2012-12-11 New DOL Regulation

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The Department of Labor has required certain fees disclosures and charged plan sponsors with making sure those fees are “reasonable.” The actual DOL regulations are 22 pages long and the word “reasonable” is mentioned 49 times. How do you determine if your plan’s fees are “reasonable?”

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  • As all of you are aware, the DOL’s new disclosure requirements for retirement plans have been finalized and you should have received your first 408b2 and 404a5 notices earlier this year.
  • Inside the DOL’s 22 pages of regulation, the word “reasonable” is mentioned 49 times…The DOL has forced service providers to disclose their fees, and now charged you, as a retirement plan fiduciary, to do something with that information. It is up to you to determine what a “reasonable” fee level is for your plan.
  • But what is “reasonable”? The DOL specifically left that decision up to you. Partly because it is nearly impossible to set guidelines on the level of fees in a plan, but also because as a fiduciary being charged with making decisions on behalf of all current and future retirement plan participants, it is up to you to decide that paying a little more for what you feel to be a superior plan offering, will benefit everyone.Expenses will vary based on plan size, number of participants, the complexity of the plan, annual cash flows into the plan, and more. These factors will often dictate the amount of work that has to be done, and thus determine the fee being charged by the various service providers. For example, a company that is instituting a retirement plan for the first time will have a very small investment balance for a number of years. This however, doesn’t change the fact that the participants will need statements, someone will have to process any loan requests and distribution forms, and annual tax filings will need to be processed. As a result, smaller plans will often pay higher fees as a percentage of assets than well established retirement plans with a larger investment balances.
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  • For a quick way to easily identify the level of fees being charged for your plan in each category as well as a comparison of those fees to other retirement plans of similar size and structure, you can purchase a peer benchmark assessment for your plan from your financial advisor, or an independent third party.There are a few companies offering benchmark assessments with a database drawn off Form 5500’s that do not contain adequate information to gain an appropriate peer group. Instead, the benchmark assessment should be from a company that employs a database that is derived directly from leading industry service providers. Once your plan’s information is loaded, it should be normalized to adjust for the various ways that fees are calculated and charged, i.e. bundled and unbundled plans, percentage vs. flat fees, and adjusting for any ERISA credit accounts.The end result should be a clear, unbiased depiction of your plan realitive to your peers, so you are able to make an informed decision as to the “reasonableness” of your plans fees.
  • The final report will need to address a few key aspects of your plan in comparison to your peers:Your plan’s total fees. These should be separated by each service provider, and compared to your peersYour plan’s investment expenses. Investment expenses have been the source of more than one lawsuit, and will continue to be a place that auditors will spend a fair amount of time. Your report should provide you with a comparative chart that reviews the expense ratios of each fund by asset class, as well as the performance of those funds relative to the appropriate benchmarks
  • We currently utilize a company called Fiduciary Benchmarks for benchmark assessments for our clients. They have partnered with some of the largest service providers to create a database of hundreds of retirement plans of various size and structure.I am going to walk you through a sample of their benchmark assessment, but does anyone have any questions before I continue?
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  • 2012-12-11 New DOL Regulation

    1. 1. New DOL Regulations: The Road to Reasonableness Dennis Gogarty, Chase Deters December 11, 2012Thrive. Grow. Achieve.
    2. 2. Raffa Wealth Management, LLCPresents:New DOL Regulations: The Road to ReasonablenessDennis Gogarty, CFP®, AIF®President, Raffa Wealth ManagementChase Deters, CFP®, ChFC®Portfolio Manager, Raffa Wealth Management
    3. 3. New Regulation Requirements Force Transparency - Require Disclosure The Department of Labor‟s New Regulations • Disclosure to Plan Sponsors – 408(b)2 ─ Service Description ─ Compensation for services (direct and indirect) ─ Fiduciary status of service provider • Disclosure to Plan Participants – 404(a)5 ─ Mutual fund related disclosures ─ Comparison chart – fees and rates of returnThe DOL believes that plan fiduciaries need this information, when selecting and monitoring serviceproviders, to satisfy their fiduciary obligations under ERISA section 404(a)(1) to act prudently andsolely in the interest of the plan‟s participants and beneficiaries and for the exclusive purpose ofproviding benefits and defraying reasonable expenses of administering the plan. 3 Invest Wisely
    4. 4. The Challenge• DOL Regulations state that plan fiduciaries must: – “…ensure that arrangements with their service providers are „reasonable‟ and that only „reasonable‟ compensation is paid for services.”• Failure to comply can result in prohibited transactions with legal liability exposure Number of times “reasonableness” or “reasonable” is mentioned in the 22 page long DOL regulation? 49 4 Invest Wisely
    5. 5. What is “Reasonable?”• DOL Regulations cannot define a figure• Doesn‟t have to be the least expensive option• Expenses will vary based on: – Number of Participants – Total Plan Assets – Number and Complexity of your plan(s) – Annual Salary Deferrals – Other services being provided (bundled or unbundled TPA, one- on-one educational meetings, etc.)• Smaller plans may pay more in a percentage of assets, than larger plans, but much less in a total dollar amount – Making determining what “reasonable” is, very difficult to determine 5 Invest Wisely
    6. 6. The Road to Reasonableness Evaluating Plan Fees and ExpensesYour current retirement plan investment advisor might not be equipped to helpyou independently access your plan’s fees due to a natural conflict of interest.You have two avenues to examine to determine if yourplans fees are truly reasonable:1. Distribute a RFP: send a proposal request to several other investment advisors to survey the marketplace on what else is available2. Peer Benchmark Assessment: use an independent third party to provide you a report of an apples-to-apples benchmark comparison of your plan‟s fees in relation to other plans of similar size and structure 6 Invest Wisely
    7. 7. The Road to ReasonablenessDistribute a Request For Proposal (RFP) The following excerpt is directly from the DOL‟s guide “Understanding Retirement Plan Fees and Expenses” • Begin by establishing an objective process to aid in your decision making • Think about the specific services you would like (e.g., tax, trustee/custodian, recordkeeping, investment management, investment education or advice)… • Consider the level of responsibility you want the prospective service provider to assume… • Give all prospective service providers complete and identical information about your plan. This information should include the number of plan participants and the amount of plan assets as of a specified date. 2011 Dept. of Labor 7 Invest Wisely
    8. 8. The Road to Reasonableness Determine Your Plan‟s Total Fees1. Administrative Fees: ─ Custodial fees – who holds the plan assets ─ Administrative fees – files tax forms, processes distributions and loans ─ Record keeping fees – day to day transactions and statements2. Investment Advisory Fees3. Weighted Average Mutual Fund Fees ─ Net amount paid to the mutual fund managers, weighted by the percentage of plan assets in each fund 8 Invest Wisely
    9. 9. The Road to Reasonableness Start by understanding your total plans costs segmented by service providerCurrent Scenario - - Plan assets $2,034,300 ABC Foundation 403b Retirement PlanParticipant Accounts - - 101RWM/XYZ Retirement Percent DollarCustodian State Street Global Adv (SSgA) 0.00% $0Adminstrator XYZ Retirement $336.66/mo 0.20% $4,036Recordkeeper XYZ Retirement 0.58% $11,799 Total Admin Fees 0.78% $15,835Investment Advisor RWM 0.35% $7,120Mutual Fund Company Multi-Family* 0.50% $10,172Total Investment Expenses 0.85% $17,292Total - ABC Foundation 403b Retirement Plan 1.63% $33,126 9 Invest Wisely
    10. 10. The Road to Reasonableness Issue an RFP to consultants or advisors that offer a comprehensive retirement plan solution1. Conduct an initial group call to communicate your needs and preferences.2. Request a single “recommended” solution either bundled or unbundled ─ Custody ─ Recordkeeping ─ Administration ─ Investment advisory3. Ask for a description of services, fees, and fiduciary status:4. Ask for fund expenses and what portion of fund expenses pay for any of the services above. ─ US stocks ─ Intl Stocks ─ Bonds ─ Stable Value or Guaranteed Contracts 10 Invest Wisely
    11. 11. Difference in Fiduciary Status None 3(21) Fidcuiary 3(38) FiduciaryDescription Level of Fiduciary ResponsibilityDuty of loyalty to serve theexlusive best interest ofthe plan participants andbeneficiariesDuty of care to exercisethe skill, diligence andprudence of a professionalShall have reasonablegrounds for believingrecommendations aresuitableDescription Level of Fiduciary AuthorityMakes recommendationsto plan sponsorMaintains discretion tomake decisions andimplement changes 11 Invest Wisely
    12. 12. The Road to ReasonablenessSet up a scoring system tocompare the RFP responsesby each investment advisor:• Firm Experience• Key Personnel Experience• Quality of References• Educational Event Offerings• Level of Fiduciary Status• Administrative Cost level• Advisory Fee level• Investment Expense level 12 Invest Wisely
    13. 13. The Road to Reasonableness Plan BPeer Benchmark Assessment 13 Invest Wisely
    14. 14. The Road to Reasonableness Peer Benchmark AssessmentThe easiest way to independently verify if your plan‟s fees andexpenses are in line with industry standards is to perform anindependent benchmark assessment of your current plan thatcontains:1. Database for fee comparisons should be derived directly from industry service providers2. Your plan‟s fees should be normalized • Adjusting for bundled and unbundled plans (Custodian, Recordkeeper, TPA, Advisor, and Money Managers) • Normalizing percentage, flat, and per participant fees • Adjusting for ERISA Spending Account Credits (i.e. AFCA)3. Resulting in a simple, transparent & practical report 14 Invest Wisely
    15. 15. The Road to Reasonableness Fiduciary Benchmarks: The OutputThe following topics should be included in your assessment and areview of your plan relative to your peers :1. Total Plan Fees • Review fees by source of funds and service provider being compensated2. Investments • Comparison of the fees being paid for every investment option in the plan relative to your peer group‟s expenses3. Value- Add by Provider • List of services being provided that help a Plan Sponsor administer the plan fulfill their Fiduciary Duties • Metrics to help determine participant utilization of the plan, or “Retirement Readiness” 15 Invest Wisely
    16. 16. Fiduciary Benchmarks, Inc.Fiduciary Benchmarks, Inc. was launched to support plan sponsors, advisors,recordkeepers and other plan service providers in addressing the new DOLregulations.They have partnered with many of the prominent service providers for acomprehensive database that contains greater detail than what can be foundusing 5500 reports. www.fiduciarybenchmarks.com 16 Invest Wisely
    17. 17. Fiduciary Benchmarks: The Output Benchmark Peer Group Your plan is compared against 53 other retirement plans of similar size and structure 17 Invest Wisely
    18. 18. Fiduciary Benchmarks: The Output Plan Fees Summary Your plan’s total fees are itemized by service provider and compared to the benchmark group. • This plan’s annual fees are 1.06% per year • This is 0.07% higher, or $7,000 more per year than the average • This equates to $45 more per employee per year 18 Invest Wisely
    19. 19. Fiduciary Benchmarks: The Output Service Providers‟ Fee Disclosure Service providers’ fees are compared to the benchmark group, allowing you to easily identify the service provider who’s fees are over/under average • Recordkeeper • Third Party Administrator • Advisor/Consultant • Investment Manager 19 Invest Wisely
    20. 20. Fiduciary Benchmarks: The Output Investment Lineup Summary Each investment’s expense in the plan is compared with the benchmark group to determine the source of any outliers. 20 Invest Wisely
    21. 21. Fiduciary Benchmarks: The Output Plan Success Measures10 recognized industry standards measure how well your plan helps participants prepare for retirement in comparison to the benchmark group. 21 Invest Wisely
    22. 22. The Road to Reasonableness Final ResultsUpon completion of your benchmark assessment, the final task is tosummarize the various aspects of your plan in an internal memo, and outlinethe reasons for keeping/changing your plan.Based on the enclosed analysis comparing our plan with xx similar plans, wefind that our plan‟s fees are reasonable for the following reasons:1. All service providers‟ fees are ____ with the average peer expenses2. The average investment expense ratio is ____ with the average3. The plan participants are taking advantage of the benefits being offeredAnalysis conducted on x/x/xx by _________ and subsequent review isscheduled in 3-5 years. 22 Invest Wisely
    23. 23. The Road to Reasonableness Summary1. Confirm receipt of the 408(b)2 disclosures from service providers.2. Understand the fees (direct and indirect) being paid by your plan for the services being provided and the fiduciary status of the service providers.3. Measure reasonableness – Have an independent analysis of your plan‟s fees/services/fiduciary status performed – Conduct an RFP for a comprehensive retirement plan solution4. Maintain all documents in a fiduciary file5. Summarize the procedures and result in a memo and retain for your files 23 Invest Wisely
    24. 24. Questions?Dennis Gogarty, CFP®, AIF® Chase Deters, CFP®, ChFC®(202) 955-6734 (202) 955-7217dennis@raffawealth.com chase@raffawealth.com www.raffawealth.com 24 Invest Wisely
    25. 25. Disclosures All economic and performance information is historical and not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management or any other investment professional. Further, the charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Raffa Wealth Management. All information, including that used to compile charts, is obtained from sources believed to be reliable, but Raffa Wealth Management does not guarantee its reliability. All performance results have been compiled solely by Raffa Wealth Management, are unaudited, and have not been independently verified. Information pertaining to Raffa Wealth Management‟ advisory operations, services, and fees is set forth in Raffa Wealth Management‟ current disclosure statement, a copy of which is available from Raffa Wealth Management upon request. Past performance is not a guarantee of future results and any investment can lose value. 25 Invest Wisely

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