, the plan administrator would be required to inform participants and beneficiaries if circumstances were to change such that the plan administrator might prospectively charge the plan s administrative expenses against the individual accounts of participants and beneficiaries. If it never intends to charge the participants, the employer may be better off deleting the language from the plan document

62 Q-9: A plan has 10 registered mutual funds as designated investment alternatives. The plan pays a recordkeeping expense of 10 basis points of the plan s total assets by liquidating shares from participants and beneficiaries accounts. Thus, paragraph (c) of the regulation requires the plan administrator to disclose this expense. Does the plan administrator have the discretion to disclose this expense under paragraph (d) of the regulation instead, as part of the total annual operating expenses of each of the plan s designated investment alternatives that is, as if these recordkeeping expenses actually were being paid from assets of the designated investment alternatives? 123 A-9: No. A plan administrator does not have this discretion under the regulation. Consequently, a plan administrator may not include the cost of a recordkeeping expense in the total annual operating expenses of a plan s designated investment alternatives, unless the fee is actually paid in such a way (e.g., through revenue sharing) as to reduce the rate of return of the designated investment alternatives

63 When a fee or expense is charged against the individual id accounts of participants i t and beneficiaries by liquidating shares or deducting dollars, it must be disclosed pursuant to paragraph (c) of the regulation. 125 Q-10: Must the revenue sharing explanation required by the regulation itemize or identify the specific plan administrative expenses being paid from the total annual operating expenses of one or more of the plan's designated investment alternatives? A-10: No

64 The regulation requires at least quarterly, [i]f applicable, an explanation that, t in addition to the fees and expenses disclosed, some of the plan s administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan s designated investment alternatives... [.] 127 This explanation would be required, for example, when a plan s administrative expenses are paid through revenue sharing arrangements, Rule 12b-1 fees, or subtransfer agent fees. The Department is concerned that, without this explanation, some participants and beneficiaries would believe that there are few or no administrative expenses associated with their participation in the plan when, in fact, significant amounts may be paid for administrative services from investment-related charges

65 As the Department explained in the preamble to the final regulation, some information, even if general, would help participants and beneficiaries to better understand that there are administrative fees and expenses attendant to the operation of their plan and that some of those fees and expenses might be indirectly paid by the plan's designated investment alternatives. NO FREE LUNCH!! 129 Consistent with that view, the Department does not interpret the regulation as requiring an identification of the specific plan administrative expense or expenses being paid or an identification of the specific designated investment alternative or alternatives making the payment. Rather, a statement that some or all of the plan s administrative expenses are paid indirectly through some or all of the plan s designated investment alternatives will satisfy this specific requirement

66 Of course the regulation does not preclude a more detailed d explanation identifying i the specific administrative expense or expenses being underwritten or an identification of the specific designated investment alternative or alternatives from which the payment is being made. 131 Q-11: All of a plan s administrative expenses are paid from revenue sharing received by the plan from one or more of the plan s designated investment alternatives. Thus, no fees or expenses are charged to individual accounts in any given quarter. Must the plan administrator furnish to participants p and beneficiaries the revenue sharing explanation described in the regulation?

67 A-11: Yes. As already stated, the regulation requires at least quarterly [i]f applicable, an explanation that, in addition to the fees and expenses disclosed, some of the plan s administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan s designated investment alternatives... [.] 133 Some individuals have interpreted this provision i to apply only if the plan allocates some fees or expenses to individuals accounts. Under this interpretation, if all administrative expenses are paid from such revenue sharing and there are no actual charges to individual plan accounts, the explanation is not required

68 The Department does not agree with this interpretation. The requirement for a revenue sharing explanation is not contingent on the plan also allocating at least some administrative expenses to participants accounts as described in the regulation. The purpose of the explanation is to inform participants and beneficiaries of plans that pay for some or all administrative services through investment-related charges so that they do not think that there are few or no administrative expenses associated with their participation in the plan. Again NO FREE PLANS. 135 There is no need to provide quarterly disclosure, if no amounts were charged to the participant s accounts, however, the general disclosure that is updated annually is still required

69 Q-13: What information must be disclosed d under the regulation about brokerage windows, self-directed brokerage accounts, and other similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan? 137 A-13: First, a plan administrator must provide a general description of any such window, account, or arrangement. The regulation does not state how specific and detailed a description must be to satisfy this requirement. Whether a particular description is satisfactory will depend on the facts and circumstances of the specific plan and the specific window, account, or arrangement

70 At a minimum, however, this description must provide sufficient information to enable participants and beneficiaries to understand how the window, account, or arrangement works (e.g., how and to whom to give investment instructions; account balance requirements, if any; restrictions or limitations on trading, if any; how the window, account, or arrangement differs from the plan s designated investment alternatives) and whom to contact with questions. 139 Second, a plan administrator also must provide an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis in connection with any such window, account, or arrangement

71 This would include: (1) any fee or expense necessary for the participant or beneficiary to start, open, or initially iti access such a window, account, or arrangement (such as enrollment, initiation, or start up fees), or to stop, close or terminate access; (2) any ongoing fee or expense (annual, monthly, or any other similarly charged fee or expense) necessary for the participant to maintain access to the window, account, or arrangement, including inactivity fees and minimum balance fees; and (3) any commissions or fees (e.g., g per trade fee) charged in connection with the purchase or sale of a security, including front or back end sales loads if known; but would not include any fees or 141 expenses of the investment selected by the participant or beneficiary (e.g., Rule 12b-1 or similar fees reflected in the investment ss total annual operating expenses). The Department understands that in some circumstances the specific amount of certain fees associated with the purchase or sale of a security through a window, account, or arrangement, such as front end sales loads for open-end management investment companies registered under the Investment Company Act of 1940, may vary across investments available through the window or may not be known by the plan administrator or provider of the window, account, or arrangement in advance of the purchase or sale of the security by a participant or beneficiary