Buyer Beware...An official publication of ASPPA summer 2013 Buyer Beware Hiring a 3(16) fiduciary won’t eliminate a plan sponsor’s fiduciary oversight responsibility. 1 Choosing

A n o f f i c i a l p u b l i c a t i o n o f A S P P A

summer 2013

BuyerBeware

Hiring a 3(16) fiduciary won’t eliminate a plan sponsor’s

fiduciary oversight responsibility.

Disability and DC Plans

DOL vs. Bankruptcy

Trustees

401(k) SummiT Highlights

1www.asppa.org/pc

Choosing a 3(16) FiduciaryA 3(16) fiduciary firm can relieve the plan sponsor of

certain fiduciary oversight duties, but the level of responsibility they can accept varies widely.

By Marcia s. Wagner

COVER STORY

22

Summer 2013

Cover Illustration: Tyler Charlton

Contents

28 The Practical Responsibility of Advisors for Participant Disclosures

Fred reisH JoAn neri

38 The Role of Pre-retirement Disability in Retirement Security

dAvid C. KAledA AnnA rAppAport

feature stories

32 From the Hill to the SummiT JoHn ortmAn

56 The Benefits of an ASPPA Benefits Council

normAn F. pierCe JAmes t. Comer, iii

60 Six Easy Steps to an ASPPA Certificate

sArAH simoneAux

62 Confidentiality and the ASPPA Code of Professional Conduct

KAren smitH

64 Welcome New and Recently Credentialed members

65 Advocating for ASPPA members

ronAld J. triCHe

67 ASPPA Calendar of Events

asppa in aCtion

2 Plan Consultant | summer 2013

Columns

teChniCal artiCles

praCtiCe management artiCles

44 The Wide Ranging impact of 408(b)(2) REGuLATiONS

JoHn J. Blossom, Jr.

50 Searching for a Plan Advisor? Try an RFP ADViSORS

sAmuel s. CHoy ellen CzurA sCHiller

54 King of the Tech Jungle TECHNOLOGY yAnnis p. KoumAntAros AdAm C. pozeK

04 Letter from the Editor

06 Legislative update

10 maintaining DB Plan Viability via Cash Balance Plans ACTuARiAL

douglAs s. lAne

14 The Omnibus Cash or Deferred Arrangement COmPLiANCE

JJ mCKinney

18 What’s All the Fuss About Between DOL and Bankruptcy Trustees? LEGAL

KennetH KirsCHenBAum steven sHeinwAld

54

ContentsPublished by

Editor in ChiefBrian H. Graff, Esq., APM

Plan Consultant CommitteeMary L. Patch, QPA, QPFC Co-chair

Gary D. BlachmanJames T. Comer, III

John Feldt, CPC, QPAJohn Frisvold, QPA, QKA

Catherine J. Gianotto, QPA, QKA William C. Grossman, QPA

Ronald A. Hayunga, QKA, QPFCBarry Kozak

Michelle C. Miller, QKA Lauren Okum, MSPA

Norman F. Pierce, QPFC David A. Pitts, MSPA

David J. Witz

EditorJohn Ortman

Associate EditorTroy L. Cornett

Art DirectorTony Julien

Graphic DesignerMichelle Brown

Technical Review BoardRose Bethel-Chacko, CPC, QPA, QKA

Michael Cohen-Greenberg Sheri Fitts

Drew Forgrave, MSPAGrant Halvorsen, CPC, QPA, QKA Jennifer Lancello, CPC, QPA, QKA

Robert Richter, APM

Advertising SalesJeff HoffmanFred Ullman

ASPPA Officers

PresidentBarry Max Levy, QKA

President-ElectDavid M. Lipkin, MSPA

Senior Vice PresidentKyla M. Keck, CPC, QPA, QKA

Vice PresidentRichard A. Hochman, APM

Vice PresidentMarcy L. Supovitz, CPC, QPA, QKA

TreasurerJoseph A. Nichols, MSPA

SecretaryAdam C. Pozek, QPA, QKA, QPFC

Immediate Past PresidentRobert M. Richter, APM

Plan Consultant is published quarterly by the American Society of Pension Professionals & Actuaries, 4245

North Fairfax Drive, Suite 750, Arlington, VA 22203. For subscription information, advertising, and customer

service contact ASPPA at the address above or 800.308.6714, [email protected]. Copyright

2013. All rights reserved. This magazine may not be reproduced in whole or in part without written permission of the publisher. Opinions expressed in signed articles are those of the authors and do not

necessarily reflect the official policy of ASPPA.Postmaster: Please send change-of-address notices for Plan Consultant to ASPPA, 4245 North Fairfax Drive,

Suite 750, Arlington, VA 22203.

Reliable, objective news coverage. Expert analysis. Comprehensive primary sources and proven practice tools. Maintain compliance with confi dence by using the most authoritative benefi ts practice and executive compensation resource. Now with new treatises, Portfolios, and monitors.

0513-JO9724 © 2013 The Bureau of National Affairs, Inc.

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l e t t e r f r o m t h e e d i t o rPC

are not auto-enrolled defer an average of about 7%. This tells us that employees who make their own decisions get it, and save more.

� Who needs a workplace plan? Among moderate income workers (those making between $30,000 and $50,000), less than 5% save for retirement through an IRA, while 72% participate in a workplace plan if one is available. For many Americans, a 401(k) is their first contact with the world of investing.

� 401(k) balances are too low. Overall, the average balance in a 401(k) is about $76,000. That’s too low. Among participants in their 50s and 60s, however, the average balance is more than $200,000. Are there things the retirement

industry needs to do better? Are there problems that need to be solved? Of course. But let’s resolve to begin defending ourselves by no longer letting those who would attack us do so with misinformation or bad data. Just tell the truth.

� As congressional taxwriters sharpen their tax reform ax, incentives for retirement saving vehicles, including workplace plans, may be on the chopping block.Why are we taking so much fire

from both the media and the federal government?

If there’s an answer to that question, it would take a whole lot more discussion than this modest space allows. But let me suggest one simple thing we could do better when it comes to defending the industry: Tell our story. Not make up a story; not devise a PR campaign. Just tell the truth.

The late Sen. Daniel Patrick Moynihan once said that, “Everyone is entitled to their own opinions, but they are not entitled to their own facts.” So let’s look at a few common misperceptions and the real facts that refute them. � 401(k) plans only benefit

the wealthy. In fact, 74% of participants make less than $100,000, and 38% make less than $50,000. And households with an AGI of less than $100,000 receive 62% of the DC plan tax incentives.

� Deferrals are too low. This is true among participants who were auto-enrolled — their deferrals average about 4%. But those who

Feeling like your livelihood is under attack? Consider these recent developments:

� PBS devoted an episode of its “Frontline” program to bashing retirement plan advisors and mutual fund fees.

� In his FY 2014 budget, President Obama proposed capping amounts held in an individual’s retirement plans at $3 million and double-taxing small business owners’ 401(k) contributions. (For more on the president’s budget, see this month’s “Legislative Update” on page 6.)

� The DOL’s effort to broaden the definition of a fiduciary to encompass advisors continues apace; a proposed rule may be upon us in the next few months.

JoHn ortmAn

editor-in-CHieF

the truth will set you Free

Ameritas Life Insurance Corp., Retirement Plans Division / 5900 O Street / Lincoln, NE 68510 / 800-923-2732 / retire.ameritas.com

This information is provided by Ameritas®, which is a marketing name for subsidiaries of Ameritas Mutual Holding Company, including, but not limited to: Ameritas Life Insurance Corp., Ameritas Life Insurance Corp. of New York, The Union Central Life Insurance Company, and Ameritas Investment Corp., member FINRA/SIPC. Ameritas Life Insurance Corp. is not licensed in New York. Each company is solely responsible for its own financial condition and contractual obligations. For more information about Ameritas®, visit ameritas.com.

Ameritas® and the bison are registered service marks of Ameritas Life Insurance Corp.© 2013 Ameritas Mutual Holding Company

RP2541 6-13

we’ve always been committed to the small retirement plan market.For more than 50 years, we’ve connected with the small business market through our retirement plans. Let us bring you a retirement plan with the service and support that works best for you. Whether it’s one of our full service bundled plans or working with your TPA, we’re here to help business owners and their employees put worries behind and the future ahead. To learn more, call 800-923-2732.


plans for themselves and their workers.

Under the proposal, if a small business owner has saved $3.4 million in his or her 401(k) account, they won’t be allowed to save any more. Without any further incentive to keep the plan, many small business owners will now either shut down the plan or reduce contributions for workers. This means that small business employees will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules.

in the form of a joint and survivor benefit commencing at age 62, is indexed for inflation, and the maximum accumulation that would apply for an individual at age 62 is approximately $3.4 million. The proposal would be effective for taxable years beginning after Dec. 31, 2013, and is projected to raise roughly $10 billion over 10 years.

This proposed cap would not close a loophole, nor would it correct some perceived abuse of the rules. Moreover, it’s simply wrong to attack small business owners who have responsibly maintained retirement

resident Obama’s proposed budget for fiscal year 2014 includes a proposal to limit the deduction or exclusion for contributions to defined contribution

plans, defined benefit plans or IRAs for an individual who has total balances or accrued benefits under those plans that are sufficient to provide an annuity equal to the maximum allowable defined benefit plan benefit.

This maximum, currently an annual benefit of $205,000 payable

President’s 2014 Budget Attacks Retirement Benefits

LegiSLaTiveuPDaTe

the Administration’s proposed budget:

a little good news and a lot of bad news

for retirement industry professionals.

BY BRiAN H. GRAFF

P

How does your plan measure up to Outcomes Based Success Metricss

For more information contact: Paul Neveu, CEBSSVP, Sales and MarketingDirect: 603-580-5522 | Cell: 617-285-8203E-mail: [email protected] | www.bpas.com

BPAS offers a number of participant outcomes reports and strategies to assist our clients. For details, please call your BPAS Sales Representative.

BPASBPAS is a national provider of retirement plan administration, actuarial, consulting, collective investment trust and VEBA / HRA services to a diverse array of clients spanning the United States and Puerto Rico. We service over 3,500 retirement plans and 300,000 plan participants in total, through partnerships with a wide array of financial interme-diaries. BPAS service offerings also include automatic rollover and post termination loan administration services. With nine offices and 240 employees, BPAS has the depth of professional and technology resources to deliver value-added services to all employee benefit stakeholders. At BPAS, we are committed to participant-based outcomes.


LegiSLaTive uPDaTe

Because contribution limits for IRAs are less than for employer-sponsored 401(k) plans, automatic IRAs are expected to expand the availability of retirement savings, not replace current 401(k) plans. In fact, once employers and employees get used to payroll withholding for retirement savings through automatic IRAs, employers may be more comfortable moving up to a SIMPLE plan or 401(k) arrangement.

Employers with 10 or fewer employees and employers in existence for less than two years would be exempt from the requirement. An employee not providing a written participation election would be enrolled at a default rate of 3% of the employee’s compensation in a Roth IRA. Employees would always have the option of opting out, opting for a lower or higher contribution within the IRA limits, or opting for a traditional IRA. Contributions by employees to automatic payroll-deposit IRAs would qualify for the saver’s credit (to the extent the contributor and the contributions otherwise qualified).

Small employers (those that have no more than 100 employees) that offer an automatic IRA arrangement (including those that are not required to do so) would be entitled to a temporary business tax credit for the employer’s expenses associated with the arrangement up to $500 for the first year and $250 for the second year. Furthermore, these employers would be entitled to an additional credit of $25 per participating employee up to a total of $250 per year for six years.

This proposal is projected to cost roughly $17.6 billion over 10 years.

otherwise reduce taxable income in the top three individual income tax rate brackets of 33, 35 and 39.6%.

This is essentially a double tax on contributions to 401(k) plans. Small business owners earning more than $250,000 would have to pay tax on contributions in the year the contributions are made, and then pay tax at the full rate when contributions are distributed at retirement.

The limit would apply to all itemized deductions, interest on tax-exempt bonds, employer-sponsored health insurance, deductions and income exclusions for employee retirement contributions, as well as certain above-the-line deductions. If a deduction or exclusion for contributions to retirement plans or individual retirement arrangements is limited by this proposal, the taxpayer’s basis would be adjusted to reflect the additional tax paid.

The limit would be effective for taxable years beginning after Dec. 31, 2013, and is projected to raise roughly $530 billion over 10 years.

Small EmployEr automatic EnrollmEnt

The president proposes to encourage saving and increase participation in retirement savings arrangements by requiring employers that do not currently offer a retirement plan to their employees to provide automatic enrollment in an IRA, effective after Dec. 31, 2014.

ASPPA supports the concept of so-called “automatic IRAs” because payroll deduction retirement savings works, and it should be more widely available to employees of small businesses.

Small business owners have been playing by the rules all along. They saved each year within federally dictated contribution limits and they provided matching and other contributions to their employees to comply with federally mandated nondiscrimination rules. Now these small business owners would be punished for doing right by their workers and saving and investing successfully.

Additionally, it is grossly unfair that a small business owner would be limited to retirement benefits that are nowhere near as valuable as executives’ at large corporations. Small businesses can’t use the nonqualified deferred compensation arrangements that provide millions — even billions — of dollars in retirement benefits to big corporate executives. Every time retirement plan limits are cut, the corporate CEOs get more nonqualified retirement benefits. It’s the small business owners and their employees who lose out. That just isn’t fair.

Let’s take a look at two other proposals in the president’s budget:

• capping the tax rate for upper-income taxpayers at 28%; and

• an effort to boost small-employer retirement plans via auto-enroll and other features.

tax cap of 28% The president’s budget proposes

to limit the tax rate at which upper-income taxpayers can use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28%. This limitation would reduce to 28% the value of the specified exclusions and deductions that would

it’s simply wrong to attack small business owners who have responsibly maintained retirement plans for themselves and their workers.”

We Believe Your ClieNTS DeServe a BeTTer reTiremeNT PlaN

Which is why we’re committed to providing top-quality retirement plan services and solutions. Don’t just

take our word for it: Transamerica Retirement Solutions1 received a combined total of 84 “Best in Class”

Cups for sponsor and participant services in PLANSPONSOR® Magazine’s 2012 Defined Contribution

Survey.2 We are the Tomorrow Makers.SM

WHAT CAN WE MAKE WITH YOU?

Please give us a call at (888) 401-5826 Monday through Friday 9 a.m. to 7 p.m. Eastern Time, or visit us online at www.TRSretire.com.1 As of January 1, 2013, Transamerica Retirement Services and Diversified became Transamerica Retirement Solutions.

2 Transamerica Retirement Services received 56 “Best in Class” cups and Diversified received 28 “Best in Class” cups for sponsor and participant services in PLANSPONSOR® Magazine’s annual Defined Contribution Survey of retirement plans. The results of the Defined Contribution Survey were announced in the November 2012 issue of PLANSPONSOR® Magazine. The survey polled 5,930 clients of 37 defined contribution plan providers. “Best in Class” cups are awarded to plan providers who score in the top quartile of a specific category. See the November 2012 issue of PLANSPONSOR® Magazine for complete results. Transamerica or Transamerica Retirement Solutions refers to Transamerica Retirement Solutions Corporation.

TRSC 6519-0613

TSA113 Plan Advisor Ad Revisions v12.indd 1 3/4/13 6:51 PM


aCTuariaL

How a cash balance plan can mitigate the three adverse factors affecting dB plans — declining interest rates, volatile asset returns and liability/asset mismatches.

BY DOuGLAS S. LANE

Maintaining DB Plan Viability via Cash Balance Plans

11www.asppa.org/pc

benefit to a business owner if the maximum defined benefit accruals are affordable. Also, depending on the circumstances, it is possible that both plans can simultaneously reach the maximum amounts available for the owner. From the examples above, using 5.5% as the earnings assumption, this would allow the owner to accumulate $3.2 million in just 10 years, which might almost be enough to retire.

Each situation is governed by the demographics of a particular company’s workforce. A typical situation may have a business owner who is older and a workforce that has at least a portion of younger employees. The most cost-efficient result may be to provide a combination of DC and DB plans providing benefits for everyone. If the circumstances are right, sometimes business owners can maximize their benefits in each plan, as described above. The nondiscrimination rules would determine the minimum level of benefits that must be provided to the remaining employees.

mitigating thE problEmS While there may be an economic

benefit to a small business owner, can the problems mentioned earlier associated with defined benefit plans be mitigated? The answer is yes, and this is where the now-popular cash balance plan design becomes

flExibility in Saving for rEtirEmEnt

It is not uncommon for small business owners to put their own capital and countless hours of effort into their business ventures early in their working years. This can lead to severely inadequate savings as they mature through their career. In these later years, small business owners may want to save larger amounts to make up for the lack of being able to do so early on.

Let’s compare a DB to a DC plan with this factor in mind. The 2013 maximum dollar limit for an employer contribution in a defined contribution plan is $51,000. With a catch-up deferral, this maximum is $56,500. Let’s assume a business owner starts saving $56,500 at age 52 and continues to do so for 10 years. With an investment return of 5.5%, this would accumulate to $727,000 after 10 years, assuming contributions are made at the end of the year.

In contrast, the 2013 defined benefit plan life annuity limit is $205,000 per year. This is the maximum annual lifetime income a defined benefit plan can provide if the payments commence at age 62. You’ll need 10 years of participation in a defined benefit plan to earn this maximum payout. You also need a consecutive 3-year average wage equal to at least $205,000 to support this benefit.

How does this lifetime annuity compare to the accumulation in the 401(k) plan? Let’s assume the business owner decides to adopt a defined benefit plan beginning at age 52. The present value of this annuity stream at 5.5% interest at age 62 is $2,485,128. The 5.5% interest rate is used because it is the minimum rate allowed if a lump sum payout is made. This produces the contribution pattern in Table 1.

This is almost 3.5 times higher than the accumulation provided with just a 401(k) plan over the same period of time. Clearly there is a great potential economic

long with the changing pension plan landscape, there haven’t been many good headlines in recent times for defined

benefit plans. Large plans in particular have seen problems plaguing their viability for more than a decade.

Three factors have caused these plans to decline in number. Of those that remain, some have closed their doors to new entrants, frozen the plan, or amended their future accruals. The factors are: � Declining Interest Rates. As

interest rates decline, traditional pension liabilities increase (particularly on termination). The composite corporate bond rate 10 years ago was approximately 7%. Today it hovers around 4%.

� Volatile Asset Returns. While interest rates declined, the capital markets experienced highly erratic returns over the same 10-year period. Because of the funding rules, this has had a tendency to require higher contributions in years when the economy is bad and lower contributions when the economy is good.

� Liability/Asset Mismatch. Many plans may have overinvested in equities or ignored the warnings that their advisors issued regarding the temptation to chase after higher investment returns (taking on higher risk). For certain plans, this problem could include a mismatch where a portion of the plan’s assets perhaps should have been, but were not, invested in products that move in the same direction as the plan’s liabilities when interest rates change.Any one of these factors alone

might not necessarily cause the exodus we’ve seen from traditional pensions. But all three have combined to create a perfect storm for the near-demise of the classic defined benefit plan.

ATable 1: DB Plan

Age Contribution With Interest to 62

52 $145,487 $248,51253 $153,489 $248,512 54 $161,931 $248,512 55 $170,837 $248,512

56 $180,233 $248,512 57 $190,146 $248,512 58 $200,604 $248,512 59 $211,637 $248,512 60 $223,277 $248,512 61 $235,557 $248,512 62 Total = $2,485,128


do not meet the expected return. Clearly this is not even a consideration when designing an investment lineup for a 401(k) profit sharing plan. One could argue that the reason the employer adopted a defined benefit plan was because they could afford the additional contributions. However, four problems can occur if volatile investment choices are made.

First, as participants terminate and make distribution elections, the plan cannot allow a lump sum payment if the plan’s funded status is too low. A predictable return on plan assets can help avoid this issue.

Second, good or great investment returns can limit and reduce the employer’s deductible contribution. If the plan was adopted because the employer wanted high contributions, a great investment return appears to be a contrary goal.

Third, a great investment return in a very small plan can result in excess plan assets — amounts that are difficult to recover because they exceed the maximum Section 415 limitation that applies to benefit payments. In rare cases, such excess becomes subject to a 50% excise tax and is also included as taxable for federal and state income tax purposes.

Lastly, as the plan matures, the impact of an investment loss is much

can be somewhat alleviated by the plan’s design regarding actuarial equivalence, its crediting rate, and by implementing an appropriate investment strategy.

What if interest rates increase? When designing the plan to withstand declining interest rates, the possibility of increasing rates should not be overlooked. Again, the plan design considerations are largely dependent on the employer’s overall goals. Is this a social plan for the benefit of the employees, or is this an owner-tilted plan?

volatilE aSSEt rEturnSThe plan sponsor (the business

owner) can certainly design the defined benefit plan’s investment portfolio based on conservative investments. Mitigating risk or focusing on an acceptable level of risk for a plan’s investments should replace the old concept of attempting to achieve an assumed rate of return. The steps taken to establish an investment portfolio for a 401(k) plan should not be the same steps taken to establish a portfolio for a defined benefit plan.

Instead, at least one additional important factor must be included: The employer is required to make extra contributions when investments

important along with a conservative investment portfolio. Let’s reexamine each of the problems discussed at the beginning of this article.

DEclining intErESt ratESTraditional defined benefit plans

struggle with declining interest rates due to lump sum payouts or annuity purchases. A lower interest rate translates into a higher lump sum liability. That is generally not the case with a cash balance plan. A cash balance plan is a defined benefit plan that is designed by establishing a hypothetical account and by providing interest credits. If certain requirements are met, the account balance is equal to the lump sum liability, thus eliminating the fluctuation otherwise caused when outside rates change or when lump sum payouts occur.

What happens if the participant elects an annuity form of payment? In practice this problem rarely occurs because participants elect lump sum payments. For a larger company, the fact that annuities are available also means the financial accounting calculations must include values for these annuity options. The result is a fluctuating liability that appears on the financial statement, even if the plan is well funded. This

mitigating risk or focusing on an acceptable level of risk for a

plan’s investments should replace the old concept of attempting to

achieve an assumed rate of return.”

13www.asppa.org/pc

With a small employer’s cash balance plan, the lump sum liabilities are not fluctuating. Here, the investment strategy could be to reproduce a low-risk return that is no more than the interest credit defined by the terms of the plan. It may be a fair tradeoff to even underperform if the result is a fairly predictable return. Underperforming will increase future contributions, of course, but to mitigate large mismatches between assets and lump sum liabilities, it’s the predictable return that helps keep the plan viable.

Douglas S. Lane, FSA, EA, MSPA, MAAA, is the president of Kidder-Lane Actuarial Services LLC,

which provides actuarial services for 270 plans.

regarding the plan’s investments in a defined benefit plan. They must know what level of risk they are truly prepared to pay for, as opposed to taking as an acceptable loss. This should be carefully considered when determining the portion of the assets to be invested in equities, bonds, and other investments.

liability/aSSEt miSmatchA traditional defined benefit

plan has a much different approach for matching assets and liabilities, especially in larger plans. A seasoned investment advisor, working with information from the plan’s actuary, can develop a strategy for this type of large plan investment planning. For a small plan, this is generally not needed or necessary as the employer is focused solely on maximization of the contribution.

greater. For example, if the second year assumption is to provide a 5.5% return but the plan actually loses 19.5% instead, the actuarial loss is 25% (the difference between the assumed return and the actual return). This loss is amortized and added to the plan’s required funding for the next seven years. From the chart described earlier, and assuming two owners (both age 52), this adds only about $13,000 or so to the required funding. Contrast this to what happens after the ninth year of the plan. After nine years, such a loss would add about $185,000 of minimum additional funding, but if both owners truly hope to retire after the 10th year, the cost is over $1 million to fully fund their benefits.

Markets will continue to rise and fall. Employers and advisors must remember to adjust their thinking


compliance

A dive into the operational issues and problematic consequences of errors in administering CodAs, using three examples.

The Ominous Cash or Deferred Arrangement BY JJ mCKiNNEY

qualified cash or deferred arrangement (CODA) has a distinct set of characteristics and a laundry list of rules to follow to maintain the tax advantages of being qualified. Practitioners tend to work more often with intentional qualified CODAs and navigate the myriad requirements to prove ongoing compliance with the tax code and IRS regulations. An examination of the specifics in defining a CODA and the

accompanying requirements to maintain qualification reveal operational issues and problematic consequences.

A

Timely documentation is the best defense against misinterpreting the actions of the plan sponsor and its participants.”

coverage and nondiscrimination beginning with a contribution of at least the gateway minimum. Each November for the past five years, during employee performance reviews Elsinore has given bonuses and allowed participants to either receive the bonus as pay or use part or all of the bonus as an additional contribution to the profit sharing plan, up to the maximum annual addition. If the bonus is paid, it is reported as compensation for plan purposes; however, if the bonus

top heavy, and the owners of the company generally receive allocations to the maximum annual additions for the plan’s calendar limitation year. The compensation definition has no exclusions, and the plan uses a five-year graded vesting schedule.

Elsinore designed the plan to cover both top-heavy contributions for non-key employees and gateway minimum contributions for all non-highly compensated employees as of the last day of the fiscal year ending on October 31. The plan satisfies

A CODA is any direct or indirect election made by an employee to the employer to either receive an amount in the form of cash or other taxable benefit or contribute the amount to a trust, thus deferring the receipt of compensation. (A Roth 401(k) also qualifies as CODA.) The election generally remains in force until the participant either changes the election through written or approved electronic means or ceases to be an employee of the employer that sponsors or adopted the plan.

ExamplE of a non-qualifiED coDa

In this hypothetical example, Elsinore Brewery sponsors a calendar year, trustee-directed profit sharing plan providing an allocation to all participants based on classification. The class or grouping methodology allows the individual participants to constitute a class of their own. The Elsinore profit sharing plan is

Both John Hancock Life Insurance Company (U.S.A.) and John Hancock Life Insurance Company of New York do business under certain instances using the John Hancock Retirement Plan Services name. Group annuity contracts and recordkeeping agreements are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02210 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595. Product features and availability may differ by state. Plan administrative services may be provided by John Hancock Retirement Plan Services LLC or a plan consultant selected by the Plan. © 2012 All rights reserved.

NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED | NOT INSURED BY ANY GOVERNMENT AGENCY

John Hancock and Plan Consultants – linking together to provide optimal client solutions.

A to partnershipcommitment

With a 150 year history, John Hancock is committed to making plans work and being easy to do business with.

We work diligently to continuously improve our products and services in order to deliver comprehensive retirement options. This, along with strong Plan Consultant partnerships, forms the pillars of our success today and in the future.

We believe the team approach can provide the best possible service for a plan. It is through our partnership with Plan Consultants that we can help design and build retirement plans specifically suited to meet your clients needs.


provided in the plan document. They make a resolution on the first Monday of December each year at the final partner meeting, providing each partner with annual additions appropriate to their personal cash flow needs and a 5% of pay allocation to eligible staff members to be increased as necessary to satisfy the nondiscrimination rules. Bob and Doug have exercised their decisions appropriately whether their contributions change or remain constant from year to year.

In the second example, Laverne and Shirley are in a partnership arrangement similar to Bob’s and Doug’s, except that Laverne and Shirley send emails independently to their service provider each February providing the amount of contributions they want in the plan for the previous plan year without consent of action, resolution or deferral election on file. The Laverne and Shirley plan is either characteristically all CODA, or more likely not CODA. Laverne’s or Shirley’s annual additions are effectively all employer non-elective contributions resulting in an increased staff cost to satisfy rate group testing.

employer; however, the tax deductible contribution comes directly from the income that is payable to the partner or sole proprietor if not paid to the plan. Furthermore, the decision to make the contribution is typically the partners’ or sole proprietor’s as plan sponsor, administrator and trustee.

Code Section 1.401(k)-1(a)(6)(iii) specifically provides that a partner in a partnership or a sole proprietor must make the election to defer before the end of the partnership tax year or the individual tax year respectively as compensation is deemed earned income as of the last day of the applicable tax year. An election or decision to defer after the tax year closes is problematic and changes to nature of the contribution.

Consider two hypothetical examples. In the first example, Bob and Doug, partners in a partnership, filing on calendar tax and plan years 2012, each make the decision and subsequent election to make a portion of their annual contribution as 401(k) as well as a resolution to fund non-elective contributions and determine the staff contribution under a new comparability allocation

is contributed, it is not included in compensation. The plan has no CODA provision.

Elsinore provides a substantial benefit for its participants and uses a favorable methodology for the morale of the staff by giving a choice on how to utilize the bonus. Unfortunately, the election by each employee to receive the bonus or have the company contribute to the plan is a CODA. Without a CODA provision in the plan, the result is a nonqualified CODA with potentially costly ramifications.

Elsinore Brewery illustrates one side of the CODA issue. The company will need the help of a competent service provider to identify and correct the violations through EPCRS or VCP before the IRS audits the plan.

ExamplE: partnErShipS anD SolE propriEtorS

Any contribution to an employer sponsored retirement plan from the partnership or sole proprietorship to a partner or sole proprietor is a CODA. The employer contribution is a tax deductible expense for the

17www.asppa.org/pc

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make a new election or leave the election in place.

A linguist can appreciate that facts and circumstances define terms like employer, employee and CODA. When auditing or examining the behavior of a plan sponsor and its participant the processes and procedures should present a clear line between the employee making an election and the employer resolving to act.

JJ McKinney, CPC, ERPA, QPA, QKA, is a principal and COO of Retirement Strategies, Inc., a service provider for employer sponsored retirement plans in Atlanta. Plan consulting, education and advocacy for the private pension system are his professional passions.

other plan related decisions. Since contributions are often made in the tax year following the deduction, documentation of the committee’s decision also supports the intended year of funding and deduction. The amount may not be determinable before the tax year ends, but the committee may still provide a decision to make or not make an employer contribution.

To avoid late and potentially harmful decisions, maintain electronic or hard copy deferral elections for all participants including partners and sole proprietors. Affirmative election for a zero deferral is as important as an election to defer especially in a safe harbor plan where notification is a key component to the safe harbor status. Partners who choose to wait until the end of the year to contribute should review the election each year before the tax year ends and either

The repercussion of the timing error may require amended partnership and individual tax returns including adjustment of FICA/FUTA and income taxes paid on top of the additional staff cost.

mitigating anD prEvEnting violationS

The consequences of CODA violations reach across several aspects of qualified plan regulations, and the preeminent prevention is fundamental to appropriate fiduciary standards.

Timely documentation is the best defense against misinterpreting the actions of the plan sponsor and its participants. It’s best to designate a decision making body to approve, ratify and aggregate the individual members elections on employer contributions. That way, employer contributions are resolved by group consensus consistent with


What’s All the Fuss About Between DOL and Bankruptcy Trustees?

LegaL

BY KENNETH KiRSCHENBAum AND STEVEN SHEiNWALD

19www.asppa.org/pc

debtor’s business. Depending on slight differences in jurisdictions, Trustees typically require or seek an order from the Bankruptcy Judge before performing most acts. These include engaging professionals, selling assets, compromising claims, making any distribution from the estate and especially paying the Trustee’s professionals or seeking compensation as Trustee.

Whether the Trustee is required to seek orders from the Court or elects to obtain a “comfort order” so that the Trustee’s action has the approval of the Court, may vary in different jurisdictions. Either way, Trustees commonly rely upon the supervision of the UST and approval of the Bankruptcy Court. The DOL opposes this supervision and approval for a number of reasons, most importantly because of the impact Bankruptcy Court approval of actions taken by the Trustee in connection with the administration of ERISA plans and the assets of those plans could have on the enforcement powers of the DOL.

The conflict between Bankruptcy Trustees and the DOL which emanate from §704(a)(11) was meticulously addressed by Bankruptcy Judge Robert Grossman in the August 2012 Robert Plan Corporation decision. In that decision, Judge Grossman held that Bankruptcy Trustees:

• are creatures of the Bankruptcy Code and are at all time under the jurisdiction and supervision of the Bankruptcy Court;

• Trustees were entitled to be compensated for their professional services; and

• the Bankruptcy Court had the authority to determine the reasonableness of Trustee compensation and direct that payment be made from either the estate or plan

efore 2005, bankruptcy trustees had no interest in debtor-sponsored pension plans other than to make sure that the debtor

did not fraudulently transfer funds into the plan. Plan assets were not property of the estate. The Chapter 7 bankruptcy case was administered and the plan ignored by the trustee.

That changed with the enactment of the Bankruptcy Abuse and Consumer Protection Act of 2005 (BACPCA), which added a new duty for the trustees in 11 U.S.C. §704(a)(11). Whether the United States Department of Labor considered the change then is no longer relevant. It is clearly on its radar screen now.

The DOL is the enforcement agency that oversees and enforces plans governed by ERISA. Its forum for enforcement is United States District Courts. ERISA plans are administered by a plan administrator, a position usually filled by one of the debtor’s corporate officers. The plan administrator engages a third party administrator and record keeper to assist with the administrative responsibilities, but these third parties will not perform any duty without approval from the plan administrator.

Typically, Bankruptcy Trustees are not ERISA experts, but they nevertheless assume the duties of plan administrator because those duties are required to be performed in accordance with §704(a)(11). Trustees are, however, professional fiduciaries, trustworthy and skilled administrators. They are also under the direct supervision of the Office of the United States Trustee (UST), a division of the U.S. Department of Justice, which appoints them to a panel of trustees, and the Bankruptcy

Judge to whom the bankruptcy case has been assigned. A Trustee is expected to comply with all laws that effect the administration of the bankruptcy estate, and is not exempt from such compliance or the consequences of noncompliance. This means that when performing the duties of plan administrator the Trustee is expected to comply with ERISA laws and is subject to enforcement proceedings by the DOL.

truStEES rEquirED to SErvE aS plan aDminiStra-torS

So what is the issue between Trustees and the DOL? Even though plans are not property of the bankruptcy estate, Trustees are nevertheless required to perform the duties of plan administrator and terminate the plan since the debtor’s operations have ceased in Chapter 7 and there are no longer any employees.

Each DOL district has a React Coordinator who is the Trustee’s contact person at DOL, but neither the React Coordinator nor anyone else at the DOL will provide any guidance or advice to the Trustee on plan administration. The DOL’s function is not to assist but to take action to enforce ERISA compliance or violations.

Plan administrators essentially perform at their own personal risk, and as far as the DOL is concerned, so do Trustees. This is in contrast to Chapter 7 Trustees who are tasked with liquidating debtor assets for distribution to creditors and find comfort relying upon derived judicial immunity for their actions as long as they are performing their Trustee duties in furtherance of liquidation and not operating the

even though a retirement plan is not the property of a bankruptcy estate, trustees are nevertheless required to perform the duties of plan administrator.

B


prohibits the Trustee from seeking Bankruptcy Court approval of the Trustee’s fees, and it requires the Trustee to waive a “release” of liability at the end of the bankruptcy case, thereby exposing the Trustee to the DOL’s enforcement jurisdiction for its six-year statute of limitations.

Curiously, Trustees are enter-taining this option. We predict, however, that Trustees will quickly realize that no matter what carrot the DOL holds out, bankruptcy practice does not permit Trustees to fix their own compensation and that provi-dence is reserved exclusively to the Bankruptcy Judge. Trustees will also realize that there is no good reason to waive their judicial immunity and leave themselves exposed to the DOL, which has made its position regarding Trustees administering ERISA plans transparent.

The outcome of this tug of war awaits further judicial or legislative action, and is not likely to be resolved by the DOL on its own.

Kenneth Kirschenbaum, Esq., is the founder of Kirschenbaum & Kirschenbaum PC, in

Garden City, N.Y. He is a United States Bankruptcy Trustee in the Eastern District of New York, Central Islip Division.

Steven Sheinwald, Esq., chairs the bankruptcy and domestic relations

assets. The decision is currently on appeal to the U.S. district court for the eastern district of New York.

What DoES thE futurE holD?

The battle between Bankruptcy Trustees and DOL is far from over, and it is disheartening to witness the DOL devoting its resources in its misplaced efforts to protect its perceived turf from interference by the Bankruptcy Court.

In an effort to circumvent the clear logic, rationale and persuasiveness of the holding in

The Robert Plan, the DOL has now promulgated new rules to entice Trustees to administer plans under the Abandoned Plan Program, permitting the Trustee to terminate the plan under a simplified process using a Qualified Termination Administrator (QTA). Under this new rule, Trustees will have the option of appointing a qualified financial institution as the QTA, or the Trustee may personally carry out the duties of QTA. Either way, the Trustee is entitled to get paid a “reasonable” fee and continues to be responsible for compliance.

Here’s the twist. The rule

Trustees will realize that there is no good reason to waive their judicial immunity and leave themselves exposed to the DOL, which has made its position regarding Trustees administering ERiSA plans transparent.”

departments at Kirschenbaum & Kirschenbaum, PC.

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Hiring a 3(16) fiduciary is rife with important decisions on the part of a plan sponsor, as well as a significant degree of complexity. The key: fiduciary oversight responsibilities can never be totally eliminated.

BuyerBeware

by marcia S. WagnEr


lthough a plan sponsor may hire various service providers, the sponsor typically retains primary

responsibility for the management of the plan as a fiduciary under ERISA. However, a number of providers are now willing to accept certain plan management responsibilities as so-called “3(16) fiduciaries.” In this article, we will examine the implications of this development.

DEfinition anD DutiES of 3(16) fiDuciary

The term “3(16) fiduciary” is derived from Section 3(16) of ERISA, which provides that the term “administrator” means either the person “specifically so designated” by the plan terms or if an administrator is not so designated, the plan sponsor. Every plan must have a person who serves as its administrator for ERISA purposes, and this person is required to fulfill certain reporting and disclosure obligations under ERISA that are not imposed on other types of plan service providers. These functions make such an administrator a unique ERISA fiduciary.

The administrator’s duties include providing summary plan descriptions (SPDs) to participants and ensuring that they receive quarterly benefit statements. In addition, the administrator must furnish participant-level fee disclosures in accordance with the DOL’s new participant-level disclosure regulations. A copy of the plan document must be provided by the administrator to participants upon request.

Furthermore, the administrator has a duty to sign and file a plan’s Form 5500, and must engage an accountant to conduct audits of the plan’s financial statements where necessary for purposes of these annual filings. The administrator has a duty to maintain the tax-qualified status of the plan and ensure that it is operated in accordance with its terms.

In addition to being subject to the aforementioned obligations, a plan’s administrator is also subject to a unique set of sanctions that only apply to administrators and their reporting and disclosure duties. Specifically, the administrator’s failure to file a Form 5500 on a timely basis may result in a penalty of up to $1,100 per day. Upon a failure to furnish certain required information (e.g., the plan’s SPD, Form 5500 or plan document) to a participant within 30 days of a request, the administrator may be subject to a penalty of up to $110 per day.

The plan fiduciary responsible for these duties that come within ERISA’s definition of “administrator” should never be confused with ordinary administrative service providers. Accordingly, this statutory term should not be used to describe a TPA that does not accept any fiduciary responsibility from the plan sponsor. When the plan sponsor serves as administrator, it has the fiduciary responsibility of ensuring that the participants receive their mandatory disclosures even if as a practical matter it relies on the plan’s record keeper or TPA to deliver these materials.

Furthermore, even if the TPA prepares the Form 5500, it is the plan sponsor in its capacity as the administrator that must file the form, making it responsible for its informational content. If the record keeper or TPA makes an error, it is the plan sponsor in its capacity as the administrator that is subject to a fiduciary penalty.

aDvantagES of hiring a 3(16) fiDuciary

To meet the desire of some plan sponsors to “outsource” fiduciary responsibilities attributable to their status as administrators, a number of third party service providers holding themselves out as “3(16) fiduciaries” are now willing to accept certain plan management responsibilities that traditionally had been performed by plan sponsors. For example, some TPA firms are now willing to perform

certain fiduciary functions as 3(16) fiduciaries. Trust companies which offer trust and custody services to plans, as well as certain registered investment advisors under federal or state securities laws, may also be willing to serve as 3(16) fiduciaries.

If a plan sponsor elects to engage a third party to serve as the plan’s 3(16) fiduciary, the plan document must be amended to designate this third party provider of fiduciary services as the plan’s administrator. When a 3(16) fiduciary is designated as the administrator, the plan sponsor ceases to be responsible for the applicable ERISA reporting and disclosure obligations.

For example, if the plan’s record keeper fails to distribute a plan document upon a participant’s request, it would be the 3(16) fiduciary (rather than the plan sponsor) that would be subject to the applicable statutory penalties. Furthermore, since the 3(16) fiduciary would be responsible for signing and filing the plan’s annual filings on the Form 5500, the 3(16) fiduciary (rather than the plan sponsor) would be liable under ERISA for any delinquent or defective filings made on behalf of the plan.

As a result of the transfer of poten-tial liability from the plan sponsor to another 3(16) fiduciary, there are some clear benefits for the plan sponsor from a fiduciary perspective once it engages the 3(16) fiduciary. However, it should be noted that the transfer of fiduciary responsibilities from the plan sponsor to the 3(16) fiduciary may in fact be limited to the transfer of the spon-sor’s fiduciary reporting and disclosure obligations. Unless the 3(16) fiduciary voluntarily agrees to accept additional fiduciary responsibilities, the plan sponsor would remain responsible for discharging all other plan management responsibilities, including the fiduciary oversight of the plan’s investment menu and management of all other benefits-related aspects of the plan.

Shifting fiDuciary rESponSibilitiES

Some plan sponsors may

COver STOry

A

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mistakenly believe that a 3(16) fiduciary will automatically assume all of the sponsor’s responsibilities. As noted above, it is entirely possible for a 3(16) fiduciary to genuinely claim that it has taken on the role of the plan’s administrator while limiting its fiduciary responsibility solely to the reporting and disclosure obligations imposed by ERISA on the plan’s administrator.

To illustrate this point, consider a hypothetical TPA firm that offers non-fiduciary administrative services to its plan clients, such as performing compliance testing, administering the plan’s loans and preparing a signature-ready Form 5500 for the plan sponsor’s execution. This kind of TPA firm could easily offer to serve as a 3(16) fiduciary for its plan sponsor clients by offering these incremental services:

(1) monitoring the plan’s record keeper to ensure that all required disclosures are delivered to participants, and

(2) signing the Form 5500 as the plan’s administrator.

Alternatively, a trust company offering to serve as a 3(16) fiduciary could agree to expand its traditional services to include adjudication of benefit claims and disputes with participants, manage the plan’s menu of investments, ensure that the plan operates in accordance with applicable tax qualification requirements, select and monitor the plan’s service providers and execute their service agreements on behalf of the plan, while ensuring that the plan’s fees and expenses are reasonable.

In the case of a third party which agrees to serve as a 3(16) fiduciary and accept a comprehensive level of

fiduciary oversight responsibilities, the plan document is typically amended to designate such third party as the plan’s “named fiduciary” (in addition to designating the third party as the plan’s administrator). ERISA Section 402(a) requires every plan to identify at least one named fiduciary with the “authority to control and manage the operation and administration” of the plan. Therefore, depending on the scope of the fiduciary responsibilities assumed by the 3(16) fiduciary as reflected in the plan document, the 3(16) fiduciary’s duties may be narrowly limited to the applicable reporting and disclosure obligations of the plan or they may be substantially broader.

If the 3(16) fiduciary accepts the role of named fiduciary, its fiduciary duty extends to the operation and management of the plan as a whole.

inability to fully EliminatE plan SponSor rESponSibility

Unfortunately, even if a 3(16) fiduciary agrees to assume full plan management responsibilities as both named fiduciary and administrator, it cannot fully eliminate the plan sponsor’s fiduciary oversight responsibilities. This especially may be the case regarding monitoring of the timely transmission of elective deferral contributions to trust. Given the fact that it is the sponsor’s decision to hire and retain a 3(16) fiduciary, the sponsor remains responsible for the duly diligent selection and monitoring of such a service provider. The courts have held that even if a plan sponsor gives the administrator control over the plan, the sponsor remains responsible for

Plan sponsors should be wary of any arrangement in which the 3(16) fiduciary has the discretion to appoint itself to serve as the plan’s investment manager.”

the administrator’s appointment.1 It is important for plan sponsors

to understand that their decision to appoint a 3(16) fiduciary is itself an affirmative fiduciary act that must be made prudently in accordance with the fiduciary standards of ERISA. Moreover, plan sponsors should realize that they have an ongoing duty to monitor the performance of its 3(16) fiduciary firm at reasonable intervals (e.g., annually).

hoW to pruDEntly SElEct a 3(16) fiDuciary

A decision to hire a 3(16) fiduciary should be made prudently and solely in the interest of plan participants. As part of its decision-making process, it is important for the plan sponsor to establish and follow a procedure that satisfies the requirements of ERISA. According to the DOL, the plan sponsor must engage in an “objective process” designed to elicit the information necessary to evaluate the following three criteria:

(1) the qualifications of the service provider,

(2) the quality of services provided, and

(3) the reasonableness of the provider’s fees in light of the services provided.2

To evaluate a prospective 3(16) fiduciary, the plan sponsor should consider the qualifications of the firm and its personnel. The plan sponsor may wish to request information concerning the firm’s track record in serving as a 3(16) fiduciary as well as the educational background and experience of the firm’s employees and management team.

Given the highly technical nature of fiduciary services, it is important

1 See, e.g., Gelardi v. Pertec Computer Corp., 761 F.2d 1323 (9th Cir.1985) (holding that the employer and the employer’s board of directors remain liable with respect to the selection of the plan’s administrator). 2 DOL Advisory Opinion 2002-08A. See also DOL Field Assistance Bulletin 2002-3.


be liable for the misdeeds and/or negligence of a 3(16) fiduciary.

Finally, the plan sponsor will want to ensure that there is no duplication of services among the 3(16) fiduciary, the TPA and the investment advisor.

limitationS of invEStmEnt managEr appointmEntS

Certain trust companies and registered investment advisers willing to serve as 3(16) fiduciaries may claim to be able to serve as the plan’s investment manager in addition to simultaneously serving as its administrator and named fiduciary. An investment manager is defined under Section 3(38) of ERISA as a qualifying financial services firm that has investment discretion over plan assets and has acknowledged in writing that it is a fiduciary.4 Despite the appeal of promotional claims made by a 3(16) fiduciary that it has the ability to take on three distinct fiduciary roles as plan administrator, named fiduciary and investment manager, the firm’s claim that it will assume the responsibilities of an investment manager (in addition to those of a named fiduciary) has no value from a technical perspective under ERISA.

Ordinarily, when a plan sponsor in its capacity as a named fiduciary appoints a third party firm to serve as investment manager, the sponsor is shielded from potential ERISA liability. While the sponsor is responsible for prudently selecting the investment manager, it cannot be held liable for any losses that arise under ERISA as a result of the investment manager’s acts or omissions. Thus, when the plan sponsor serves as the plan’s named fiduciary, there is a substantial benefit to the sponsor from a liability perspective

that the firm have sufficient expertise in ERISA as well as the fiduciary standards and requirements that are imposed on named fiduciaries and administrators under ERISA. The plan sponsor should also consider the firm’s size, the total amount of client assets under administration and whether the prospective firm is a trust company, registered investment adviser or a non-regulated entity

When considering the quality of the services offered by the prospective firm, it is especially important to identify the scope of the fiduciary responsibilities that would be assumed by the 3(16) fiduciary in connection with the proposed engagement. The scope of the firm’s services should be described in its upfront fee disclosures mandated under ERISA’s new plan-level disclosure rules, which must be provided to the plan sponsor before the firm may be hired.

Using these disclosures and other relevant information, the plan sponsor should determine the extent to which the 3(16) fiduciary will accept fiduciary responsibilities beyond those of an administrator, and whether the firm is also willing to be named as the plan’s named fiduciary. The plan sponsor should also identify which direct services the 3(16) fiduciary intends to render itself and inquire how the 3(16) fiduciary intends to monitor and evaluate other plan servicer providers with respect to their performance and compensation.

In order to evaluate the reasonableness of the fees of a 3(16) fiduciary, the plan sponsor may request bids or quotes from comparable 3(16) fiduciary firms to help it determine the prevailing rate for similar services.3 However, the number of 3(16) fiduciary

firms (offering both fiduciary oversight and non-fiduciary administrative services) may be small in comparison to the number of firms, such as TPAs, that routinely offer non-fiduciary administrative services only.

Accordingly, if the plan sponsor is not able to obtain bids or quotes from multiple firms that are comparable to the prospective firm, it may wish to consider comparing the 3(16) fiduciary firm’s quoted fee for its suite of fiduciary oversight and non-fiduciary administrative services against the quoted fees of comparable firms offering non-fiduciary administrative services only. This comparison would enable the plan sponsor to determine the fee “premium” charged by the 3(16) fiduciary firm for accepting additional fiduciary responsibilities as an administrator (or as both an administrator and named fiduciary).

In addition to evaluating the three criteria required under the DOL’s guidance for prudently engaging a service provider, when considering a 3(16) fiduciary firm, the plan sponsor may also wish to consider the firm’s capacity to pay any possible legal claims made by the plan sponsor or its participants in connection with any breach by the 3(16) fiduciary of its duties to the plan. For example, if a 3(16) fiduciary were to imprudently approve the hiring of a record keeper with dishonest or incompetent employees, the 3(16) fiduciary would be subject to potential liability for causing any related losses sustained by the participants.

Plan sponsors may wish to confirm that their 3(16) fiduciaries maintain a sufficient level of insurance coverage and/or have deep pockets. If not, a plan sponsor could ultimately

When a 3(16) fiduciary is designated as the administrator, the plan sponsor ceases to be responsible for the applicable ERiSA reporting and disclosure obligations.”

3 If a separate fee quote is provided, the plan sponsor should also review the compensation information included in the firm’s 408(b)(2) fee disclosures. 4 ERISA Section 3(38). To qualify as an investment manager, the financial services firm must be a bank, insurance company or registered investment adviser.

27www.asppa.org/pc

if the sponsor appoints a third party to serve as investment manager.

On the other hand, when a 3(16) fiduciary serving as the plan’s named fiduciary appoints itself as investment manager, there is no benefit from a liability perspective to the plan sponsor. From the sponsor’s perspective, there is no substantive difference between an arrangement in which the 3(16) fiduciary appoints itself to serve as an investment manager, and an arrangement in which the 3(16) fiduciary provides investment management services directly as the named fiduciary.5

Plan sponsors should be wary of any arrangement in which the 3(16) fiduciary has the discretion to appoint itself to serve as the plan’s investment manager. If the unilateral exercise of such discretion results in any increase in the aggregate compensation of the

3(16) fiduciary, it would be in violation of ERISA’s prohibited transaction rules, which bar fiduciary self-dealing.6

To the extent the plan sponsor considers hiring a 3(16) fiduciary that holds itself out as both named fiduciary and investment manager (in addition to being the administrator), the sponsor should ensure that it is paying a single fee for all bundled services. No prohibited self-dealing would occur under ERISA so long as the sponsor ensures that the 3(16) fiduciary is unable to unilaterally increase the compensation that it earns.

concluSionAlthough a 3(16) fiduciary firm

can relieve plan sponsors of a great deal of their fiduciary oversight duties under ERISA, the level of fiduciary responsibility that may be accepted from plan sponsors varies

considerably, and sponsors should focus on the nature of their remaining fiduciary duties. Even if a 3(16) fiduciary accepts a comprehensive level of fiduciary responsibility, the plan sponsor’s fiduciary oversight responsibilities can never be totally eliminated. If a plan sponsor is uncomfortable with engaging a 3(16) fiduciary for any reason, it can simply retain its customary plan management responsibilities and make all plan-related decisions prudently with such technical or practical assistance from investment advisers, TPAs or plan service providers, as it deems necessary.

Marcia S. Wagner, Esq., is the managing partner of the Wagner Law Group in Boston, Mass.

5 Accordingly, the investment management services do not necessarily need to be documented in a separate investment management agreement (which is separate and in addition to the main service agreement for the 3(16) fiduciary firm’s services). 6 ERISA Section 406(b). Section 4975 of the Internal Revenue Code includes “mirror” provisions imposing excise taxes on such prohibited transactions.

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The Practical Responsibility of Advisors for Participant Disclosures

feaTure

BY FRED REiSH AND JOAN NERi

The 404a-5 participant disclosure regulation places the legal responsibility for those disclosures on the ERISA plan administrator (that is, the plan sponsor or

committee). However, plan sponsors, as a practical matter, expect their service providers to make those disclosures. (For ease of reference, we will refer to the plan administrator as the plan sponsor.) While record keepers will handle most of the disclosures, advisors may need to take responsibility for at least some of them. This article briefly describes four advisor services requiring participant disclosures: � Plan-level investment advisory

services � Asset allocation models for

participants � Participant-level advisory services � Self-directed brokerage accounts

This article refers to the RIA as the plan advisor since in most cases

Four services provided by riAs involve required participant disclosures. How well do you know your responsibilities?

29www.asppa.org/pc

be provided to the plan sponsor. Also, RIAs can coordinate the disclosure with the plan record keeper to insure that it is timely distributed — initially to newly eligible employees and annually to all participants.

aSSEt allocation moDElSAsset allocation models take many

different forms. Depending upon how an RIA structures and presents its asset allocation models, they could be considered designated investment alternatives (DIAs) subject to detailed participant disclosure about expense ratios, performance history, portfolio turnover rates and more. In our experience, while most RIAs do not object to presenting this detailed investment information, few record keepers have the systems in place to capture and report this information.

Dol guiDancEUnder Q&A-28 of the FAB, an

asset allocation model must have the following characteristics in order to avoid DIA status: � it is clearly presented to participants

as an investment service that enables participants to allocate among the plan’s DIAs;

� it cannot use investments that are not in the plan’s line-up of DIAs; and

� it is not unitized, meaning that it does not have its own trading value and operate like an investment.The DOL guidance also indicates

that to avoid DIA status, the plan must provide participants with an explanation of how the asset allocation model functions and how it differs from the DIAs.

the disclosure rules contemplate the typical RIA service arrangement — namely, one in which the advisor is serving as a fiduciary and is receiving a fee. However, in instances where non-RIA advisors provide similar services and charge similar fees, those advisors should likewise consider taking responsibility for these disclosures.

plan-lEvEl invEStmEnt aDviSory SErvicES

RIAs are typically hired — either as a nondiscretionary adviser or as a discretionary investment manager — to provide a range of plan-level investment services, including advice about the plan line-up (e.g., selection and monitoring of investments) and the investment strategy (e.g., development of the investment policy statement). If the RIA’s fee is paid from the plan and charged to participants’ accounts, the participant disclosure rules apply.

The requirements for these participant disclosures are found in the DOL’s 404a-5 regulation. The regulation was issued in 2010 and then, in 2012, some of its provisions were clarified by DOL Field Assistance Bulletin 2012-02R (“the FAB”), which was organized in a Q&A format.

Dol guiDancEQ&A-5 of the FAB describes the

information that must be disclosed to participants for administrative fees for plan services, including advisory fees, that are charged to participants’ accounts. Under that guidance, the disclosure must identify the service (e.g., nondiscretionary investment

advisory or discretionary investment management services), the cost of the service from a participant’s perspective (e.g., percentage of the participant’s account balance, per participant dollar amount) and the plan’s allocation method (e.g., pro rata, per capita).

The disclosure must be provided initially — i.e., to newly eligible employees before they can first direct investments. The disclosures must also be made to all participants annually. (Note that “participant” is broadly defined to include all eligible employees, even if they do not elect to enroll in the plan, as well as beneficiaries who have the right to direct investments). In addition, participants must be provided with a quarterly disclosure of the dollar amount of the administrative fees (including the RIA fee) charged against their individual account along with a description of the service to which the charge relates.

thE iSSuESThe participant disclosure rules

require information about RIA services and fees when the fees are charged to participants’ accounts. Without the RIA’s assistance, plan sponsors may fail to provide this required information to participants.

practical rESponSibility of thE ria

RIAs which provide plan-level investment services — whether as a nondiscretionary investment advisor or a discretionary investment manager — should help plan sponsors comply with these disclosure rules. RIAs can develop compliant disclosure language about their fees and services that can

For risk management purposes, RiAs should provide participants with additional disclosures, including a description of the investment strategy that will be employed and the manner in which the RiA will apply that strategy to a particular participant.”


service (e.g., participant investment management services).

To qualify as a DIM, the DOL requires that the RIA: � serve as an ERISA 3(38) discre-

tionary investment manager; � be designated by the plan sponsor

to manage participant plan accounts; and

� employ investment strategies on a participant-by-participant basis.

thE iSSuESTo be a DIM, the RIA must invest

on a “participant-by-participant basis”, yet the DOL has not defined this phrase. Rather, the DOL lists several participant appropriate factors that the DIM can consider, including age, time horizons, risk tolerance, current investments, sources of income and investment preferences. Accordingly, the DOL guidance raises questions as to what documentation and procedures an RIA should employ in order to satisfy the DOL requirements.


RIAs that intend to qualify as DIMs should assist plan sponsors in developing the disclosure language that describes the DIM services and fee and should coordinate with the record keeper to make sure it is timely delivered to newly eligible employees and annually to all participants.

Also, for risk management purpos-es, RIAs should provide participants with additional disclosures, including a description of the investment strategy that will be employed and the man-ner in which the RIA will apply that strategy to a particular participant. To support the investment strategy, the RIA will need to develop a process for collecting participant information — for example, through a participant questionnaire. The RIA should also consider whether other documents need to reflect the DIM service and may need to revise service agreements, the IPS, the Form ADV, marketing material and other participant disclosure materials.

thE iSSuESMany RIAs are structuring

and describing their asset allocation models with the object of avoiding DIA status. Yet, the DOL guidance leaves open several issues that RIAs need to consider. For instance, the DOL does not address whether rebalancing or the plan sponsor’s removal and replacement of DIAs within the model will cause the model to be a DIA — or, if not, what disclosures must be made about those matters.

Also, because the DOL guidance focused on a fact scenario involving risk-based models, an unanswered question is whether the asset allocation strategies can be based upon some other factor (e.g., age-based or target date) and still avoid DIA status. RIAs should consult with their ERISA attorneys about disclosures and consequences for those issues.


RIAs can assist plan sponsors in complying with these participant disclosure requirements for models that are structured to avoid DIA status. The RIA can develop a description of the model that makes it clear it is an asset allocation service and not an investment option (e.g., DIA) and that adequately explains how the model functions. This means that the disclosure should explain, if relevant, the re-balancing feature, the plan sponsor’s removal and replacement of DIAs, and details about allocation changes, such as in the case of age-based models.

Because the model is intended as

a tool for allocation among the plan’s DIAs, the RIA should coordinate with the record keeper to present this description initially to newly eligible employees and to all participants annually.

participant-lEvEl invEStmEnt SErvicES

If a plan chooses an RIA to provide investment management services for participants, the RIA is considered a “designated investment manager” (DIM). There are specific participant disclosure rules that apply to DIM services.

Dol guiDancEQ&A-4 of the FAB provides that,

if an RIA is a DIM, then the RIA’s investment management strategies — including asset allocations — are not DIAs and, therefore, are not subject to the detailed participant disclosure rules about expense ratios, performance history, portfolio turnover rates and more. This is the case even if the DIM includes investments outside the plan’s DIA lineup.

Q&A-27 of the FAB explains that if an RIA is a DIM, the participant disclosure rules require that the plan sponsor identify the RIA serving as a DIM and describe the DIM services and fees. This disclosure must be provided initially to newly eligible employees and annually to all participants. Also, the plan sponsor must provide participants with a quarterly statement of the DIM fee charged against their individual accounts and a description of the DIM

many RiAs are structuring and describing their asset allocation models with the object of avoiding DiA status.”

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permits participants to select their own broker-dealer, plan sponsors will need additional assistance.


RIAs that provide participant-level investment services through brokerage accounts can assist the plan sponsor in complying with the participant disclosure rules. The RIA can do this by facilitating the collection of the required information through coordination and delivery with the record keeper and the broker-dealers and then developing a disclosure that reflects the collected information.

concluSion

Plan sponsors typically rely on RIAs to assist them with their ERISA responsibilities. It follows that most plan sponsors have an expectation that the RIA will help with disclosing the RIA’s services and fees in compliance with the participant disclosure rules, as well as with other investment-related issues. For this reason, RIAs need to know the participant disclosure rules that apply to these services and should work with their attorneys to develop compliant disclosure language to assist the plan sponsor.

Fred Reish is an ERISA attorney with Drinker Biddle & Reath. His practice focuses on fiduciary responsibility,

retirement income and plan operational issues. Fred serves as a member of his firm’s Retirement Income team and is a member of the Institutional Retirement Income Council.

Joan Neri is an ERISA attorney at Drinker Biddle & Reath in the firm’s Financial Services ERISA team. With

more than 25 years of experience, she counsels clients on all aspects of ERISA compliance. Joan is a frequent speaker throughout the country on legislative and regulatory developments impacting ERISA fiduciaries.

SElf-DirEctED brokEragE account SErvicES

RIAs that provide investment services to plan participants through self-directed brokerage accounts — as either a nondiscretionary investment advisor or a discretionary investment manager — should consider assisting plan sponsors with the participant disclosure responsibilities that apply to these accounts.

Dol guiDancEUnder Q&A-13 of the FAB,

participants must receive: � a general description of how a

self-directed brokerage account works;

� an explanation of any fees and expenses that may be charged against the participants’ account, such as the initial access and termination fees; and

� the ongoing expenses and transaction fees.This information must be

provided initially to newly eligible employees and annually to all participants — even if they have not elected the brokerage window. In addition, at least quarterly, a disclosure must be provided to participants of the dollar amount of fees and expenses charged to their account and a description of the services. (This disclosure can be made more frequently than quarterly, for example, on confirmations or brokerage statements.)

thE iSSuEPlan sponsors are not equipped

to prepare and distribute the information needed to comply with these disclosure rules, and will need to rely on other service providers to assist them. If the record keeper works with a particular broker-dealer so that only brokerage accounts of that broker-dealer are offered in the plan, the collection of the participant disclosure information should be facilitated through the record keeper. In contrast, where there are multiple broker-dealers because the plan

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From the Hill to the SuMMiT

feaTure

BY JOHN ORTmAN

PHOTOGRAPHY: JAmES TKATCH

Keynote speaker Simon Sinek addressing the audience.

Rights Center’s Karen Friedman.Crain suggested that we have

been on a journey over the past 10 years in a system that has become characterized by “democratic paternalism” — democratic because participants still have to make their own decisions, but turning paternalistic with the evolution of auto enrollment and escalation. For example, auto enrollment is now being applied to non-participating employees, he noted.

This approach, in combination with investment advice, increases average deferrals by almost $2,500 per year, Crain said. Even Freidman,

a failED ExpErimEnt?While 401(k)s have become

ubiquitous in our society and have garnered over $3 trillion in assets, the bright light shining on 401(k)s does show some of its blemishes, raising the question of whether we should create a whole new system or try to improve the one we have. Four senior policy and industry people addressed a provocative question: Is the 401(k) a failed experiment?

Moderated by Brian Graff, Executive Director/CEO of ASPPA and NAPA, the panel included Merrill Lynch’s Kevin Crain, ASPPA’s Judy Miller and the Pension

he NAPA/ASPPA 401(k) SUMMIT 2013, held March 3-5 in Las Vegas, was the biggest ever — with more than 1,400 people in attendance. More advisors attended than ever, too —

in fact, the percentage of advisors practically doubled from last year.

The 2013 SUMMIT featured six general sessions, a score of concurrent workshops, sponsored breakfasts, more than 60 speakers and an exhibit hall featuring more than 120 industry leaders. Let’s take a look at some of the highlights from the general sessions and workshops.

Bigger, better and more rewarding — the 401(k) summit keeps improving every year. Here are some of the many highlights of this year’s summit.

T

33www.asppa.org/pc

fees, more competition and clients’ laser focus on managing costs, there are two keys to maintaining a profitable practice, according to Sue Kelley of Ann Schleck & Co.: adopting a formal process to assess profitability and having a strategy in place to optimize profitability.

Taking part in a panel discussion, Kelley was joined by Troy Hammond of Pensionmark Retirement Group and Chad Larsen of Moreton Retirement Partners.

Kelley listed five ways changes in the marketplace are affecting advisors’ profitability: � The old focus on number of new

plans is shifting to a new one: revenue per client.

� The focus on AUA is shifting to a focus on cost per client.

� The focus on maximizing revenue is shifting to a focus on controlling costs.

� The focus on asset-based fees is shifting to fixed fees.

� The focus on providing the same services to all clients is shifting to segmentation — that is, providing different services to different clients.

a prominent critic of the system, admitted 401(k)s are attractive and popular because of payroll deduction, portability and transparency. In addition, Graff noted, plans and participants enjoy economies of scale, lowering the cost of service and investment products.

Responding to criticism that average and median account balances are too low, Miller noted that many participants keep old accounts when they leave their jobs, skewing the numbers. Noting that the system doesn’t cover the part-time workforce, statistics purporting to show that overall coverage is low are wrong when applied to full-time workers.

So how do we improve the system? There was much discussion about the emerging state-run MEPs, especially California’s plan, which seem to be garnering the interest of many states and has been on Treasury’s agenda for a while, in the form of their auto IRA proposal.

Surprisingly, there was consensus among the panel that these schemes, especially the one under study in California (which would require all employers with more than five workers to offer a plan), are beneficial as long as providers are allowed

to compete for the business with the states. The question was raised whether the Feds will step in to create a uniform system if many states adopt MEPs, and Graff cautioned that any mandatory funding requirements by employers will likely meet resistance.

Friedman advocated for universal coverage, more responsibility shared by the employer, pooling risk among investors and allowing states to allow private workers to leverage the efficiencies and scale of their retirement systems. Crain advocated that enrollment in retirement plans should mirror health plans, and that personalized advice should be expanded to everyone at a low cost or even for free.

And all four panelists agreed that offering some sort of retirement income product would be helpful and that translating participant account balances into streams of income would be a good start.

thE roaD to grEatEr proDuctivity bEginS With aSSESSmEnt

In today’s world of compressed

Are 401(k)s a failed experiment? Brian Graff, Kevin Crane, Karen Friedman and Judy Miller (L-R) tackled this provocative question.


the drastic cuts enacted in TRA ’86, DEFRA and TEFRA.

Reish offered a couple of suggestions for advisors if the tax reform axe does fall on the industry once again. “For small firms, look at adding DB or cash balance plans. For large plans, think about adding non-qualified deferred comp plans,” Reish suggested, as a way to soften the blow if it comes.

DOL Fiduciary StandardTurning to the issue of an

expanded definition of fiduciary by the DOL, Wagner noted that DOL’s first proposal was to eliminate the five-part ERISA test and make a provider of even casual advice a fiduciary. This idea has been scrapped, she noted, but DOL still wants to expand the definition. Wagner expects that, to avoid being held up to the forthcoming fiduciary standard, an advisor or service provider will have to expressly exempt themselves by making a disclaimer.

One benefit of the new fiduciary rule that industry experts are hoping for is a clearer definition of education versus advice, and the easing of prohibited fiduciary transactions for broker/dealers, said Levine.

Reish said he does not expect the DOL to “change the definition of fiduciary too much,” although the standard will render nearly all 401(k) advisors fiduciaries. “For TPAs, life will be as usual,” Reish said. “Record keepers will survive; they have the legal staff to support them. RIAs will want a stronger definition of fiduciary. Broker/dealers and insurance brokers? They will consider it too much.”

Rather than having to disclose to sponsor and participant clients that they are not a fiduciary, Reish expects that broker/dealers will create more RIA programs. Among broker/dealers, he believes, there will also be levelized compensation.

Hammond suggested four key metrics to measure profitability:1. Financial (growth in annual

revenue, expenses as a percent of revenue, and profit margin growth)

2. Productivity (revenue goal per producer, and time spent on billable vs. non-billable hours)

3. Client-specific (time spent per client, profitability per client, and client retention and satisfaction rates)

4. Sales (number of new clients/new plans, cross-sell revenue)Larsen outlined a process for

assessing your profitability:1. Identify weaknesses that

negatively affect productivity (time wasters, manual processes, etc.).

2. Create a written plan to address inefficiencies, including steps and who is responsible.

3. Implement the plan.4. Review progress using a

dashboard of metrics to monitor.Addressing fee structure, Larsen

reported that hard-dollar fees currently make up about 35% of Moreton’s revenue. At Pensionmark that figure is around 15%, Hammond indicated. His firm has adopted hybrid pricing for some (mostly larger) plans.

What’s it like when effective assessment efforts really kick in? For Pensionmark, Hammond said, the “a-ha” moment came when they ran reports from different perspectives,

showing profitability by plan size, location, provider and product.

lEgal rounDtablESeveral themes emerged in the

presentations and off-the-cuff remarks by the conference’s featured speakers, especially on the topic of tax reform. One of these themes was sounded loud and clear by ERISA attorney David Levine of the Groom Law Group: Congress is looking for tax revenue to help resolve the budget deficit, and they’re going to come after 401(k) plans.

More specifically, said Levine, the likeliest target is Roth 401(k)s — again. “Congress needs revenue … to them, Roth plans are like a drug,” Levine told a packed general session yesterday. “Yes, they just used Roth plans to generate revenue [in the fiscal cliff deal], and they could do it again,” he said. Changing the tax treatment of Roth 401(k)s to generate more revenue may help solve a problem today, Levine noted, but as a result, revenue may not be available 20 years from now.

Marcia Wagner of The Wagner Law Group and Fred Reish of Drinker Biddle joined Levine in a legal roundtable moderated by Sarah Simoneaux of Simoneaux & Stroud.

Addressing the possible impact of tax reform on 401(k) plans, Wagner outlined the various deferral, compensation and other limitations applicable to 401(k)s and other forms of DC plans, reminding attendees of

The road to profitability: Sue Kelley looks on as Chad Larsen makes a point.

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For advisors, Brandwein believes, it all leads back to the critical need to demonstrate value to their clients. He singled out five things that advisors must do to show their value: � Benchmarking — and not

just costs. � Helping plan sponsors renegotiate

with providers to gain more favorable terms.

� Leveraging the plan sponsor’s time.

� Providing training, both to participants and to the investment committee.

� Assisting with plan design changes to make the plan more cost-efficient.Brandwein’s co-presenter Fred

Reish of Drinker Biddle & Reath addressed the legal dimension of disclosure—in particular, focusing on the fact that the DOL does not believe that plan fiduciaries should get a free pass from liability unless they take reasonable steps to review the disclosures, understand them enough to determine they are adequate, and demand in writing any missing or inadequate information within 90 days or terminate the covered service provider relationship.

In addition, Reish emphasized

their effectiveness, for the most part the participant notices were ignored.

Samuel Brandwein of Morgan Stanley Wealth Management is taking a longer view in judging the effectiveness of the rules. When looked at from the perspective of whether plan sponsors and participants have changed their behavior, “the rules will be a game-changer — eventually,” Brandwein told a workshop audience.

Brandwein made his case for taking a longer view by citing the impact of state seat belt laws and the 1990 federal nutrition labeling law. “Both took time to change behavior — and in both cases, change resulted from education efforts, not from the law itself,” he said. “That’s why it takes time to see a meaningful impact.”

For plan sponsors, Brandwein noted, the major barriers in implementing the requirements were confusion (especially over electronic disclosure), liability issues, determining what’s “reasonable,” benchmarking non-traditional investments like stable value products, and increased numbers of in-service withdrawal requests — as well as the costs involved, of course.

408(b)(2) UpdateAddressing the hot-button issue of

408(b)(2) fee disclosure, Reish warned plan advisors about the coming onslaught of auditors asking their plan sponsor clients how they review 408(b)(2) fee disclosures.

Wagner concurred. “The SEC is telling auditors to look at 408(b)(2)s,” Wagner noted. Her advice: “Document everything. No service is apples to apples, but you can figure out appropriate fees through RFPs, asking peers and getting detailed explanation of fees from service providers. Prove an intelligent analysis was done.”

For its part, the DOL will ask whether 408(b)(2) disclosure is adequate, Reish noted. “If you’re a fiduciary and you are getting additional compensation, DOL will scrutinize you,” he warned.

lifE aftEr fEE DiScloSurENow that the DOL’s fee disclosure

regulations have been in effect for about a year, the conventional wisdom is that despite the costs of gearing up for the new required participant notices, implementing new procedures, sending out the notices and following up to gauge

Top: Legal eagles: Attorneys David Levine, Marcia Wagner and Fred Reish (L-R) shared their takes on legal issues. Right: Life after fee disclosure: Fred Reish explains a point as moderator Lisa Smith and co-presenter Samuel Brandwein look on.

37www.asppa.org/pc

the team at Moreton Retirement Partners in Denver, Colo.; and Michael Kane, Founder & Managing Director, and the team at Plan Sponsor Consultants in Alpharetta, Ga., were selected from more than 65 nominations submitted by peers and colleagues in the retirement plan industry.

Leadership Award during a general session at the SUMMIT. Jania Stout, Retirement Plans Practice Leader at PSA, accepted the award on behalf of her team.

The 401(k) Advisor Leadership Award recognizes a leading financial advisor or team for contributions that exemplify leadership, experience and expertise in the retirement plan industry. Sponsored by NAPA and ASPPA, the award reflects the multi-faceted efforts of advisors to serve their clients (plan sponsors and participants), act as a mentor, maintain high ethical standards and consistently improve their practices and services in the retirement industry.

“Stout and her team at Fiduciary Consulting Group are committed to making a difference in the lives of plan sponsors and their participants,” said Brian Graff, executive director/CEO of ASPPA and NAPA. “They channel this attitude in their service model centered on fiduciary duty, emphasis on participant education, and their openness to innovation in plan design and results. As a result, Stout and her team have enhanced the ability of American workers to achieve a secure retirement.”

The Fiduciary Consulting Group team — Stout, Chad Wilson and Peter Godfrey — along with fellow finalists Chad Larsen, President, and

the DOL’s position on the need to continually monitor the arrangements using a prudent process. He added that the DOL is considering amending the regulation to require “a guide or similar tool” to help plan fiduciaries — especially in small plans — better understand the disclosures, since there is no uniformity in how they must be disclosed.

Turning to 404a-5 participant fee disclosure, Reish noted the conundrum existing in the reality that while the disclosures are a fiduciary act, non-fiduciary record keepers are the service providers primarily preparing them. Plan fiduciaries “should develop a checklist to review these disclosures for adequacy,” Reish recommended, thus fulfilling their fiduciary duty.

Reish also warned about possible areas of future litigation, noting lawsuits may arise due to missing or inadequate disclosures, inappropriate share classes — especially when a provider may have multiple share classes available — and challenges to allocations of revenue sharing.

fiDuciary conSulting group WinS 2013 401(k) aDviSor lEaDErShip aWarD

The team at Fiduciary Consulting Group at PSA from Hunt Valley, Md., received the 2013 401(k) Advisor

Contributors

the following nApA members contributed to this article:• Kristine J. Coffey, CPC• Joe Connell, AIF, CRPS, RFKris and Joe volunteered to report

on the summit through AsppA’s “news from the Field” program, along with several other nApA and AsppA members. their reports are posted on the AsppA newsroom at http://www.asppanews.org/category/member-focus/. more information about the news from the Field program is at http://bit.ly/ASPPANFTF. if you’d like to volunteer to cover a future AsppA event, contact melinda semadeni, director of media relations, at [email protected].

Leadership Award: 2013 winner Jania Stout is joined by conference co-chair Todd Lacey, Brian Graff and NAPA President Marcy Supovitz.


The Role of Pre-retirement Disability in Retirement Security

feaTure

BY DAViD C. KALEDA AND ANNA RAPPAPORT

hen employees turn to employer-sponsored programs for benefits and risk protection, disability is often

far down on the list of priorities because they do not understand how financially devastating an extended disability can be to a family. Disability risk is underestimated by many Americans. Not only does the employee experience a loss of income by not working, but other family members may also stop working in order to care for the disabled family member and medical costs incurred by the employee may be very high. Often, different professionals work with retirement programs and disability programs, so that intersection of disability risk and retirement security is often not on the retirement security radar screen. The issue is often forgotten. In fact, long term disability coverage is extended to only 31% of the labor force.

Actuaries, pension consultants and administrators are concerned about structuring programs that will provide retirement security at

W

How does disability relate to retirement security? the rise of dC plans and decline of dB plans has brought in-plan out out-of-plan options to the fore.

39www.asppa.org/pc

offering programs to provide for security on disability. Employees of smaller employers are more likely to depend on individual long term disability if they have coverage at all. Some individual disability insurance carriers offer added coverage through riders to provide coverage for DC contributions lost. For small employers, the main focus should be on encouraging employees to purchase individual disability coverage and to think broadly about disability risk. An advisor (such as an agent or broker) who is knowledgeable about the risk and who will consider the related retirement issues will be important in making a good decision about what to buy.

DiffErEncES bEtWEEn Db anD Dc DiSability bEnEfit practicES

The U.S. pension laws recognize the need for disability benefits in retirement plans, but that recognition is not adequately supported with

a reasonable cost, minimize risk to plan sponsors and provide for stable plan operations. In recent years, this had lead to an increased focus on defined contribution retirement plans. In general, defined benefit plans traditionally have provided more extensive risk protection than DC plans, and the employer has borne more of that risk. In the move to DC plans, risk has shifted to individuals or separate programs outside of the retirement program. The risks covered by DB plans included loss of income from retirement, death and, in many cases, disability.

However, in the shift to DC plans, the disability provisions that protected retirement security after disability have often been lost, so that there is a significantly increased risk that mid- or late-career disability will derail retirement security.

The protection of retirement income for DC participants during extended periods of disability involves two goals: participants must continue saving for retirement during disability, and participants must refrain from using accumulated retirement funds to replace income lost during disability rather than saving those funds for their retirement years. While the problem is seemingly straightforward, DC plans are subject to extensive regulations that are not as conducive to meeting those goals as the regulations applicable to DB plans.

This article sets forth the conceptual and regulatory issues involved in providing disability benefits embedded within or as an add-on to DC plans in the United States. It addresses plans covered by the Employee Retirement Income Security Act (ERISA).

What conSultantS might Do to aDDrESS DiSability riSk in a Dc WorlD

It is important for actuaries and consultants working with DC plans to think beyond the plan. What are the goals of the entire compensation

and benefits program? Are there risks that are not being protected against? How does the DC plan fit into the compensation and benefits scheme? Are there adequate protections against loss of current income and retirement benefits in the event of disability?

Ideally, plan sponsors will be able to provide more employee-friendly direct disability benefits integrated within DC plans, but in the interim, there are some possible strategies to be considered: � Encourage employees of

employers without disability programs to purchase individual coverage and when setting up their program, not to forget about providing a benefit adequate to protect retirement savings. This is probably the best strategy for small employers.

� Provide a generous after-tax group LTD program, and encourage employees to make contributions to a tax qualified plan and an IRA up to the applicable limits.

� Provide a voluntary disability program to purchase added coverage on individual basis to make up retirement savings. Encourage that the money be saved for retirement.

� Communicate with employees about the importance of not dipping into retirement savings during disability.None of these strategies is ideal.

These ideas are presented with the hope that practitioners, sponsors and employees will engage in a dialogue about this issue, and that better ideas will emerge. In addition, more people may add voices to those who are trying to get the regulatory issues unscrambled.

Small vS. largE EmployEr iSSuES

Large employers are much more likely to offer employer sponsored long-term disability on a group basis to all employees and to get directly engaged in

DOL’s ERISA Advisory Council

the 2012 department of labor erisA Advisory Council studied the topic of

disability and how it relates to retirement security. the testimony presented to the Council laying out the concerns of witnesses representing different perspectives can be obtained from the erisA Advisory Council. the report can be found at http://www.dol.gov/ebsa/publications/2012ACreport2.html. the authors served on the erisA Advisory Council during 2012 and worked on the disability topic.

this article draws on testimony submitted to the Council as well as the authors’ research. it article represents the views of the authors and not that of the Council or of the department of labor, or any organization either of the authors is affiliated with.


impact on the participant’s savings at retirement. An employee who is disabled from ages 50 to 55 will lose five years of retirement savings that he will not be able to recover over his remaining working career. There is an added problem in DC plans. If benefits are paid as a lump sum on disability, then the benefits may be spent to meet current expenses rather than retained to meet retirement needs.

DC plans today are generally employees’ primary retirement vehicles. In a DC plan, the employer and/or the participant make contributions to an individual account within the plan on behalf of participant while the individual is working. The participant bears the risk of investment loss. Contributions are typically based upon compensation (e.g., a percentage of a participant’s compensation) though other allocation methods may be applied (e.g., flat dollar). The total retirement benefit available to the participant at retirement (or some other permitted distribution event) is based upon his or her account balance, which consists of employer and participant contributions and any investment gains realized on those contributions.

Arguably, it makes sense to offer the equivalent of a waiver of premium provision and include continued savings in the DC plan or in a separate fund, but this is not usual practice. Some plan sponsors

appropriate regulations with regard to DC plans. Both ERISA and the Internal Revenue Code allow for a “qualified disability benefit,” which is defined as a benefit at normal retirement age that does not exceed the benefit the plan participant would have earned had he or she not become disabled.1 A “qualified disability benefit” may be included in either a DB plan or a DC plan. However, disability retirement benefits appear to be a much more common feature in a DB plan. Employers have not been as willing to implement disability retirement income benefit features within or next to their DC retirement programs.

This lack of “take up” by DC plan sponsors may be tied to how such plans work in comparison to DB plans and to fact that DC plans generally transfer most retirement benefit funding risk to plan participants. In addition, lack of clarity in applicable regulations make implementation of disability retirement programs in DC plans unattractive for employers who are interested in this topic.

Defined Benefit PlansIn a DB plan, the plan provides

for a benefit payable to a participant at normal retirement age with some plans offering early retirement benefits that are reduced from the amount paid at normal retirement. Disability retirement benefits may be offered through the DB plan in a number of ways. For example:

� Continued Benefit Accruals During Periods of Disability: The plan may provide that participants will continue to accrue a benefit while disabled.2

� Disability Retirement Pension Benefits: The plan may provide that a participant will receive his or her accrued pension benefit under the plan upon becoming disabled prior to normal retirement age. In many cases, the benefit is subsidized by the employer. The disability retirement pension is paid until the participant dies with a death benefit payable to his or her spouse.3

� Supplemental Payments during Disability: The plan may provide for a supplemental retirement benefit as a set dollar amount per month (such as $100) for the disability period until normal retirement age or, if earlier, upon the participant’s becoming eligible for SSDI.

When the disability retirement benefit is built into the plan’s benefit formula, the employer bears the risk for this benefit and the funding of such benefits is included in the plan’s actuarially determined annual funding requirements.

Defined Contribution Plans

Any period of time during which a participant cannot continue contributions to his or her account balance can have a significant

1 Code §411(a)(9); ERISA §3(22). 2 These provisions are often designed to work side-by-side with LTD plans providing current income replacement benefits. They are analogous to the waiver of premium provisions commonly found in life insurance programs. 3 These provisions might be offered in lieu of LTD plans providing current income replacement benefits, or coordinated with such benefits (e.g., the disability pension benefit is offset against the LTD plan benefit).

more people may add voices to those who are trying to get the regulatory issues unscrambled.

41www.asppa.org/pc

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the participant is “permanently and totally disabled” as defined in Code Section 22(e)(3), which in essence requires that the disability cause the person to be unable to work in any occupation.6

This definition of disability is not consistent with the definition of disability in many LTD plans, which often provide only that the disability result in the employee not being able to work in his or her own occupation. Thus, while the employee may be eligible for LTD income replacement benefits offered by the employer, he or she in many cases will not qualify for disability replacement contributions pursuant to Section 415 of the Code under the defined contribution retirement plan.7

Challenges to Implementing Options Outside of a DC Plan

As stated above, some plan sponsors implemented an arrangement designed to make up for the lack of accrual of disability benefits under a DC plan during a disability with an “out of plan” option. A portion of LTD insurance benefits paid by an insurer were contributed to an IRA or individual retirement annuity from which they could be paid at the time the employee retired. Another idea that may be possible is for an insurer issuing a LTD policy that is designed to provide both current income and retirement income. However, both of these arrangements pose administrative and legal issues. The 2012 ERISA Advisory Council testimony from Richard Shea and Louis Mazawey provides insight into some of the challenges. The testimony can be obtained from the ERISA

Insurance” as an Investment in the Defined Contribution Plan: The participant elects to have a portion of his or her own contributions (e.g., pre-tax deferrals) and possibly employer contributions (e.g., matching contributions, profit sharing contributions, etc.) to purchase LTD coverage that is offered as an investment option under the plan. Such insurance is funded either through a LTD policy issued by an insurance company or a voluntary employee benefits association (VEBA) established by or on behalf of one or more employers. In the event the participant becomes disabled, the insurance carrier pays cash to the participant’s account in the amount of the contributions he or she was making (and possibly the employer was making) prior to disability.5 These arrangements were presented as “LTD 401(k) insurance” in testimony to the Council and are referred to as such throughout this report.From an actuarial point of view,

each of these approaches works well but none is trouble free in the current regulatory environment. The issues linked to each approach are discussed below.

barriErS to Dc plan DiSability bEnEfitS/ rEgulatory iSSuES

While Code Section 415 permits employers to make contributions on behalf of participants who are disabled, the ability to take advantage of this is limited because Section 415 only permits such contributions if

and advisors to plan sponsors have recognized the issue that an extended period of disability can have a very severe negative impact on employees’ retirement savings and have implemented different strategies to help participants to continue to accrue benefits.

Here are some examples of approaches that can be used to make up the lost savings: � Continue Contributions

During Disability Period: To the extent permitted under Section 415(c) of the Code,4 the plan provides that the employer may continue to make contributions to a participant’s account during a period of total and permanent disability.

� Implement Alternative Savings Option Outside of Defined Contribution Plan: The employer purchases additional LTD insurance (i.e., current income replacement insurance) on behalf of its employees. Upon the occurrence of a disability and the subsequent triggering of payments under the LTD policy, the proceeds from this additional coverage are invested on behalf of the participant in an annuity or IRA on behalf of the participant. The proceeds of such annuity or IRA would then supplement the retirement benefit otherwise accumulated under the defined contribution plan. The intent of the arrangement is to make up for the benefits that would have been made to the defined contribution plan but for the disability.

� Purchase of “LTD 401(k)

4 Code Section 415(c) limits the amount of allocations, which include contributions, to a participants defined contribution plan account during a measurement period (generally, the calendar year) to the lesser of either: (i) 100% of the participant’s compensation, as defined under Section 415 of the Code or (ii) a dollar amount that is indexed to inflation ($50,000 in 2012). Because a participant is disabled and not actively employed, he or she does not receive “compensation” as defined for purposes of the Section 415 limits. Thus, the Section 415 limits effectively prevent any contributions being made on behalf a participant that does not receive compensation from the employer. 5 Testimony presented to the 2012 ERISA Advisory Council suggests that there is a considerable amount of flexibility available in such an arrangement. For example, employee contributions and/or employer contributions could be used to purchase the insurance. 6 Specifically, Code Section 22(e)(3) provides that the person “is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” 7 Note that Code Section 415 does not permit such contributions to be made on behalf of highly compensated employees. Thus, employees who made over $115,000 in 2012 or owned more than 5% of his or her employer in 2013 or 2012 could not make or receive contributions even if they were in fact “permanently and totally disabled.”

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Advisory Council (see sidebar on page 39).

Another possible solution is that an employer-sponsored LTD arrangement, whether insured or self-insured, could be designed to provide disability retirement income replacement benefits (i.e., lost retirement benefits) not just current income replacement benefits (i.e., lost wages). However, a concern about this idea is that an insured or self-insured arrangement that by its terms that provided post-retirement LTD benefits could possibly be viewed by the DOL as “pension benefit plan” rather than a “welfare benefit plan.” (The authors understand that riders are available to be added to individual disability coverage to provide added coverage to replace retirement savings, but that such riders are not used very often.)

Lack of Clarity on Tax Treatment of “LTD 401(k) Insurance” Arrangements

The position taken by the IRS in two private letter rulings8 is conducive to employers implementing LTD 401(k) insurance or similar products within defined contribution plans. However, some proposed regulations issued by the IRS in 2007 have called into question the IRS’ position in the rulings and have stymied the implementation and growth of such arrangements. The authors understand that prior to the 2007 proposed regulations some employers implemented this type of program, but that new implementations have in large part stopped until the regulations are clarified. Trade associations representing both plan sponsors and the financial service industry support such clarification. For example, the American Benefits Council indicated their support for such clarification in testimony to the ERISA Advisory Council. The ERISA Advisory Council report and testimony provide more information

on these issues (see sidebar on page 39).

concluSionThe authors’ research indicates

that the continued accumulation of retirement benefits in employer sponsored DC plans during extended periods of disability is very important, but also difficult. We hope that this will change, but in the meantime, the issue will not be ignored. While DB plans commonly offered disability benefits so that the program would not fail on disability, these plans are in decline. The realities of the employer marketplace today, which continues to move toward only offering DC plans, requires employers who wish to provide its employees with the opportunity to have adequate retirement benefits in the event of disability to consider other options such as the “in plan” and “out of plan” options discussed above.

The authors hope that the federal regulatory agencies will issue guidance to clear up the uncertainties discussed above. We hope that the readers of this article will focus on these issues with the system stakeholders they serve.

David C. Kaleda, based in Washington D.C., is a Principal at the Groom Law Group, in the firm’s fiduciary

responsibility practice group. He has extensive experience dealing with the ERISA and tax issues that impact employee benefit plans.

Anna Rappaport, FSA, MAAA, is an internationally known researcher speaker and author. She chairs the Society

of Actuaries’ Committee on Post Retirement Needs and Risks, and is a Past President of the SOA. She founded Anna Rappaport Consulting in 2005 after retiring from Mercer, and will complete 50 years as a Fellow in 2013.

8 See Private Letter Ruling 200031060 and Private Letter Ruling 200235043.

The intersection of disability risk and retirement

security is often not on

the retirement security radar

screen.”


The Wide Ranging impact of 408(b)(2)

reguLaTiOnS

BY JOHN J. BLOSSOm, JR.

the 408(b)(2) rules have ushered in a new era. plan sponsors, who now must know what services they receive and review the costs of those services for reasonableness, need help from their retirement plan service providers to understand disclosure and the responsibility it entails.

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uly 1, 2012, was a big day in the retirement plan world. Covered Service Providers (CSPs) were breathing a sigh of relief because they got their disclosures into the hands

of their customers and clients. It seemed, for a moment, that the fog had lifted and there was time to relax and reflect on a job well done. But the real work was only beginning.

The roots of plan sponsor responsibility as defined in ERISA Section 408(b)(2) are not new. Plan sponsors are mandated broad fiduciary responsibility for plan operation under Section 404 of ERISA. This fiduciary standard has existed from the very beginning of ERISA’s regulation of qualified plans. The five fiduciary standards for an ERISA plan sponsor (or any qualified plan fiduciary) are: � Duty of Loyalty: A fiduciary

must discharge his duties solely in the interest of plan participants and beneficiaries.

� Exclusive Purpose Rule: A fiduciary must perform his duties for the exclusive purpose of providing benefits or defraying reasonable expenses of the plan.

� Duty of Care: A fiduciary must discharge his duties with the “care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like

published on July 16, 2010 (with a July 16, 2011, proposed effective date) and (finally) a final rule, published on Jan. 25, 2012, with an effective date of July 1, 2012.

As part of its 408(b)(2) regulation, the DOL, in the rule’s “Summary of Impacts” section, states: “… this final rule will provide substantial benefits by reducing search time and costs for fiduciaries to identify the relevant fee and compensation information

they need to fulfill their fiduciary responsibility under ERISA.” The DOL also predicted a three-year cost of compliance burden of 1,644,000 hours at a cost of $134,733,000.

Only time will tell whether the DOL’s cost estimates and expected benefits are realistic, but the DOL states in its “Overview of Final Regulation” section: “… although the benefits are hard to quantify, the Department is confident they more than justify the cost.”

So WhErE arE WE noW?Plan sponsors have a new

responsibility and more pressure on an old one. All plan sponsors are responsible for 408(b)(2) compliance as part of their fiduciary responsibility to participants and beneficiaries. A “covered plan” is any plan within the meaning of ERISA Section 3(2)(A) with the exception of a simplified employee pension, a simple retirement account, individual retirement accounts, frozen 403(b) plans and contracts, HSAs and any plan with no “common law” employee participants.

aims.” We know this duty as the “prudent expert” standard.

� Duty to Diversify: A fiduciary must diversify plan investments to minimize the risk of large losses.

� Duty of Obedience: A fiduciary must discharge his duties in accordance with plan documents and other plan instruments so long as they are consistent with ERISA. The responsibility to determine

that plan expenses are reasonable is rooted in the Exclusive Purpose Rule for the plan sponsor as a fiduciary. However, having or finding the information to fulfill this responsibility was a real challenge for most plan sponsors.

With a few notable exceptions, fee disclosure and transparent information about services to be received, costs that would be paid, indirect compensation paid by plan providers, sales compensation, etc., were difficult to determine from the information plan sponsors received. Many plan sponsors actually believed their plan was “free.” At least, the plan sponsor was not aware of costs built into the plan, particularly with bundled providers.

The political and practical needs for improved and specific assistance to plan sponsors and plan participants for fee information resulted in action from the Department of Labor’s Employee Benefits Security Administration (EBSA). Proposed regulations published in December 2007 gave rise to an interim final rule

it is increasingly obvious that many plan sponsors will need the help of experienced professionals to assemble and analyze fee disclosures from each plan’s CSPs.”

J


competitor. It’s clear that plan sponsors

have a responsibility to review the reasonableness of costs paid by plan participants. In the preamble of its proposed interim regulations for 408(b)(2), the DOL makes the following comments: � “The Department believes

that plan fiduciaries need this information, when selecting and monitoring service providers, to satisfy their fiduciary obligations under ERISA section 404(a)(1) to act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.”

� “Small plan fiduciaries are likely to benefit most — lacking economies of scale and negotiating power, they would otherwise face the greatest potential cost to obtain and consider the information necessary to the performance of their duty.”DOL confirmation of

the necessity for review and determination of reasonableness has fueled growth of providers who provide benchmarking of service fees. Since a plan sponsor is required to monitor and measure the efficacy of services and fees, services that offer solutions for this need are flourishing.

bEnchmarkingBenchmarking services of many

varieties are proliferating in response to the fiduciary imperative that plan sponsors review their 408(b)(2) disclosures and make judgments about the reasonableness of plan costs. Some advisors routinely offer benchmarking services as a method to measure costs. Advisors may offer benchmarking to prospects as a way to discredit and displace an incumbent provider.

A retirement plan professional should ask a number of questions in determining an appropriate

Each CSP must provide the required disclosure of services provided and fees charged to plan sponsors, not to the DOL. New plans are required to receive 408(b)(2) disclosure prior to (defined as “reasonably in advance”) entering into a service agreement with a provider.

Any payment from a plan that does not comply with 408(b)(2) will, by definition, be a prohibited transaction. If a prohibited payment is made to a service provider, it can trigger an excise tax, refunds of any payments made plus interest and potential imposition of a 20% penalty. It is the plan sponsor’s duty to confirm receipt of required disclosure from each CSP.

A plan sponsor that does not fulfill its 408(b)(2) responsibility will commit a fiduciary breach, leaving it vulnerable to real or perceived losses by participants resulting from potentially unreasonably high costs paid from the retirement plan.

Many plan sponsors lack the time, expertise or commitment to collect and analyze 408(b)(2) disclosures even though they are required to do so. However, 408(b)(2) compliance is no less important than annual testing requirements, filing a Form 5500 or required participant notices. It is increasingly obvious that many plan sponsors will need the help of experienced professionals to assemble and analyze fee disclosures from each plan’s CSPs.

Many ASPPA professionals are knowledgeable experts and serve the needs of the plan sponsor as part of their value proposition. Many plan sponsors will expect to rely on the services of the TPA, independent record keeper or financial adviser whom they trust to assure that all CSPs have been identified and all 408(b)(2) disclosures have been received. In many cases it will be a pension professional who will be the catalyst that results in compliance.

It can also be expected that a plan sponsor which finds itself in trouble

with a disappointed plan participant or the DOL will look for someone to blame for the trouble. Careful documentation of what you expect to do — and what you will not do — for the plan sponsor becomes more important than ever.

Questions about 408(b)(2) compliance services should become a standard part of the process of selecting business partners to work with when providing plan services. A TPA that partners with a bundled provider or an independent record keeper without reviewing their 408(b)(2) business process and a sample disclosure is courting disaster. There are providers who do an outstanding job of disclosure — and there are a few who don’t even accept responsibility as CSPs.

Anyone with whom an ASPPA professional works in qualified plan sales and service should be ready to explain their 408(b)(2) disclosure and demonstrate it. Without disclosure, anything that generates a plan level fee is prohibited. This includes direct payments that come from plan assets and indirect compensation (payments that can expect to total more than $1,000 during the life of the contract for services that are paid by a CSP — production bonuses, TPA subsidies, revenue sharing, etc.).

EnforcEmEnt anD compliancE

The competitive retirement plan sales industry may be the best enforcer of the 408(b)(2) regulations, and the greatest beneficiary, particularly in micro and small plan markets.

New sales processes are being driven by offers to assist with 408(b)(2) compliance. Assistance with the determination of whether all covered service providers have delivered satisfactory disclosure can be a big help to many plan sponsors. If incumbent service entities are lax in supporting their client needs to assemble and understand disclosures, the plan sponsor may be open to discussing these matters with a

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benchmarking solution. Here are a few:What is to be benchmarked? � Money manager cost? � Total advisor fees? � Total record keeper cost? � All in total cost? � Cost in basis points? � Cost per participant? � Participant behavior?

What is the appropriate benchmark for comparison? � Asset size? � Number of participants? � Industry? � Plan complexity? � Arithmetic average of samples?

(statistical mean) � Middle of samples?

(statistical median) � Most frequent sample?

(statistical mode)Many benchmarking offerings

compare plan data against the statistical mean. It can be argued that the arithmetic mean is not an appropriate measure. Whether it is appropriate or not depends largely on a review of the data. Is the goal to benchmark against the average of plan data found in a database? Is the goal to benchmark against middle of the range of plans sampled, or should each factor be benchmarked against the most frequently experienced data for each criterion?

The key to appropriate benchmarking is complete information and full transparency. Some providers talk about the average expense ratio of the complete menu of funds they offer a plan. Average weighted cost based on the actual,

or an assumed, allocation of fund choices made by participants is a more valid measure because it takes into consideration the fact that participants will not invest equally across all funds.

The table shows a sample cost analysis my firm prepares for clients. It is readily benchmarked against a variety of criteria. Whether it will be benchmarked or not, the cost analysis is complete and factual.

Disclosure, transparency and comparison against alternatives has become the norm for the retirement plan industry. A best practices business model includes taking steps that empower the plan sponsor to fully understand their plan services and costs. Of course, that same information will empower a competitor to see if an incumbent

Full Disclosure - Cost Analysis Sample

Asset Class Fund NameLarge Growth $357,500 11% T. Rowe Price New America Growth Adv 1.07% $3,825 0.38% $1,359Large Blend $0 0% Schwab S&P 500 Index 0.09% $0 0.02% $0Large Value $455,000 14% American Funds American Mutual R4 0.67% $3,049 0.33% $1,502Mid-Cap Growth $65,000 2% Columbia Acorn Z 0.77% $501 0.38% $247Mid-Cap Value $130,000 4% Ridgeworth Mid-Cap Value Equity I 1.07% $1,391 0.38% $494Small Growth $65,000 2% Janus Triton T 0.94% $611 0.33% $215Small Value $97,500 3% Victory Small Company Opportunity A 1.41% $1,375 0.38% $371Real Estate $130,000 4% Cohen & Steers Realty Shares 1.03% $1,339 0.38% $494Commodities Broad Basket $130,000 4% Pimco Commodity Real Return Strat Cl A 1.19% $1,547 0.38% $494Foreign Large Blend $455,000 14% American Funds Europacific Gr R4 0.85% $3,868 0.33% $1,502Diversified Emerging Mkts $65,000 2% Goldman Sachs Struct Emerg Mkt 1.58% $1,027 0.48% $312High Yield Bond $65,000 2% Metropol itan West High Yield Bond M 0.80% $520 0.38% $247Intermediate-Term Bond $162,500 5% Pimco Total Return D 0.75% $1,219 0.38% $618World Bond $162,500 5% Templeton Global Bond Fund Cl A 0.89% $1,446 0.38% $618Inflation-Protected Bond $260,000 8% Blackrock Inflation Protected Bond Inv A 0.86% $2,236 0.38% $988Stable Value $650,000 20% Metli fe Stable Value Fund II 0.35% $2,275 0.35% $2,275

TOTALS $3,250,000 0.81% $26,228 0.36% $11,733

Weighted Average Expense Ratio 0.81% $26,228Plan Expense Reimbursement Offset -0.36% -$11,733

EXPENSES SUB TOTAL 0.45% $14,495

Recordkeeping & TPA Services Annual Flat Base 0.08% $2,500Per Capita Recordkeeping & TPA Services- $25 x 65 participants 0.05% $1,625Recordkeeping & TPA Services Services Asset Based 0.10% $3,250

Investment Advisory Service – 0.30% $9,750

Custodial Annual Base 0.02% $500Custody & Trading Asset Based 0.05% $1,625

TOTAL EXPENSES 1.05% $33,745

Investment Advisory

Trustee/Custodial

Administration/Recordkeeping

Expense Ratio P.E.R.Asset Allocation


provider’s costs are unreasonable. This is the private sector at work in reducing retirement plan cost. However, the basic rule is, “If you don’t benchmark your services, a competitor will.”

vEnDor SEarchThe ultimate benchmarking tool

is a set of alternative proposals based on the goals of the plan sponsor, specifics of the plan and of participant demographics. “Vendor search” has become a baseline service of advisors in search of new business. Analysis of competitive proposals is a complex task but, when done well, demonstrates the reasonableness, or unreasonableness, of current fees beyond argument.

A Request For Proposal on existing client business is a growing nuisance to incumbent providers

who have not done a thorough job of fee disclosure as a defensive measure. The RFP is always a costly process for providers. The process may result in replacement of an advisor, replacement of the provider or a reduction in plan costs by the incumbent provider.

The vendor search process usually begins when a plan sponsor has not been well educated about the services and fees charged by current providers. Retirement plan professionals can save a great deal of time and minimize the risk of loss of a client by doing a thorough job of client education concerning services and fees charged.

concluSionThe 408(b)(2) rules have ushered

in a new era of retirement plan service. There is no requirement that a plan must select the lowest cost

provider for services, but there is no question that plan sponsors must know what services they receive and review the costs of those services for reasonableness. Plan sponsors need help from their retirement plan service providers to understand disclosure and the responsibility it generates. The retirement plan professional who is prepared for this new era is the ideal person to meet these client needs.

John J. Blossom Jr., MSPA, AIF, PPC, is the president and CEO of Alliance Benefit Group-Illinois, an

independent record keeper and full service retirement plan provider serving more than 40,000 participants and more than $2.5 billion in retirement plan assets. He is a 45-year member of ASPPA.

A best practices business model includes taking steps that empower the plan sponsor to fully understand their plan services and costs.”

49www.asppa.org/pc

ASPPA RETIREMENT PLAN SERVICE PROVIDER CERTIFICATION

Assessments are performed by CEFEX, Centre for Fiduciary Excellence, LLC.

The following � rms are certi� ed* within the prestigious ASPPA Service Provider Certi� cation program. They have been independently assessed to the ASPPA Standard of Practice. These � rms demonstrate adherence to the industry’s best practices, are committed to continuous improvement and are well-prepared to serve the needs of investment � duciaries.

For more information on the certi� cation program, please visit: http://asppa.org/home-page/rkcert.aspx or call 416.693.9733.

Actuarial Consultants, Inc.

Advanced Pension Solutions, Inc.

Alliance Bene� t Group North Central States, Inc.

Alliance Bene� t Group of Houston

Alliance Bene� t Group of Illinois

American Pensions, Inc.

ASPire Financial Services, LLC

Associated Bene� t Planners, Ltd.

Atessa Bene� ts, Inc.

Bene� t Planning Consultants, Inc.

Bene� t Plans, Inc.

Bene� t Plans Plus, LLC

Bene� ts Administrators, LLC

Blue Ridge ESOP Associates

BlueStar Retirement Services, Inc.

Creative Plan Designs Ltd.

DailyAccess Corporation

ExpertPlan, Inc.

First Allied Retirement Services / Associates in Excellence

Ingham Retirement Group

July Business Services, Inc.

Kidder Bene� ts Consultants, Inc.

Moran Knobel

North American KTRADE Alliance, LLC

Pension Financial Services, Inc.

Pension Plan Professionals, Inc.

Pension Solutions, Inc.

Pinnacle Financial Services, Inc.

Retirement Planning Services, Inc.

Rogers Wealth Group, Inc.

RPG Consultants

SI Group Certi� ed Pension Consultants

SLAVIC401K.COM

Summit Bene� t & Actuarial Services, Inc.

Tegrit Retirement Plan Services

TIAA-CREF

TPS Group

Warren Averett Bene� t Consultants, LLC

As of April 15, 2013


aDviSOrS

try an rFpsearching for a plan Advisor?

RFPA plan fiduciary’s duties, increased

scrutiny by the dol and the rise of fee

litigation highlights the importance of

the rFp process.

BY SAmuEL S. CHOY AND ELLEN CzuRA SCHiLLER

No law specifically requires that fiduciaries retain investment advisors for their tax qualified retirement plans. However, qualified investment advisors can assist plan fiduciaries to carry

out their responsibilities to select and monitor plan investments in a prudent manner, thereby reducing their risks. A request for proposal (RFP) is a widely accepted process that enables plan fiduciaries to solicit information from advisors so that the fiduciaries can evaluate whether the engagement and retention of a particular advisor to provide investment services to their plan is prudent.

This article discusses the primary reasons that a plan fiduciary should engage in an RFP every three to five years and provides some guidance for plan fiduciaries undertaking an RFP.

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Even if the plan fiduciary does not wish to change advisors, undertaking an RFP is important because it documents why it is reasonable for a particular advisor to continue to provide services to the plan.

ERISA Prohibited Transaction Exemption

ERISA generally exempts from the prohibited transaction rules contracts with service providers for legal, accounting or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid. The requirement to determine “reasonableness” strongly suggests that plan fiduciaries must engage in some form of comparison of the compensation paid to investment advisors. An RFP can demonstrate that the amount of fees paid to an advisor is reasonable because it enables plan fiduciaries to fully assess fees charged for the services provided against fees charge by other vendors in the marketplace for similar services.

Fee DisclosureLast year, the DOL issued

regulations under ERISA Section 408(b)(2) which generally require that covered service providers disclose to plan fiduciaries detailed information regarding the compensation they receive directly or indirectly from plans, or else a prohibited transaction results. In the preamble to the interim final regulations, the DOL assumes that “plans normally conduct [RFPs] from service providers at least once every three to five years.” This strongly suggests the DOL’s

Even if a plan fiduciary does not change service providers as a result of an RFP, the information gathered through the RFP process provides strong evidence that the fiduciary satisfied its duties.”

endorsement of the RFP process and its overall expectation that plan fiduciaries undertake an RFP every several years.

In general, the “market” practice is to have an RFP every three to five years, or more frequently if there is an event affecting the plan such as a corporate transaction, significant increase in the value of assets or number of participants, plan merger or spinoff, etc. For interim periods, plan fiduciaries may engage in fee benchmarking studies and/or requests for information (RFI), both of which are less burdensome than RFPs, to further ensure that the fees paid to their investment advisor continue to be reasonable.

Fee LitigationThe rising trend of litigation over

service provider fees highlights the importance of conducting an RFP. For example, in George v. Kraft Foods Global, Inc., 641 F.3d 786 (7th Cir. 2011), the plaintiffs claimed that plan fiduciaries breached their ERISA fiduciary duties by paying excessive fees to the plan’s record keeper. The plaintiffs argued that it was a breach of fiduciary duty for the plan fiduciaries to retain the record keeper without conducting RFPs on a periodic basis, because failing to conduct an RFP resulted in the plan overpaying for the record keeper’s services.

The district court held that there was no breach of fiduciary duty, but on appeal, the 7th Circuit reversed and held that there was an issue of material fact as to whether the plan fiduciary acted

thE importancE of an rfp

A plan fiduciary may hire an investment advisor to handle some of its duties, but the decisions to select and retain the advisor are subject to fiduciary requirements. Under Section 404 of ERISA, a retirement plan fiduciary’s duties include: � the duty of loyalty; � the duty of prudence; � the duty to act in conformity

with plan documents; and � the duty to diversify the

investments of the plan.These duties require that a plan

fiduciary prudently select an advisor, including, for example, taking into account qualifications of the advisor, quality of services offered and reasonableness of the fees charged. In addition, these duties require that a plan fiduciary monitor the advisor’s performance and assess whether the advisor is properly performing its delegated duties on an ongoing basis.

Adherence to ERISA’s fiduciary duties is strictly required, and failing to abide by these duties could result in liabilities and penalties — either imposed by the U.S. Department of Labor or resulting from a lawsuit filed by the plan participants. Plan fiduciaries can reduce their risk of liability for fiduciary breaches related to retaining advisors by making sure that they take reasonable steps to select and monitor the advisors. A plan fiduciary can demonstrate that it has properly carried out its fiduciary duties by documenting the process used to select and monitor advisors, such as through the performance of an RFP.


prudently. The 7th Circuit also held that while a consultant’s advice as to reasonableness of the fees was evidence of prudence, the plan fiduciary’s reliance on the consultant’s advice was not a complete defense. The case was remanded to the district court, so it is unclear whether the plaintiffs will ultimately prevail on their claims. However, this case does indicate the importance of periodically conducting RFPs in order to satisfy a plan fiduciary’s ERISA duties.

conDucting an rfp The benefits of the RFP

process depend on the scope and implementation of the RFP, including how well it’s tailored to the specific retirement plan and the questions asked of the potential advisors. Another important aspect of RFPs is how the group of possible advisors is selected. Thus, it is important for the plan fiduciary to assess its needs and goals for the RFP process before the RFP.

Below are some questions that a plan fiduciary also should consider when conducting an RFP: � Resources. What internal and

external resources will be required to conduct the RFP? The RFP process should be manageable within a specific timeframe (typically no longer than six months). Also, the required expertise should be available to run the RFP, including developing the desired qualifications for possible advisors and reviewing their responses. Many plan fiduciaries engage outside consultants and legal advisors to assist them with the RFP process.

� Pool of Possible Advisors. How many advisors should be included in the RFP? Many factors will determine the number of advisors that should be included in the RFP, including the size of the plan and resources for the RFP. Typically, five to 10 advisors

Likewise, if an advisor typically handles 401(k) plans, the advisor may not be well suited to handle a DB plan. Interviewing some of the advisor’s current clients is an excellent way to verify the information provided by the advisor.

� Fees. What fees are charged for the services provided? Advisors are required to provide certain information on fees in accordance with ERISA Section 408(b)(2), but the plan fiduciary must assess whether the fees are reasonable compared to the value of the services provided. This determi-nation may require the fiduciaries to solicit information that is not included in this fee disclosure. A plan fiduciary is not always required to pick the lowest cost provider; rather, this is only one factor to consider.

� Type of Advisor. What type of advisor is needed — a non-fiduciary advisor, a 3(21) investment advisor or a 3(38) investment manager? (See sidebar.)

� Legal Requirements. Is the advisor appropriately licensed? For example, a 3(38) manager must be registered as an investment advisor under the Investment Advisers Act of 1940, registered as an investment advisor under state law, a bank, or an insurance company. Also, is there any conflict of interest that would arise if the advisor were hired? In order to help a plan fiduciary evaluate whether a conflict of interest may exist, the DOL has published “Selecting and Monitoring Pension Consultants – Tips for Plan Fiduciaries,” an article that is available at http://www.dol.gov/ebsa/newsroom/fs053105.html.

� Service Agreement. It is helpful to request and review a form of service agreement from possible advisors in connection with the RFP process so that any issues are

who have been prequalified are included in RFPs. After the proposals are analyzed, plan fiduciaries typically narrow the group to three to four finalists. The finalists are then invited to make in-person presentations and for in-person interviews.

� Experience and Reputation. What is the investment advisor’s experience in handling plans of similar sizes and types? The advisor should have experience in providing services to plans similar to the one undergoing the RFP, so consider the size of the plan, the number of participants, the plan design, etc., when evaluating whether the advisor is qualified. For example, if an advisor typically works on plans with $1 million in assets, the advisor may not be well suited to handle a plan with $100 million in assets.

What’s the Difference Between a 3(21) Manager and a 3(38) Advisor?

For purposes of this article, the term “advisor” is used to refer to both a

section 3(21) advisor and a section 3(38) manager; however, the distinction between these types of advisors is important. A 3(21) advisor generally assists plan fiduciaries in selecting and monitoring the plan’s investment funds, but ultimately, the plan fiduciaries make all final investment decisions.

A 3(38) manager, unlike a 3(21) advisor, has the discretionary authority to make investment decisions and to direct the investment of plan assets. when hiring a section 3(38) manager, it is possible for a plan fiduciary to delegate nearly all of its fiduciary duties regarding the plan’s investment decisions, but the plan fiduciary will continue to be responsible for selecting and monitoring the section 3(38) manager.

53www.asppa.org/pc

to five years. Even if a plan fiduciary does not change service providers as a result of an RFP, the information gathered through the RFP process provides strong evidence that the fiduciary satisfied its duties.

Samuel S. Choy, J.D., LL.M., is a Partner in McKenna Long & Aldridge LLP’s Employee Benefits &

Executive Compensation Practice Group in Atlanta. His clients include public and private companies, tax-exempt entities, fiduciary committee and senior executives.

Ellen Czura Schiller, J.D., LL.M., is a Senior Associate in McKenna Long & Aldridge LLP’s Employee

Benefits & Executive Compensation Practice Group. She advises clients on qualified and non-qualified employee pension and welfare and compensation plans, programs and arrangements. She also assists clients in design, negotiation and drafting of various equity and other incentive plans and programs.

advisor on an ongoing basis.The RFP process should be

well documented to protect a plan fiduciary against claims of breach of its fiduciary duties. At a minimum, the documentation should include: � the reasons a particular decision

was made; � why a particular advisor was

selected or retained; � why the advisor’s fee were

determined to be reasonable and � the process used to determine

reasonableness, etc. It is important to remember

that it is generally not the decision that matters as much as the process through which the decision was made. This decision making process evidences that a plan fiduciary conducted adequate due diligence in accordance with its ERISA fiduciary duties.

concluSionA plan fiduciary’s duties,

increased scrutiny by the DOL and the rise of fee litigation highlights the importance of the RFP process. It is generally considered a “best practice” to conduct an RFP of the plan’s investment advisor every three

identified and addressed early in the process. In addition, a plan fiduciary may have more leverage to negotiate favorable provisions during the RFP process rather than after an advisor is selected. The agreement should be transparent when addressing certain key issues, such as fiduciary responsibility, the advisor’s services and responsibilities, fees and liability. For example, a plan fiduciary hiring a 3(21) advisor may believe that the advisor is a fiduciary under ERISA, but this must be specified in the agreement. If the agreement does not address key issues or it is sloppily written, it may indicate that the advisor will not provide high-level services.

� Reports and Availability. How often will the advisor provide information related to its services in the form of reports, summaries, etc., and how often will the advisor be available for in-person meetings? These questions are important to ask because such reporting and meetings will help a plan fiduciary fulfill its responsibilities and monitor the

Safe Haven Incubator Could Spur 401(k) Innovation

why is the pace of innovation so slow in the 401(k) market? According to two professors, shlomo Benartzi of uClA and John payne at duke, there’s little upside

and a lot of downside for plan sponsors to take risks, with government afraid of creating bad policy.

in a June column written for Pensions & Investments, Benartzi and payne proposed the creation a “safe haven incubator” where ideas vetted by a committee of academics, government officials and business people would be tested by plan sponsors given safe haven for their efforts. ideas that seem to work would be validated by academics and rolled out nationally.

one problem that could be addressed is the $80 billion that leaks out of the system — which is more than total annual match contributions. Fixing that problem could add $1 trillion to the system over time.

As a true partnership between government, academia and business, the safe haven incubator proposed by Benartzi and payne may be a good way to attack this problem, and others as well. ultimately, the results might not be wholesale changes, but rather just a series of nudges and tweaks.


TeCHnOLOgy

tech Jungle

Kingof theBY YANNiS P. KOumANTAROS

& ADAm C. POzEK

55www.asppa.org/pc 55www.asppa.org/pc

tech Jungle

When it comes to technology, one of the most important considerations is access to information where you want it when you want it. Jungle Disk gives you all that and more. It’s similar to some of the cloud storage services we’ve highlighted in the past, but it also has some key differences. For starters, it allows organizations of any size to create a web-based file server without the need to purchase hardware or hire an IT staff. The folders you create can be mapped to your drive in Windows Explorer and appear as a remote drive in Mac Finder. You can use permissions to restrict access to certain content. The system employs state-of-the-art encryption and can be set to automatically back up your data at whatever frequency makes the most sense for you.

Unlike some of the other services, you are not required to purchase storage space in big chunks. Jungle Disk’s workgroup edition is priced at $4.95 per user per month, and each user account includes 10 GB of storage. Additional storage is $0.15 per GB per month.

Jungle Disk also provides free apps for iOS and Android devices so you can access data on the go when you don’t have your computer with you.

Have you ever been at a meeting or on the road without your laptop and come across a document or some other content you want to download? Depending on the content, your only option may be to email the URL to yourself or make a note for future reference. Enter Transloader. Through a combination of a mobile app and a desktop app, anything you download on your mobile device via the app is automatically downloaded to your laptop or computer back at the office.

Transloader is currently only available for iOS and Mac, but other platforms are coming soon. The mobile app is free, and the desktop app is only $4.99.

Cheap Technology Tool #1: Jungle Disk (www.JungleDisk.com) 2 Cheap Technology Tool #2: Transloader

(www.transloader.com)

3You nailed that prospective client meeting — just nailed it. But by the time you’re driving back to the office, you get the bad news — they chose “the other guys” instead of you. After hearing the bad news, your mind goes into a tailspin and then a post mortem analysis on what you could have done differently. Now you definitely cannot expense the travel time, miles or gas you spent traveling 100 miles to and from the prospect’s office. To add insult to injury, your reserve gas light comes on and you’re in the middle of nowhere.

Have no fear, GasBuddy is here! This application uses a network of users and GPS to record the daily prices of 87, 89 and 91/92 octane gas throughout the United States. You can sort by distance or price to find the best deals in town, or in another town you never plan to visit again. The application is free, and you can even contribute to the community by snapping a picture and uploading it. Although you lost the prospect, at least you saved $3 filling up your gas tank … and hopefully “the other guys” paid way more on their own trip back!

Cheap Technology Tool #3: GasBuddy (www.gasbuddy.com)

Uber is a German language word meaning “above,” “over” or “across.” However, it is also the coolest way to roll up to your favorite meeting, event or conference. Sick of cabs? Travel in style with Uber, avoid the hassle of cabs, and pay an all-in tip/tax-included fare, all while using your SmartPhone. This start-up company out of San Francisco has expanded to more than 30 major cities, and uses a network of available drivers with Lincoln town cars, Cadillac Escalades, BMW 7 Series, and Mercedes-Benz S550s. Simply download the app, enter your profile information with credit card, order the town car, and voila! It’s paperless and easy. You get an email confirmation receipt after the ride and get to rate the ride on a five star system. But so do the drivers — yes, that’s right, they get to rate their passengers, so be careful what you say on a bad day.

How much does it cost? Only about 10-20% more than a cab, and the fancy algorithm uses a mileage or minute rate depending on the car’s speed (over or under 11 MPH), so you never need to worry about having cash or being overcharged!

4 Cheap Technology Tool #4: Uber(www.uber.com)

Adam and Yannis are always on the lookout for new and creative mobile applications and other technologies. If you have any tips or suggestions, please email them at [email protected] and [email protected].

Yannis Koumantaros, CPC, QPA, QKA, is a shareholder with Spectrum Pension Consultants, Inc. in Tacoma, Wash. He is a frequent speaker at national conferences, and is the editor of the blog and

newsroom at www.spectrumpension.com.

Adam Pozek, ERPA, QPA, QKA, QPFC, is a partner with DWC ERISA Consultants, LLC in Salem, N.H. He is a frequent author and speaker, and publishes a blog at www.PozekOnPension.com.

1


BuSineSS PraCTiCeS

there are many benefits to having an AsppA Benefits Council in your area. Here are some tips on getting one started.

BY NORmAN F. PiERCE AND JAmES T. COmER, iii

the Benefits of an AsppA Benefits CouncilAt a hotel meeting room in Charlotte, a group of 80 or so

professionals from different backgrounds in the retirement plan industry gathered last March to commiserate and listen to

speakers covering several timely topics impacting in the industry. They included ERISA attorneys, CPAs, financial advisors, employees from plan providers and regional TPAs. Among the attendees were also several credentialed ASPPA members.

What brought all of those people together? It was the ASPPA Benefits

57www.asppa.org/pc

provide communication between the local council and ASPPA.

From this point, formal documents must be gathered including a bio of each executive committee member, a petition for recognition, a formal operating budget and a business plan. Additionally, ASPPA’s bylaws must be adopted by the local council.

On the national level, the staff at ASPPA becomes invaluable. In setting up and planning a benefits council, you will be assisted by Michael Copp, COO, and ASPPA’s customer service staff, who are actively involved in assisting local ABCs throughout the country. Our council here in the Carolinas would not exist today without their support. They will also guide and support the council after it is up and running through assistance in meeting planning and marketing your event.

hoW Do WE pay for all thiS?

A key component the executive team will have to address is how to fund and pay for planned events.

Council of the Carolinas’ kickoff meeting.

An ASPPA Benefits Council (ABC) is a regional group formed and directed by local professionals. The purpose of the group is to allow for and foster continuing education and networking opportunities to professionals already involved, or those who wish to get involved in the industry. Essentially the goal is to bring ASPPA to the local level so that interested parties can share knowledge and ideas based on their experience and have access to superior education via local or national authorities on various pertinent topics.

According to Gina Farmer, co-chair of the ABC Committee, “the key aspiration of the ABCs is to provide quality, affordable and timely education at the local level through collaboration with industry leaders and ASPPA’s network of industry professionals.”

hErE’S hoW to Start onEOur local chapter here in North

Carolina came into existence through the effort and involvement of several

local professionals. Initially, we had discussed the idea of putting a council together because we recognized a need in our region for such a group. We live in an area heavily focused in the retirement plan business, with Bank of America headquartered here, Wells Fargo having a large presence, as well as Schwab SRT, Relius Trust, TIAA-CREF and many more.

As the idea developed further, we decided that we wanted our executive council to include individuals with different backgrounds and experience. As such, our current executive team includes members from two local TPAs, two plan providers, an experienced local ERISA attorney, two CPAs with plan audit experience and an independent consultant.

A local ABC does not exist, however, until it is formally recognized by ASPPA. The process begins when an initial executive committee is formed and officers are elected. These officers must include a president, secretary, treasurer and ASPPA liaison. The primary role of the liaison is to interact directly with ASPPA on the national level and

The goal is to bring ASPPA to the local level so that interested

parties can share knowledge and ideas based on their

experience and have access to superior education via local or national authorities on various

pertinent topics.”


is and appoint that person to handle this function. Of course, make sure that the message you are sending coordinates with the email campaign generated by ASPPA and that you provide links for participants to register for the event.

rEmEmbEr Who you SErvESpeaking for our humble council

here in the Carolinas, we believe one of the most gratifying experiences is to have the opportunity to serve our peers in the region. There are many different professionals playing different roles, with different perspectives in our industry. How often does one have the opportunity to gather many of these individuals in one room to take advantage of their collective knowledge and experience? The opportunity to meet your peers and share ideas makes all of the effort worth it. The camaraderie of our professional employee benefit community is wonderful, and it’s great to see everyone share ideas and lessons learned.

Norman F. Pierce, QPFC, is the president of the ASPPA Benefit Council of the Carolinas. He is the client

services manager for the retirement services division of American United Life Insurance Company® (AUL), a OneAmerica company. Norman is also a registered representative of and securities offered through OneAmerica Securities, Inc., member FINRA, SIPC.

James T. Comer, III, is the ASPPA liaison of the ASPPA Benefit Council of the Carolinas. He is the president

of ABG Carolinas, which serves more than 1,500 clients throughout the Southeast. Jim has practiced in the employee benefit and retirement plan administration field for more than 30 years.

There are two basic models that can be used here. One would be to use a membership model, where a fee is charged to individuals who wish to become members. Presumably, this fee would then cover all or a portion of annual meeting expenses. It can also offer members a feeling of exclusivity that comes from membership in the organization.

The second model would be to make the council an open council and simply charge a fee for events as they are planned, with an understanding that any ASPPA member will get to pay a discounted rate (this is a requirement from ASPPA). Based on our discussions with other councils throughout the country, there does not seem to be a consensus as to the best way to handle this. Each council makes the decision that they deem most appropriate for their group.

A newly formed council would also be wise to seek corporate sponsors from their local community and region. A council should be prepared to offer something of value in return while also keeping in mind that the goal of the council is to provide education opportunities to its membership. If meeting attendees feel like they are listening to a sales pitch, they could quickly sour to the idea of attending future events. Still, there are opportunities for corporate sponsors to provide speakers or set up informational booths. Let your executive team be creative here!

nExt StEpS: plan a mEEting

Once your council is formally recognized by ASPPA, your council will likely want to begin planning a kick-off meeting. This will consist of

lining up speakers, finding a venue within the budget you have allotted and, most importantly, marketing your event.

A good place to begin looking for speakers and/or presenters is your own council’s professional network. More than likely, there are competent professionals willing to present at your meetings in your region. ASPPA also maintains a list of speakers who have presented at past events and topics as well. At our event in March, we were fortunate to have Craig Hoffman, ASPPA’s General Counsel, give us a legislative update. With enough planning, it may be possible to have someone from ASPPA attend.

Choosing a venue may be the easiest part of this process. It will be dictated in part by what type of meeting you anticipate having, how many attendees you expect, etc. You will also want to consider whether you want to serve a meal or refreshments of some sort. It’s also important to visit the facility prior to the meeting and review with your contact at the venue your expectations. One person with the executive team should be appointed to handle this.

The last step is the most critical: marketing your event. ASPPA’s customer service staff are most helpful with this function. They will work with you to develop a website for your council and an email marketing campaign to ASPPA members in your area. Another valuable tool to market your meeting is LinkedIn. This is an excellent way to reach professionals in the industry who may not be formally affiliated with ASPPA yet. If you’re not comfortable on LinkedIn, find someone on your executive team who

A council should be prepared to offer something of value in return while also keeping in mind that the goal of the council is to provide education opportunities to its membership.”

59www.asppa.org/pc

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marriage deduction was outweighed by her desire to do the tax-return work in her community. Identify which exam follows specific career goals, passions or what helps in day-to-day work. Not sure which exam is the best fit? Look at the learning objectives of the online exams on ASPPA’s website: � Retirement Plan Fundamentals

(RPF-1 and RPF-2) � Plan Financial Consulting

(PFC-1) � Tax Exempt Governmental Plan

(TGPC-1) � Defined Benefit Administration

(DB-A)If qualified plan administration

is the career path, consider RPF-1 and

As part of a service learning course in college, my daughter decided to volunteer for a

group that helps low-income workers complete their tax returns. When she called to check in, she expressed surprise that her volunteer activity would require earning a certificate after completing an online IRS exam. Despite dealing with years of exams and papers — and despite being a technology-obsessed Millennial — she was stymied about how to best tackle the project. She had to complete and pass the test before the first volunteer session in 10 days, and she explained, “Mom, I know you like this stuff, but I think it is so dry and boring! But I really want to help

people avoid predatory tax-refund lenders. Any ideas?”

When the young adult pendulum begins to swing away from “what do you know” toward “any ideas?” — well, the pent-up parental advice tends to spill out. (I decided to overlook the “dry and boring” comment.) But as I rattled off the steps she could follow to pass the exam, I realized the information would also work for those tackling online ASPPA certificate exams.

Here are the six steps to follow:

StEp 1: SElEct thE right Exam

My daughter’s distaste at learning the intricacies of claiming the

A six-point plan for tackling ASPPA’s online certificate exams.

BY SARAH SimONEAux

six easy steps to an AsppACertificate

61www.asppa.org/pc

to discuss issues raised by the exam and the material that they are encountering in their daily work.

StEp 6: offEr a boot campDespite everyone’s best intentions

to study on their own or with a group, life — both professional and personal — often intervenes. The boot camp, or intensive review session, is ideal to get staff trained and certified in a short timeframe — sometimes even in one day.

Before the boot camp, participants should review the sample exam and have access to the study guide or textbook. The boot camp should cover the learning objectives and use the sample exam questions and answers as a guide to passing the online exam. Participants should take the exam as soon as possible after the boot camp; upon passing the exam, they can print out their certificate.

A boot camp I urged my daughter to attend helped her to pass the IRS online exam, and she said it was essential to getting her certificate immediately after the boot camp was over.

My daughter is now doing the “dry and boring” work of helping people complete their tax returns and getting their refunds. Maybe it’s time to introduce her to retirement plan fundamentals!

Sarah Simoneaux, CPC, is president of Simoneaux Consulting Services in Mandeville, LA, and a

principal of Simoneaux & Stroud Consulting Services. She is a former president of ASPPA and previously served on the Education and Examination Committee as a Technical Education Consultant. She is the author of the textbook, Retirement Plan Consulting for Financial Professionals, which is used for the PFC-1 course in ASPPA’s QPFC credentialing program.

RPF-2 — these exams are required for ASPPA’s advanced credentials, including the Qualified 401(k) Administrator (QKA), Qualified Pension Adminis-trator (QPA) and the Certified Pension Consultant (CPC). However, RPF-1 and RPF-2 on their own are also a great introduction to the world of qualified plans, and are particularly useful for entry-level employees and call center staff.

If, however, personnel are working with 403(b) and 457 plans, review the learning objectives of TGPC-1. Advisors and those supporting 401(k) advisors and salespeople can get a high-level introduction to qualified plans with PFC-1.

StEp 2: chEck thE timE-framE

The advantage to online on-demand exams is their 24/7 access. However, the exams do have a deadline by which they must be completed in order to earn the certificate, as well as to avoid forfeiting exam fees. Check the ASPPA website for details on dates. Although the timeframe is typically a calendar year, if the firm has purchased a block of exams to take advantage of ASPPA volume discounts, exams may be able to be completed within one year of the firm’s purchase date.

Think about the demands of the job and how realistic passing one or more exams might be. Administrators assisting with compliance will find it hard to complete any exam in the first quarter of the year, while advisors and sales support personnel are much busier in the last quarter of the year.

The reason for my daughter’s short timeframe? She had to have the certificate granted by passing the online exam before the volunteer group’s required training class.

StEp 3: rEgiStEr anD rEviEW

After deciding on the appropriate exam and certificate, register for the exam. Candidates do not have to be

ASPPA members; they only need to create a login and password for the ASPPA website. After registering for the exam, candidates can access it any time without answering questions. The exam is not complete until it is submitted. Review all the exam questions to see what material looks familiar, what is less obvious, and what appears completely foreign. Don’t be intimidated if the questions appear harder than those on proctored exams; online exams are designed to be study tools where candidates look up answers in a study guide or work together in a group to answer them. The IRS online exam required for my daughter’s volunteer work was just as accessible as the ASPPA certificate exams, and she found it helpful to look at the exam questions before she reviewed the study guide.

StEp 4: gEt — anD uSE — thE StuDy matErial

After reviewing the exam questions, get the study guide or textbook. RPF-1 and 2 and PFC-1 have PDF study guides that can be purchased by a firm for unlimited use. A PDF format allows candidates to search on key words to jump to the section that they need when answering exam questions. For example, a question on safe harbor plans could result in any of the following key word searches: “safe harbor notice,” “safe harbor contribution” or “safe harbor eligibility.” It’s always best to use the study material to double-check answers that may seem obvious —it’s also a productive way to learn something new!

StEp 5: form or Join a group

If a group of staff members are taking the exams at the same time, consider a “lunch and learn” study group that meets two or three days each week. The group can focus on a few questions in each session, making the exam more manageable. This process also allows the participants


eTHiCS

effective July 1, AsppA’s newly revised Code of professional Conduct goes into effect, including the duty of confidentiality. How does the Code define confidentiality and to whom is the duty owed?

BY KAREN SmiTH

In the age of Twitter and Facebook, information moves almost at the speed of light. We can get instant updates on topics as important as breaking news and

as mundane as what people ate for breakfast. Today’s culture and technology puts a greater premium on quick dissemination of information and less of a premium on discretion. But as members of ASPPA, we have a duty to keep certain of our clients’ information confidential.

confiDEntiality DEfinEDBreaking the duty of confidentiality down into

smaller pieces, we need to understand what confidential information is and to whom we owe the duty of confidentiality. All references to the ASPPA Code of Professional Conduct are to the newly adopted revised ASPPA Code of Professional Conduct effective July 1,

2013. The revised ASPPA Code of Professional Conduct is available on the ASPPA website.

Precept 5 of the ASPPA Code of Professional Conduct provides as follows:

A Member shall not disclose to another party any Confidential Information obtained in rendering Professional Services for a Principal unless authorized to do so by the Principal or required to do so by Law.The ASPPA Code of Professional Conduct defines

confidential information as: Information not in the public domain of which the Member becomes aware during the course of rendering Professional Services to a Principal. It may include information of a proprietary nature, information which is legally restricted from circulation, or information which the Member has reason to believe that the Principal would not wish to be divulged.

Confidentiality and the AsppA Code of professional Conduct

63www.asppa.org/pc

To be confidential information, the information must be both not in the public domain and we must become aware of the information while rendering professional services. There is no universal definition of what it means for information to be “in the public domain.” However, in considering whether the information is in the public domain, we would want to consider how many people have access to the information. As an example, after a Form 5500 is filed, the information on the Form 5500 would generally be considered in the public domain because the information is posted on the EBSA website and is available to everyone. The information on a Form 5500-EZ would generally not be in the public domain because the information is not available to the public.

If we are friends with our clients, it may be hard to differentiate when information is being shared with us in the course of a professional assignment. For example, if a client shares information with us at a social event, is the information obtained through a professional assignment? When sharing information with us, most clients probably expect that our treatment of confidential information is the same whether we are told in social setting or at the office.

Duty of confiDEntialityIf we determine that we are in

receipt of confidential information, we must then determine to whom we owe a duty of confidentiality. Precept 5 indicates that we owe a duty to “Principals.” The ASPPA Code of Professional Conduct defines a Principal as:

Any present or prospective client of a Member or the employer of a Member where the Member provides retirement plan services for their employer’s plan.First, we owe a duty of

confidentiality to our clients. On most days this is easy to understand, but sometimes it gets complicated. For example, assume that a 401(k) plan client contact tells Service

Provider A that he is dissatisfied with Service Provider B. Service Provider A and Service Provider B have a great working relationship, and Service Provider A and Service Provider B work together on a regular basis to service their mutual clients. Additionally, Service Provider A and Service Provider B refer business to each other. Overall, Service Provider A may attach much more economic value to its relationship with Service Provider B than its relationship to this particular 401(k) plan.

Service Provider A may want to alert Service Provider B to the client’s dissatisfaction so that Service Provider B can address the client’s concerns and rehab the relationship. Service Provider A may actually believe that it is in his 401(k) client’s best interest to do so. However, Service Provider A owes a duty of confidentiality to his 401(k) client and this duty trumps any loyalty to Service Provider B and what Service Provider A believes is best. Before Service Provider A discusses the matter with Service Provider B, Service Provider A must determine whether the information that the client is dissatisfied is confidential. If the information is confidential, then Service Provider A cannot discuss the 401(k) client’s comments with Service Provider B unless the client confirms that he may.

Second, we owe a duty of confidentiality to prospective clients. Because the definition of Principal includes a prospective client as a Principal and Precept 5 extends the duty of confidentiality to Principals, we owe a duty of confidentiality to prospective clients. If the prospective client shares confidential information with us in the sales process, we need to keep that information confidential unless authorized to disclose the information.

Third, in certain circumstances we have a duty of confidentiality to our employer. The definition of Principal includes our employer when we work on our employer’s retirement plan, so the Precept 5

duty of confidentiality applies. Any information that is shared with us by our employer so that we can provide services to our employer’s retirement plan is confidential.

When we have a duty of confidentiality, we may disclose the information when either authorized by the Principal or required to do so by law. Many confidentiality issues can be handled through appropriate contract drafting or clarifying with Principals what information they expect us to treat as confidential. While retirement professionals have certain obligations to promptly respond to IRS, DOL and PBGC requests, under the ASPPA Code of Professional Conduct, we may only release information with the Principal’s consent or when required to do so. So when information is requested by a government agency, we should either request the client to consent to the release of the information or get clarity that we are required by law to release the information. This may require the assistance of an attorney.

concluSionIn close situations, we should also

remember that we have a duty to act with integrity under Precept 10. So, even if we can construct a hyper-technical argument that particular information is not confidential, we may have an overriding obligation to act with integrity.

Many confidentiality issues can be solved by raising our awareness of our duty of confidentiality and stopping to consider whether we can disclose the information before sharing the information. Just a short pause before speaking or typing can often prevent an imprudent disclosure.

Karen Smith, MSPA, is an actuary and attorney in Houston. She is the president of Nova 401(k) Associates.


WELCOME NEW AND RECENTLY CREDENTIALED MEMBERS

MSPAKevin Abrahams, MSPAStuart W. Brunsvold, MSPADavid B. Reid, MSPAPaul Rosenow, MSPAVirgilio C. Ty, MSPAAndrzej Tyminski, MSPA

QPADonald G. Anderson, QPA, QKALouis A. Beckerman, QPAFernando C. Bernabe, QPA, QKAJanet J. Buckley, QPAHrishekesh R. Chakkalath, QPA, QKAKathryn A. Davis, QPA, QKADavid R. Dorazio, QPAElizabeth N. Goodhart, QPA, QKAMelissa L. Jogan, QPA, QKARichard L. Kaplan, QPA, QKASeung H. Kim, QPA, QKARosalind Yovovich, QPA

QKADonald G. Anderson, QPA, QKAGregory M. Archinal, QKAJennifer A. Bilbrey, QKAYoshua V. Casey, QKAKathryn A. Davis, QPA, QKAJanice W. Davis, QKANathan A. DePonte, QKAKimberly A. Domiano, QKA, TGPCCaterina M. Falcone, QKAJessica M. Frent, QKAElizabeth N. Goodhart, QPA, QKAJamilah A. Grant-Norman, QKAMichael James Gribben, QKAAndrew J. Griess, QKA

Kayla R. Grove, QKAMarie A. Harabin, QKASara E. Heim, QKAEzekiel A. Heydenreich, QKAHaley E. Hollenberger, QKARichard L. Kaplan, QPA, QKAPamela W. Kensler, QKAMichael F. Rahn, QKACarol A. Smatlak, QKADaniel B. Toomey, QKARonda M. Trepagnier, QKAJohn S. Werth, QKARyan S. Woodlee, QKAMatthew N. Woudstra, QKA

QPFCAshley L. Barb, QPFCCharlie L. Clark, III, QPA, QKA, QPFCDoreen A. Duffy, QPFCLawrence M. Stein, QPFCLai Linda Xu, QPA, QKA, QPFC

TGPCCharles Bremer, TGPCSadie A. Gensler-Hooker, CPC, QPA, QKA, QPFC, TGPC

APMCarl W. Meinhold, APMKatrina A. Veldkamp, APM

ASPPA AFFiliATeMichael AxelrodDavid K. BabbDaniel BowmanNancy C. BrowerDeborah C. BushClaire O. ChavezJames K. CouturePeter R. D’AngioJoseph C. FaucherTheodore R. FisherBeth Lee GarnerMark E. HoganKen JacksonMichael R. LeskoRobert F. MiottoRyan R. MontgomeryRyan RoldWilton SandersJohn J. SchaferMarvin R. SouchekJenny C. St. ClairGary M. StineKristine L. ThomasDarla H. VaughanJohn D. WinslowMike P. Wyant

65www.asppa.org/pc

An update on the activities of AsppA’s government Affairs Committee and government Affairs staff.

American workers through expanded coverage, simplification, tools to address longevity issues and improved disclosure.

In addition to lobbying to preserve critical tax incentives, ASPPA GAC staff has been working with key members of Congress to have our proposals included in legislation that either has been or will be introduced in Congress during the current session. The statement and the “Proposals” document can be found in the Comments Letters section under the Government Affairs tab on the ASPPA website.

If you would like to become involved with the ASPPA GAC, please fill out an application found in the Government Affairs Committee section under the Government Affairs tab on the website (member log-in is required).

Ronald J. Triche is ASPPA’s Assistant General Counsel and Director of Government Affairs.

(EPCRS) issued by the IRS in Revenue Procedure 2013-12;

� the need for post-PPA guidance under Section 404(o);

� the “Sample Plan Provisions and Information Package” issued by the IRS in March regarding Section 403(b) pre-approved plans; and

� the “Advance Notice of Proposed Rulemaking” issued by the DOL in May regarding proposed regulations being developed by the DOL that would require defined contribution plan benefit statements to include lifetime income illustrations (in addition to other information). In April, ASPPA submitted a

statement to the House Ways and Means Committee’s tax reform working group on retirement savings, explaining the critical role tax incentives play in providing workplace retirement plans for American workers. Along with the statement, we submitted GAC’s “Proposals to Enhance the Private Retirement Plan System” that includes numerous proposals to enhance the retirement security of

The ASPPA Government Affairs Committee has been very busy this year. Through

the tireless efforts of our volunteers on several GAC subcommittees, we have submitted six comment letters to the IRS and the DOL during the first five months of 2013. The comment letters address various topics of interest to our members, including: � in-plan Roth rollovers; � the Master & Prototype and

Volume Submitter pre-approved plan program;

� required 404a-5 disclosures to participants in defined contribution plans; and

� the recently announced Code Section 403(b) pre-approved plan program. ASPPA’s comment letters can be

found on the ASPPA website (www.asppa.org), under the Government Affairs tab.

In addition, GAC subcommittees are currently working on several new comment letters to the IRS and the DOL. The letters will address, among other things: � the updated Employee Plans

Compliance Resolution System

Advocating for AsppA members

By ronAld J. triCHe


67www.asppa.org/pc

july

Jul 21–24WBC • San Diego, CA

august

Aug 9–10ACOPA Actuarial Symposium Chicago, IL

october

Oct 27–30ASPPA Annual Conference National Harbor, MD

November

Nov 18–19ASPPA Cincinnati Pension Conference Covington, KY

CincinnatiPENSION CONFERENCE

Cincinnati

NOVEMBER 18-19, 2013Northern Kentucky Convention CenterCovington, KY

The ASPPA

www.asppa.org/cincy

SAVE THE DATE

ACOPAAugust 9-10, 2013 | Embassy Suites Downtown

Chicago, IL

Actuarial Symposium

ACOPAASPPA® COLLEGE OF PENSION ACTUARIES

www.asppa.org/aas

ASPPA uPCOMing COnFeRenCeS

ASPPA ANNUAL BUSINESS MEETING

The aSPPa annual Business meeting will be held during the 2013 aSPPa annual Conference at the gaylord national in national Harbor, mD, on Sunday, October 27. The aSPPa annual Business meeting will include a vote by the membership on a Bylaws change that would establish a new category of aSPPa membership, the “international Credentialed member.” under rules prescribed by the Board of Directors, this membership would only be available (and any associated designations) in countries other than the united States of america. all aSPPa members are strongly encouraged to attend this important meeting.

The ERISA Outline Bookby Sal L. Tripodi, J.D., LL.M.

PRINTThe ERISA Outline Book is both

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12-MONTH ONLINE SUBSCRIPTIONThe ERISA Outline Book-Online

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2013 HIGHLIGHTS

• Final service provider fee disclosure

• American Taxpayer Relief Act

• Revised EPCRS Procedure

regulations

• MAP-21 statutory changes and IRS and

PBGC guidance

• Updates on multiple employer plan rules

and latest DOL opinions

• Longevity initiatives from the IRS

• Important changes to the determination

letter process

• Form 8955-SSA guidance

• New IRS practice rules in Circular 230

• Latest guidance for 403(b) plans

• Guidance for governmental plans

• Latest court cases and

IRS/DOL/PBGC guidanceEOBE R I S A O U T L I N E B O O K

Visit www.asppa.org/eob for more details or call ASPPA Customer Support at 1.800.308.6714.

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