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

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1 October 17, 2013 Current ERISA Developments: What They Mean to Your Clients and You Daniel A. Notto Senior Vice President and Senior Retirement Plan Counsel

2 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? 1

3 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 Plaintiffs lawyers are ready, willing and able to take plan sponsors and service providers to task 2

4 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 3

5 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 I have identified your plan as a potential high-cost plan. 4

6 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 A Revenue sharing and ERISA budgets Multiple employer plans (MEPs) A cost effective solution for small employers? 5

7 DOL Advisory Opinion A 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 Potential prohibited transaction issues 6

8 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 DOL Advisory Opinion For A plan sponsor, financial advisor or pension consultant use only. Not for inspection by, distribution or quotation to, the general public. 7

9 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 Consider share classes with lower revenue sharing rates * Field Assistance Bulletin

10 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 9

11 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 SAFE Retirement Act Senator Hatch (R-Utah) Retirement Plan Simplification and Enhancement Act Representative Neal (D-Massachusetts) 10

12 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)) 11

13 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 and theft 12

14 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 13

15 Important Disclosure Information The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor's personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of, any financial instrument, product or service sponsored by AllianceBernstein or its affiliates. 14