The plan sponsor’s role in complying with the Department of Labor’s Final Rule for service provider fee disclosures may be passive compared to its service provider’s who will actually be providing the required disclosures.  However, plan sponsors are responsible for ensuring that the disclosures made by its service providers are sufficient under the regulations; therefore, monitoring and determining whether ongoing disclosures are needed and reporting non-compliant service providers are necessary.

To prepare for this obligation, plan sponsors should consider establishing procedures for evaluating their service providers’ disclosure obligations under the final rule with a particular emphasis on identifying instances where either:

(1) its service providers’ initial disclosures are insufficient; or
(2) where its service providers, under the given circumstances, need to make additional, ongoing disclosures.

The same procedures should enable plan sponsors to accurately provide their record keepers with information needed for the participant level disclosures that they may not already have.

Regarding participant level disclosures, which are effective August 30, 2012, we have seen most record keepers work diligently to furnish their clients with a sample. Without these resources, compliance would be virtually impossible. Ideally we would see more streamlined solutions from the industry that plan sponsors can implement to ensure they are prudently discharging their fiduciary obligations under these fee disclosure rules rather than blindly relying on the templates and forms furnished by their record keepers. Prior to the regulation’s effective date, it is prudent that plan fiduciaries begin to establish procedures for administering the required disclosures.

Question: In this economy and with the markets fluctuating so much over the last year, do you see a trend in employer confidence in individuals’ ability to save? And if so, how are they responding to this economy?

Cody: Individuals’ lack of confidence in their retirement readiness is well documented in studies, but a recent study from Aon Hewitt showed a significant decline in employer confidence in their employees’ retirement readiness as well. The study showed a decline of employer confidence from 30% last year to just 4% this year. So year-over year, we’ve seen a significant drop in retirement readiness confidence levels, even from the employers’ standpoint.

Studies have also shown that many sponsors’ plans have increased both attention and resources to participants in this coming year. Many plan sponsors are actually looking to add plan features, and are beginning to concentrate on how those plan features can be used more effectively. For example, more employers plan on implementing automatic enrollment, and I’m seeing more use of the auto escalation feature for contributions as well.

Question: Is retirement even possible for Americans anymore? And is it the role of the employer to contribute to this dream?

Cody: When I talk about retirement, I’m talking about an individual’s future at retirement age. Everyone has the choice to have a better future. The idea that retirement is a day when you no longer work, buy a sailboat and go sail around the world is most likely not possible for most Americans, especially those who started saving late. But that doesn’t mean that there’s no hope and that people shouldn’t prepare for their future.

The truth is that everybody has options for retirement when they get to retirement age. And our job, as consultants, is to help them understand what those options are. Maybe for some people, it’s the joy of not having to wake up to an alarm clock anymore. Bottom line, even people who start planning for retirement late in their careers can improve their future; for example, perhaps by reducing the amount of hours that they’ll have to work once they get to a specific age.

Employers can make a huge impact here by providing the resources for individuals to prepare by following logical steps. First, talk about your vision of retirement and make a choice to prepare for it. Second, choose a retirement plan strategy, act on it, then monitor the plan annually. And finally, reach that day of enjoyment, whatever that looks like.

As employers have moved away from defined benefit (DB) pension plans in favor of defined contribution (DC) pension plans, workers have been left with what the industry calls an “income gap” previously filled by the DB pension plans.

I believe the answer to this problem is finding a balance. In the DB pension plan world, plan sponsors were the ones that had all the responsibility. In the DC plan world, individuals have been transferred all of that responsibility. We need a DC plan, but with some of the attention to individuals and resources from the plan sponsor that existed in the DB world.

Question: I understand that we will be faced with a national problem if individuals aren’t prepared for their future – or fail to become “retirement ready.” As a plan sponsor, I think we have an opportunity to make an impact on that potential crisis, but where in the world do we start?

Cody: I agree. We can make a big impact on retirement readiness not just for individuals, but on society as a whole. What plan sponsors can do is create an education plan that is more effective by being more results focused rather than activity focused.

And some of the analysis we’ll provide is on the replacement income ratio, a common metric that individuals use in individual planning to see if they are on track to replace somewhere between 70% to 90% of their pre-retirement income. We’re introducing it into the actual plan to measure the replacement ratio for the plan as a whole. This allows us to see the health and effectiveness of the plan in aggregate.

Workforce data will allow us to identify unique needs of each employer’s retirement plan. We will work with both employers and record keepers to pull key data, including data unique to a plan to customize an education program appropriate for a specific plan’s needs.

Continual communication, especially one-on-one efforts throughout the year are crucial too.

Question: We already have a lot of resources and tools available for our employees from our record keeper and Pension Consultants. What more can we do to help our employees become retirement ready?

Cody: The industry does a decent job of continual improvement with these resources, but we must combine these with a focus on one on one interactions.

Unfortunately, some people procrastinate saving for retirement. To be effective we must take a more active role in helping employees by planning their retirement options with them through one on one interactions.

We also need to have a continual message, not just one time meetings. We will use all resources available to prepare a custom campaign for each retirement plan that not only includes one-on-one interactions, but also specific themes in emails, on websites and in newsletters.

Getting this right is so important and we are committed to its success.

View the on-demand video of Cody Mendenhall’s presentation on Retirement Readiness: Is your plan getting employees to a better retirement?

The Labor Department’s rule requires service providers to furnish information that will enable pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider’s performance under a service contract or arrangement. It requires disclosures of direct and indirect compensation certain service providers receive in connection with the services they provide. The rule applies to those service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or record-keeping services or otherwise receive indirect compensation for providing certain services to a plan. 

The key provisions of the interim final rule were covered in the presentation Fee Disclosure Regulations: A Practical Guide for Plan Sponsors, which is now available to watch on-demand.  In the response to the comments submitted to the Department, the final rule differs from the interim final rule in the following ways:

• It includes an exclusion for certain Code § 403(b) annuity contracts and custodial accounts;

• It expands the information that service providers must disclose about the “indirect” compensation they receive;

• It changes the requirements regarding investment-related disclosures to conform to the requirements of the participant-level disclosure rules; and

• It adds a separate provision for disclosing changes to investment-related information, which must be updated at least annually.

Another key change in the final rule is an extension of the effective date.  This is particularly important because it affects the effective and applicable dates of the participant-level disclosure rules promulgated under ERISA § 404(a).  The interim final rule’s April 1 effective date was extended to July 1, 2012 in order to allow service providers more time to prepare for compliance.  The transitional rule for the participant-level disclosure regulation was revised in July 2011 so that the first disclosures would follow the effective date of the 408(b)(2) regulation.

Consequently, for calendar year plans, the initial annual disclosure of “plan-level” and “investment-level” information must be furnished no later than August 30, 2012 (i.e., 60 days after the 408(b)(2) regulation’s July 1 effective date).  The first quarterly statement must then be furnished no later than November 14, 2012 (i.e., 45 days after the end of the third quarter (July through September), during which initial disclosures were first required).  This quarterly statement need only reflect the fees and expenses actually deducted from the participant or beneficiary’s account during the July through September quarter to which the statement relates.

Consumers of all sorts need transparency to make good decisions; however, even with perfect transparency, not all will.  Without it though, consumers are deprived of the resources needed to decide which products and services serve their best interest.

The retirement plan community is not immune from these natural forces.  In fact, our industry, our chosen profession, is awash with examples of blurring meaningful information from those who are our consumers.  Plan sponsors and fiduciaries have often had trouble understanding exactly who is paid what for plan services.  Hiding the various charges or overstating the services to be provided is almost so common that it is unnoticeable.

Ditto for the plan participants.  The typical employee has little understanding of what investment and administrative services they are paying.  Added to that opaqueness are the motivations of the “advisers” guiding them towards retirement.  How is an employee to know that the “adviser” is really only there to cross-sell them life insurance or to earn a commission for moving them to the managed account option in the plan?

In finally implementing the new 408(b)(2) and 404(a) regulations in the next few months, the Department of Labor is attempting to mandate transparency in the retirement plan marketplace.  Most of the industry vendors will, no doubt, make a good faith effort to comply with both the letter and spirit of the new regulations, and for that the consumers will be better off.

Sure, there will be an adjustment period where we all adapt to the new information and the complicated processes that will ensue.  But let’s not forget that more transparency is a good thing. 

So, chalk one up for free enterprise.  Soon things will be a little less opaque in our industry.

This year’s Pension Focus Conference will be held May 17th & 18th at Chateau on the Lake in Branson, Missouri.  The two day conference provides plan sponsors and fiduciaries with information from the industry’s leading experts in the areas of 401(k), Profit Sharing and Defined Benefit plans.

Mark your calendar and stay tuned—more information to come soon!

Those of us in the retirement planning industry have spent the year working diligently to make the employer-sponsored, private retirement system work -  in totality for all stakeholders.  Each stakeholder rightfully demands attention, and must receive information and expert guidance for the system to work as intended.

The employers who sponsor the plans (plan sponsors) are one group of stakeholders.  They have a unique set of needs as do another group of stakeholders, the fiduciaries of the plans who are charged with making decisions and overseeing the plan’s operation.  Finally, we can’t forget the stakeholders that the private retirement system is intended to benefit – the employees and their families.

In the history of the employer-sponsored, private retirement system, it was the employers themselves that the marketplace first rushed to accommodate—after all, this was where the financial incentives were greatest.  As a result, companies and private practitioners competed to satisfy the employers’ desires for low company expenses and fewer burdens on their internal staff, both of which directly affected the bottom line.  Services were designed and marketed to give the appearance that the employer didn’t have much to do in the management of the plan and the fees were shifted from tangible corporate expenses (written out of the company checkbook) to the participant via investments and other expenses which were often not realized or noticed.

Later on, fiduciary duties came to light as plans were frequently poorly managed and the actual fees, although hidden, were very high.  Therefore, in the last five to ten years, the marketplace has seen services developed to meet the needs of the plan’s fiduciaries and the retirement plan industry has improved dramatically as a result.  Plans are now generally better managed, more competent in oversight and more transparent in their fees, which as a result, have significantly decreased.

Unfortunately, the intended recipients of this benefit, the plan participants, have been the last to get the full attention of the marketplace.  That is not to say that there has been any shortage of marketing materials, colorful handouts, general training presentations and the like given to them but that there has not been an effective solution developed that fully addresses the needs of individuals planning for retirement.

Too many people are woefully unprepared for retirement as a direct result of the industry’s best and brightest devoting their energies to the employer (plan sponsor) and the plan’s fiduciaries.  Next year we will be communicating to you our commitment to solving this problem.  It isn’t going to be an easy problem to solve, but we can’t in good faith stand back and witness a problem that has become so glaringly obvious without taking action. Finding a solution is vital to the retirement health of our citizens and to the public policy of our nation, and even though it will take resources and dedication to create a better way to get individual employees ready for retirement, we simply must do something about it. 

Beginning in 2012, we will accept the challenge and will take up the fight.  I look forward to sharing more with you in the upcoming weeks and hope you will work with us to solve the final piece of the puzzle for an effective employer-sponsored, private retirement system.

Merry Christmas!  May God bless you and your family.

Regulations.  Changes in regulations.  Exemptions.  What’s the fuss all about?  “Given the rise in participation in 401(k) type plans and IRAs, the retirement security of millions of America’s workers increasingly depends on their investment decisions,” as stated by EBSA Assistant Secretary Phyllis C. Borzi.  Through all the regulations, transactions and details, the sole purpose of a retirement plan is to allow individuals to prepare for and enjoy a successful retirement. 

While the industry shift from defined benefit to defined contribution plans has provided many benefits, it has also forced individuals to become professional money managers, and although education efforts help, they are not enough.  The passing of the Pension Protection Act of 2006 (PPA) opens the door for fiduciary advisers to fill the void and pick up where education leaves off.  The fear in the industry is that while these regulations and rules are aimed at helping individuals become retirement ready, they may inadvertently allow for advice that is not truly in the client’s best interest.  To help protect consumers and ensure the advice they receive is un-conflicted, EBSA has issued the final regulations discussed below.

Under the regulations, an eligible investment advice arrangement can only be provided on a ‘level-fee’ basis or by a certified computer model.  The regulation further clarifies that an adviser providing advice under the level-fee basis must base that advice on generally accepted investment theories, historical risk and return data of different asset classes over a defined period of time, take into account related investment and management fees and expenses, take into account participant information including age, risk tolerance and investment preferences and finally the fiduciary adviser’s fees may not vary based on the investment options recommended to the participant.  The regulations also include several disclosure requirements and an annual independent audit of the advice service. 

We believe a comprehensive participant services campaign, one that includes both education and advice, is the most effective way to prepare participants for a successful retirement.  Many individuals feel confident in their retirement readiness by using ‘do it yourself’ online tools, reading education materials and attending classes; however, there are many other individuals who feel overwhelmed with the responsibility of being a professional money manager themselves and would prefer to utilize the services of a true professional. 

Services like our RetireAdvisers® Plan Participant service provide a solution under the PPA approved ‘level-fee’ advice arrangement, allowing individuals the opportunity to receive help from an independent, professional retirement consultant.  Effectively investing retirement plan money is one of the major factors of reaching a successful retirement.  The Department of Labor’s final regulations will help plan sponsors ensure that the advice provided to their participants is truly in their best interest, and not simply in the best interest of the adviser.

Question: Can you give me some examples of what a settlor function is?

Chase:  A settlor function is one that is distinct from a fiduciary function. In other words, it’s a decision or a function that’s performed “above the plan,” and is not subject to fiduciary scrutiny because it’s a decision or an act that’s being made while the employer and the individuals who represent the employer are wearing their corporate hats. Some settler function examples include the decision to execute a merger, sell the company or acquire another company. Even though that decision is going to profoundly impact the retirement plan, the decision is still insulated from a business fiduciary standard.

So if a merger or acquisition has an incidental adverse impact to plan participants, plan participants would not be able to bring a cause of action against the employer or the plan sponsor for that merger or business transaction because the act was performed as a settlor, not as a fiduciary.

Other examples of settlor functions would be tweaking the design of the plan, removing certain benefits and features, adding a Roth feature and eliminating a match. As long as certain requirements are met because of their settlor functions, there’s not going to be fiduciary exposure for those actions.

Question:   How do I know if my trustee is directed or discretionary?

Chase:  This should be a relatively easy issue to determine. The first place to look is in the trustee provision of the plan. If it’s not exclusively stated there, it will be in the trustee agreement.

Question: Does paying for postage to mail out the plan summary constitute a reasonable plan expense?

Chase:  Yes. I believe that would constitute a reasonable plan expense in nearly every instance. Unfortunately, though, with other types of items, it’s not always a clear cut issue. There are no tests to determine whether something is a reasonable plan expense or not; however, the DOL provides expense guidance, mostly through advisory opinions. They provide hypothetical examples that constitute reasonable plan expenses. I believe your example would safely fall into the reasonable plan expense category.

Question:  Have there been any changes to the Pension Protection Act of 2006? If so, what are the tasks that a plan sponsor needs to do?

Chase:  The PPA was the most recent comprehensive amendment to ERISA. There have been amendments since, some of which have expounded upon changes that were first brought on by PPA. The HEART Amendment and the WRERA Amendment may sound familiar to many plan sponsors. Each one of those amendments have introduced a multitude of changes, some of which deal with topics that are both addressed and not addressed by PPA.

The applicability of those topics to certain retirement plans is going to depend on the nature of the plan itself. But a big part of what we do on a daily basis is to review a plan’s historical records and maintain administrative document manuals. That involves reviewing recent legislative amendments including HEART, WRERA and others.

Based on the changes since PPA was introduced in 2006, plan sponsors first need to make sure the plans have adopted the new amendments and second, they need to make sure that they’re administering their plans in accordance with these provisions. This is a big initiative for us and an important part of what we do on a daily basis.

Question: From the webinar, I learned that employees’ benefits plan provided by the state, such as a state-funded community college, are exempt from ERISA. But what about the 403(b) plans that are offered as an alternative to the employees, do they have to follow the ERISA standards?

Chase:  That’s a good question, and the short answer is, no. The 403(b) plans that are sponsored by governmental employers are exempt from ERISA’s requirements. Some types of 403(b) plans are subject to ERISA. The determining factor in whether or not ERISA is going to apply to one of these special types of plans, such as a 403(b) plan, hinges on the status of the employer. Two types of employers can sponsor a 403(b) plan, governmental plans and certain private organizations that qualify as 501(c)(3)s, charitable organizations. The charitable organizations that are private and sponsor a 403(b) plan have a choice whether or not they want the plan to be subject to ERISA.

There is an ERISA safe harbor under the 403(b) rules that allow charities to exempt their plans from ERISA if they meet a certain set of requirements. If they don’t meet those requirements, then the plan will be subject to ERISA.

Going back to the original question, if it’s clearly determined that the employer is a governmental employer, you don’t even need to look at the ERISA safe harbor for 403(b) plans. All of the plans will be exempt from ERISA by virtue of the employer’s governmental status.

Question: How do I know who to be designated a named fiduciary? What kind of guidance can you provide on that?

Chase: Who should be the named fiduciary is a different question than from who is the named fiduciary. I’ll first address how you know who the named fiduciary is under the plan. The first place to look is the plan document. Most likely in the definitional section or in the plan administration section you’ll see the employer named as the named fiduciary. Now, that’s a pretty broad, not very helpful or specific provision if it’s just the employer name. The next place to look would be at board resolution to see who the employer, as a named fiduciary, has actually delegated specific responsibilities of plan administration.

The question “who should be the fiduciary in a plan?” is going to vary depending on the size and complexity of the plan and depending on the size and complexity of the employer. In a small plan sponsored by a relatively small employer, it may be sufficient to have a single individual who’s the benefits director or who has responsibility for human resource duties to be named as the plan administrator.

I always tend to think it’s a better idea to have the named fiduciary be a committee. How important that is will hinge on the size and complexity of the plan and the employer.

For very large employers who have multiple participating entities and who have a complex set of plan features, I think it becomes more important, then, to have an entity such as a retirement plan committee or multiple committees named as the fiduciary. If not actually the named fiduciary, such committees should be vested with the primary fiduciary responsibilities from the named fiduciary.

Question:  Can you explain what “unfunded” means in relation to top hat plans?

Chase:  One of the top hat plan requirements is that the assets of the plan can be nothing more than an unfunded, unsecure promise to pay benefits or compensation in the future. This is quite the opposite of qualified plans that actually require a trust to be funded. This idea of what is an unfunded, unsecure promise to pay benefits in the future isn’t a black and white proposition. In fact, there has been a lot of litigation as to what constitutes unfunded, unsecure promise to pay benefits. To summarize 60 or 70 years worth of case law, where we are today and have been for several decades is this idea of a rabbi trust.

A rabbi trust is basically as close as you can get to securing benefits for participants and beneficiaries of the plan without actually funding the plan. A rabbi trust is a trust where you could put assets, and it will be secure from all things except for judgment claims from the employers’ creditors. So should the company go bankrupt and owe debts to its creditors, the participants and beneficiaries of that plan wouldn’t lose out to those creditors. In a nutshell, that’s what it means to be unfunded.

That’s very important for top hat plans because, should they fail that requirement and should the trust of the plan become fully funded, then it would fill the top hat requirements and then retroactively be subject to the requirements of ERISA.

Question:  Do brokers who make fund recommendations need to take some fiduciary responsibility?

Chase:  This is an interesting question. There are three categories of functional fiduciary conduct rules. One of those three actions is providing investment advice for a fee. So whether or not a broker’s mutual fund recommendation would constitute fiduciary status under that rule would be whether or not a fee is involved. In this scenario, the compensation or fee that the broker receives may not be direct. In most arrangements, this would constitute a fiduciary act; however, it’s important to note that this is an evolving area of the law. The current five factor test, which the current regulation uses to determine if advice is considered fiduciary investment advice, is largely dependent on the facts and circumstances. With pending regulations, the likelihood of this type of scenario evading fiduciary status is going to decrease when, and if, the current proposed rule on fiduciary investment advice is reformed.