Update on Participant Fee Disclosure - International Public

Update on Participant Fee Disclosure

Revised DOL Regulations as of July 13, 2011

Presentation to International Public Management Association (IPMA) Conference

September 16, 2011

Agenda

Background on Plan Sponsor ExpensesCase StudyUpdated Plan Sponsor and Participant Fee Disclosure DeadlinesDisclosure RequirementsParticipant Disclosure Impact on 404(c) ComplianceNext Steps

Expense Analysis FrameworkFee and Expense Type What is it Used For? What Does it Cover?

Transaction Charges Transactions Transaction Cost

Base Fees Plan AdministrationPer-Head Charges Profit

Add-on Charges for Specific Services

Sub-TA Fees

Wrap Fees

12 b-1 Fees

Other Asset Charges

Investment Management Profit

Investment Management Cost

Plan Administration

Plan Administration Cost

Investment ManagementInvestment Management Fees

Explicit Participant Paid Fees

Dollar Based Fees

Asset Based Fees

Component of Exp. Ratio

IPMA Conference Proprietary & Confidential | September 16, 2011 3

Attention to Fees

Protecting Participants - every dollar paid in fees is a dollar less (and even more on a compounded basis) that a participant has in their account for retirement

Protecting Plan Sponsors – the courts have been busy with an increasing number of lawsuits filed against plan sponsors and providers regarding excess fees in defined contribution plans


Participant Savings Through Cost Reduction

$742 $5,429 $16,531$36,283

$68,964

$120,675

$181,440

$0

$50,000

$100,000

$150,000

$200,000

Year 1 Year 5 Year 10 Year 15 Year 20 Year 25 Year 30

Assumptions

• 35 year old participant• Account balance of $66,650 in year 1• Contributes $7,500 annually• Earns 7% annual return• Pays 2% in fees

Savings Potential

• Reduction in fees from 2% to 1%

A 1% reduction in fees yields an additional $181,440 in assets over 30 years

Source: Greenspring Wealth Management, team analysis


Case Study:ABC Company Inc.

Fee & ExpenseReview


About ABC and Its Plan

The Company– Architectural engineering firm– 500 employees– One location in Washington, DCThe Plan– 401(k) plan– 400 participants– $30 million– Balanced investments

• 50% equities• 25% fixed income• 25% Target Date Funds


Services Being Provided

Recordkeeping and administrationPlan-level accountingCompliance testing and government reportingTrustee and custodial servicesCommunication and education


Direct-billed Charges

Recordkeeping/administrationBase fee $ 2,600

+$25 per participant charge + $10,000Total $12,600

Trustee chargesFlat dollar +$ 5,000Asset-based N/A

Total Direct-billed Charges $17,600$44 per participant


Other Charges

Broker commission– 10 bps wrapperInvestment-related– Investment management fee: 50 bps– Other service fees: 25 bps– 12b-1 fees: 25 bps– Total: 100 bpsAvailable to offset recordkeeping– Assumed: 30 bps– Total dollar amount: $90,000– Per participant: $225


Getting Things to Balance

Generally, (A) + (B) should = (C)– (A) is what the provider collects via direct-billed charges– (B) is what the provider obtains through investment revenue fee-sharing– (C) is what it costs the provider to deliver plan administration services (includes some level of

profit)$44 (A) + $225 (B) = $269 (C)Should be in mid-range of $150


Service Provider and Participant Fee Disclosure – Additional Extension

On July 13, 2011 DOL issued final rule on extension of both service provider (SP) and participant fee disclosure– The final rule ties the implementation timing of participant fee disclosure rules to the

implementation of service provider regulation– If the DOL further extends the service provider fee disclosure rules, participant fee disclosure rules

will be automatically extendedService provider fee disclosure is extended from January 1, 2012 to April 1, 2012Participant fee disclosure rules are extended as follows:

Impact on 404(c): Revised 404(c) rules will become effective at the same time as initial/annual disclosure rules become effective (60 days after service provider regulations)

View Extension TimingDates for Calendar Year Plans

w/SP disclosure @ April 1, 20121: Initial/Annual Disclosure 60 days after service provider

regulations are effectiveMay 31, 2012

2: Website for updated investment detail

60 days after service provider regulations are effective

May 31, 2012

3: Quarterly Disclosure (quarterly statements)

45 days after the end of the quarter in which initial/annual disclosure must be provided

August 14, 2012(2Q2012 statements)


The various participant fee disclosure requirements can be grouped in three views into providing participants with the required fee information

1. Initial/Annual Disclosure of plan level information about how the plan works, available investment options, administrative and investment fees and expenses, and individual expenses a participant could pay depending on choices they make

2. Website Disclosure of current investment fund detail requirements3. Quarterly Disclosure of Administrative and Individual Fees the participant has incurred, in dollars

The various participant fee disclosure requirements can be grouped into three views of providing participants with the required fee information:

Overview of Three Views of Participant Fee Disclosure


Initial/Annual Disclosure (Plan and Investment Level Information)Discloses the Fees a Participant May Experience

Information RequiredPlan sponsor is required to send this disclosure (plan-specific; will not vary by individual)DOL requires Plan-related and Investment-related components:

General InformationAdministrative ExpensesIndividual (Transaction) ExpensesInvestment Detail (the DOL has published a safe harbor Model Comparative Chart)

Ongoing annual disclosure may remain unchanged for up to one year– Certain changes may trigger a requirement to send an updated disclosure; participants must

receive updated disclosure at least 30 and no more than 90 days in advance of the changeAny change in General Information, Administrative Expense, and/or Individual Expense information A change to the investment options offered or the investment managers of the options

Note changes in expense ratio, rate of return, benchmark, and benchmark rate of return may not require an updated disclosure to be delivered


Initial/Annual Disclosure (Plan and Investment Level Information)Discloses the Fees a Participant May Experience

Timing of DeliveryParticipants must be given disclosure on or before the date they can first direct their investments, and then again annually– Send with existing communications (may be sent by Client or vendor)All participants (newly-eligible participants and existing, including those eligible and not participating) must receive first annual disclosure no later than May 31, 2012 (for calendar year plans)Any option must follow DOL’s delivery rules (e.g., SPD, SAR, safe harbor notices)

ConsiderationsVendor to draft initial and annual noticesAon Hewitt and Client to review and finalizeDetermine fulfillment of initial and annual notices (media and party)


Website Requirement (Investment Level) Discloses Current Investment Fund Details

Information RequiredDOL regulations require an Internet website that is sufficiently specific to give participants access to the following information about variable return investment options:

Name of issuerPrincipal strategies and risksPerformance data (updated at least quarterly)Fee and expense informationRegulations also indicate free paper copy of the website information needs to be available

Information for fixed, annuity, employer stock, and target date funds are slightly different for both website and Annual Disclosure

ConsiderationsConfirm vendor will provide all required website information

Objectives or goalsPortfolio turnover rateAny trading restrictions, limitation on feesA glossary of terms


Quarterly Disclosure (Participant Level) Reports Individual/Transaction Fees and Plan Expense Allocations Paid by a Participant

Information RequiredAdministrative and Individual/Transaction expenses incurred by each participant must be disclosed in dollars at least quarterly (within 45 days)

– Investment fees incurred are not required to be included in the quarterly disclosure– Regulations also indicate free paper copy of the quarterly disclosure needs to be available

Timing of DeliveryApplies to second quarter 2012 statement for calendar plan years, no later than August 14, 2012

ConsiderationsConfirm vendor has made modifications for quarterly statements and on-demand statements, including a new section with specific individual participant and plan administration expense information


Overview of ERISA 404(c) Rules

Section 404(c) of ERISA relieves fiduciaries from liability for participant investment losses if:Participants are able to exercise control over their plan investments Participants have a reasonable opportunity to provide investment instructions to the plan fiduciaryPlan offers a reasonably diverse portfolio of investments (at least three with different risk and return characteristics) Participants are given the information they need to understand how to direct their investmentsParticipants are able to change investments frequently enough to address market volatility and avoid large lossesPlans comply with special rules relating to employer stock funds (e.g., voting and tender rights, confidentiality) A participant’s contributions are directed to a qualified default investment alternative when participant does not provide investment instructions and participants are provided with required noticesParticipants are informed of the intent of the plan to relieve fiduciaries from liability for participant investment losses pursuant to ERISA section 404(c)


Participant Disclosure Impact on 404(c) Compliance

What has changed?Fiduciaries now have a safe harbor: Plan fiduciaries are deemed to comply with informational requirements if the specified disclosures are provided; there is more certainty of relief from liabilityMost of the investment-specific disclosure requirements have been moved to the participant fee disclosure rules and are required for ALL participant-directed account plans—not just 404(c) plansProspectus needs to be supplied only upon request instead of automatically upon investment Rates of return and expense ratio information now must be provided automatically; currently these only have to be provided upon request New rules add provision that 404(c) does not relieve the fiduciary from its duty to prudently select and monitor a plan’s investments and service providersGeneral requirements are much the same (e.g., diverse investment portfolio, opportunity to direct investments)


Next Steps

Review vendor’s draft initial and annual participant disclosures when availableReview vendor’s draft website to meet investment information requirementsReview vendor’s draft quarterly participant statement with disclosure of individual and administrative feesConfirm method of delivery of the above items and if vendor or Client will fulfill

Appendix


Website Investment Requirement Details

DOL regulations require an Internet website that is sufficiently specific to give participants access to the following information about variable return investments:– Name of issuer– Objectives or goals– Principal strategies and risks– Portfolio turnover rate– Performance data (updated at least quarterly)– Fee and expense information

• The amount and description of each shareholder-type fee and a description of any restrictions or limitation on the purchase/transfer, etc.

• Expense ratio• Expense ratio expressed as a dollar amount for a $1,000 investment• Statement that fees and expenses are only one of several factors to consider when making

investment decisions• Statement that the cumulative effect of fees and expenses can substantially reduce the growth

of a participant's account and participants can go to the DOL website for an example– A glossary of termsRegulations also indicate free paper copy of the website information needs to be available

Documents

Update on Participant Fee Disclosure - International Public