Your SlideShare is downloading. ×
The Impact of IRS Regulation 408(b)(2) & Your 401(k)
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

The Impact of IRS Regulation 408(b)(2) & Your 401(k)

1,576

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,576
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
33
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide
  • Investment expense is a common fee that is often excluded
  • Because rates are averaged over two years, it will take a couple of years for costs to decline Plans will likely see high requirements drop quickly to zero within a few years of rates increasing
  • Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial Consulting Learn more at www.nyhart.com
  • Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial Consulting Learn more at www.nyhart.com
  • Transcript

    • 1.
      • The Impact of 408(b)(2)
      • & Your Company’s Defined Contribution Plan
      www.nyhart.com Presented by Eric Roberts, RIA Copyright 2011. All Rights Reserved.
    • 2. Eric Roberts
      • Fiduciary Consultant
      • eric.roberts@nyhart.com | (317) 845-3511
      • Qualifications or certifications: Accredited Retirement Plan Consultant through The Society of Professional Asset-Managers and Recordkeepers and Series 63 and 65 designations..
      •  
      •  
    • 3.
      • How did we get to 408(b)(2)?
      • What is 408(b)(2)?
      • Review an example of how 408(b)(2) creates transparency in costs of a ‘free’ 401(k)
      • Demonstrate how 408(b)(2) unveils how a vendor can reduce plan costs and create income
      • Show impact on plan participants
      • Outline an action plan
    • 4. How did we get to 408(b)(2)?
    • 5.
      • Hidden payments (a.k.a. indirect compensation) to a plan’s service provider might include 12b-1 and Sub-TA fees paid from the plan’s investment funds.
      • A plan sponsor’s lack of knowledge that such hidden payments exist can give a false impression that they’re receiving “free” administrative services.
      Hidden Fees and Conflicts of Interest
    • 6.
      • This lack of understanding creates a potential conflict of interest for the administrative provider.
      • Service providers who steer plan clients to arrangements with the highest level of indirect compensation presumably are able to receive fees in excess of what plan clients would otherwise agree to if they knew the true cost of services.
      Hidden Fees and Conflicts of Interest
    • 7.
      • Without full disclosure of the indirect compensation paid to the plan’s service providers, the plan and its participants might end up paying fees that are unreasonable, resulting in a breach of its fiduciary duties under ERISA.
      Hidden Fees and Conflicts of Interest
    • 8. The Fee Transparency Timeline Form 5500 Effective 1/1/09 408(b)(2) Interim Final 7/10/10 404(a)(5) Final Reg 10/20/10 408(b)(2) Takes Affect 4/1/12 404(a)(5) Takes Affect 6/1/12 ERISA §408(b)(2) is designed to increase fee transparency
    • 9. What is Regulation 408(b)(2)?
    • 10.
      • Amends a prohibited transaction rule under ERISA and the Internal Revenue Code. That rule says that it is a prohibited transaction for a plan to enter into an arrangement with a service provider unless the “arrangement” is reasonable and the compensation being received by the service provider is reasonable.
      • The regulation adds disclosure requirements for the service provider so that plan fiduciaries can determine whether a service provider arrangement is reasonable.
      ERISA § 408(b)(2)
    • 11.
      • Defined Contribution (i.e. 401(k), ERISA 403(b)) and Defined Benefit Pension plans. Excluded from this definition:
      • IRAs
      • Simplified employee pensions, and
      • Simple retirement accounts.
      Covered Plans
    • 12. Let’s Run An Analysis for the Broker-Dealer “Free” Plan
    • 13. SITUATION ANALYSIS
      • COMPANY: XYZ & Son Manufacturing, Inc.
      • LOCATION: Indianapolis, IN
      • EMPLOYEES: 234
      • Plan Assumptions
      • 401(k) with $10 million in assets
      • 200 participants with account balances
      • Company has one location
      • Services Needed
      • Administration
      • Recordkeeping
      • Investment Related
      • Employee Communication / Education
    • 14. SITUATION ANALYSIS Current Plan’s Fee Schedule of Services COMPANY: XYZ & Son Manufacturing, Inc. Annual Administration: No Charge Annual Recordkeeping Per Participant: No Charge Broker Fee: Paid from 12b-1 Fee Mutual Fund Expense: See schedule
    • 15. SITUATION ANALYSIS Current Plan – Example Fund From Portfolio American Balanced Fund (% as of 6/30/11) Cash: 8.60% U.S. Stocks: 57.90% Non-U.S. Stocks: 6.40% Bonds: 27.00% Other: 0.10% 100.00%
    • 16. SITUATION ANALYSIS Current Plan – Share Class Selected American Balanced Fund Share Class / Target Ticker Expense Ratio R-1 RLBAX 1.40% R-2 RLBBX 1.40% R-3 RLBCX 0.94% R-4 RLBEX 0.65% R-5 RLBFX 0.35% R-6 RLBGX 0.30%
    • 17. SITUATION ANALYSIS What are the fees and expenses hidden inside the fund and in this particular share class?
    • 18. SITUATION ANALYSIS Current Plan – Share Class Selected American Balanced Fund Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
    • 19. SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Plan Costs under Broker-Dealer Scenario Costs % of Plan Assets Administration & Recordkeeping $0 0.00% Investment $94,000 0.94% Total $94,000 0.94%
    • 20. SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
    • 21. SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $94,000 or $470 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
    • 22. SITUATION ANALYSIS The Broker-Dealer has NO FIDUCIARY LIABILITY OR RESPONSIBILITY .
    • 23. Let’s Run An Analysis When An Registered Investment Adviser (As A Fiduciary)
    • 24. SITUATION ANALYSIS RIA’s Fee Schedule of Services COMPANY: XYZ & Son Manufacturing, Inc. Annual Administration: $3,000 Annual Recordkeeping Per Participant: $50/per RIA Flat Fee: $25,000 Mutual Fund Expense: See schedule
    • 25. SITUATION ANALYSIS RIA Plan– Proper Share Class Selected American Balanced Fund Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
    • 26. SITUATION ANALYSIS RIA Plan– Proper Share Class Selected American Balanced Fund Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
    • 27. SITUATION ANALYSIS Current Plan – Share Class Selected American Balanced Fund No Hidden Fees Plus Lower Costs for Shares. Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
    • 28. SITUATION ANALYSIS Let’s View the Overall Fees with the RIA American Balanced Fund Plan Costs under RIA Scenario Costs % of Plan Assets Administration $3,000 0.03% Recordkeeping ($50 x 200) $10,000 Recapture Fee used to offset Recordkeeping ($10,000) 0.00% RIA Fee $25,000 Recapture Fee used to offset RIA Fee ($25,000) Investment $65,000 0.65% Total $68,000 0.68%
    • 29. SITUATION ANALYSIS Let’s View the Overall Fees with the RIA American Balanced Fund Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-4 RLBEX $65,000.00 $24,000.00 $25,000.00 $10,000.00
    • 30. SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $68,000 or $340 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
    • 31. What difference does this make for me and my participants?
    • 32. Let’s Take An Average Employee
      • $40,000 Salary at Age 28
      • Initial 401(k) Balance at Age 28: $10,000
      • Annual Pay Growth: 2.5%
      • Deferral Rate: 6%
      • Employer Match: 3%
      • Deferrals made Bi-Monthly
    • 33. How fees impact overall retirement earnings for a participant.
    • 34. How fees impact overall retirement earnings for a participant Lost Retirement Savings: $50,750 or 7.81%
    • 35. Steps You Can Take Now Before 408(b)(2) Takes Affect
      • Identify who your “responsible plan fiduciary” is – that person in your organization who has the authority to enter into, or extend or renew, a contract or arrangement with a service provider
      • Identify who your “covered service providers” are
      • Know all fees – request an ‘all-in’ fee disclosure from your current vendor
      • Get an independent audit of your current fees
      • Get a benchmarking of your total fees against industry standards
      • If in RFP mode this fall, rewrite your RFP to meet upcoming 408(b)(2) Transparency Requirements
    • 36. ANY QUESTIONS?
      • This concludes our discussion
    • 37. Eric Roberts
      • Fiduciary Consultant
      • eric.roberts@nyhart.com | (317) 845-3511
      • Qualifications or certifications: Accredited Retirement Plan Consultant through The Society of Professional Asset-Managers and Recordkeepers and Series 63 and 65 designations..
      •  
      •  
    • 38. So Where is the Peak?
      • Register for upcoming educational events on pensions, 401(k), healthcare and other actuarial and employee benefits topics at:
      • www.nyhart.com/events/
      Looking for more benefit presentations?
    • 39.
      • ACTUARY &EMPLOYEE BENEFITS
      16 Actuaries Consulting In 48 States . Nyhart is one of the nation’s largest independent actuarial and employee benefit firms, consulting to and administering the plans for clients with more than $14 billion in assets. Our team of benefit advisers deliver personalized analysis and recommendations, translating complex calculations and issues into common language that enables corporations, associations, churches and governments to effectively manage their retirement and health care benefits.
    • 40.
      • ACTUARY &EMPLOYEE BENEFITS
      • Established in 1943, Nyhart is an ESOP with 84 employees and offices in Indianapolis, Chicago, Atlanta and Kansas City.
      • Areas of Expertise Include:
      • Cash Balance Plan
      • Defined Benefit & Pension
      • Defined Contribution & 401(k)
      • Employee Stock Ownership Plan
      • Flexible Spending, HRA & HSA
      • Healthcare Actuarial Consulting
      • Learn more at www.nyhart.com
    • 41.  

    ×