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Are There Red Flags in Your 5500?
Are There Red Flags in Your 5500?
Senior Retirement Plan Consultant
Institutional Consultant
UBS Financial Services Inc.
Danford Meischen
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Danford Meischen
Senior Retirement Plan Consultant
Institutional Consultant
Top 25 Retirement Plan Advisor (2004, 2005, 2007) – Plan Sponsor Magazine
300 Most Influential in 401(k) (2007) – 401(k) Wire
Founding Lecturer for the Retirement Advisor University at UCLA
Certified Investment Management Analyst – CIMA®
Certified Retirement Plan Consultant – CRPC®
CERTIFIED FINANCIAL PLANNER
TM– CFP®
Accolades are independently determined and awarded by their respective publications. For more information on a particular rating, visit their corresponding website. Neither UBS Financial Services Inc. nor its employees pay a fee in exchange for these ratings. Accolades can be based on a variety of criteria including length of service, compliance records, client satisfaction, assets under management, revenue, type of clientele and more.
Who Looks At Your Form 5500?
Financial Advisors working with
retirement plans
Attorneys
Department of Labor
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“The past can hurt, but the way I see it, you can either run from it, or learn
from it.”
– The Lion King
“Happiness can be found in the darkest of times, when one only remembers
to turn on the light.”
– Harry Potter and the Prisoner of Azkaban
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2013 – Average ERISA class action settlement was $17,000,000
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This does NOT cover legal costs
2007-2011 average cost of paid claim was $994,000
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Average defense cost was approximately $365,000
2013 DOL enforcement $1.69 Byn total monetary results
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$911.3 M Prohibited transactions
$423.6 M plan assets restored
$72.1 M voluntary fiduciary correction program
2013 DOL civil investigations
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3,677 cases closed (2,677 closed with results)
72.8% closed with results
190 civil investigations referred for litigation
Informal complaint resolution, e.g. participant complaints
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$281.3 M restored to workers
1ERISA Litigation; Baker & McKenzie; February 2014
2Fiduciary Liability Coverage; Travelers, Fiduciaries be aware – your personal assets are at risk, 2014 3United States Department of Labor; EBSA Fact Sheet, 2013
What Triggers A DOL Audit?
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Unlike the IRS, the Department of Labor does not select targets at random.
DOL relies on three primary factors:
1.
Participant complaints
2.
Form 5500 issues
3.
Media Reports
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Person Signing the Form 5500 is the 3(16) Administrative
Person Signing the Form 5500 is the 3(16) Administrative Fiduciary
Person who signs is the 3(16) administrative fiduciary and is responsible for all
administrative, not investment actions, that if missed, could lead to penalties for the
plan's administrative fiduciary such as:
Failure to provide quarterly participant statements is subject to $110 per day per participant
Failure to provide timely blackout notice is subject to $100 per day per participant
Failure to send automatic contribution notice is subject to $1,100 per day for each
Failure to distribute Summary Plan Description
$100 - $1000+ per day plus
or $5,000 per fiduciary and 1 year in prison for a willful violation.
or $100,000 for a business entity
Filing Form 5500 with missing items
$150 per day up to $50,000 for missing auditor’s report
$100 per day up to $36,500 for missing financial information
$10 per day up to $3,650 for other report items
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Plan Characteristic Codes
2A = Age/Service Weighted or New Comparability or Similar Plan
Age/Service Weighted or New Comparability or Similar Plan
Age/Service Weighted Plan: Allocations are based on age, service or age and
service.
New Comparability or Similar Plan: Allocations are based on participant
classifications and a classification(s) consists entirely or predominately of highly
compensated employes; or the plan provides an additional allocation rate on
compensation above a specific threshold, and the threshold or additional rate
exceeds the maximum threshold or rate allowed under the permitted disparity
rules of section 401(l).
Plan Characteristic Codes
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2F = 404(c) plan
Claim to be 404(c) and not follow requirements = problem
Basics
3 materially different investment options (stock, bond, money fund)
Ability to change investments at least quarterly
Also, must meet requirements for
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Investment selection
Investment monitoring
Plan administration
Plan and investment disclosures
Plan Characteristic Codes
1401khelpcenter; Collected Wisdom on ERISA 404(c)
Plan Characteristic Codes
2R = Self Directed Brokerage Accounts (SDBA) in 401(k) Plan
DOL issued pre-rule RFI in April 2014
To 58% of plans with SDBA’s
Approximately 10% of 401(k) plans offer SDBA’s
ERISA Industry Committee (ERIC) submitted comments to DOL
November 2014
Do not impose additions disclosures
Do not impose additional fiduciary requirements on SDBA’s
Imposing fiduciary responsibilities on SDBA’s would be unwieldy
Refrain from imposing added regulatory burdens on plans with a
diversified investment lineup
ERISA Industry Committee; Nov 19, 2014; ERIC Urges DOL to Ensure Any Guidance on Brokerage Windows is Narrowly Tailored to
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Plan Characteristic Codes
2T = Plan Uses Default Investment for participants who fail to
direct assets in their account
Default is often a Target Date Fund (TDF) Series
Target Date Funds – The Next Wave of
Litigation?
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TDF as default investment can increase your fiduciary liability:
“Target date funds provide windfall for investment complexes,
devastations for participants and increased liability exposure for
fiduciaries.”
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404(c) originally did not contemplate “negative” or “deemed” elections
o
DOL clarified in fee regulations that 404(c) protection does not extend to the
selection and monitoring of funds
31401k Helpcenter.com; Target Date Funds – The Next Wave of Litigation; Thomas B. Bastin, JD, LLM, AIF, CEBS
2American Bar Association, Section of Labor and Employment Law; Employee Benefits Committee, Summer 2009 Newsletter 3Morgan, Lewis & Boclus, LLP; 404(c) Compliance; Lisa Barton, Esq. and Marianne Yudes, Esq.; Sept 2011
As a Fiduciary You Are Required to Understand All Plan
Fees and Expenses
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As a Fiduciary You Are Required to Understand All Plan
As a Fiduciary You Are Required to Understand All Plan
Fees and Expenses
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As a Fiduciary You Are Required to Understand All Plan
Regulation – Money Market Funds
Investment Management – basis point fee to manage the fund, as the fund gets bigger the
investment management basis point fees may decline
Sub Transfer Agent Fees – Paid from Investment Management Fee to record keeper for
services provided by record keeper that the mutual fund does not have to do
12b-1 Fee / Advisor Compensation –
Distribution expenses, in addition to Investment
Management Fee, generally commissions to brokers that impact their personal income as plan
assets increase
Revenue Sharing –
Record keeping expenses, in addition to Investment Management Fee, paid
to record keeper for services not covered by Sub Transfer Agent Fees
Variable Annuity Wrap Fees –
Insurance providers which have underlying mutual funds
offered inside of them add a plan level “wrap” charge in addition to Investment Management
Fees to cover the structure / services provided by the insurance company
As a Fiduciary You Are Required to Understand All Plan
Fees and Expenses
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“New disclosure rules and the threat of fiduciary violation lawsuits have helped bring
down investment management, recordkeeping and other fees in 401k and other
retirement accounts. Now revenue sharing is following suit.
About 13% of plans had
no form of revenue sharing whatsoever last year, a figure that most expect will grow
.”
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“Most plans that allow participants to choose how to invest their money do so in
reliance on Section 404(c). That statutory provision protects plan sponsors and
fiduciaries from liability for any losses participants may incur when making their own
investment choices. However, this protection applies only if participants are given
sufficient information with which to make investment decisions.
According to the
participants, by failing to provide adequate information about plan expenses, the
fiduciaries did not comply with Section 404(c), and thus they remain responsible for
any investment losses the participants may have suffered
.”
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1401khelpcenter.com; Collected WisdomTM on Revenue Sharing Within 401k Plans; Thinkadvisor.com; July 2014 2401k Revenue Sharing.com; Hidden Revenue Sharing – compilation 1999-2014
Is 401(k) Revenue Sharing on Its Way Out?
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Corrective Distributions
•Schedule H, Part II, 2f (large plans; 100+)
•Schedule I, Part 1, 2f (small plans long form)
•5500-SF, Part III, 8e (small plans short form)
•Corrective distributions indicate plan failed discrimination testing
If company cannot afford making safe harbor matching contributions, there are
other alternatives available
o Some do not have any additional cost to company
If not aware of all alternatives to failed
Investment Documentation
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Employer Stock in 401(k)
Approximately 8% of the $3 trillion in 401(k) assets is in company stock
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Farewell to Company Stock, or Not?
– DC Dialogue, Vol 9, Issue 7, Oct 2014o Fifth Third Bancorp v. Dudenhoefferon rejects “hardwiring” of company
stock into a 401(k) plan as protection and then erects significant barriers
for plaintiffs bringing stock drop claims
Company stock not recommended
– Companies with Company Stock Funds in 401(k) Plan or ESOPShould Review Compliance in Light of Recent SEC Enforcement Actions; Winston & Strawn, LLP, Sept 25, 2014
o On September 10, 2014, the SEC announced enforcement actions against
34 companies and insiders (directors, officers, and 10% owners) for failing
to file timely reports for stock transactions. All but one settled, with
cease-and-desist orders and monetary penalties ranging from $25,000 to
$150,000. The enforcement actions came without warning, after more
than a decade of little or no SEC enforcement in this area.
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Questions?
Danford Meischen, CFP®, CRPC®
Senior Retirement Plan Consultant
Institutional Consultant
UBS Financial Services Inc.
10001 Woodloch Forest Drive, Suite 100
The Woodlands, TX 77380
Tel. 281-362-6362
Mobile 713-857-5710
dan.meischen@ubs.com
Top 25 Retirement Plan Advisor (2004, 2005, 2007) – Plan Sponsor Magazine
300 Most Influential in 401(k) (2007) – 401(k) Wire
Founding Lecturer for the Retirement Advisor University at UCLA
Certified Investment Management Analyst – CIMA®
Certified Retirement Plan Consultant – CRPC®
CERTIFIED FINANCIAL PLANNER
TM– CFP®
Disclaimers
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
CIMA® is a registered certification mark of the Investment Management Consultants Association, Inc. in the United States of America and worldwide. Chartered Retirement Planning CounselorSM and CRPC® are registered service marks of the College for Financial Planning®.
This presentation is for informational and educational purposes only and should not be relied upon as investment advice or the basis for making any investment decisions. The views and opinions expressed may not be those of UBS Financial Services Inc. UBS Financial Services Inc. does not verify and does not guarantee the accuracy or completeness of the information presented.
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