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ERISA Retirement Service Providers November 2012

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  • 1. ERISA Newsletterfor Retirement PlanService ProvidersNovember 2012 Dear Reader: Focused 401(k) advisers and service providers will benefit from those changes, but only if they are This is a newsletter for service providers to ERISA- constantly attentive and are willing to embrace governed retirement plans. The newsletter focuses on new ways of serving plans and new demands on the legal issues that impact investment advisers, broker- their time and expertise. This newsletter is written dealers, recordkeepers, third party administrators and to help those advisers and service providers. bank and trust companies. However, it may also be interesting reading for plan sponsors and committee Fred Reish members because of the need—particularly with the Chair, Financial Services ERISA Team new disclosure rules—to understand the services, (310) 203-4047 status and compensation of their service providers. Fred.Reish@dbr.com For example, now that “covered” service providers have made their 408(b)(2) disclosures, plan sponsors must, In This Issue under both the fiduciary responsibility and prohibited transaction rules, review and evaluate those disclosures. Page The failure to do so could result in personal liability for 2 DOL Advances (and Then Retreats) on plan committee members. However, many plan sponsors Brokerage Windows—What May be Next? do not have the expertise and industry knowledge that 4 408(b)(2) Disclosures—Now What? is needed to do that job. As a result, service providers 5 A Ripe Opportunity for Advisers—The Benefits will need to help their plan sponsor clients do that job. of a Service Provider Agreement When viewed from a service provider perspective, 6 The DOL is Paying Attention to that Additional we know that these changes will impact the 401(k) Compensation—You Should Too industry. Compensation will be more closely scrutinized. 7 DOL Service Provider Investigations The value of services—and how to measure that 8 Next Steps for Service Providers to “Open” value—is being highlighted as an issue. While the Multiple Employer Plans outcomes are not yet known, it seems clear that there will be change, change and more change. 10 Around the Firm Financial Services ERISA Team www.drinkerbiddle.com 1
  • 2. Financial Services ERISA | November 2012 they argued it was too close to final implementation to Now that service providers to ERISA-governed make such a change, that the practical issues of tracking retirement plans have provided written disclosures the investments could not be readily resolved, that the about their services, fiduciary status and compensation policy itself was an unreasonable interpretation of to the “responsible plan fiduciary” for all their existing fiduciary duty, and that DOL lacked the authority to plan clients, the focus shifts to plan sponsors. make such a change in a mere guidance document. That’s why Drinker Biddle attorneys recently offered a complimentary webcast focused directly on the 408(b) While the outcry resulted in DOL retreating from its (2) issues facing plan sponsors, including: guidance, its revised and reissued Q&A made it clear Next steps plan sponsors must take the retreat was temporary, and that DOL still has Appropriate procedures in cases where disclosures serious concerns about certain usages of brokerage- were not furnished windows by plans. The revision may have served the Issues from the policy perspective of the short-term needs of the regulated community (as it government. resulted in no change to the disclosures due only a few To hear a recording of the webinar and view the weeks later), but it is not the end of the story. Plans presentation, visit www.drinkerbiddle.com/Register/ and service providers should take a moment to try plan-committees. to understand why DOL pursued this policy change in the first place, and what they might try next. The Original Brokerage Window Q&A:DOL Advances DOL’s Q&A 30 in Field Assistance Bulletin (FAB)(and Then Retreats) 2012-02 came as a surprise to most outside observers, because the brokerage window issue generallyon Brokerage was viewed as settled. The regulation states that brokerage windows are not DIAs, and the historyWindows—What of the regulation prior to the FAB suggested that disclosure obligations regarding brokerage windowsMay Be Next? were limited to the window itself—disclosing transaction fees, explaining how to use the window, etc.—not to investments made through the window. Q&A 30 conceded that a brokerage window By Bradford P. Campbell is not a Designated Investment Alternative, (202) 230-5159 but offered an analysis that fiduciary duty Bradford.Campbell@dbr.com requires looking “through” the window: “If, through a brokerage window or similar arrangement, non-designated investment alternativesDOL caused quite a stir this summer when it published available under a plan are selected by significantguidance addressing the participant disclosure numbers of participants and beneficiaries, anrequirements of the new 404a-5 regulation. In a Q&A affirmative obligation arises on the part of thecontroversial enough to result in letters of opposition plan fiduciary to examine these alternatives andfrom Congressional Democrats to White House officials determine whether [they] should be treated asand to unite the trade associations representing plan designated for the purposes of the regulation.”sponsors and service providers, DOL wrote that planadministrators would, under certain circumstances, Taking this concept a step further, DOL then articulatedhave to treat participant investments made through a new “enforcement policy”—it would refrain frombrokerage windows or self-directed brokerage accounts requiring every investment to be a to be a DIA if aas if they were Designated Investment Alternatives plan with a platform of more than 25 undesignated(DIAs) in order to comply with their fiduciary duty. investment alternatives did two things. First, the planCritics attacked the policy change on several grounds: would have to designate at least three investments (that Financial Services ERISA Team www.drinkerbiddle.com 2
  • 3. Financial Services ERISA | November 2012collectively met the 404(c) requirements for a “broad was motivated by DOL’s concerns that some plansrange” of investments) as DIAs. Second, it would have would adopt a brokerage window-only design in whichto treat as DIAs any investments at least five participants there are no DIAs in order to avoid disclosure.(or 1% of participants in a plan with more than 500participants) individually selected on the platform as of a This theory is bolstered by a provision in thedate within 90 days before the annual disclosure deadline. revised Q&A 39 in which DOL wrote:The few paragraphs of the guidance led to considerable “…in the case of a 401(k) or other individual accountdebate. In addition to the arguments about timing (too plan covered under the regulation, a plan fiduciary’snear the deadline), process (the policy has to be made failure to designate investment alternatives, for example,in a notice and comment rulemaking to be valid) and to avoid investment disclosures under the regulation, raisespracticality (systems are not set up to track investments questions under [ERISA’s] general statutory fiduciarythis way), some argued that the guidance was not clear duties of prudence and loyalty.” [emphasis added]because the terminology alternated between “platform”and “brokerage window,” making it hard to know This provision in the Q&A may serve as the roadmapwhether the enforcement policy applied to one or both. for those future conversations with interested parties. Even though the Q&A notes that the regulation requires no designation of a DIA, DOL seems to be saying thatThe Revised Brokerage Window Q&A: general fiduciary duty may, “including” when the goal is to avoid disclosure. Plan sponsors and service providersBowing to the regulated community’s concerns (and should take note that DOL used the word “including”…the bipartisan political pressure brought to bear) DOL and that “including” does not mean “limited to.”withdrew FAB 2012-02 and Q&A 30, replacing itwith a revised FAB 2012-02R and a new Q&A 39. What Comes Next and WhoIn the revised Q&A 39, DOL began by conceding (1) Is It Likely to Affect?the regulation states that a brokerage window is not aDIA, (2) nothing in the regulation requires a plan to Of course, as with any policy question, what DOLhave a particular number of DIAs, and (3) nothing might do next likely depends significantly on thein the FAB prohibits a plan from using a brokerage outcome of the Presidential election. If there is awindow or similar arrangement. DOL also noted that change in the Administration, it is likely that thisthe FAB does not change the requirements of the 404(c) issue is either eliminated or significantly slowed.regulation, and it does not address the application ofERISA’s fiduciary requirements to SEPS or SIMPLE Assuming there is a second term for the ObamaIRA plans. Finally, DOL reiterated that the general Administration, DOL is likely to pursue this issue,fiduciary duties of prudence and loyalty apply to particularly focusing on plans that offer only brokeragebrokerage accounts, “including taking into account the windows. The guidance suggests that DOL may arguenature and quality of services provided in connection such brokerage window-only plans are per se imprudentwith the platform or the brokerage window...” because they do not give participants sufficient information to exercise their rights and responsibilities.On balance, this meant a short-term victory for If so, this issue will likely be controversial again.critics, as DOL was requiring no changes to currentdisclosures. However, DOL also clearly stated its Our attorneys will continue to monitor DOL’sintention to revisit the fiduciary issues associated with activities in this area, working with our clients tothe use of brokerage windows, intending to “engage help ensure their plans are not caught by surprise.in discussions with interested parties” that mightlead to regulatory amendments “if appropriate.” Bradford P. Campbell advises financial service providers and plan sponsors on ERISA Title I issues, including fiduciary conduct andIt is not entirely clear why DOL appears suddenly to prohibited transactions. ERISA’s former “top cop” and primaryhave concerns that brokerage windows might create regulator, he served as the U.S. Assistant Secretary of Labor forspecial fiduciary issues—prior to the FAB, the issue Employee Benefits, head of the Employee Benefits Security Admin-did not arise in the nearly three years of notice and istration. Mr. Campbell was listed as one of the 100 Most Influ-comment rulemaking leading to the final regulation. ential Persons in Defined Contribution by 401kWire in 2011.Some observers theorize that the original guidance Financial Services ERISA Team www.drinkerbiddle.com 3
  • 4. Financial Services ERISA | November 2012408(b)(2) Technically, plan sponsors are not required to know if all of the disclosures were made by a coveredDisclosures— service provider. Interestingly, though, plan sponsors are expected to compare the disclosures againstNow What? the provisions of the regulation and identify any inadequacies that would be apparent from that comparison. In that way, the DOL reasons, the plan sponsor could have formed a “reasonable belief ” that the disclosures were adequate. But, is it realistic to By Fred Reish think that plan sponsors will compare the disclosures (310) 203-4047 against the regulation . . . or even to believe that plan Fred.Reish@dbr.com sponsors are aware of the regulation? Obviously, in many cases that will not be the case. As a result, advisers will need to help plan sponsors with that job. And, some advisory firms are doing just that; in fact, weThe first wave of 408(b)(2) disclosures was made to have prepared 408(b)(2) checklists for those firms.plan sponsors in the months before July 1 of this year.The “covered” service providers for “covered” ERISA- Once the prohibited transaction responsibility hasgoverned retirement plans were required to make those been fulfilled, plan sponsors then have an obligationdisclosures to their plan clients. (As Joan Neri explains to evaluate the disclosures. Realistically, most of thein another article in this newsletter, many advisers evaluation will be of the compensation received by thehave advantageously used their service agreements to service providers. (However, the law actually requiresmake those disclosures and to describe their services . that a comparative analysis be done, taking into account. . and, in effect, to explain their value proposition.) factors such as fiduciary status, quantity and quality of services, conflicts of interest, and so on.) Nonetheless,However, this article is not about the requirement that the focus undoubtedly will be on compensation.service providers make disclosures. Instead, it is aboutthe responsibility of plan sponsors to review those In order to evaluate compensation, it appears thatdisclosures. Unfortunately, many plan sponsors lack the marketplace data will be needed. That could be doneknowledge—both of the rules and industry practices— through requests for proposals, benchmarking services,to fulfill their fiduciary and prohibited transaction proprietary studies, and so on. Regardless of the method,responsibilities. As a result, 401(k) advisers will need to plan fiduciaries will need to compare compensationhelp plan sponsors fulfill their legal responsibilities to to marketplace data . . . and then make a decisionevaluate the disclosures. Since some advisers work with about whether the compensation of the plan’s serviceonly a few plans, the odds are that they will not have providers is reasonable. If it is not, plan sponsors willmuch more knowledge about the new requirements than need to take steps to reduce the compensation to aplan sponsors do. As a result, there is an opportunity for reasonable level, which could include terminating thefocused 401(k) advisers to expand their market share. service provider and hiring another one, re-negotiating the compensation with the service provider, and so on.The first step for plan sponsors is to review thedisclosures to make sure (i) that all of the covered Plan sponsors need help in fulfilling their prohibitedservice providers made disclosures, and (ii) that the transaction and their fiduciary responsibilities. Focuseddisclosures were adequate. If it turns out that disclosures 401(k) advisers are ideally situated to provide that help.were not made, or that they were not adequate, theregulation requires that plan sponsors send out written NOTE: This article refers to plan sponsors asrequests for the needed information. If the covered having the responsibility to evaluate the 408(b)service provider refuses to provide the information or (2) disclosures. From a legal perspective, thefails to provide it within 90 days, the plan sponsor must “responsible plan fiduciary” (RPF) receives, reviewsfire the service provider. If the plan sponsor fails to and evaluates the disclosures. Most often the RPFsend out the letter, or fails to fire the non-compliant will be the plan sponsor or a committee. As a result,service provider, the plan sponsor will have engaged in a for ease of reading I have used “plan sponsor.”prohibited transaction and will be in violation of the law. Financial Services ERISA Team www.drinkerbiddle.com 4
  • 5. Financial Services ERISA | November 2012Fred Reish is chair of the Financial Services ERISA practice The compensation element of the disclosure hasat Drinker, Biddle & Reath. Fred has been recognized as received the most attention because of the obligationone of the “Legends” of the retirement industry by both of the responsible plan fiduciary to evaluate thePLANADVISER magazine and PLANSPONSOR reasonableness of fees under ERISA’s “prudentmagazine. Fred has also received the IRS Commissioner’s man” standard. The other two elements – statusAward and the District Director’s Award; the Eidson and services – have received less attention, yetFounder’s Award by the American Society of Professionals they present a number of considerations that& Actuaries (ASPPA); the Institutional Investor and the can be addressed in a service agreement. ThisPLANSPONSOR magazine Lifetime Achievement Awards; article addresses some of those considerations.and the ASPPA/Morningstar 401(k) Leadership Award. An RIA providing investment advice for a fee isA Ripe Opportunity an ERISA fiduciary and under 408(b)(2), both the RIA status and the ERISA fiduciary status must befor Advisers— disclosed. We have found that the existing service agreements of some RIAs fail to acknowledge ERISA fiduciary status and as such, are deficientThe Benefits of a under 408(b)(2). If the disclosure is not corrected, the RIA is engaged in a prohibited transaction.Service Agreement ERISA imposes a high standard of care on ERISA fiduciaries - that of the prudent man acting in a like capacity and familiar with such matters. If the services By Joan M. Neri performed include both fiduciary services and non- (973) 549-7393 fiduciary services, then only the fiduciary services Joan.Neri@dbr.com should be subject to the ERISA standard. This can be accomplished by separately identifying those services that are non-ERISA fiduciary services and specifying that they are subject to a different standard – for instance, one that uses negligence as the standard of care.With the July 1 408(b)(2) compliance deadline an eventof the past, many advisers may be overlooking the Let’s take the example of an RIA who providesmerits of a well-drafted service agreement. The 408(b) plan-level investment advice and also provides(2) disclosure obligations are a continuing responsibility benchmarking services for compensation of servicefor both registered investment advisers (RIAs) and providers. Benchmarking services typically areregistered representatives of broker-dealers (B-D not ERISA fiduciary services. The benchmarkingrepresentatives). Current ERISA plan clients must service can be separately identified in the RIA’sbe notified when there is a change to the disclosed service agreement as a non-fiduciary service andinformation and new ERISA plan clients must receive expressly made subject to the negligence standard.the disclosure reasonably in advance of entering intothe arrangement. While 408(b)(2) does not require that Similarly, if a B-D’s registered representative providesthese disclosures be in the form of a service agreement, investment education to participants as a part of itsthe advantage of the agreement format is that it enables B-D services, such services typically are not ERISAthe RIA or B-D representative to address a number fiduciary services. In that instance, the B-D serviceof issues. Also, this is a timely consideration because agreement could include a client acknowledgementright now the responsible plan fiduciaries – such as, that the registered representative is not acting as anthe plan sponsors or plan committees – are obligated ERISA fiduciary in offering that service and is notto evaluate the disclosures to determine whether they subject to ERISA’s prudence standard. By documentingare complete and constitute reasonable plan service this distinction in the form of an agreement ratherarrangements. The considerations of a new (or updated) than a disclosure, the B-D representative will haveservice agreement can be part of that process. the benefit of a contractual protection. While a contractual provision will not “override” ERISA’sThe 408(b)(2) disclosure rules are comprised of fiduciary provisions, we have seen some FINRAthree elements – compensation, status and services. arbitrators put weight on that provision in determining Financial Services ERISA Team www.drinkerbiddle.com 5
  • 6. Financial Services ERISA | November 2012whether the “mutual understanding” portion of standards to which they are held. Specifically, I pointedthe fiduciary advice regulation was satisfied. out that fiduciaries – such as registered investment advisers (RIAs) -- who recommend investments thatThese are just a few of the many considerations generate indirect compensation in addition to theirthat can be addressed in a service agreement. A fee may trigger a prohibited transaction, by dealingwell-drafted service agreement can be used with the assets of the plan for their own benefit.by RIAs and B-Ds as a vehicle to both satisfythe 408(b)(2) disclosure requirements and also As one recent case demonstrates, this is no mereto provide risk management protections. hypothetical concern. On August 23, 2012, the Department of Labor issued a press release regardingJoan Neri is in the firm’s Financial Services ERISA the result of its recent investigation of an RIA firm. TheTeam. With more than 24 years of experience, Joan coun- press release stated that as a result of the investigation,sels clients on all aspects of ERISA compliance including the RIA agreed to pay over $1.265 Million to thirteenfiduciary responsibility and plan operational issues. A part defined benefit pension plans to whom the RIA hadof Joan’s practice includes representing registered investment provided fiduciary investment advice. According toadvisors in fulfilling their obligations under ERISA. Joan the press release, the RIA invested the plans’ assets inis a frequent speaker throughout the country on legislative and mutual funds that paid 12b-1 fees to the RIA. Theseregulatory developments impacting ERISA fiduciaries. fees were apparently not disclosed to the plan fiduciaries and did not offset or reduce the advisory fees that theThe DOL is Paying plans agreed to pay. The $1.265 Million is presumably based on the amount of 12b-1 fees received by the RIA during the six-year period covered by the investigationAttention To – 2004-2010. (Although the press release is silent on this point, it is reasonable to assume that at least someThat Additional of that $1.265 Million figure is attributable to interest on the 12b-1 fees that the RIA allegedly received.)Compensation— The DOL’s investigation in this case was no fluke.You Should Too It was carried out as part of the Employee Benefit Security Agency’s Consultant/Adviser Project (“CAP”). As stated on the EBSA website, CAP: “…focuses on the receipt of improper or undisclosed By Joseph C. Faucher compensation by employee benefit plan consultants (310) 203-4052 and other investment advisers. EBSA’s investigations Joe.Faucher@dbr.com will seek to determine whether the receipt of such compensation, even if it is disclosed, violates ERISA because the adviser/consultant used its position with a benefit plan to generate additional fees for itself orIn our last newsletter for retirement plan service its affiliates. When ERISA violations are uncovered,providers, I addressed whether service providers EBSA will seek corrective active for past violations as are obligated to offset indirect compensation they well as prospective relief to deter future violations.”receive in connection with the services they provideto their plan clients. “Indirect compensation” is Under the auspices of CAP, the EBSA takes actioncompensation received from a source other than the not only against financial advisers, but also againstplan or the plan sponsor. Common types of indirect other fiduciaries, including plan sponsors:compensation in the retirement plan world includecommissions, 12b-1 fees and sub-transfer agent fees. “EBSA may also need to investigate individualSome service providers may describe the compensation plans to address such potential violations as failuremore generically, for instance, as “marketing to adhere to investment guidelines and improperallowances,” “revenue sharing” or “subsidies.” selection or monitoring of the consultant or adviser. The CAP will also seek to identify potentialIn that article, I emphasized the difference between criminal violations, such as kickbacks or fraud.”fiduciary and non-fiduciary service providers, and the Financial Services ERISA Team www.drinkerbiddle.com 6
  • 7. Financial Services ERISA | November 2012In other words, under CAP, the DOL assessesnot only whether financial advisers received DOL Serviceunreasonable compensation, but whether plansponsors and other fiduciaries allowed plan Provider Investigations:advisers to receive that compensation in potentialviolation of their own fiduciary duties.The monetary and reputational damage to financialadvisers who are caught up in an investigation Impact Ofunder CAP can be significant. First, as shown inthis case, the amount that advisers who are found The 408(b)(2)to have received unreasonable or undisclosedcompensation can be substantial, particularly Regulationif – as is typical -- the investigation spawns aseveral year period and the adviser’s practiceswere consistent throughout that period. By Bruce L. AshtonSecond, while an adviser’s fiduciary liability insurance (310) 203-4048may cover some of the cost of the investigation, it Bruce.Ashton@dbr.comis unlikely to cover the bulk of the expense. In ourexperience, fiduciary liability insurers will pay attorney’sfees after the DOL issues a “voluntary compliance”letter to the target of the investigation, which gives the Investigations of service providers to ERISA retirementservice provider an opportunity to informally resolve plans by the U.S. Department of Labor are on thethe matter before the DOL initiates litigation. Those rise. In first half of 2012 alone, we saw close to ainsurers, however, will typically not pay for all of the dozen DOL investigations of broker-dealers andattorneys fees incurred during the period of time that were involved in handling several for our clients.the DOL is investigating and before the voluntary This increase is due in part to the DOL’s on-goingcompliance letter is issued. More importantly, while these national enforcement initiative, the Consultant/Adviserpolicies may pay some portion of the service provider’s Project (“CAP”). But we anticipate an accelerationattorney fees, they will almost certainly not pay any of service provider investigations arising out of thepart of the compensation that the service provider is disclosure requirements under Section 408(b)(2).required to refund to the affected retirement plans. The DOL traditionally investigates individualFinally, because the service provider’s clients may employee benefit plans. The investigations sometimesbe swept into the investigation, the reputational point to alleged improprieties by a service provider,damage to the service provider can be as bad, or which then leads to an investigation of all plan-worse, than the cost to resolve the matter. related activities by that service provider. CAP was established as a standalone project out of a concernIn addition to handling an active litigation practice, Joe Faucher reg- that many pension consultants were fiduciariesularly consults with third party administrators, registered investment but ignored or were not aware of their obligationsadvisers and insurance carriers on ERISA and employee benefit and were receiving improper compensation.matters and fiduciary liability insurance and ERISA bond issues. The 408(b)(2) regulation clearly ties into this concern, at least indirectly. Under the regulation, service providers are required to disclose their services, fiduciary status, and compensation, both direct and indirect. Failure to do so results in a prohibited transaction, which subjects the service provider to penalties and possible disgorgement of compensation. While the purpose of the disclosures is to enable plan fiduciaries to determine whether the service arrangement and compensation are reasonable, the disclosures Financial Services ERISA Team www.drinkerbiddle.com 7
  • 8. Financial Services ERISA | November 2012themselves – or the lack of disclosures – can provide Within the last several weeks, we submitted aa roadmap for investigative activity by the DOL. proposal to the DOL for a voluntary correction program for inadvertent violations of the 408(b)The compliance date of the 408(b)(2) regulation was (2) disclosure rules. If adopted, this would protectJuly 1 of this year. Typically, DOL investigations are service providers from adverse prohibited transactionkeyed off the filing of the Form 5500, and start about consequences and potentially from an investigation. Aa year later. Following this pattern, in the usual course copy of our proposal can be obtained at [insert url].of things, investigations that focus on the 408(b) Regardless of whether such a program is adopted,(2) disclosures would start in 2014. But these are not service providers are well-advised to perform atypical times. The DOL has already begun asking for self-audit to determine if there are areas of non-the 408(b)(2) disclosures in plan investigations, even compliance and take steps to correct them now.though the year under investigation may be 2009 or2010, long before the disclosures were required. The Bruce Ashton is in the firm’s Financial Services ERISAregional offices are also engaged in training of their and Retirement Income Teams. Bruce’s practice focuses on allinvestigators on the disclosure rules. Though we aspects of employee benefits issues, especially representing planhave not heard of any service provider investigations service providers (including RIAs, independent record-keepers,arising out of the review of 408(b)(2) disclosures, third party administrators, broker-dealers and insurancewe expect they will not be long in coming. companies) in fulfilling their obligations under ERISA and in assisting service providers and plan sponsors in addressingWhat should service providers anticipate? In a typical the retirement income needs of participants. He is a well-CAP investigation, the DOL asks for (among other known speaker and author on employee benefits topics.things) a listing of the service provider’s benefit Next Steps forplan clients, copies of service agreements, anddocuments related to the provision of investment Service Providersadvice, who gave the advice, and the compensationreceived. When 408(b)(2) is thrown into the mix, weexpect the DOL will ask for copies of the disclosureson a plan-by-plan (rather than generic) basis andpotentially the backup documentation that supports to “Open” Multiplethe statements regarding their status and indirectcompensation. Service providers unable to provide this Employer Plansinformation will face prohibited transaction penaltiesand potentially a more in depth inquiry into fiduciarystatus and potential breaches of fiduciary duty. By Joshua J. Waldbeser (312) 569-1317To prepare for this rise in investigation activity, service Joshua.Waldbeser@dbr.comproviders will need to make sure they understand therequirements of the 408(b)(2) disclosure rule andhow they apply – or do not apply – to the serviceprovider. They need to be able to document whetherthey have provided complete, accurate, plan specific On May 25, 2012, the Department of Labor (“DOL”)disclosures and should be able to document all sources issued Advisory Opinion 2012-04A (the “Advisoryof compensation. And service providers should not Opinion”), which held that “open” multiple employerbe surprised if they receive an inquiry from the DOL plans (“Open MEPs”)1 do not constitute single plansasking for any or all of these materials. The DOL for purposes of ERISA. Adapting to the DOL’smay take request documents as a first step – rather position will require Open MEP service providers tothan starting a full-blown investigation -- to sort out make a few changes for these ERISA requirements.the clearly compliant from the questionable or non- Open MEPs will continue to be treated as MEPscompliant providers. Service providers who receive 1 Open MEPs refer to MEPs that are available to anysuch an inquiry should respond promptly and fully employer who wishes to participate, regardless of whether the employers have any pre-existing relationship, such as commonin consultation with an experienced consultant. membership in a trade group or similar organization that sponsors the plan. Financial Services ERISA Team www.drinkerbiddle.com 8
  • 9. Financial Services ERISA | November 2012(i.e., single plans) under the Internal Revenue Code purposes, the vendor can continue to act as the Plan(“Code”). No changes to Open MEPs are required Administrator and Named Fiduciary. Thus, it isunder the Code because the Advisory Opinion possible that no adjustments will be required (or theydoes not affect plan qualification requirements. may be very minor), but this should be confirmed.In short, Open MEPs will be treated as a group of single If the services or compensation of a “covered serviceemployer plans only for ERISA purposes. Accordingly, provider” under ERISA Section 408(b)(2) changeOpen MEPs will still look and feel very much like MEPs. because the Open MEP is treated as multiple plans underThis article summarizes those few ERISA changes that ERISA, such changes must be disclosed. This mustwill apply and how they affect Open MEP providers. occur as soon as practicable, and in no case later than 60 days after the provider learns of the change, unlessAnnual Reporting. First, each participating employer’s precluded by extraordinary events outside of its control.portion of the Open MEP will have to file its ownannual Form 5500, since it will be treated as a separate Similarly, participant-directed (e.g., 401(k))“plan” for ERISA purposes. This is an additional cost. Open MEPs may continue to use standardizedAlso, any such “plan” that has 100 or more participants forms for providing participant disclosures, butwill need to have its own annual accountant’s audit and some minor changes may be necessary.file its own Schedule C. Many participating employerswill have less than 100 covered employees, so audits Funding Vehicles. No changes to an Open MEP’sand Schedules C will not be required for them. funding vehicle are required. Even though the Open MEP will be treated as multiple plans for ERISAProviders should take these competing factors into purposes, ERISA permits the use of group trusts andaccount in determining the effect on costs for their other collective funding arrangements that are DFEs.employer-clients. Economies of scale may be achieved Likewise, an Open MEP can continue to be a singleby utilizing a group trust that is treated as a direct plan under the Code, which requires that all plan assetsfiling entity (a “DFE”) for reporting purposes. must be available to satisfy all benefit liabilities.The DOL has not issued guidance regarding whether Alternatively, an Open MEP vendor could elect tothe individual ERISA “plans” need to file retroactive use segregated trusts for each employer. In this case,Forms 5500 for previous years. If this were required, use the Open MEP would cease to be a single qualifiedof the DOL’s Delinquent Filer Voluntary Compliance plan. Converting an Open MEP to multiple qualifiedProgram (“DFVCP”) would provide an avenue to do plans may increase costs due to lost economies ofso. The hope is that the DOL will not require this. scale, a factor that should be taken into account.ERISA Bonding. For the same reason noted above, Joshua has been in the Employee Benefits and Executivefiduciaries and other providers who handle Open MEP Compensation Practice Group at Drinker Biddle & Reath’sassets will need to recalculate the required coverage Chicago office since 2008. Prior to this he worked for theamounts of their ERISA bonds. The amount of U.S. Department of Labor, Employee Benefits Securitythe bond will still be 10% of the assets handled, Administration. Joshua’s practice focuses on working with planbut determined on an employer-by-employer basis sponsors and service providers with respect to Title I of ERISA(subject to the $500,000 limit). This affects investment and the IRS qualification requirements for retirement plans.managers, discretionary investment advisers andbroker-dealers, custodians, administrators with controlover funds, and trustees. A single bond—if appropriatelystructured—can still be used for an Open MEP, sinceDOL guidance permits this for multiple ERISA plans.Contracts and ERISA Disclosures. Serviceproviders to Open MEPs should review their contractsto determine if any changes or fee adjustments areneeded to reflect the DOL’s position. Open MEPs willstill be single plans under the Code, and for ERISA Financial Services ERISA Team www.drinkerbiddle.com 9
  • 10. Financial Services ERISA | November 2012 Employee Benefits & Executive Compensation Around the Firm In July 2012 Heather Abrigo, Summer Conley and Joe Faucher spoke at the Western Benefits Conference. Heather Abrigo was the ASPPA co-chair for the Conference, and will serve again next year as co-chair. She will also serve as a member of the Western Benefits Conference steering and program committees. Summer Conley moderated a workshop at the July Western Benefits Conference titled, “Have You Done Your 408(b)(2) Disclosures? Is Anyone Reading Them?” Joe Faucher presented one of the Conference’s highly anticipated and popular sessions “ERISA Litigation Update.” Fred Reish and Brad Campbell kicked off a new audiocast series called Inside the Beltway on August 16, 2012. The program was presented in a “radio show” format, with hosts Fred and Brad discussing current observations and trends on legislative and regulatory events which affect the day-to-day management of retirement plans. The hosts addressed questions asked by program listeners. The next broadcast will be presented on November 15, 2012 which will focus on the impact of the Presidential election on enforcement and regulations, and potential changes that service providers and plan sponsors can anticipate. To listen to the inaugural audiocast from August use this link: http://www.drinkerbiddle.com/beltway Joan Neri co-presented a webcast with National Association of Plan Advisors (NAPA) on October 16, 2012. The presentation, titled “404a-5 Revisited: Opportunities for Advisors,” highlighted the gapsOn October 16, 2012, Fred Reish, that exist in the execution and fulfilment of the recent participant level fee disclosure notices. JoanBrad Campbell and Bruce Ashton co-hosted another webcast on October 24, 2012, titled “408(b)(2) Disclosures - A Plan Sponsor Call tosent a letter to DOL Assistant Secretary Action” which highlighted what steps Plan Sponsors and other responsible plan fiduciaries need toPhyllis Borzi urging the Employee take now in order to avoid a fiduciary breach and possibly, a prohibited transaction.Benefits Security Administration to The Autumn 2012 issue of Journal of Pension Benefits features two articles written by members ofcreate a remedial program for covered Drinker Biddle’s ERISA Financial Services team: “’Open’ Multiple Employer Plans After Advisory Opinionservice providers under the 408(b)(2) 2012-04A: An Assessment” was co-authored by Fred Reish, Bruce Ashton and Josh Waldbeser,regulation. The proposed program and “ERISA Compliance Issues for Plan Providers: The DOL Consultant/Adviser Project” was written bywould soften the blow for broker- Fred Reish, Bruce Ashton, Brad Campbell, Josh Waldbeser and Summer Conley.dealers and other retirement planproviders who may have made mistakes Howard Levine and Rob Jensen authored an article for the Fall 2012 issue of Plan Consultant titled,when spelling out their fees and “ERISA Fiduciary Duty and Other Legal Considerations in Cash Balance Plan Conversions.”services to plan sponsors.Advisor One,Investment News, Plan Adviser, RIABiz, Heather Abrigo wrote an article for the Women in Pensions Network’s Fall 2012 Newsletter. Heather’sPlan Sponsor, Fiduciary News and article, titled, “Why I Do What I Do,” focused on the trials and tribulations of co-chairing the WesternBenefits Pro all ran subsequent articles Benefits Conference, a role she has undertaken annually since 2010. Heather will co-chair therelated to this important proposal. conference again next year.See www.drinkerbiddle.com/news/ Joan Neri authored an article for the National Association of Plan Advisors’ (NAPA) July 2012headlines/2012/408b2-Correction- newsletter. The article was titled, “DOL Issues Guidance on Participant Disclosure of Asset AllocationProgram for a brief fact analysis and Models.”to view a copy of the letter sent toAssistant Secretary Borzi. Fred Reish, Bruce Ashton and Gary Ammon co-authored an article for The Hedge Fund Law Report. In the article, the three authors analyze the final rule under ERISA §408(b)(2) as it applies to hedge fund managers. Brad Campbell was quoted in the November 2012 issue of Kiplinger’s Personal Finance on the subject of new 401(k) fee-disclosure regulations. Brad, in his former role as head of EBSA, proposed the original disclosure regulations. Brad Campbell was quoted in August 2012 by Reuters on the issue of a $1.27 million fine imposed by the Department of Labor on USI Advisors, a Glastonbury, Connecticut-based fiduciary investment adviser. On October 11, 2012, Fred Reish, Brad Campbell and Bruce Ashton held a complimentary webcast on “What Plan Committees Must Do With 408(b)(2),” The recorded session may be accessed here: http://www.drinkerbiddle.com/register/plan-committees Fred Reish spoke at the Center for Due Diligence conference on October 22, 2012 on “Actionable Steps to Impose the Plan Level Funding Gap,” and again on October 23, 2012 on “Benchmarking Advisor Fees From A Legal Perspective.” Bruce Ashton spoke at the same conference on “Evaluating & Vetting Advisors: A Mock Plan Committee Meeting” on October 22, 2012, and on “The Prudent Allocation of Participant Account Fees” on October 23, 2012. At the ASPPA annual conference on October 28, 2012, Bruce Ashton presented a workshop on the “Non-Investment Fiduciary,” and spoke on October 29, 2012 about “Open MEPs.” Fred Reish presented workshops at the ASPPA conference on “Allocation for Plan Expenses and Revenue Sharing: Fiduciary and Qualification Issues” on October 29 and 30, 2012 and presented on “Retirement Distributions and Lifetime Income” on October 31, 2012. Bruce Ashton and Fred Reish presented “ERISA Disclosures: Questions Broker-Dealers Are Asking” on November 1, 2012 in a webinar hosted by Financial Services Institute, Inc. Financial Services ERISA Team www.drinkerbiddle.com 10
  • 11. Financial Services ERISA | November 2012Financial Services ERISA TeamHeather B. Abrigo Mona Ghude Joan M. Neri(310) 203-4054 (215) 988-1165 (973) 549-7393Heather.Abrigo@dbr.com Mona.Ghude@dbr.com Joan.Neri@dbr.comGary D. Ammon Robert L. Jensen Fred Reish(215) 988-2981 (215) 988-2644 (310) 203-4047Gary.Ammon@dbr.com Robert.Jensen@dbr.com Fred.Reish@dbr.comBruce L. Ashton Melissa R. Junge Ryan C. Tzeng(310) 203-4048 (312) 569-1309 (310) 203-4056Bruce.Ashton@dbr.com Melissa.Junge@dbr.com Ryan.Tzeng@dbr.comMark M. Brown Sharon L. Klingelsmith Michael A. Vanic(215) 988-2768 (215) 988-2661 (310) 203-4049Mark.Brown@dbr.com Sharon.Klingelsmith@dbr.com Mike.Vanic@dbr.comBradford P. Campbell Christine M. Kong Joshua J. Waldbeser(202) 230-5159 (212) 248-3152 (312) 569-1317Bradford.Campbell@dbr.com Christine.Kong@dbr.com Joshua.Waldbeser@dbr.comSummer Conley Howard J. Levine(310) 203-4055 (312) 569-1304Summer.Conley@dbr.com Howard.Levine@dbr.comJoseph C. Faucher Sarah Bassler Millar(310) 203-4052 (312) 569-1295Joe.Faucher@dbr.com Sarah.Millar@dbr.comEmployee Benefits & Executive Compensation Practice Groupcalifornia | delaware | illinois | new jersey | new york | pennsylvania | washington DC | wisconsin© 2012 Drinker Biddle & Reath LLP. All rights reserved. A Delaware limited liability partnership. Jonathan I. Epstein and Andrew B. Joseph, Partners in Charge of the Princeton and Florham Park,N.J., offices, respectively.This Drinker Biddle & Reath LLP communication is intended to inform our clients and friends of developments in the law and to provide information of general interest. It is not intended toconstitute advice regarding any client’s legal problems and should not be relied upon as such.Disclaimer Required by IRS Rules of Practice:Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, forthe purpose of avoiding any penalties that may be imposed under Federal tax laws.