Are There Red Flags in Your 5500? Are There Red Flags in Your 5500?

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1 Public Are There Red Flags in Your 5500? Are There Red Flags in Your 5500? Danford Meischen Senior Retirement Plan Consultant Institutional Consultant UBS Financial Services Inc. May 13-15, 2015

2 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. 2

3 Who Looks At Your Form 5500? Financial Advisors working with retirement plans Attorneys Department of Labor 1 Congress Blog; June 17, 2014; The Retirement Crisis Is Upon Us 3

4 The past can hurt, but the way I see it, you can either run from it, or learn from it. The Lion King Today, we are here to learn from the past. 4

5 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 And, hopefully, to shed a bit of light. 5

6 2013 Average ERISA class action settlement was $17,000,000 1 This does NOT cover legal costs average cost of paid claim was $994,000 2 Average defense cost was approximately $365, DOL enforcement $1.69 Byn total monetary results 3 $911.3 M Prohibited transactions $423.6 M plan assets restored $72.1 M voluntary fiduciary correction program 2013 DOL civil investigations 3 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 3 $281.3 M restored to workers 1 ERISA Litigation; Baker & McKenzie; February Fiduciary Liability Coverage; Travelers, Fiduciaries be aware your personal assets are at risk, United States Department of Labor; EBSA Fact Sheet,

7 What Triggers A DOL Audit? 1 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 1 401(k) Fiduciary Solutions; Pandamensional Solutions, Inc; Christopher Carosa; 2012; pg 77 7

8 Person Signing the Form 5500 is the 3(16) Administrative Fiduciary 8

9 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 TheStandard; Specific Examples of ERISA Fiduciary Violations and Associated Penalties 9

10 Plan Characteristic Codes 10

11 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). Source: IRS.gov 11

12 Plan Characteristic Codes 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 1 Investment selection Investment monitoring Plan administration Plan and investment disclosures 1 401khelpcenter; Collected Wisdom on ERISA 404(c) 2 The Prudent Investment Adviser Rules; April 17, 2013, How Safe are ERISA 401(k) / 404(c) Safe Harbors? 12

13 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 Address Specific Concerns 13

14 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? 1 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 (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 k Helpcenter.com; Target Date Funds The Next Wave of Litigation; Thomas B. Bastin, JD, LLM, AIF, CEBS 2 American Bar Association, Section of Labor and Employment Law; Employee Benefits Committee, Summer 2009 Newsletter 3 Morgan, Lewis & Boclus, LLP; 404(c) Compliance; Lisa Barton, Esq. and Marianne Yudes, Esq.; Sept

15 As a Fiduciary You Are Required to Understand All Plan Fees and Expenses 15

16 As a Fiduciary You Are Required to Understand All Plan Fees and Expenses 16

17 As a Fiduciary You Are Required to Understand All Plan Fees and Expenses 17

18 As a Fiduciary You Are Required to Understand All Plan Fees and Expenses 18

19 Regulation Money Market Funds As a Fiduciary You Are Required to Understand All Plan Fees and Expenses 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 19

20 Is 401(k) Revenue Sharing on Its Way Out? Treasury & Risk, July 9, 2014 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. 1 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 khelpcenter.com; Collected Wisdom TM on Revenue Sharing Within 401k Plans; Thinkadvisor.com; July k Revenue Sharing.com; Hidden Revenue Sharing compilation

21 Corrective Distributions 21

22 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 discrimination tests, be aware of your advisor 22

23 Investment Documentation Other Alternatives Considered? How Selected? Appropriate for Your Demographics? 23

24 Employer Stock in 401(k) 24

25 Employer Stock in 401(k) Approximately 8% of the $3 trillion in 401(k) assets is in company stock 1 Farewell to Company Stock, or Not? DC Dialogue, Vol 9, Issue 7, Oct 2014 o 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 ESOP Should 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. 1 Employer Stock in a 401k: Caveat Emptor; MarketWatch; February 15,

26 Questions? Danford Meischen, CFP, CRPC Senior Retirement Plan Consultant Institutional Consultant UBS Financial Services Inc Woodloch Forest Drive, Suite 100 The Woodlands, TX Tel Mobile 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 26

27 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. Important information about advisory & brokerage services It is important that you understand the ways in which UBS Financial Services Inc. (UBS) conducts business and the applicable laws and regulations that govern the firm. As a firm providing wealth management services to clients, UBS is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Though there are similarities among these services, the investment advisory programs and brokerage accounts UBS offers are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that you carefully read the agreements and disclosures UBS provides to you about the products or services offered. While UBS strives to ensure that these materials clearly describe the nature of the services provided, please do not hesitate to contact your Financial Advisor team, [insert team name], if you would like clarification on the nature of your accounts or services you receive from us. For more information, please visit our website at ubs.com/workingwithus. Neither UBS Financial Services Inc. nor its employees (including its Financial Advisors) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement. UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC. 27