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Presentation Title
© 2010 Fox Rothschild
How Much Does Your Retirement Plan Really Cost?
Presented byHarvey M. Katz, Esq.Fox Rothschild LLP
100 Park Ave. 15th FloorNew York, NY 10017
212-878-7976973-650-7656
Presentation Title
© 2010 Fox Rothschild
Overview
Hidden fees cost employers and participants money
Who is legally responsible? Department of Labor Regulations What’s an employer to do? Conclusion
Presentation Title
© 2010 Fox Rothschild
Explicit Fees Charged to Retirement Plans and Sponsors
Recordkeeping Fees Custodian Fees Third Party Administration Fees Plan document filing Set up, conversion costs Annual audit fees Trustee service costs Non-discriminatory testing fees Participant Education fees
Presentation Title
© 2010 Fox Rothschild
Hidden Fees – Brokerage Costs
Whenever the fund manager buys or sells a security, he pays for it which means you pay for it.
Even though fund may pay a lower commission rate, based upon volume trading,
These costs are not included in the Annual expense ratio or the prospectus.
Statement of Additional Information for the fund will contain statement
Presentation Title
© 2010 Fox Rothschild
Asset Management/Fund Expenses
Asset management fee is not the only cost a retirement plan will incur.
Plans must also pay funds expenses, and this is where you’ll find fixed expenses and variable expenses.
Every mutual fund and ETF charges the annual expense ratio. This pays for, the fund’s recurring operating costs, the fund manager’s salary.
Average expense ratio is about 1.5%, although many are more 2%,
The annual expense ratio is actually debited on a daily basis. Contained in the prospectus
Presentation Title
© 2010 Fox Rothschild
Revenue Sharing
Mutual Fund 12b-1 Fees Used to compensate brokers and sales
personnel Shared with recordkeepers, brokers,
consultants and administrators Sharing arrangements are generally
hidden from consumers
Presentation Title
© 2010 Fox Rothschild
Undisclosed and Partially Disclosed Fees
Asset management fee brokerage commission costs 12b-1 fees Investment transfer expenses Other asset based fees and charges Undisclosed/partially disclosed “revenue
sharing” arrangements Termination Charges/ Asset value
adjustments
Presentation Title
© 2010 Fox Rothschild
Department of Labor Focus
DOL does not care about fees paid by employers
Focus is on fees paid by plans that detract from investment performance
Compliance burden is imposed upon fiduciaries
Disclosure obligation is imposed upon providers
Presentation Title
© 2010 Fox Rothschild
How Does ERISA Regulate Plans and Providers?
Fiduciaries are responsible for operation and administration of plan
Functional definition of the term fiduciary Professionals generally not responsible
even though may be fiduciaries for some purposes
Presentation Title
© 2010 Fox Rothschild
How Does ERISA Regulate Service Providers
ERISA §406(a)(1)(C) generally prohibits a plan fiduciary from engaging a “party in interest” to furnish goods or services to the plan (“Prohibited Transactions”)
A “fiduciary” is a person with discretionary authority or who provides investment advice for a fee
A “party in interest” includes persons providing services to the plan.
Presentation Title
© 2010 Fox Rothschild
Exemptions from Prohibited Transactions
Dual services are prohibited but for the Prohibited Transaction exemption
Arrangements between plans and service providers are exempt as Prohibited Transactions if: (i) the contract or arrangement is reasonable; (ii) the services are necessary for the plan’s establishment or operation; and (iii) no more than reasonable compensation is paid for the services. (See ERISA §408(b)(2)).
Presentation Title
© 2010 Fox Rothschild
Prior Regulation Versus Interim Final Regulations
Under the previous final regulations under ERISA §408(b)(2), a contract or arrangement was deemed reasonable if it permitted the plan to terminate the contract or arrangement without penalty on reasonably short notice.
Presentation Title
© 2010 Fox Rothschild
Department of Labor Regulations
The Department of Labor’s Employee Benefits Security Administration recently issued interim final regulations (Labor Reg. §2250.408b-2(c)) that require information disclosures by certain ERISA plan service providers
Presentation Title
© 2010 Fox Rothschild
Purpose of Final Regulations
The purpose of the final regulations is to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, compensation, and any potential conflicts of interest.
Using power as an advisor/fiduciary to increase/maintain compensation
Presentation Title
© 2010 Fox Rothschild
More Stringent Provider Requirements
The new interim final regulations impose more stringent information disclosure requirements on covered service providers to provide specified information to a “responsible plan fiduciary” for certain contracts and arrangements. If such disclosures are not made, the contracts or arrangement will fail to be reasonable and thus, will not be exempt as a Prohibited Transaction.
Presentation Title
© 2010 Fox Rothschild
INTERIM FINAL REGULATION REQUIREMENTS
Covered Plan: The final regulations apply only to “covered plans” which include most employer–sponsored plans,
Not SEPs, SIMPLE plans, or IRAs (or Welfare Plans)
Presentation Title
© 2010 Fox Rothschild
Covered Service Provider
Covered Service Provider: A “covered service provider” is a service provider that enters into a contract or arrangement with the covered plan and reasonably expects to receive $1,000 or more in compensation, directly or indirectly, from the Plan.
No formal contract is required
Presentation Title
© 2010 Fox Rothschild
Specific Service Providers
ERISA fiduciary or as a registered investment adviser;
Recordkeeping services or brokerage services to a covered plan that is an individual account plan with participant directed investments in connection with such recordkeeping services or brokerage services;
Expects to receive “indirect” compensation or certain payments from related parties.
Presentation Title
© 2010 Fox Rothschild
No Formal Contract Required
The plan fiduciary must receive initial disclosure information in writing but the final regulations do not provide a particular manner or format for such disclosure.
final regulations do not require that a formal contract or arrangement itself be in writing or that any representations concerning the specific obligations of the service provider be included in a written contract or arrangement.
Presentation Title
© 2010 Fox Rothschild
Disclosure Requirements
Services: A description of the services to be provided
Status: Status of the provider i.e. as a fiduciary, service provider etc.
Compensation: all direct and indirect compensation
Presentation Title
© 2010 Fox Rothschild
Basis on which Compensation is Charged
A description of any compensation that will be paid among the covered service provider, an affiliate, or a subcontractor, in connection with services - transaction basis (e.g., incentive compensation) - or is charged directly against the covered plan’s
investment- A description of any compensation in connection
with termination of the contract or arrangement. - Offsets against other fees- Manner of receipt
Presentation Title
© 2010 Fox Rothschild
Example – Fiduciary Investment Services
Fiduciaries for investment vehicles holding plan assets must provide additional information :
- any compensation charged directly against the amount invested in connection with the acquisition, sale, transfer or withdrawal from the investment contract, etc.;
- the annual operating expenses if the return is not fixed; and
- any ongoing expenses in addition to annual operating expenses.
Presentation Title
© 2010 Fox Rothschild
Disclosure - Timing The initial disclosure information must be provided
reasonably in advance of the date the contract is entered into and extended or renewed.
Any changes to the initial disclosure information must be provided as soon as practicable but no later 60 days from the date the service provider is informed of such changes.
Service providers are required to provide, upon request any other information that is required for the covered plan to comply with the reporting and disclosure requirements of Title I of ERISA and its regulations.
Presentation Title
© 2010 Fox Rothschild
Fiduciary Burdens
New Regulations will become effective 2012
Plan Fiduciaries now will have information concerning fee arrangements and how fees are computed and imposed
No excuse for failure to negotiate appropriate fees
Participant disclosure required
Presentation Title
© 2010 Fox Rothschild
Fiduciary Risk – Participant Litigation
Hecker vs. Deere. Participants charged Deere violated its fiduciary duty by providing investment options that charged excessive fees and failed to adequately disclose the fee structure to participants.
Wal-mart sued by their participants in 2008, which has gained the support of the DOL And most recently the case against
Caterpillar which agreed to pay $16.5 million to settle charges that the company violated its fiduciary duty by offering options with “excessive fees’ and concealed administration costs.
Presentation Title
© 2010 Fox Rothschild
Conclusion – New Burden
No easy answers – burden on plan fiduciaries
Look for providers whose fees are transparent
Review fees and expenses carefully No one size fits all
Presentation Title
© 2010 Fox Rothschild
Contact Information
Harvey m. Katz, Esq.
212.878.7976