Current ERISA Developments: What They Mean to Your Clients and You

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Daniel A. Notto

Senior Vice President and Senior Retirement Plan Counsel

October 17, 2013

Current ERISA Developments:

What They Mean to Your Clients…and You

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AllianceBernstein.com For plan sponsor, financial advisor or pension consultant use only. Not for inspection by, distribution or quotation to, the general public.

Defined Contribution Plan Fees: The Dialog Continues

How much are they?

Who pays them?

How do service providers receive them?

Are there any conflicts of interest?

What should plan fiduciaries do?

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To State the Obvious About Fees…

Plan sponsors must understand them and conclude they are reasonable

Service providers must disclose them

Participants must be given information about them

The government wants to know about them

If they give rise to conflicts of interest, the DOL wants to change the rules

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Recent Developments

DOL initiatives

 2009: 5500 Schedule C

 2012: 404a-5 participant disclosure rules

 2012: 408(b)(2) service provider disclosure rules

 2013: 408(b)(2) “roadmap”

Class action lawsuits – Dozens of suits brought against large plan sponsors and service

providers

 Working their way through the court system

 At least 7 cases have settled: Average settlement amount $16.7 million

 ABB case: $36 million trial judgment (currently on appeal)

 $$$ millions in attorney fees

 Significant drain on defendants’ resources

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Recent Developments (cont)

Popular press – A few headlines:

 “The High Cost of 401(k) Fees: How Much Are You Paying?—Hidden Charges Can Rob You of a

Comfortable Retirement” – Kiplinger

 “Fees For 401(k) Plans Are Higher At Small Companies” – LA Times

 “How High Fees Can Doom Your Retirement Plan” – Slate

 “401(k) Fees Still Widely Misunderstood” – Forbes

 “Uncovering the Hidden Fees in Retirement Plans” – Wall Street Journal

PBS Frontline program – “The Retirement Gamble”

Yale Law School Professor Ian Ayers letters to plan sponsors

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Recent Developments (cont)

GAO report on rollovers – Key findings:

 IRA fees are often opaque or difficult to understand

 Rolling to a new employer plan can be complex and inefficient, making an IRA rollover an easier option

 Plan service providers tend to encourage participants to roll over to the provider’s IRAs when they

terminate their employment…and sometimes give inaccurate or misleading information

DOL initiative to redefine investment advice fiduciary

 Conflicts of interest around fees is a key driver

 May affect how service providers charge for servicing employer plans and IRAs

DOL Advisory Opinion 2013-03A – Revenue sharing and “ERISA budgets”

Multiple employer plans (MEPs) – A cost effective solution for small employers?

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DOL Advisory Opinion 2013-03A

Question presented – Are revenue sharing payments made to a recordkeeper plan assets?

DOL’s answer – It depends

 Yes: Plan assets if actually paid into the plan

 No: Not plan assets if retained by the recordkeeper in a bookkeeping account and applied to pay plan

expenses

Why is this important?

 Person holding plan assets is a fiduciary

 Plan assets must be held in a trust

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DOL Clarifies Fiduciaries’ Responsibilities in Evaluate Revenue Sharing

Understand the agreement with the recordkeeper regarding the use of revenue sharing

Obtain sufficient information about all fees and other compensation to “make an informed

decision” whether the recordkeeper’s compensation is reasonable

If the recordkeeper is an advice fiduciary, evaluate whether revenue sharing leads to conflicts of interest or self dealing

Understand the formula, methodology and assumptions the recordkeeper uses to pay service

providers or credit revenue sharing to the plan

Periodically monitor the recordkeeper to assure that revenue sharing is being correctly calculated and applied

Obtain sufficient information to assure that fees paid by the recordkeeper to other service providers out of the ERISA budget are reasonable

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The Dilemma of Excess Revenue Sharing

How is it used?

Does the investment policy statement prescribe a methodology?

Is it allocated among participants?

 DOL guidance* on mutual fund market timing settlements may be helpful

 What is possible vs. what is reasonable?

Ultimately, a fiduciary decision

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Rethinking Revenue Sharing

How should plan administration costs be paid?

Courts have affirmed that revenue sharing is legal

Potential inequities

 Different revenue sharing rates

 Some funds pay no revenue sharing

Growing interest in fund classes with no revenue sharing

Plan sponsors should carefully consider the options

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Multiple Employer Plans (MEPs)

Definition: A plan adopted by two or more unrelated employers (IRC Section 413(c))

Not to be confused with a multi-employer plan which is a union plan (sometimes called a Taft

Hartley plan)

Often maintained by trade or professional associations for their members

Adopting employers usually can make some design decisions like match level

One employer’s failure to comply with the rules could disqualify the entire plan

Recent bills introduced in Congress address MEPs

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Oft-Cited Benefits of MEPs

Because of economies of scale, MEP sponsor can negotiate lower fees

Adopting employer avoids expenses for

 Obtaining and updating plan documents

 Preparing and filing 5500s

 Preparing annual plan audits (for plans with 100 or more participants)

 Searching for recordkeepers and other plan service providers

MEP sponsor assumes fiduciary responsibility for investment selection and monitoring

MEP sponsor is usually the plan administrator (as defined in ERISA Section 3(16))

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Potential Concerns With MEPs

Employer retains fiduciary responsibility for selecting the MEP sponsor

Issues with “open” MEPs – Plans where no relationship exists among adopting employers

 Recent DOL rulings shed doubt on open MEPs

 Each employer would need to file its own 5500

 DOL may be concerned that employers are trying to avoid fiduciary responsibility by participating in MEPs

Recent criminal case: Trustee and fiduciary for open MEPs sentenced to 17 ½ years for fraud

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In Summary…

Focus on fees likely will continue

Plan sponsors need to have a considered approach to financing the costs of their plans

Financial advisors and consultants will continue to play a critical role

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