Memorandum To: The SPARK Institute Board of Directors, GRC and Various Task Forces From: Larry H. Goldbrum Date: April 8, 2011 Re: Anticipated Practices for 408(b)(2) Disclosures - Survey Results We recently surveyed our membership regarding their plans for complying with the DOL 408(b)(2) fee disclosure regulations. Set forth below is a summary of the results. The qualitative responses are reported verbatim. Twenty one companies responded to the survey, which was fielded between March 8 and March 25, 2011. The results are shown in the same order as the questions appeared. 1 1. Please identify your organization type. 24% -- Bundled service provider (other). Please explain: Bundled provider with both mutual funds and insurance products available. Third Party Administrator supporting a variety of service models. Mutual fund and/or insurance product. Brokerage and record keeping. Trust and custody, record keeping and mutual fund. 19% -- Bundled service provider (mutual fund with record keeping) 19% -- Bundled service provider (insurance product with record keeping) 14% -- Other. Please explain: Mutual fund, insurance product and record keeping provider. Mutual fund provider mostly DCIO, plus small population of small plans with limited record keeping. We operate as a bundled provider with insurance product and record keeping, as DCIO and as a record keeper. 10% -- DCIO 10% -- Record keeper 5% -- Bundled service provider (bank investment product with record keeping) 1 Some results may not add to 100% due to rounding.
2. What format do you expect to use to satisfy the 408(b)(2) disclosure requirements? 10% -- A single report that includes all required disclosures 5% -- A roadmap to multiple other documents 71% -- A combination of a report that includes some information, with cross references to other documents 0% -- None of the above 10% -- Undecided 5% -- Other. Please explain: All fee disclosure will be in one document, but other documents will be referenced for services provided and fiduciary status. 3. To what extent do you expect to deliver 408(b)(2) disclosures through electronic means? 52% -- As the primary means for making disclosures, both the initial 2011 disclosure (to existing customers) and ongoing 38% -- Not as the primary means of disclosure for the initial 2011 disclosure, but we expect to implement it later (e.g., for new customers after the initial effective date) Mailing and posting to website. 0% -- Not as the primary means for making disclosures; we expect to rely on paper delivery 4. If the option exists to express compensation as a formula or percentage, do you intend to also provide an estimated dollar amount? 48% -- No 19% -- Yes 19% -- Undecided 14% -- Other. Please explain: We expect to refer them to a customer service representative for an explanation. Most sources of compensation will rely on a formula or percentage. Combination of percentages, rates in dollars and estimated total dollar amounts depending on the data point. 0% -- Not applicable 2
5. Does your firm plan to disclose the direct compensation it expects to receive in the aggregate (e.g., "Direct Compensation to service provider x was 1.00 % of assets") or by service (e.g., Recordkeeping compensation paid by plan to service provider x was 0.50% of assets, Investment Management compensation paid by plan to service provider x was 0.50% of assets)? 33% -- By service 29% -- Undecided 19% -- In the aggregate 19% -- Other. Please explain: To the extent we have a distinct fee, we will disclose it Both in the aggregate and by service. Primarily investment management services. By service for explicitly charged administration fees. 0% -- Not applicable 6. To what extent do you expect to disclose compensation for plan record keeping services in the form of an aggregate bundled fee? (20 Responses - one respondent does not record keep) 60% -- Some record keeping services will be included in the bundled fee while others will be itemized 25% -- All record keeping services will be presented with one bundled fee 15% -- All services and related fees will be itemized 6.1 If you said that some record keeping services will be itemized in question 6, please identify the record keeping services that you intend to itemize? Only services that carry an explicit fee under current pricing structures will be itemized. Itemized entries will vary by client. To the extent an explicit fee is charged for the following services we will use itemization: plan administration; trustee services; compliance services; loan origination; start-up/conversion; termination of contract; employee meetings; advice. Distribution fees will be broken out separately. Set-up/conversion fee; trustee/custodial fee; plan amendments; letter of determination filings; plan merger; self-directed brokerage; administration of illiquid assets; maintaining beneficiary information; corrections/nonautomated activity; annual notice mailings; overnight check processing, etc. Distribution fees (loans, hardships). Plan administration. Out of scope and product services. Services outside the bundle, such as compliance testing, individual participant transaction-based fees, participant education and advice services. Record keeping services provided by subcontractors who work with plan but have fees embedded in asset charge. 3
7. If your firm is a bundled service provider that does not charge an explicit fee for record keeping services, how do you intend to calculate an estimate of the cost to the plan of the record keeping services? Our estimate of the cost is all compensation to the record keeper. We have attributed a portion of the investment expense ratio to offset the record keeping costs. We will be utilizing a formula used in our base pricing. The estimates are based on the pricing structure of the plan. Our firm has an explicit fee for record keeping. Fees not related to trust or custody and/or fund management will be categorized as fees for record keeping services and record keeping services will be defined broadly to include all services described in the final regulation as well as services not specifically included in the final regulation, including, but not limited to: compliance, government reporting, participant communication and education, etc.. Record keeping will be broadly defined to include all services described in the final regulations as well as services not specifically included in the regulation such as compliance, government reporting, participant communication and education. 8. How do you plan to disclose float compensation? 48% -- No dollar estimate; we will rely on existing written float policy to provide a formula 24% -- Not applicable 14% -- Undecided Will provide actual on an ongoing basis. No dollar estimate; will rely on existing float policy and disclosure amounts pursuant to DOL FAB 2002-3. 5% -- Dollar estimate at the plan level 0% -- Dollar estimate at the investment fund level 0% -- Dollar estimate at the "book" level 9. How do you expect to disclose non-monetary gift and entertainment compensation? 57% -- Do not expect to receive non-monetary gift & entertainment compensation 19% -- Undecided 10% -- No estimate of gift and entertainment compensation will be provided Collected at overall level then a methodology is used to allocate to plans. N/A. 5% -- At the "book" level 0% -- At the plan level 0% -- At the investment fund level 4
10. How do you expect to report changes/updates to previously provided compensation disclosures? 43% -- Undecided 19% -- Provide report(s) listing only the item(s) changed 19% -- Provide updated, full report upon a change to any item(s), flagging the item(s) changed 14% -- Provide updated, full report upon a change to any item(s) without flagging the item(s) changed 5% -- Other. Please explain: Initially, we intend to provide a file report then migrate to a report listing only items changed. 11. How do you intend to disclose changes to investment related compensation? 48% -- Undecided 19% -- Provide updates only as changes are made 19% -- Provide updates automatically every 30 days Initially, we intend to provide a file report then migrate to a report listing only items changed. Existing disclosure process to continue in addition to summary document to be updated automatically every 30 days. 5% -- Provide updates automatically at a time frame other than 30 days. Please specify time frame: 60 days 12. How do you intend to deliver updates referenced in Question 11? 38% -- Via web, with email alert 38% -- Undecided 10% -- Via email Via regular mail in addition to posting to website. Email and regular mail for designated investment alternatives. Via web, with email alert for brokerage. 5% -- Via web, without email alert Thank you to the companies that responded to the survey. If you have questions about this information, please feel free to contact me. 5