Capstone Financial 408(b)(2) disclosures and agreements

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  • 1. CAPSTONE FINANCIAL 401K RULES AND REGULATION408(b)(2) Disclosures and Agreements David J. Melilli President 856-248-0645
  • 2. OVERVIEWThe purpose of this presentation is to identify the main issues forplan sponsors and provide an overview of the fiduciaryresponsibilities involved with company sponsored retirementplans. The obligation to review information provided by serviceproviders falls on the fiduciary, business owner or plan sponsor;this individual has the power to engage the service provider, whois referred to in the 408(b)(2) regulation as the “responsible planfiduciary.”We will review the rules and regulation changes and how theywill effect business owners.
  • 3. ERISA §408(B)(2)April 1, 2012, is a significant date for plan sponsors andtheir plan committees. By that date, they will have receivedand will need to begin evaluating information from theirplan’s service providers. The information being disclosedwill detail all fees and expenses, as well as any conflicts ofinterest within the plan. The regulation 408(b)(2) requiresplan service providers to make disclosures about theirservices, compensation and fiduciary status – to theirclients and participants by April 1 of next year. As a result,starting next spring, plan sponsors will face heightenedexpectations and legal responsibilities.
  • 4. FIDUCIARIES OF RETIREMENT PLANSFiduciaries of retirement plans are nowgoing to be held accountable for theevaluation of expenses paid by their plansparticipants for services and investments. Infact, it is both a fiduciary breach and aprohibited transaction to have a plan in placethat is currently paying more than what isconsidered reasonable expenses. Many plan sponsors are not aware that they must also evaluate the reasonableness of the compensation of their plans’ service providers.
  • 5. POTENTIAL LIABILITY FOR BUSINESS OWNERS Plan Structure Plan Administrative Costs Investment Costs  Total Expense Ratios on plan investments  12b-1 Fees  Sales Commissions  Advisory Fee  Investment Firm Fee  Revenue Sharing with Administrative Providers  Direct & Indirect Service Fees
  • 6. NEW DOL REGULATIONThe 408(b)(2) regulation requires your plan’s serviceproviders to disclose information about their services,status and compensation. Major changes will be seenon monthly statements being sent to all participants,they will now see a detailed breakdown of allinvestment & transaction fees as well as planadministrative fees; the breakdown will give an exactamount being paid by every participant each month.All fees will be disclosed on participants monthly statement.
  • 7. FEE DISCLOSURECompensation is divided into three categories: direct, indirect, relatedparties. All of the following fees will be required and printed on eachparticipant statement.Direct compensation: This category covers any payments made directlyfrom the plan or trust. As an example, if a service provider sends you aninvoice and it is paid through plan assets, that is considered directcompensation.Indirect compensation: This category covers any payments being madefrom any source other than directly from the plan or the plan sponsor.Compensation among related parties: Commissions or incentivecompensation based on business placed or retained with your plan andits services. In addition, 12b-1 (marketing expense on mutual funds)fees that might be paid to a recordkeeper or broker-dealer.
  • 8. RECORDKEEPER DISCLOSURESRecordkeeper disclosures: Your recordkeeper will need to makeadditional disclosures in regards to compensation from service providers.The recordkeeper, or bundled providers that include recordkeepingservices, will need to: Describe all direct and indirect compensation it receives; and If its compensation is offset or rebated, or otherwise adjusted, for any compensation it, or its affiliates or subcontractors, receives, the recordkeeper will need to provide you with a reasonable estimate of what it would charge your plan without those factors being considered.
  • 9. PLAN INVESTMENT FEES Transaction compensation: Fees that are charged against the investments for, e.g., commissions, redemption fees, surrender charges. Operating expenses: Charges against the investments for their ongoing operation. e.g., expense ratios. Other ongoing expenses: Items such as wrap fees, mortality and expense fees. Financial Advisory Fees Investment Company Fees
  • 10. PLAN SPONSOR RESPONSIBILITIES Review and Evaluate Each disclosure Is compensation reasonable for the services being received? Are the services appropriate for the plan? Are additional services required? Are they meeting the needs of the plan sponsors and participants? Has the plan sponsor done adequate due diligence on the plan service providers and investment choices?
  • 11. FAILURE TO MAKE PLAN CORRECTIONS Taxes and Penalties Suspension of the retirement plan Employee initiated litigation due to:  Investment loss  Excessive Fees  Lack of resources to make educated investment decisions  Unreasonable administrative fees/newly disclosed fees
  • 12. WHAT SHOULD A PLAN SPONSOR DO? Do a comprehensive plan review prior to April 2012. Ascertain all expense information currently being paid on the plan. Review the suitability of the plan structure for all participants. Review investments choices and fees, determine if they are appropriate. Review all service providers and their fees, determine if they are appropriate. Evaluate financial advisor’s performance
  • 13. MAKING CHANGES Fee based platform Fee based financial advisor Fee based service providers Low cost investments & Exchange Traded Funds No transaction fees Monthly Financial Advisory visits with participants Participant friendly technology