The Cost of Doing Nothing: Examples of 401(k) Fee Disclosure in Action (Inaction) Michael Kiley and Emily Hooyman February 21, 2013
CompuPay is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.
Housekeeping Course Level: Basic Prerequisites: None required Advanced Preparation: None required Instructional Delivery Method: Group Internet based CPE Credits: 50-60 minutes. One (1) credit hour is available for this session. Questions Evaluation
4 Before We Begin PAi has been servicing the small business retirement market for 30 years. We are not Attorneys or licensed to practice law of any nature; CPAs or accountants; Investment professionals.
Learning Objective We will discuss Department of Labor regulations 408(b)(2) and 404(a)(5) starting with a review of basics and then continuing through retirement industry trends, impacts to business owners, plan sponsors and participants. 5
Today s Agenda An Introduction to PAi and Your Presenters Retirement Industry Update lots of changes, not all driven by fee disclosure. Origin of Fee Disclosure Requirements of: 408(b)(2) 404(a)(5) Real World Examples Q & A 6
An Introduction to PAi PAi partners with CompuPay to offer affordable 401(k) plans to CompuPay clients on a national basis. Founded in 1983; Incorporated in 1985. Oldest national independent nonproducing Third Party Administrator in the market. ( Nonproducing means we don t sell products or get commissions.) 150 employees in U.S. and Argentina. Over 13,000 plans with over $3 billion in assets under administration 7
Your Presenters Today Michael Kiley President and Owner Emily Hooyman Compliance Manager 8
9 Presenter Bios Michael Kiley is the founder and CEO of Plan Administrators, Inc. (PAi). Based in De Pere, WI, PAi provides retirement plan recordkeeping and administration services to more than thirteen thousand small and mid-sized 401(k) plans nationwide. As an expert and visionary in his field, Michael testified before the U.S. Senate Aging Committee speaking in favor of retirement plan fee disclosure. Michael has been working with Capitol Hill and various agencies of the executive branch of the federal government for the last 25 years. Emily Hooyman is a Compliance Manager for PAi and oversees regulatory initiatives and support within the organization as they relate to the retirement industry. She has over 18 years experience within the retirement and investment arena, primarily focused on compliance of third-party administration. Over her career, Emily has obtained the APA designation through NIPA, QPA through ASPPA and ERPA through the IRS. She is a current member of ASPPA.
Retirement Industry Update Industry is moving away from product and moving towards service. How should my 401(k) be serviced and in which investments? It will be more difficult to be a casual provider in this marketplace, but not impossible. Bad news for inefficient products. There will be budget reform. Everyone from the federal government to states are looking for cash and the retirement plan industry is pretty attractive. 401(k)s will be affected but not eliminated. 401(k) is a failed experiment false. 10
Retirement Industry Update Cont... Times They Were A Changin well before fee disclosure the emergence of DCIO. That s GREAT for advisers and brokers active in this marketplace. New companies entering the market others leaving. Bottom Line brokers are not getting the support they once received from product providers other service providers stepping in. Everyone is concerned about the F word Fiduciary. DOL has promised regulations and everyone is anxious. 11
Effect of Fees on Accumulation $120,000 $100,000 $80,000 $100,627 $60,000 $66,144 $40,000 $20,000 $0 $10,000 $10,000 1.5% Contract Fee No Contract Fee $10,000 8% market 30 year career. 12
Origin of Fee Disclosure: Where It Began Bush Administration started fee disclosure effort with proposed regulations and comment period. Obama Administration - General Accountability Office produced a study that revealed that: Most people didn t know what they were paying for their retirement account; A fee reduction of 1 percent of assets per year was possible AND would increase the retirement account of the average worker by 28 percent. Fee disclosure regulations were born. 13
14 POLLING QUESTION #1 Have you been asked to help a client with a plan fee question or analysis? Yes/No
Fee Disclosure Rules and Regulations 408(b)(2) & 404(a)(5) Requirements 15
Fee Disclosure Rules and Regulations ERISA Section 408(b)(2) Regulatory Project Proposed regulations released December 14, 2007 Originally proposed to be effective 90 days after issued in final form Final regulation was published on February 3, 2012, and became effective July 1, 2012 ERISA Section 404(a)(5) Regulatory Project Proposed regulation released July 23, 2008 Described ERISA fiduciaries obligations to participants in a directed investment plan Final regulation effective for plan years beginning on or after November 1, 2011, subject to transitional rule FAB 2012-02R provides further clarification of what was intended under the regulation 16
ERISA 408(b)(2) Requirements 17
ERISA 408(b)(2) Requirements Provide Services To Service Provider (Party In Interest) ERISA plan Service Provider Exemption (ERISA 408(b)(2) ) No prohibited transaction if the services provided to the plan: Are necessary for the establishment or operation of the plan Are provided under a reasonable contract or arrangement, and No more than reasonable compensation is paid 18
ERISA 408(b)(2) Requirements Covered ERISA Plans: Any employee pension benefit plan as defined in ERISA 3(2)(A) This means: pension plans, 401(k) plans, 403(b) plans, profit sharing, ESOPS, etc. Not Covered: SEPs, SIMPLEs, IRAs, Roth IRAs, Governmental and nonelecting Church plans, nonqualified deferred compensation plans, owner-only 401(k) plans 19
ERISA 408(b)(2) Requirements Who Is a Covered Service Provider? (CSP) Provides described services to CSP Reasonably expects $1,000 or more in compensation for services under the contract Plan Payment Info: Whether paid as direct or indirect compensation, and Whether payment is received or services performed by the CSP, an affiliate or a subcontractor 20
ERISA 408(b)(2) Requirements What are Described Services? All services provided directly to the plan in a fiduciary capacity (per ERISA 3(21) ) Fiduciary services relative to plan investments that hold plan assets Services as an investment adviser to the plan Recordkeeping or brokerage services to an individual account plan with designated investment alternatives Other services, such as accounting, auditing, appraisal, legal, administration, recordkeeping, etc. for indirect compensation or for related party compensation 21
22 POLLING QUESTION #2 Here is an invoice from a CPA firm for work completed on calculating a year end contribution. Is this CPA firm a covered service provider?
23 POLLING QUESTION #3 Are you or your firm a covered service provider for any qualified plan(s)? Yes, No, Haven t determined.
ERISA 408(b)(2) Requirements What Must Be Disclosed? CSP must provide in writing: Description of all services under the contract If applicable, that the CSP is a fiduciary or an investment adviser Description of all direct compensation expected (either in the aggregate or by service) and who will receive it Description of all indirect compensation and related party compensation All services which will trigger its payment Identity of payer(s) Description of arrangement between payer and the CSP, affiliate, or subcontractor pursuant to which payment is made 24
ERISA 408(b)(2) Requirements When must disclosure be made? Initial disclosure: before July 1, 2012 In advance of the service contract date Any change in information, within 60 days Exception for investment information changes Upon request of the responsible plan fiduciary if needed to comply with reporting and disclosure Responsible plan fiduciary (RPF): authority to enter into contracts for the plan with a provider Plan sponsor is always an RPF RPF is personally responsible to plan for any loss, if service provider fails to comply with disclosure requirements (ERISA 406(a)(1)(C) ) 25
ERISA 408(b)(2) Requirements RPF Exemption An RPF will not be responsible for service provider disclosure failure if: RPF did not know the service provider failed to make disclosures AND reasonably believed all information had been provided Upon discovery that service provider failed to disclose, RPF requests required information in writing If the service provider does not comply within 90 days, the RPF notifies the Department of Labor of the failure: Notice must be filed within 30 days after service provider s refusal to furnish the requested information or 90 days after written request Notice must contain: Name of plan, plan number, sponsor name, address, EIN Name, address and phone of RPF Name, address, phone of service provider and EIN if known 26
ERISA 404(a)(5) Requirements 27
ERISA 404(a)(5) Requirements Participant Disclosure 404(a)(5) Background / History RFI April 2007, proposed July 2008, suspended January 2009, legislative proposals, published October 2010 Philosophy Target: defined contribution plans with participant direction 401(k), ERISA 403(b), NOT IRAs, SEPs, SIMPLE Participants with the right to direct must have access to basic information 28
ERISA 404(a)(5) Requirements Who Provides Participant Disclosure? Plan Administrator (not Covered Service Provider!) Safe Harbor: Plan Administrator not liable for sufficiency if: Information is from Service Provider or issuer of investment; and Reasonable good faith reliance Who Receives Participant Disclosure? All eligible participants whether or not they are participating DOL believes annual notice serves as important reminder Former employees, death beneficiaries, QDRO alternate payees, disclosure obligation only extends to those who have the right to direct the investments held in their account 29
ERISA 404(a)(5) Requirements Timing of Disclosures: Initial Disclosure: August 30, 2012 (60 days after July 1, 2012) Initial quarterly disclosure: 45 days after the quarter end in which the initial disclosures are due (November 14 for calendar year) Annual Disclosure On or before date participant can first direct investments Annually thereafter: at least once in any 12 month period whether plan operates on calendar or fiscal year basis Updates of Annual Disclosure At least 30 days, but no more than 90 If unable due to unforeseeable events beyond plan administrator s control, provide as soon as reasonably practicable Quarterly Disclosure At least once in any 3 month period, whether plan operates on calendar or fiscal year basis. No more than 3 months after last 30
ERISA 404(a)(5) Requirements Required Disclosure Content Plan-related Information General information about the plan Expenses: Administrative and individual expenses Investment-related Information On or before first investment and annually thereafter After a new investment Upon request 31
ERISA 404(a)(5) Requirements Plan-related Information: General Plan Information List of investment options and designated investment alternatives Circumstances under which they may give investment instructions Limitations on instructions (i.e. transfer restrictions) Description of brokerage windows or self-directed brokerage accounts Expense Information Expenses paid directly by plan or participants Reduce participant account balances Two types of plan expenses: Administrative expenses: administration, recordkeeping, accounting, legal Does not include investment expenses such as annual operating expense, 12b-1 etc. Individual expenses: charged to the individual not plan. Distributions, loans, ppt investment advice, redemption fees, etc. 32
ERISA 404(a)(5) Requirements Investment-related Information: Format Designated investment alternatives must be presented in a chart or similar format for easy comparison Model comparative chart provided in DOL appendix to final regulation Information Provided Identifying information: investment fund name, category, Performance data / Benchmarks: 1, 5 and 10 year avg, fixed, Investment expense fee information: restrict, exp. per $1,000, Website: specific for investment info, objectives, performance, issuer Glossary: DOL provided guidance and requested terminology Special disclosure for annuity investments Special rules for employer securities 33
34 POLLING QUESTION #4 Have you seen a client with plan expenses that seemed too high to you?
Real World Examples - Roles Fund Operation mutual fund company, ETF or CIT Fund Selection RIA, 3(38), 3(21), 3(16) Administration/Compliance third party administrator Recordkeeping TPA or separate provider Education financial adviser or other vendor Custody trust company or fund company NOTE if any of these are missing from a fee disclosure you should pay attention to fees. 35
Reasonable? According to the DOL: This isn t okay... when this is reasonable. 36
I don t have to be faster than the bear WRONG DOL requires you to seek value. It s not okay to just be a step faster than the slowest guy. Expenses will be benchmarked and are expected to be reasonable. Some benchmarking is based on a high count of plans in inefficient products with high costs. DOL requires you to seek reasonable. If a Google search returns 10 reputable brands with low prices, is it okay to be in a high-price benchmark? Its value, not cost. Cheapest is not automatically best - it s also not automatically the worst; it just might be the most efficient. 37
How Much Is Not Too Much? Expensive Plan participants not financially sophisticated, traditionally low participation with no explanation, participants in many locations, no HR department, participants have limited access to computers or call center. Not So Expensive Plan participants are comfortable with financial issues, have access to the Internet, experienced investors/savers, all gathered in one location 38
Good News, Bad News 39
Cost of Inaction Participants with an average balance of $10,000, can cost $1,000 per year of delay each.* Participants with an average balance of $100,000 can cost $10,000 per year of delay each.* *Assumes the compounded value of the extra fees over a 30-year working life for a 35 year old participant. 40
Effect of Fees on Accumulation $120,000 $100,000 $80,000 $100,627 $60,000 $66,144 $40,000 $20,000 $0 $10,000 $10,000 1.5% Contract Fee No Contract Fee $10,000 8% market 30 year career. 41
Fee Disclosure Have you looked at your cell phone or cable bill recently? There are MANY CREATIVE things happening in the industry to produce disclosures that cause people to go to sleep. 12 page notices. ERISA buckets. Etc 42
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What Fee Disclosure Should Look Like Fund Operations Fund Selection Administrative/Compliance Recordkeeping Education Custody $xxx $xxx $xxx $xxx $xxx $xxx 44
POLLING QUESTION #5 As a percentage of plan assets, what is the cost of your plan? <1%,1%-1.99%,2%-2.99%, 3% or more, Don t Know 45
Action Items Review your own plan. Take Action. Be overt in client communications. Are you a covered service provider? Have you provided disclosures? Value opportunity work with your clients to review disclosures and suggest action. Use available Internet resources Reducing fees does not necessarily mean breaking relationships. The same adviser that got a client into a plan can tune it. Take action and urge clients to take action. Delays are measured in future value and paid in the immediate. Look for value and outcomes not low fees. Plan vendors must work together to produce maximum retirement readiness. 46
Q & A and Thank you! 47