Best Practices for Ensuring Retirement Plan Fee Reasonableness Multnomah Group, Inc. All Rights Reserved.

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1 Best Practices for Ensuring Retirement Plan Fee Reasonableness Multnomah Group, Inc. All Rights Reserved.

2 Gina Gurgiolo, JD, LL.M Gina Gurgiolo is a Senior Consultant for the Multnomah Group responsible for the firm s ERISA technical and recordkeeping vendor search consulting services. Gina consults with plan sponsors on plan design, fiduciary governance, and vendor fees/services. Prior to joining the Multnomah Group in 2010, Gina managed the product portfolio for a national retirement services firm and directed the firm s plan administration unit serving its largest clients. Prior to that, Gina managed the retirement plan compliance and regulatory policy functions at another national retirement services firm. Gina earned her JD from the University of Pittsburgh and her LL.M in Taxation with an emphasis in retirement plan and executive compensation law from the University of Denver. Gina is a member of the Portland Chapter of the Western Pension & Benefits Council, where she has been a conference speaker. 2

3 Agenda Context and Historical Overview Legislative Regulatory Judicial Preparing for a DOL Audit Most frequently requested information Case study Step-by-Step Guide to Fee Reasonableness Fee reasonableness to-dos 3

4 Context & Historical Overview What is reasonable? Intangible no bright line Agreeable to sound judgment or logic That which is appropriate for a particular situation Not excessive relative to circumstances Determining reasonableness requires comparison of alternatives and evaluation of processes used Under ERISA section 408(b)(2), retirement plan fees must be reasonable in light of the services being rendered But, no specific codified definition of what constitutes fee reasonableness per se Impossible to be absolute about reasonableness determinations Follow prudent process that contemplates alternatives - Using prudent process to negotiate/compare fees/services promotes improved participant outcomes Must know and understand applicable fees to determine reasonableness Where can plan sponsors find comprehensive fee information? 4

5 Context & Historical Overview Regulations under ERISA section 408(b)(2) require annual covered service provider-to-employer disclosure of fees First-year deadline July 1, 2012 Empower plan sponsors to better comply with the fee reasonableness standard under ERISA section 408(b)(2) Must terminate non-compliant covered service providers 1974: ERISA is enacted, including section 408(b)(2) 2007: Proposed fee disclosure regulations are issued 2009: Revised 2009 Form 5500 Schedule C requests more fee information than ever : Fee disclosure regulations are finalized and become effective; DOL investigation and enforcement activity increases 2012: First retirement plan fee class action suit decided (Tussey, et al. v. ABB, Inc.); similar litigation looming 5

6 Context & Historical Overview Tussey, et al. v. ABB, Inc. Federal district court in Missouri; appeal to Eighth Circuit Court of Appeals? Case originated in 2006 from 15 separate complaints filed by ABB, Inc. employees Separate actions certified as a class in 2007? first instance of a plan fee related class action suit Plaintiffs awarded $37M because: 401(k) plan fees subsidize corporate services benefiting executives A lower cost share class of investments was available, but was not being used Policies/process not being followed Failure to pass excess investment revenue sharing back to the plan Reaffirmed fee reasonableness standards under ERISA section 408(b)(2) Similar litigation is looming At issue is whether the plan fiduciary used a prudent reasonableness evaluation process, had the right level of expert assistance, and/or documented the process steps No requirement to choose lowest-cost services and investment options, just act prudently and pay reasonable fees 6

7 Preparing for a DOL Audit The DOL has the responsibility to enforce ERISA s standards, including ensuring fee reasonableness DOL investigation/enforcement activity is on the rise since 408(b)(2) regulations were proposed and fee litigation trend began How are plans are selected for investigation?: Randomly For cause/ red flag 5500 reports late deferral remittance Independent auditor issues qualified report Participant complaints Up to 6-year investigation period 7

8 Preparing for a DOL Audit What will DOL request? Service provider information Accountants, actuaries, administrators, attorneys, brokers, consultants, contract administrators, insurance companies, investment advisors, investment managers, recordkeepers, TPAs, valuation appraisers Service agreements/contracts Describing services, duties, obligations, responsibilities, fee / compensation / commission schedule Service provider reports Investment performance reports, audit reports, actuarial reports Fee assessment and payment documents Invoices, cancelled checks Service provider selection documents RFP, proposals, comparative evaluation analysis, negotiation communications, assessment of fees relative to quality of service Investment documents Revenue sharing information, share class identification, stable value fund illiquidity/redemption or surrender fees Rebate information 12-b-1 fees, sub-transfer account fees, marketing/services fees, expense reimbursement account deposits 8

9 DOL Audit Case Study: Fee Reasonableness Context: 403(b) Plan Sponsor 2012 investigation January 1, 2007 to present investigation period Response / Outcomes: Submitted requested information, including annual fee benchmarking, search effort documentation, fee policy statement No requested follow-up information regarding the DOL s evaluation of fee reasonableness 9

10 Step-by-Step Guide to Fee Reasonableness Fee reasonableness to-do list: Maintain a Fee Policy Statement and other proper fiduciary governance documents (e.g. Committee Charter, Investment Policy Statement) List applicable fees under the Plan State whether the employer, forfeiture account, or participants pay the fees State intent to ensure fee reasonableness Timely receive and review/analyze annual covered service provider-toemployer fee disclosure notice Know your plan s fees and understand how they work Follow-up with questions as needed Benchmark recordkeeper s fees to the market annually Plan is not required to select the recordkeeper with the lowest fees Fees must be reasonable in light of services rendered Negotiate incumbent recordkeeper s fees if they are higher than benchmarked range 10

11 Step-by-Step Guide to Fee Reasonableness Fee reasonableness to-do list (cont.): Request lowest-cost share class of investment options Document the process and decision whether to implement Issue request for bid or request for proposal to the prequalified recordkeeper universe every 5-6 years Coincides with typical statutes of limitations Document the effort, resulting decisions and rationale Gather appropriate documentation in preparation for DOL investigation Expect an audit and prepare to avoid scramble for documents (typically, 15-day response period allowed) Organize service, investment and fee information requested in the event of an investigation 11

12 Disclosures Multnomah Group, Inc. is an Oregon corporation and SEC registered investment adviser. Any information and materials contained herein or on our website are provided as is for general informational purposes only. It is not intended to be comprehensive for any particular subject. While Multnomah Group takes pride in providing accurate and up to date information, we do not represent, guarantee, or provide any warranties (either express or implied) regarding the completeness, accuracy, or currency of information or its suitability for any particular purpose. Receipt of information or materials provided herein or on our website does not create an adviser-client relationship between Multnomah Group and you. Multnomah Group does not provide tax or legal advice or opinions. You should consult with your own tax or legal adviser for advice about your specific situation. 12