Retirement Plan Investment Monitoring and Best Practices for Plan Sponsors

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1 Retirement Plan Investment Monitoring and Best Practices for Plan Sponsors Tyrone Golatt Senior Regional Vice President Geoff Finkel Associate Account Executive 1

2 This material is not intended to give legal or tax advice, and you should not rely on it for legal or tax advice. You should consult your legal or tax adviser regarding retirement plan rules and regulations. 2

3 Agenda Who is a Fiduciary? Types of Fiduciaries Claims of Fiduciary/Co-Fiduciary Status Types of Investment Platforms Section 404(c) Meeting Fiduciary Obligations 3

4 Who is a Fiduciary? Includes a person who exercises any discretionary control or authority with respect to the: management of a retirement plan management or disposition of a retirement plan s assets 4

5 Types of Fiduciaries ERISA 3(16) - an individual who is a plan administrator. This individual/entity agrees to take responsibility for either all of the daily operation of the plan or agrees to take responsibility for only certain administrative functions. 5

6 Types of Fiduciaries ERISA 3(21) - a paid professional who provides investment recommendations to the plan sponsor/trustee. The plan sponsor/trustee retains ultimate decisionmaking authority for the investments and may accept or reject the recommendations. 6

7 Types of Fiduciaries ERISA 3(38) - specifically appointed/hired to have full discretionary authority and control to make the actual investment decisions. The manager may select, monitor, remove and replace the investment options offered under the plan. 7

8 Claims of Fiduciary/Co-Fiduciary Status Obtain clear written explanation of exactly which fiduciary responsibilities, and liability, will be shared 8

9 Types of Investment Platforms Fund selection vs. Fixed Investment Menu Associated Costs Numerous Investments 9

10 Section 404(c) Generally provides that if a plan fiduciary gives a participant a reasonable opportunity to direct the investment of his or her account by providing sufficient information to make informed investment decisions, the plan fiduciary will not be liable for any losses that directly result from the participant s investment decisions 10

11 Meeting Fiduciary Obligations Plan documents, contracts, and participant disclosure material Timely remittance of contributions and payments Selection, monitor, and retention of funds Bond requirements 11

12 Thank You Mutual of America Life Insurance Company Home Office: 320 Park Avenue New York, NY mutualofamerica.com Mutual of America and Mutual of America Your Retirement Company are registered service marks of Mutual of America Life Insurance Company. Mutual of America Life Insurance Company is a Registered Broker-Dealer. 12

13 Understanding Retirement Plan Fees and Expenses

14 To view this and other EBSA publications, visit the agency s Web site at: To order publications, contact us electronically at: Or call toll free: To speak to a benefits advisor, visit the Employee Benefits Security Administration s Web site at and click on Request Assistance. Or call toll-free: This material will be made available in alternative format to persons with disabilities upon request: Voice phone: (202) TTY: (202) This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.

15 Understanding Retirement Plan Fees and Expenses December 2011 U.S. Department of Labor Employee Benefits Security Administration

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17 Understanding Retirement Plan Fees and Expenses As the sponsor of a retirement plan, you are helping your employees achieve a secure financial future. Sponsoring a plan, however, also means that you, or someone you appoint, will be responsible for making important decisions about the plan s management. Your decisionmaking will include selecting plan investments or investment options and plan service providers. Many of your decisions will require you to understand and evaluate the costs to the plan. The Federal law governing private-sector retirement plans, the Employee Retirement Income Security Act (ERISA), requires that those responsible for managing retirement plans referred to as fiduciaries carry out their responsibilities prudently and solely in the interest of the plan s participants and beneficiaries. Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable. This booklet will help you better understand and evaluate your plan s fees and expenses. While the focus is on fees and expenses involved with 401(k) plans, many of the principles discussed in the booklet also will have application to all types of retirement plans. Remember, however, that this booklet provides a simplified explanation of plan and investment fees. It is not a legal interpretation of ERISA or other laws, nor is it intended to be a substitute for the advice of a retirement plan or investment professional. 1

18 Why consider fees? Plan fees and expenses are important considerations for all types of retirement plans. As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan s participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided. There has been a dramatic increase in the number of investment options, as well as level and types of services, offered to and by plans in which participants have individual accounts. In determining the number of investment options and the level and type of services for your plan, it is important to understand the fees and expenses for the services you decide to offer. The cumulative effect of fees and expenses on retirement savings can be substantial. When plans allow participants to direct their investments, fiduciaries need to take steps to regularly make participants aware of their rights and responsibilities under the plan related to directing their investments. This includes providing plan and investment related information, including information about fees and expenses, that participants need to make informed decisions about the management of their individual accounts. Participants must receive the information before they can first direct their investments in the plan and annually thereafter. 2

19 What are the types of plan fees and who pays for them? There are a variety of plan fees and expenses that may affect your retirement plan. The following is an overview of some of those fees and expenses and the different ways in which they may be charged. Plan fees and expenses generally fall into three categories: Plan administration fees. The day-to-day operation of a plan involves expenses for basic administrative services such as plan recordkeeping, accounting, legal and trustee services that are necessary for administering the plan as a whole. In addition, a profit sharing or 401(k) plan also may offer a host of additional services, such as telephone voice response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation, and online transactions. In some instances, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. In other instances, when the administrative costs are billed separately, they may be borne, in whole or in part, by the employer or charged directly against the assets of the plan. In the case of a 401(k), profit sharing, or other similar plans with individual accounts, administrative fees are either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses (a pro rata charge)) or passed through as a flat fee against each participant s account (a per capita charge). Generally the more services provided, the higher the fees. 3

20 Investment fees. By far the largest component of plan fees and expenses is associated with managing plan investments. Fees for investment management and other related services generally are assessed as a percentage of assets invested. Employers should pay attention to these fees. They are paid in the form of an indirect charge against the participant s account or the plan because they are deducted directly from investment returns. Net total return is the return after these fees have been deducted. For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent to employers. (See pages 5-9 for more information on investment-related fees.) Individual service fees. In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under an individual account plan. Individual service fees may be charged separately to the accounts of those who choose to take advantage of a particular plan feature. For example, fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions. Plan administrative and investment services may be provided through a variety of arrangements: Some or all of the various plan services and investment alternatives may be offered by one provider for a single fee paid to that provider (sometimes referred to as a bundled arrangement). The provider will then pay, out of that fee, any other service providers that it may have contracted to provide the services. In other cases, plans may obtain services and investments from a variety of providers (sometimes referred to as an unbundled arrangement). The 4

21 expenses of each provider (e.g., investment manager, trustee, recordkeeper, communications firm) are charged separately. Plans also may use an arrangement that combines a single provider for certain services, such as administrative services, with a number of different providers for investments. Fees need to be evaluated keeping in mind the cost of all covered services. What fees are associated with the investment choices in my retirement plan? Apart from fees charged for administering the plan itself, there are two basic types of fees that may be charged in connection with plan investments or investment options made available to participants and beneficiaries. These fees, which can be referred to by different terms, include: Sales charges (also known as loads or commissions). These are basically transaction costs for buying and selling shares. They may be computed in different ways, depending on the particular investment product. Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment 5

22 products that require significant management, research, and monitoring services generally will have higher fees. (See page 9.) Be aware that higher investment management fees do not necessarily mean better performance. In addition, there are some fees that are unique to specific types of investments. Following are brief descriptions of some of the more common investments available to retirement plans and explanations of some of the different terminology or unique fees associated with them. Some common investments and related fees: Most investments offered by smaller plans pool the money of a large number of individual investors. Pooling money makes it possible for smaller plans and participants in individual account plans to diversify investments, to benefit from economies of scale, and to lower their transaction costs. These pooled funds may invest in stocks, bonds, real estate, and other investments. Larger plans, by virtue of their size, are more likely to pool investments on their own for example, by using a separate account held with a financial institution. Smaller plans generally invest in commingled pooled investment vehicles offered by financial institutions, such as banks, insurance companies, or mutual funds. Generally, investment-related fees, usually charged as a percentage of assets invested, are paid by the participant or the plan. Mutual funds. Mutual funds pool and invest the money of many people. Each investor owns shares in the mutual fund that represent a part of the mutual fund s holdings. The portfolio of securities held by a mutual fund is managed by a professional investment adviser following a specific investment policy. In addition to investment management and administration fees, you may find these fees: 6

23 Some mutual funds assess sales charges (see above for a discussion of sales charges). These charges may be paid when you invest in a fund (known as a frontend load) or when you sell shares (known as a backend load, deferred sales charge, or redemption fee). A front-end load is deducted up front and, therefore, reduces the amount of your initial investment. A back-end load is paid when the shares are sold. A back-end load is determined by how long you keep your investment. There are various types of back-end loads, including some that decrease and eventually disappear over time. Mutual funds also may charge what are known as 12b-1 fees, which are ongoing fees paid out of fund assets. 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors, and to pay various service providers to a plan pursuant to a bundled services arrangement. Some mutual funds may be advertised as no load funds. This can mean that there is no front- or backend load. However, there may be a 12b-1 fee. Collective investment funds. A collective investment fund is a trust fund managed by a bank or trust company that pools investments of retirement plans and other similar investors. Each investor has a proportionate interest in the trust fund assets. For example, if a collective investment fund holds $10 million in assets and your investment in the fund is $10,000, you have a 0.1 percent interest in the fund. Like mutual funds, collective investment funds may have a variety of investment objectives. There are no front- or back-end fees associated with a collective investment fund, but there are investment management and administrative fees. 7

24 Variable annuities. Insurance companies frequently offer a range of investment alternatives for individual account plans through a group variable annuity contract between an insurance company and an employer on behalf of a plan. Variable annuities include one or more insurance elements, which are not present in other investment alternatives. Generally, these elements include an annuity feature, interest and expense guarantees, and any death benefit provided during the term of the contract. The variable annuity contract wraps around investment alternatives, often a number of mutual funds. Participants select from among the investment alternatives offered, and the returns to their individual accounts vary with their choice of investments. In addition to investment management fees and administration fees, you may find these fees: Insurance-related charges are associated with investment alternatives that include an insurance component. They include items such as sales expenses, mortality risk charges, and the cost of issuing and administering contracts. Surrender and transfer charges are fees an insurance company may charge when an employer terminates a contract (in other words, withdraws the plan s investment) before the term of the contract expires or when a participant withdraws an amount from the contract. These charges may be imposed if these events occur before the expiration of a stated period and commonly decrease and disappear over time. They are similar to an early withdrawal penalty on a bank certificate of deposit or a back-end load or redemption fee charged by some mutual funds. Pooled guaranteed investment contract (GIC) funds. A common fixed income investment option, a pooled GIC fund generally includes a number of contracts issued by an insurance company or bank paying an interest rate 8

25 that blends the fixed interest rates of each of the GICs included in the pool. There are investment management and administrative fees associated with the pooled GIC fund. While the investments described above are common, plans also may offer other investments that are not described here (such as employer securities). What other factors might have an impact on the fees and expenses of my retirement plan? Funds that are actively managed (i.e., funds with an investment adviser who actively researches, monitors, and trades the holdings of the fund to seek a higher return than the market as a whole) generally have higher fees than funds that are passively managed (see below). The higher fees are associated with the more active management provided and increased sales charges from the higher level of trading activity. While actively managed funds seek to provide higher returns than the market, neither active management nor higher fees necessarily guarantee higher returns. Funds that are passively managed generally have lower management fees. Passively managed funds seek to obtain the investment results of an established market index, such as the Standard and Poor s 500, by duplicating the holdings included in the index. Thus, passively managed funds require little research and less trading activity. What steps can I take to evaluate plan fees and expenses? Fees and expenses are one of several factors to consider when you select and monitor plan service providers 9

26 and investments. The level and quality of service and investment risk and return will also affect your decisions. Begin by establishing an objective process to aid in your decisionmaking. This process should include an understanding of the fees and expenses you will pay and a review of those charges as they relate to the services to be provided and the investments you are considering. Before negotiating with prospective providers, think about the specific services you would like from a service provider (e.g., legal, accounting, trustee/custodian, recordkeeping, investment management, investment education or advice). Include the types and frequency of reports you wish to receive, communications to participants, meetings for participants, and the frequency of participant investment transfers. You will also need to consider the level of responsibility you want the prospective service provider to assume, the services that must be included in any retirement plan, the possible extras or customized services you wish to provide, and optional features, such as loans, Internet trading, and telephone transfers. Once you have a clear idea of your requirements, you are ready to begin receiving estimates from prospective providers. Give all of them complete and identical information about your plan and the features you want so that you can make a meaningful comparison. This information should include the number of plan participants and the amount of plan assets as of a specified date. For a service contract or arrangement to be reasonable, service providers must provide certain 10

27 information to you about the services they will provide to your plan and the compensation they will receive. This information will assist you in understanding the services, assessing the reasonableness of the compensation (direct and indirect), and determining any conflicts of interest that may impact the service provider s performance. Once you have selected a service provider or investments, be prepared to monitor the level and quality of the services and performance of investments to make sure they continue to be reasonable and they suit the needs of your employees. Make sure that you receive information on a regular basis so that you can monitor investment returns and service provider performance and, if necessary, make changes. Review any notices received from the service provider about possible changes to their compensation and the other information they provided when hired (or when the contract or arrangement was renewed). By continuing to ask questions, you can make better decisions for your plan and your employees. How do I need to provide fee and expense information to the participants in my plan? For plans that allow participants to direct the investments in their accounts, plan and investment information, including information about fees and expenses, must be provided to participants before they can first direct investments and periodically thereafter primarily on an annual basis with information on fees and expenses actually paid provided at least quarterly. The initial plan related information may be distributed as part of the Summary Plan Description provided when a participant joins the plan as long as it is provided before the 11

28 participant can first direct investments. The information provided quarterly may be included with the Individual Benefit Statement. The investment related information needs to be presented in a format, such as a chart, that allows for a comparison among the plan s investment options. A model chart is available on If you use information provided by a service provider that you rely on reasonably and in good faith, you will be protected from liability for the completeness and accuracy of the information. In Conclusion... Fees and expenses are an important component in managing your retirement plan. For further information, you may want to consult the following resources at Meeting Your Fiduciary Responsibilities Selecting an Auditor for Your Employee Benefit Plan Reporting and Disclosure Guide for Employee Benefit Plans 12

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33 Selecting and Monitoring Pension Consultants Tips for Plan Fiduciaries U.S. Department of Labor Employee Benefits Security Administration May 2005 The Employee Retirement Income Security Act (ERISA) requires that fiduciaries of employee benefit plans administer and manage their plans prudently and in the interest of the plan s participants and beneficiaries. In carrying out these responsibilities, plan fiduciaries often rely heavily on pension consultants and other professionals for help. Findings included in a report by the staff of the U.S. Securities and Exchange Commission released in May 2005, however, raise serious questions concerning whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients. Under the Investment Advisers Act of 1940 (Advisers Act), an investment adviser providing consulting services has a fiduciary duty to provide disinterested advice and disclose any material conflicts of interest to their clients. In this context, SEC staff examined the practices of advisers that provide pension consulting services to plan sponsors and trustees. These consulting services included assisting in determining the plans investment objectives and restrictions, allocating plan assets, selecting money managers, choosing mutual fund options, tracking investment performance, and selecting other service providers. Many of the consultants also offered, directly or through an affiliate or subsidiary, products and services to money managers. Additionally, many of the consultants also offered, directly or through an affiliate or subsidiary, brokerage and money management services, often marketed to plans as a package of bundled services. The SEC examination staff concluded in its report that the business alliances among pension consultants and money managers can give rise to serious potential conflicts of interest under the Advisers Act that need to be monitored and disclosed to plan fiduciaries. To encourage the disclosure and review of more and better information about potential conflicts of interest, the Department of Labor and the SEC have developed the following set of questions to assist plan fiduciaries in evaluating the objectivity of the recommendations provided, or to be provided, by a pension consultant. 1. Are you registered with the SEC or a state securities regulator as an investment adviser? If so, have you provided me with all the disclosures required under those laws (including Part II of Form ADV)? You can check yourself - and view the firm s Form ADV - by searching the SEC s Investment Adviser Public Disclosure Web site. At present, the IAPD database contains Forms ADV only for investment adviser firms that register electronically using the Investment Adviser Registration Depository. In the future, the database will expand to encompass all registered investment advisers - individuals as well as firms - in every state. If you can t locate an investment adviser in IAPD, be sure to contact your state securities regulator or the SEC s Public Reference Branch. 2. Do you or a related company have relationships with money managers that you recommend, consider for recommendation, or otherwise mention to the plan? If so, describe those relationships. When pension consultants have alliances or financial or other relationships with money managers or other service providers, the potential for material conflicts of interest increases depending on the extent of the relationships. Knowing what relationships, if any, your pension consultant has with money managers may help you assess the objectivity of the advice the consultant provides. 3. Do you or a related company receive any payments from money managers you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, what is the extent of these payments in relation to your other income (revenue)? Payments from money managers to pension consultants could create material conflicts of interests. You may wish to assess the extent of potential conflicts.

34 4. Do you have any policies or procedures to address conflicts of interest or to prevent these payments or relationships from being a factor when you provide advice to your clients? Probing how the consultant addresses these potential conflicts may help you determine whether the consultant is right for your plan. 5. If you allow plans to pay your consulting fees using the plan s brokerage commissions, do you monitor the amount of commissions paid and alert plans when consulting fees have been paid in full? If not, how can a plan make sure it does not over-pay its consulting fees? You may wish to avoid any payment arrangements that could cause the plan to pay more than it should in pension consultant fees. 6. If you allow plans to pay your consulting fees using the plan s brokerage commissions, what steps do you take to ensure that the plan receives best execution for its securities trades? Where and how brokerage orders are executed can impact the overall costs of the transaction, including the price the plan pays for the securities it purchases. 7. Do you have any arrangements with broker-dealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers? As noted above, you may wish to explore the consultants relationships with other service providers to weigh the extent of any potential conflicts of interest. 8. If you are hired, will you acknowledge in writing that you have a fiduciary obligation as an investment adviser to the plan while providing the consulting services we are seeking? All investment advisers (whether registered with the SEC or not) owe their advisory clients a fiduciary duty. Among other things, this means that advisers must disclose to their clients information about material conflicts of interest. 9. Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide the plan? If the consultant is a fiduciary under ERISA and receives fees from third parties as a result of their recommendations, a prohibited transaction under ERISA occurs unless the fees are used for the benefit of the plan (e.g., offset against the consulting fees charged the plan) or there is a relevant exemption. 10. What percentage of your plan clients utilize money managers, investment funds, brokerage services or other service providers from whom you receive fees? The answer may help in evaluating the objectivity of the recommendations or the fiduciary status of the consultant under ERISA. For more information on the SEC staff s findings, please read Staff Report Concerning Examinations Of Select Pension Consultants. Plan trustees, pension consultants, and other service providers can learn about their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) by visiting the Web site of the U.S. Department of Labor. Pension consultants who have questions concerning their obligations under the Investment Advisers Act of 1940 should either consult with an attorney who specializes in the federal securities laws or contact the staff of the SEC s Division of Investment Management. This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC It will be made available in alternate formats upon request: Voice phone: (202) ; TTY: (202) In addition, the information in this fact sheet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.

35 Getting It Right Know Your Fiduciary Responsibilities Tips for Selecting and Monitoring Service Providers for Your Employee Benefit Plan As sponsors of 401(k) and other types of pension plans, business owners generally are responsible for ensuring that their plans comply with Federal law including the Employee Retirement Income Security Act (ERISA). Many businesses rely on other professionals to advise them and assist them with their employee benefit plan duties. For this reason, selecting competent service providers is one of the most important responsibilities of a plan sponsor. The process of selecting service providers will vary depending on the plan and services to be provided. To assist business owners in carrying out their responsibilities under ERISA to prudently select and monitor plan service providers, the Employee Benefits Security Administration has prepared the following tips which may be a helpful starting point: 1. Consider what services you need for your plan legal, accounting, trustee/custodial, recordkeeping, investment management, investment education or advice. 2. Ask service providers about their services, experience with employee benefit plans, fees and expenses, customer references or other information relating to the quality of their services and customer satisfaction with such services. 3. Present each prospective service provider identical and complete information regarding the needs of your plan. You may want to get formal bids from those providers that seem best suited to your needs. 4. You may also wish to consider service providers or alliances of providers who provide multiple services (e.g., custodial trustee, investment management, education, or advice, and recordkeeping) for a single fee. These arrangements are often called bundled services. 5. Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. Compare the information you receive, including fees and expenses to be charged by the various providers for similar services. Note that plan fiduciaries are not always required to pick the least costly provider. Cost is only one factor to be considered in selecting a service provider. More information on pension plan fees and expenses can be found in Understanding Retirement Plan Fees and Expenses and the 401(k) Fee Disclosure Form, located at 6. If the service provider will handle plan assets, check to make sure that the provider has a fidelity bond (a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts). 7. If a service provider must be licensed (attorneys, accountants, investment managers or advisors), check with state or federal licensing authorities to confirm the provider has an up-to-date license and whether there are any complaints pending against the provider.

36 8. Make sure you understand the terms of any agreements or contracts you sign with service providers and the fees and expenses associated with the contracts. In particular, understand what obligations both you and the service provider have under the agreement and whether the fees and expenses to be charged to you and plan participants are reasonable in light of the services to be provided. 9. Prepare a written record of the process you followed in reviewing potential service providers and the reasons for your selection of a particular provider. This record may be helpful in answering any future questions that may arise concerning your selection. 10. Receive a commitment from your service provider to regularly provide you with information regarding the services it provides. 11. Periodically review the performance of your service providers to ensure that they are providing the services in a manner and at a cost consistent with the agreements. 12. Review plan participant comments or any complaints about the services and periodically ask whether there have been any changes in the information you received from the service provider prior to hiring (e.g. does the provider continue to maintain any required state or Federal licenses).

37 u 403(b) PLAN ADMINISTRATOR S CHECKLIST

38 To help ensure that your 403(b) Thrift plan is being operated properly, the following is an outline of some of the rules 1 applicable to a 403(b) plan that is subject to the Employee Retirement Income Security Act of 1974 (ERISA). As plan administrator, you should review these rules to make sure that they are being carried out by the designated person or persons in your organization. An employer that sponsors an employee pension benefit plan undertakes important obligations and responsibilities, including, among other things, compliance with various government regulations. While Mutual of America s services and group annuity contracts facilitate compliance with many of those rules, it is ultimately the obligation of the plan sponsor and plan administrator to ensure the plan is operating in accordance with the plan provisions and legal requirements. u ERISA and Fiduciary Duties Fiduciaries have a legal obligation to perform their plan-related duties in a prudent manner and in accordance with certain rules. Some of these rules, known as fiduciary duties under ERISA, are: Exclusive Benefit Rule Fiduciaries must operate the plan and make decisions for the sole benefit of plan participants. This includes making sure that plan expenses that reduce a plan participant s account balance are reasonable. Prudent Person Rule Fiduciaries must act with the same level of care and prudence that a prudent person with retirement plan experience would exercise under like circumstances and with like aims. Bonding Requirement Fiduciaries must maintain a bond, the amount of which should be updated each year, as security for the plan s assets. The bond is intended to provide protection to the plan against loss by reason of acts of fraud or dishonesty. The persons to be bonded include those designated to have responsibility for the ultimate control, management, handling or disposition of the plan assets. In general, the amount of the bond should be at least 10% of the value of the plan assets held under the contract, but no less than $1,000 and no greater than $500,000, subject to exceptions. Plan sponsors should consult with their Risk Manager or Accountant to ensure they are properly bonded. Mutual of America does not provide, underwrite or offer fidelity bonds. Follow Plan Terms To the extent consistent with ERISA, fiduciaries must follow the written plan terms when operating the plan. Conduct Regular Review Meetings Meetings to review the plan and its provisions should be held on a regular basis. Mutual of America can provide important plan information at these meetings. Avoid Prohibited Transactions Fiduciaries have a duty to make sure that they do not cause the plan to enter into certain types of transactions. A Prohibited Transaction is one that involves a 403(b) plan s assets and a party in interest, a term which includes any fiduciary, service provider, third-party administrator or investment provider to your plan, among others. Entering into a prohibited transaction can result in significant penalties, unless the transaction fits into a statutory or regulatory exemption. There are several types of transactions that are prohibited by ERISA. In general the rules intend to prohibit plan fiduciaries from operating the plan under a conflict of interest, or dealing with the assets of the plan as if such assets were the fiduciary s own property. One type of transaction prohibited by ERISA is the furnishing of services by a party in interest to the plan. Without an exemption, this very broad rule would prohibit any services to a plan by a plan service provider. Fortunately, another section of ERISA provides relief from that prohibited transaction by permitting parties in interest to provide services to a plan, as long as the arrangement is reasonable, and the compensation received by the party in interest is reasonable. In order to meet the conditions of that exemption, the Department of Labor (DOL) has issued rules 2 requiring service providers, such as Mutual of America, to provide plan sponsors with extensive disclosures of the services to be provided to the plan and the fees charged for those services. 1 This checklist was prepared as general information and does not discuss all of the rules applicable to your plan. 2 It is important to note that the fee disclosure regulation is part of an exception to just one of the ERISA prohibited transactions. There are several other types of transactions that are prohibited, and each has its own set of statutory or regulatory exemptions. For a more complete understanding of these prohibited transactions, we encourage you to consult with an attorney. -2-

39 These fee disclosure regulations are effective July 1, Mutual of America will provide you with the necessary disclosure in advance of that date to ensure that the exemption to this prohibited transaction rule is met. Mutual of America already discloses much of the information required by the DOL regulation through the Important Notice attached to the contract, which discusses services to be provided to the Plan, and through its prospectuses, which provide detailed information regarding fees, including investment management fees and expenses. Mutual of America provides its Exclusive and Coordinated Services 403(b) Thrift plan clients with plan document services, plan amendments as needed, summary plan descriptions (SPD), summary of material modifications (SMM) and a summary annual report (SAR). The documents that Mutual of America provides, together with related participant disclosure materials, help employers satisfy several requirements under ERISA and the Internal Revenue Code, including ERISA Section 404(c), which provides protection to Plan fiduciaries who provide individual account plans where employees exercise investment control over their individual accounts. u Investment Responsibility An employer that complies with Section 404(c) of ERISA will be relieved of fiduciary liability for losses that result from participants investment decisions. However, the employer will still be responsible for its own decisions. In general, DOL regulations provide that an employer must satisfy all of the following conditions to be relieved of its investment responsibility: Type of Plan Section 404(c) applies only to ERISA-covered individual account plans under which participants have the ability to exercise investment control over their individual accounts. These plans include thrift plans under Code Section 403(b). Plan Document Language A fiduciary may not permit a participant to decide how his or her plan account will be invested unless this is authorized by the plan document. Most plan documents prepared by Mutual of America allow each participant to direct the investment of his or her entire account balance. Investment Information An employer will not be relieved of fiduciary liability for the investment decisions of participants unless it provides its participants with enough information for them to make informed investment decisions. Participants in Exclusive Services and Coordinated Services contracts provided by Mutual of America already receive Summary Plan Descriptions (SPD), brochures and/or prospectuses that satisfy this requirement. In addition, section 404(c) requires fiduciaries to notify participants (including former participants and alternate payees who have accounts under divorce orders) that they will bear the risk of their own investment decisions. A sample 404(c) Notice is available from your Mutual of America representative. Investment Diversification Section 404(c) requires fiduciaries to offer participants a broad range of investment alternatives. In general, the regulations require at least three different investment options, with different risk and return characteristics, that have diversified portfolios and that permit investment changes at least once every three months. The regulations state that a plan may satisfy this diversification requirement even if all of its funds are held by a single organization. -3-

40 This requirement is satisfied by the investment alternatives available under Mutual of America s contracts. Mutual of America currently offers a variety of diversified investment alternatives, as well as an Interest Accumulation Account, and permits investment changes on virtually any business day (unless your plan document limits those options or their flexibility and subject to frequent transfer restrictions required by regulation). Free Exercise of Choice Even if all other conditions are satisfied, an employer may be responsible for an investment decision by a participant who did not act freely and voluntarily. Consequently, Section 404(c) will not protect an employer that exerts improper influence on a participant s investment decisions. The investment funds available through the Separate Accounts under the Company s contracts have always been carefully selected and subject to rigorous ongoing monitoring by Mutual of America s investment professionals. These funds provide plan participants with varied choices in investment strategies and styles of management in adherence with the highest professional standards of investment portfolio management. These funds provide participants with many different risk/return opportunities so that, whether such participants prefer to construct a portfolio that reflects their own specific mix of investments using funds that are style specific or use investment funds that simplify the investment allocation processes, such as our targetdate Retirement Funds, they can construct a portfolio to suit their own financial needs and objectives. Importantly, participants are permitted to move their money between investment options, in total or in part, without any charges or any limitations, other than those that comply with policies on frequent transfers. All of these funds are designed to be appropriate choices for participants seeking to accumulate assets for use in their retirement years. This broad but focused range of quality investment funds provides competitive, long-term investment performance at a reasonable cost. In addition, Mutual of America offers an Interest Accumulation Account, which provides stability and value, with competitive interest rates, to help protect against market risk. u Protection for Plan Fiduciaries Mutual of America stands behind the investment funds offered through the Separate Accounts under its contracts and the selection and monitoring processes for them. As evidence of our confidence in our investment products, we will indemnify a Plan Sponsor/Fiduciary who maintains and continues to contribute to an ERISA defined contribution Plan funded through the Company s group variable accumulation annuity contract against liability, losses or reasonable related expenses (including reasonable attorneys fees and court costs) that arise from ERISA fiduciary claims brought against the Plan Sponsor/Fiduciary with respect to the Separate Account investment funds offered under the Company s contract, subject to certain terms and conditions. These claims include the following: 1. Breach by the Plan Sponsor of ERISA s prudence and/or diversification requirements in its selection and monitoring of the investment funds. 2. Failure by the investment funds offered under the Company s investment menu to meet ERISA Section 404(c) s broad range of investment alternatives requirements to the extent applicable. 3. Failure by any Qualified Default Investment Alternatives (QDIA) offered under the Company s investment menu to meet one of the DOL s investment product requirements for QDIAs. Our indemnification is effective for such claims brought against the Plan Sponsor/Fiduciary after January 1, We complement this indemnification with superior customer service provided by salaried staff located in 34 Regional Offices throughout the country. Whether meeting with plan sponsors to assist them in developing investment policies, to provide sample investment policy statements, to offer ongoing review of their plan or to hold retirement education seminars for employees, these services are a critical component of our business model, including the investment services we provide. -4-

41 u Regulatory Compliance On July 26, 2007, the Treasury Department and IRS jointly issued comprehensive final regulations governing 403(b) plans, which require greater oversight on the part of the plan sponsor and include the following provisions: 1. Written Plan Requirement All 403(b) plans or arrangements must be maintained pursuant to a written plan and all contracts must be issued pursuant to that written plan. The 403(b) plan document sets forth a general description of the duties of the plan administrator. A Summary Plan Description (SPD) is a written summary of the provisions of the 403(b) plan. It describes how the 403(b) plan works, what benefits the plan provides, and how the benefits are provided. A summary of material modifications (SMM) must be distributed to plan participants and beneficiaries within 210 days after the close of the plan year in which a modification or change is adopted. No particular form is required for the SMM, but it must explain the modification or change in plain language. Do you have a written plan document? When did you most recently review and update your plan document? Are you operating your plan in accordance with the written plan document and any other legally applicable documents governing your plan? Do you maintain a copy of the plan document(s) at the office of the plan administrator for review by participants and beneficiaries? Do you have a procedure for responding, within 30 days, to written requests from plan participants for information about the plan or a copy of the plan document(s)? Do you have procedures for providing plan participants with a summary plan description (SPD) and summary of material modifications (SMM) to the plan? Mutual of America provides its Exclusive and Coordinated Services 403(b) Thrift plan clients with plan document services, plan amendments as needed, SPDs and SMMs. The documents that Mutual of America provides, together with related participant disclosure materials, help employers satisfy several requirements under ERISA and the Internal Revenue Code, including ERISA Section 404(c), which provides protection to Plan fiduciaries who provide individual account plans where employees exercise investment control over their individual accounts. 2. Information Sharing Agreement (ISA) New rules apply for tax-free plan-to-plan transfers and tax-free exchanges of contracts (or custodial accounts) within a plan. Under the final regulations, transfers are only permitted from a 403(b) plan if the written plan specifically permits, and only to another 403(b) plan of the participant s current or former employer that specifically accepts such transfers and only to an issuer specifically authorized in the new plan s written document to accept such transfers. Mutual of America provides its Coordinated Services clients with a sample ISA for completion and inclusion with their plan document. If there are other authorized providers under the plan, they are specifically identified in the SPD prepared by Mutual of America. 3. Universal Availability The final 403(b) regulations issued jointly by the Treasury Department and the IRS in 2007 clarify the longstanding IRC requirement that all employees must be permitted to make elective deferrals (salary reduction contributions) to their employer s 403(b) plan and modify previous guidance that permitted certain classes of employees to be excluded from eligibility to make elective deferrals. Under the new regulations, the plan sponsor must provide an annual notice to eligible employees and participants of their right to contribute or change their contribution amount. -5-