ERISA Retirement Service Providers November 2012

ERISA Newsletter for Retirement Plan Service ProvidersNovember 2012

Dear Reader:

This is a newsletter for service providers to ERISA-governed retirement plans. The newsletter focuses on the legal issues that impact investment advisers, broker-dealers, recordkeepers, third party administrators and bank and trust companies. However, it may also be interesting reading for plan sponsors and committee members because of the need—particularly with the new disclosure rules—to understand the services, status and compensation of their service providers.

For example, now that “covered” service providers have made their 408(b)(2) disclosures, plan sponsors must, under both the fi duciary responsibility and prohibited transaction rules, review and evaluate those disclosures. The failure to do so could result in personal liability for plan committee members. However, many plan sponsors do not have the expertise and industry knowledge that is needed to do that job. As a result, service providers will need to help their plan sponsor clients do that job.

When viewed from a service provider perspective, we know that these changes will impact the 401(k) industry. Compensation will be more closely scrutinized. The value of services—and how to measure that value—is being highlighted as an issue. While the outcomes are not yet known, it seems clear that there will be change, change and more change.

Focused 401(k) advisers and service providers will benefi t from those changes, but only if they are constantly attentive and are willing to embrace new ways of serving plans and new demands on their time and expertise. This newsletter is written to help those advisers and service providers.

Fred Reish Chair, Financial Services ERISA Team(310) [email protected]

Financial Services ERISA Team www.drinkerbiddle.com 1

In This Issue Page

2 DOL Advances (and Then Retreats) on Brokerage Windows—What May be Next?

4 408(b)(2) Disclosures—Now What?

5 A Ripe Opportunity for Advisers—The Benefits of a Service Provider Agreement

6 The DOL is Paying Attention to that Additional Compensation—You Should Too

7 DOL Service Provider Investigations

8 Next Steps for Service Providers to “Open” Multiple Employer Plans

10 Around the Firm


Financial Services ERISA | November 2012

DOL Advances (and Then Retreats) on Brokerage Windows—What May Be Next?

DOL caused quite a stir this summer when it published guidance addressing the participant disclosure requirements of the new 404a-5 regulation. In a Q&A controversial enough to result in letters of opposition from Congressional Democrats to White House offi cials and to unite the trade associations representing plan sponsors and service providers, DOL wrote that plan administrators would, under certain circumstances, have to treat participant investments made through brokerage windows or self-directed brokerage accounts as if they were Designated Investment Alternatives (DIAs) in order to comply with their fi duciary duty. Critics attacked the policy change on several grounds:

they argued it was too close to fi nal implementation to make such a change, that the practical issues of tracking the investments could not be readily resolved, that the policy itself was an unreasonable interpretation of fi duciary duty, and that DOL lacked the authority to make such a change in a mere guidance document.

While the outcry resulted in DOL retreating from its guidance, its revised and reissued Q&A made it clear the retreat was temporary, and that DOL still has serious concerns about certain usages of brokerage-windows by plans. The revision may have served the short-term needs of the regulated community (as it resulted in no change to the disclosures due only a few weeks later), but it is not the end of the story. Plans and service providers should take a moment to try to understand why DOL pursued this policy change in the fi rst place, and what they might try next.

The Original Brokerage Window Q&A:

DOL’s Q&A 30 in Field Assistance Bulletin (FAB) 2012-02 came as a surprise to most outside observers, because the brokerage window issue generally was viewed as settled. The regulation states that brokerage windows are not DIAs, and the history of the regulation prior to the FAB suggested that disclosure obligations regarding brokerage windows were limited to the window itself—disclosing transaction fees, explaining how to use the window, etc.—not to investments made through the window.

Q&A 30 conceded that a brokerage window is not a Designated Investment Alternative, but offered an analysis that fi duciary duty requires looking “through” the window:

“If, through a brokerage window or similar arrangement, non-designated investment alternatives available under a plan are selected by signifi cant numbers of participants and benefi ciaries, an affi rmative obligation arises on the part of the plan fi duciary to examine these alternatives and determine whether [they] should be treated as designated for the purposes of the regulation.”

Taking this concept a step further, DOL then articulated a new “enforcement policy”—it would refrain from requiring every investment to be a to be a DIA if a plan with a platform of more than 25 undesignated investment alternatives did two things. First, the plan would have to designate at least three investments (that

By Bradford P. Campbell (202) [email protected]

Now that service providers to ERISA-governed retirement plans have provided written disclosures about their services, fiduciary status and compensation to the “responsible plan fiduciary” for all their existing plan clients, the focus shifts to plan sponsors.

That’s why Drinker Biddle attorneys recently offered a complimentary webcast focused directly on the 408(b)(2) issues facing plan sponsors, including:

Next steps plan sponsors must take

Appropriate procedures in cases where disclosures were not furnished

Issues from the policy perspective of the government.

To hear a recording of the webinar and view the presentation, visit www.drinkerbiddle.com/Register/plan-committees.

www.drinkerbiddle.com/Register/plan-committees



collectively met the 404(c) requirements for a “broad range” of investments) as DIAs. Second, it would have to treat as DIAs any investments at least five participants (or 1% of participants in a plan with more than 500 participants) individually selected on the platform as of a date within 90 days before the annual disclosure deadline.

The few paragraphs of the guidance led to considerable debate. In addition to the arguments about timing (too near the deadline), process (the policy has to be made in a notice and comment rulemaking to be valid) and practicality (systems are not set up to track investments this way), some argued that the guidance was not clear because the terminology alternated between “platform” and “brokerage window,” making it hard to know whether the enforcement policy applied to one or both.

The Revised Brokerage Window Q&A:

Bowing to the regulated community’s concerns (and the bipartisan political pressure brought to bear) DOL withdrew FAB 2012-02 and Q&A 30, replacing it with a revised FAB 2012-02R and a new Q&A 39.

In the revised Q&A 39, DOL began by conceding (1) the regulation states that a brokerage window is not a DIA, (2) nothing in the regulation requires a plan to have a particular number of DIAs, and (3) nothing in the FAB prohibits a plan from using a brokerage window or similar arrangement. DOL also noted that the FAB does not change the requirements of the 404(c) regulation, and it does not address the application of ERISA’s fiduciary requirements to SEPS or SIMPLE IRA plans. Finally, DOL reiterated that the general fiduciary duties of prudence and loyalty apply to brokerage accounts, “including taking into account the nature and quality of services provided in connection with the platform or the brokerage window...”

On balance, this meant a short-term victory for critics, as DOL was requiring no changes to current disclosures. However, DOL also clearly stated its intention to revisit the fiduciary issues associated with the use of brokerage windows, intending to “engage in discussions with interested parties” that might lead to regulatory amendments “if appropriate.”

It is not entirely clear why DOL appears suddenly to have concerns that brokerage windows might create special fiduciary issues—prior to the FAB, the issue did not arise in the nearly three years of notice and comment rulemaking leading to the final regulation. Some observers theorize that the original guidance

was motivated by DOL’s concerns that some plans would adopt a brokerage window-only design in which there are no DIAs in order to avoid disclosure.

This theory is bolstered by a provision in the revised Q&A 39 in which DOL wrote:

“…in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under [ERISA’s] general statutory fiduciary duties of prudence and loyalty.” [emphasis added]

This provision in the Q&A may serve as the roadmap for those future conversations with interested parties. Even though the Q&A notes that the regulation requires no designation of a DIA, DOL seems to be saying that general fiduciary duty may, “including” when the goal is to avoid disclosure. Plan sponsors and service providers should take note that DOL used the word “including”…and that “including” does not mean “limited to.”

What Comes Next and Who Is It Likely to Affect?

Of course, as with any policy question, what DOL might do next likely depends significantly on the outcome of the Presidential election. If there is a change in the Administration, it is likely that this issue is either eliminated or significantly slowed.

Assuming there is a second term for the Obama Administration, DOL is likely to pursue this issue, particularly focusing on plans that offer only brokerage windows. The guidance suggests that DOL may argue such brokerage window-only plans are per se imprudent because they do not give participants sufficient information to exercise their rights and responsibilities. If so, this issue will likely be controversial again.

Our attorneys will continue to monitor DOL’s activities in this area, working with our clients to help ensure their plans are not caught by surprise.

Bradford P. Campbell advises financial service providers and plan sponsors on ERISA Title I issues, including fiduciary conduct and prohibited transactions. ERISA’s former “top cop” and primary regulator, he served as the U.S. Assistant Secretary of Labor for Employee Benefits, head of the Employee Benefits Security Admin-istration. Mr. Campbell was listed as one of the 100 Most Influ-ential Persons in Defined Contribution by 401kWire in 2011.



408(b)(2) Disclosures—Now What?

The first wave of 408(b)(2) disclosures was made to plan sponsors in the months before July 1 of this year. The “covered” service providers for “covered” ERISA-governed retirement plans were required to make those disclosures to their plan clients. (As Joan Neri explains in another article in this newsletter, many advisers have advantageously used their service agreements to make those disclosures and to describe their services . . . and, in effect, to explain their value proposition.)

However, this article is not about the requirement that service providers make disclosures. Instead, it is about the responsibility of plan sponsors to review those disclosures. Unfortunately, many plan sponsors lack the knowledge—both of the rules and industry practices—to fulfill their fiduciary and prohibited transaction responsibilities. As a result, 401(k) advisers will need to help plan sponsors fulfill their legal responsibilities to evaluate the disclosures. Since some advisers work with only a few plans, the odds are that they will not have much more knowledge about the new requirements than plan sponsors do. As a result, there is an opportunity for focused 401(k) advisers to expand their market share.

The first step for plan sponsors is to review the disclosures to make sure (i) that all of the covered service providers made disclosures, and (ii) that the disclosures were adequate. If it turns out that disclosures were not made, or that they were not adequate, the regulation requires that plan sponsors send out written requests for the needed information. If the covered service provider refuses to provide the information or fails to provide it within 90 days, the plan sponsor must fire the service provider. If the plan sponsor fails to send out the letter, or fails to fire the non-compliant service provider, the plan sponsor will have engaged in a prohibited transaction and will be in violation of the law.

Technically, plan sponsors are not required to know if all of the disclosures were made by a covered service provider. Interestingly, though, plan sponsors are expected to compare the disclosures against the provisions of the regulation and identify any inadequacies that would be apparent from that comparison. In that way, the DOL reasons, the plan sponsor could have formed a “reasonable belief ” that the disclosures were adequate. But, is it realistic to think that plan sponsors will compare the disclosures against the regulation . . . or even to believe that plan sponsors are aware of the regulation? Obviously, in many cases that will not be the case. As a result, advisers will need to help plan sponsors with that job. And, some advisory firms are doing just that; in fact, we have prepared 408(b)(2) checklists for those firms.

Once the prohibited transaction responsibility has been fulfilled, plan sponsors then have an obligation to evaluate the disclosures. Realistically, most of the evaluation will be of the compensation received by the service providers. (However, the law actually requires that a comparative analysis be done, taking into account factors such as fiduciary status, quantity and quality of services, conflicts of interest, and so on.) Nonetheless, the focus undoubtedly will be on compensation.

In order to evaluate compensation, it appears that marketplace data will be needed. That could be done through requests for proposals, benchmarking services, proprietary studies, and so on. Regardless of the method, plan fiduciaries will need to compare compensation to marketplace data . . . and then make a decision about whether the compensation of the plan’s service providers is reasonable. If it is not, plan sponsors will need to take steps to reduce the compensation to a reasonable level, which could include terminating the service provider and hiring another one, re-negotiating the compensation with the service provider, and so on.

Plan sponsors need help in fulfilling their prohibited transaction and their fiduciary responsibilities. Focused 401(k) advisers are ideally situated to provide that help.

NOTE: This article refers to plan sponsors as having the responsibility to evaluate the 408(b)(2) disclosures. From a legal perspective, the “responsible plan fiduciary” (RPF) receives, reviews and evaluates the disclosures. Most often the RPF will be the plan sponsor or a committee. As a result, for ease of reading I have used “plan sponsor.”

By Fred Reish (310) 203-4047 [email protected]



Fred Reish is chair of the Financial Services ERISA practice at Drinker, Biddle & Reath. Fred has been recognized as one of the “Legends” of the retirement industry by both PLANADVISER magazine and PLANSPONSOR magazine. Fred has also received the IRS Commissioner’s Award and the District Director’s Award; the Eidson Founder’s Award by the American Society of Professionals & Actuaries (ASPPA); the Institutional Investor and the PLANSPONSOR magazine Lifetime Achievement Awards; and the ASPPA/Morningstar 401(k) Leadership Award.

A Ripe Opportunity for Advisers— The Benefits of a Service Agreement

With the July 1 408(b)(2) compliance deadline an event of the past, many advisers may be overlooking the merits of a well-drafted service agreement. The 408(b)(2) disclosure obligations are a continuing responsibility for both registered investment advisers (RIAs) and registered representatives of broker-dealers (B-D representatives). Current ERISA plan clients must be notified when there is a change to the disclosed information and new ERISA plan clients must receive the disclosure reasonably in advance of entering into the arrangement. While 408(b)(2) does not require that these disclosures be in the form of a service agreement, the advantage of the agreement format is that it enables the RIA or B-D representative to address a number of issues. Also, this is a timely consideration because right now the responsible plan fiduciaries – such as, the plan sponsors or plan committees – are obligated to evaluate the disclosures to determine whether they are complete and constitute reasonable plan service arrangements. The considerations of a new (or updated) service agreement can be part of that process.

The 408(b)(2) disclosure rules are comprised of three elements – compensation, status and services.

The compensation element of the disclosure has received the most attention because of the obligation of the responsible plan fiduciary to evaluate the reasonableness of fees under ERISA’s “prudent man” standard. The other two elements – status and services – have received less attention, yet they present a number of considerations that can be addressed in a service agreement. This article addresses some of those considerations.

An RIA providing investment advice for a fee is an ERISA fiduciary and under 408(b)(2), both the RIA status and the ERISA fiduciary status must be disclosed. We have found that the existing service agreements of some RIAs fail to acknowledge ERISA fiduciary status and as such, are deficient under 408(b)(2). If the disclosure is not corrected, the RIA is engaged in a prohibited transaction.

ERISA imposes a high standard of care on ERISA fiduciaries - that of the prudent man acting in a like capacity and familiar with such matters. If the services performed include both fiduciary services and non-fiduciary services, then only the fiduciary services should be subject to the ERISA standard. This can be accomplished by separately identifying those services that are non-ERISA fiduciary services and specifying that they are subject to a different standard – for instance, one that uses negligence as the standard of care.

Let’s take the example of an RIA who provides plan-level investment advice and also provides benchmarking services for compensation of service providers. Benchmarking services typically are not ERISA fiduciary services. The benchmarking service can be separately identified in the RIA’s service agreement as a non-fiduciary service and expressly made subject to the negligence standard.

Similarly, if a B-D’s registered representative provides investment education to participants as a part of its B-D services, such services typically are not ERISA fiduciary services. In that instance, the B-D service agreement could include a client acknowledgement that the registered representative is not acting as an ERISA fiduciary in offering that service and is not subject to ERISA’s prudence standard. By documenting this distinction in the form of an agreement rather than a disclosure, the B-D representative will have the benefit of a contractual protection. While a contractual provision will not “override” ERISA’s fiduciary provisions, we have seen some FINRA arbitrators put weight on that provision in determining

By Joan M. Neri (973) 549-7393 [email protected]



whether the “mutual understanding” portion of the fiduciary advice regulation was satisfied.

These are just a few of the many considerations that can be addressed in a service agreement. A well-drafted service agreement can be used by RIAs and B-Ds as a vehicle to both satisfy the 408(b)(2) disclosure requirements and also to provide risk management protections.

Joan Neri is in the firm’s Financial Services ERISA Team. With more than 24 years of experience, Joan coun-sels clients on all aspects of ERISA compliance including fiduciary responsibility and plan operational issues. A part of Joan’s practice includes representing registered investment advisors in fulfilling their obligations under ERISA. Joan is a frequent speaker throughout the country on legislative and regulatory developments impacting ERISA fiduciaries.

The DOL is Paying Attention To That Additional Compensation— You Should Too

In our last newsletter for retirement plan service providers, I addressed whether service providers are obligated to offset indirect compensation they receive in connection with the services they provide to their plan clients. “Indirect compensation” is compensation received from a source other than the plan or the plan sponsor. Common types of indirect compensation in the retirement plan world include commissions, 12b-1 fees and sub-transfer agent fees. Some service providers may describe the compensation more generically, for instance, as “marketing allowances,” “revenue sharing” or “subsidies.”

In that article, I emphasized the difference between fiduciary and non-fiduciary service providers, and the

standards to which they are held. Specifically, I pointed out that fiduciaries – such as registered investment advisers (RIAs) -- who recommend investments that generate indirect compensation in addition to their fee may trigger a prohibited transaction, by dealing with the assets of the plan for their own benefit.

As one recent case demonstrates, this is no mere hypothetical concern. On August 23, 2012, the Department of Labor issued a press release regarding the result of its recent investigation of an RIA firm. The press release stated that as a result of the investigation, the RIA agreed to pay over $1.265 Million to thirteen defined benefit pension plans to whom the RIA had provided fiduciary investment advice. According to the press release, the RIA invested the plans’ assets in mutual funds that paid 12b-1 fees to the RIA. These fees were apparently not disclosed to the plan fiduciaries and did not offset or reduce the advisory fees that the plans agreed to pay. The $1.265 Million is presumably based on the amount of 12b-1 fees received by the RIA during the six-year period covered by the investigation – 2004-2010. (Although the press release is silent on this point, it is reasonable to assume that at least some of that $1.265 Million figure is attributable to interest on the 12b-1 fees that the RIA allegedly received.)

The DOL’s investigation in this case was no fluke. It was carried out as part of the Employee Benefit Security Agency’s Consultant/Adviser Project (“CAP”). As stated on the EBSA website, CAP:

“…focuses on the receipt of improper or undisclosed compensation by employee benefit plan consultants and other investment advisers. EBSA’s investigations will seek to determine whether the receipt of such compensation, even if it is disclosed, violates ERISA because the adviser/consultant used its position with a benefit plan to generate additional fees for itself or its affiliates. When ERISA violations are uncovered, EBSA will seek corrective active for past violations as well as prospective relief to deter future violations.”

Under the auspices of CAP, the EBSA takes action not only against financial advisers, but also against other fiduciaries, including plan sponsors:

“EBSA may also need to investigate individual plans to address such potential violations as failure to adhere to investment guidelines and improper selection or monitoring of the consultant or adviser. The CAP will also seek to identify potential criminal violations, such as kickbacks or fraud.”

By Joseph C. Faucher (310) 203-4052 [email protected]



In other words, under CAP, the DOL assesses not only whether financial advisers received unreasonable compensation, but whether plan sponsors and other fiduciaries allowed plan advisers to receive that compensation in potential violation of their own fiduciary duties.

The monetary and reputational damage to financial advisers who are caught up in an investigation under CAP can be significant. First, as shown in this case, the amount that advisers who are found to have received unreasonable or undisclosed compensation can be substantial, particularly if – as is typical -- the investigation spawns a several year period and the adviser’s practices were consistent throughout that period.

Second, while an adviser’s fiduciary liability insurance may cover some of the cost of the investigation, it is unlikely to cover the bulk of the expense. In our experience, fiduciary liability insurers will pay attorney’s fees after the DOL issues a “voluntary compliance” letter to the target of the investigation, which gives the service provider an opportunity to informally resolve the matter before the DOL initiates litigation. Those insurers, however, will typically not pay for all of the attorneys fees incurred during the period of time that the DOL is investigating and before the voluntary compliance letter is issued. More importantly, while these policies may pay some portion of the service provider’s attorney fees, they will almost certainly not pay any part of the compensation that the service provider is required to refund to the affected retirement plans.

Finally, because the service provider’s clients may be swept into the investigation, the reputational damage to the service provider can be as bad, or worse, than the cost to resolve the matter.

In addition to handling an active litigation practice, Joe Faucher reg-ularly consults with third party administrators, registered investment advisers and insurance carriers on ERISA and employee benefit matters and fiduciary liability insurance and ERISA bond issues.

DOL Service Provider Investigations: Impact Of The 408(b)(2) Regulation

Investigations of service providers to ERISA retirement plans by the U.S. Department of Labor are on the rise. In first half of 2012 alone, we saw close to a dozen DOL investigations of broker-dealers and were involved in handling several for our clients. This increase is due in part to the DOL’s on-going national enforcement initiative, the Consultant/Adviser Project (“CAP”). But we anticipate an acceleration of service provider investigations arising out of the disclosure requirements under Section 408(b)(2).

The DOL traditionally investigates individual employee benefit plans. The investigations sometimes point to alleged improprieties by a service provider, which then leads to an investigation of all plan-related activities by that service provider. CAP was established as a standalone project out of a concern that many pension consultants were fiduciaries but ignored or were not aware of their obligations and were receiving improper compensation.

The 408(b)(2) regulation clearly ties into this concern, at least indirectly. Under the regulation, service providers are required to disclose their services, fiduciary status, and compensation, both direct and indirect. Failure to do so results in a prohibited transaction, which subjects the service provider to penalties and possible disgorgement of compensation. While the purpose of the disclosures is to enable plan fiduciaries to determine whether the service arrangement and compensation are reasonable, the disclosures

By Bruce L. Ashton (310) 203-4048 [email protected]



themselves – or the lack of disclosures – can provide a roadmap for investigative activity by the DOL.

The compliance date of the 408(b)(2) regulation was July 1 of this year. Typically, DOL investigations are keyed off the filing of the Form 5500, and start about a year later. Following this pattern, in the usual course of things, investigations that focus on the 408(b)(2) disclosures would start in 2014. But these are not typical times. The DOL has already begun asking for the 408(b)(2) disclosures in plan investigations, even though the year under investigation may be 2009 or 2010, long before the disclosures were required. The regional offices are also engaged in training of their investigators on the disclosure rules. Though we have not heard of any service provider investigations arising out of the review of 408(b)(2) disclosures, we expect they will not be long in coming.

What should service providers anticipate? In a typical CAP investigation, the DOL asks for (among other things) a listing of the service provider’s benefit plan clients, copies of service agreements, and documents related to the provision of investment advice, who gave the advice, and the compensation received. When 408(b)(2) is thrown into the mix, we expect the DOL will ask for copies of the disclosures on a plan-by-plan (rather than generic) basis and potentially the backup documentation that supports the statements regarding their status and indirect compensation. Service providers unable to provide this information will face prohibited transaction penalties and potentially a more in depth inquiry into fiduciary status and potential breaches of fiduciary duty.

To prepare for this rise in investigation activity, service providers will need to make sure they understand the requirements of the 408(b)(2) disclosure rule and how they apply – or do not apply – to the service provider. They need to be able to document whether they have provided complete, accurate, plan specific disclosures and should be able to document all sources of compensation. And service providers should not be surprised if they receive an inquiry from the DOL asking for any or all of these materials. The DOL may take request documents as a first step – rather than starting a full-blown investigation -- to sort out the clearly compliant from the questionable or non-compliant providers. Service providers who receive such an inquiry should respond promptly and fully in consultation with an experienced consultant.

Within the last several weeks, we submitted a proposal to the DOL for a voluntary correction program for inadvertent violations of the 408(b)(2) disclosure rules. If adopted, this would protect service providers from adverse prohibited transaction consequences and potentially from an investigation. A copy of our proposal can be obtained at [insert url]. Regardless of whether such a program is adopted, service providers are well-advised to perform a self-audit to determine if there are areas of non-compliance and take steps to correct them now.

Bruce Ashton is in the firm’s Financial Services ERISA and Retirement Income Teams. Bruce’s practice focuses on all aspects of employee benefits issues, especially representing plan service providers (including RIAs, independent record-keepers, third party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA and in assisting service providers and plan sponsors in addressing the retirement income needs of participants. He is a well-known speaker and author on employee benefits topics.

Next Steps for Service Providers to “Open” Multiple Employer Plans

On May 25, 2012, the Department of Labor (“DOL”) issued Advisory Opinion 2012-04A (the “Advisory Opinion”), which held that “open” multiple employer plans (“Open MEPs”)1 do not constitute single plans for purposes of ERISA. Adapting to the DOL’s position will require Open MEP service providers to make a few changes for these ERISA requirements. Open MEPs will continue to be treated as MEPs 1 Open MEPs refer to MEPs that are available to any employer who wishes to participate, regardless of whether the employers have any pre-existing relationship, such as common membership in a trade group or similar organization that sponsors the plan.

By Joshua J. Waldbeser (312) 569-1317 [email protected]



(i.e., single plans) under the Internal Revenue Code (“Code”). No changes to Open MEPs are required under the Code because the Advisory Opinion does not affect plan qualification requirements.

In short, Open MEPs will be treated as a group of single employer plans only for ERISA purposes. Accordingly, Open MEPs will still look and feel very much like MEPs. This article summarizes those few ERISA changes that will apply and how they affect Open MEP providers.

Annual Reporting. First, each participating employer’s portion of the Open MEP will have to file its own annual Form 5500, since it will be treated as a separate “plan” for ERISA purposes. This is an additional cost. Also, any such “plan” that has 100 or more participants will need to have its own annual accountant’s audit and file its own Schedule C. Many participating employers will have less than 100 covered employees, so audits and Schedules C will not be required for them.

Providers should take these competing factors into account in determining the effect on costs for their employer-clients. Economies of scale may be achieved by utilizing a group trust that is treated as a direct filing entity (a “DFE”) for reporting purposes.

The DOL has not issued guidance regarding whether the individual ERISA “plans” need to file retroactive Forms 5500 for previous years. If this were required, use of the DOL’s Delinquent Filer Voluntary Compliance Program (“DFVCP”) would provide an avenue to do so. The hope is that the DOL will not require this.

ERISA Bonding. For the same reason noted above, fiduciaries and other providers who handle Open MEP assets will need to recalculate the required coverage amounts of their ERISA bonds. The amount of the bond will still be 10% of the assets handled, but determined on an employer-by-employer basis (subject to the $500,000 limit). This affects investment managers, discretionary investment advisers and

broker-dealers, custodians, administrators with control over funds, and trustees. A single bond—if appropriately structured—can still be used for an Open MEP, since DOL guidance permits this for multiple ERISA plans.

Contracts and ERISA Disclosures. Service providers to Open MEPs should review their contracts to determine if any changes or fee adjustments are needed to reflect the DOL’s position. Open MEPs will still be single plans under the Code, and for ERISA

purposes, the vendor can continue to act as the Plan Administrator and Named Fiduciary. Thus, it is possible that no adjustments will be required (or they may be very minor), but this should be confirmed.

If the services or compensation of a “covered service provider” under ERISA Section 408(b)(2) change because the Open MEP is treated as multiple plans under ERISA, such changes must be disclosed. This must occur as soon as practicable, and in no case later than 60 days after the provider learns of the change, unless precluded by extraordinary events outside of its control.

Similarly, participant-directed (e.g., 401(k)) Open MEPs may continue to use standardized forms for providing participant disclosures, but some minor changes may be necessary.

Funding Vehicles. No changes to an Open MEP’s funding vehicle are required. Even though the Open MEP will be treated as multiple plans for ERISA purposes, ERISA permits the use of group trusts and other collective funding arrangements that are DFEs. Likewise, an Open MEP can continue to be a single plan under the Code, which requires that all plan assets must be available to satisfy all benefit liabilities.

Alternatively, an Open MEP vendor could elect to use segregated trusts for each employer. In this case, the Open MEP would cease to be a single qualified plan. Converting an Open MEP to multiple qualified plans may increase costs due to lost economies of scale, a factor that should be taken into account.

Joshua has been in the Employee Benefits and Executive Compensation Practice Group at Drinker Biddle & Reath’s Chicago office since 2008. Prior to this he worked for the U.S. Department of Labor, Employee Benefits Security Administration. Joshua’s practice focuses on working with plan sponsors and service providers with respect to Title I of ERISA and the IRS qualification requirements for retirement plans.



Employee Benefits & Executive Compensation Around the FirmIn July 2012 Heather Abrigo, Summer Conley and Joe Faucher spoke at the Western Benefi ts Conference. Heather Abrigo was the ASPPA co-chair for the Conference, and will serve again next year as co-chair. She will also serve as a member of the Western Benefi ts Conference steering and program committees. Summer Conley moderated a workshop at the July Western Benefi ts Conference titled, “Have You Done Your 408(b)(2) Disclosures? Is Anyone Reading Them?” Joe Faucher presented one of the Conference’s highly anticipated and popular sessions “ERISA Litigation Update.”

Fred Reish and Brad Campbell kicked off a new audiocast series called Inside the Beltway on August 16, 2012. The program was presented in a “radio show” format, with hosts Fred and Brad discussing current observations and trends on legislative and regulatory events which affect the day-to-day management of retirement plans. The hosts addressed questions asked by program listeners. The next broadcast will be presented on November 15, 2012 which will focus on the impact of the Presidential election on enforcement and regulations, and potential changes that service providers and plan sponsors can anticipate. To listen to the inaugural audiocast from August use this link: http://www.drinkerbiddle.com/beltway

Joan Neri co-presented a webcast with National Association of Plan Advisors (NAPA) on October 16, 2012. The presentation, titled “404a-5 Revisited: Opportunities for Advisors,” highlighted the gaps that exist in the execution and fulfi lment of the recent participant level fee disclosure notices. Joan co-hosted another webcast on October 24, 2012, titled “408(b)(2) Disclosures - A Plan Sponsor Call to Action” which highlighted what steps Plan Sponsors and other responsible plan fi duciaries need to take now in order to avoid a fi duciary breach and possibly, a prohibited transaction.

The Autumn 2012 issue of Journal of Pension Benefi ts features two articles written by members of Drinker Biddle’s ERISA Financial Services team: “’Open’ Multiple Employer Plans After Advisory Opinion 2012-04A: An Assessment” was co-authored by Fred Reish, Bruce Ashton and Josh Waldbeser, and “ERISA Compliance Issues for Plan Providers: The DOL Consultant/Adviser Project” was written by Fred Reish, Bruce Ashton, Brad Campbell, Josh Waldbeser and Summer Conley.

Howard Levine and Rob Jensen authored an article for the Fall 2012 issue of Plan Consultant titled, “ERISA Fiduciary Duty and Other Legal Considerations in Cash Balance Plan Conversions.”

Heather Abrigo wrote an article for the Women in Pensions Network’s Fall 2012 Newsletter. Heather’s article, titled, “Why I Do What I Do,” focused on the trials and tribulations of co-chairing the Western Benefi ts Conference, a role she has undertaken annually since 2010. Heather will co-chair the conference again next year.

Joan Neri authored an article for the National Association of Plan Advisors’ (NAPA) July 2012 newsletter. The article was titled, “DOL Issues Guidance on Participant Disclosure of Asset Allocation Models.”

Fred Reish, Bruce Ashton and Gary Ammon co-authored an article for The Hedge Fund Law Report. In the article, the three authors analyze the fi nal rule under ERISA §408(b)(2) as it applies to hedge fund managers.

Brad Campbell was quoted in the November 2012 issue of Kiplinger’s Personal Finance on the subject of new 401(k) fee-disclosure regulations. Brad, in his former role as head of EBSA, proposed the original disclosure regulations.

Brad Campbell was quoted in August 2012 by Reuters on the issue of a $1.27 million fi ne imposed by the Department of Labor on USI Advisors, a Glastonbury, Connecticut-based fi duciary investment adviser.

On October 11, 2012, Fred Reish, Brad Campbell and Bruce Ashton held a complimentary webcast on “What Plan Committees Must Do With 408(b)(2),” The recorded session may be accessed here: http://www.drinkerbiddle.com/register/plan-committees

Fred Reish spoke at the Center for Due Diligence conference on October 22, 2012 on “Actionable Steps to Impose the Plan Level Funding Gap,” and again on October 23, 2012 on “Benchmarking Advisor Fees From A Legal Perspective.” Bruce Ashton spoke at the same conference on “Evaluating & Vetting Advisors: A Mock Plan Committee Meeting” on October 22, 2012, and on “The Prudent Allocation of Participant Account Fees” on October 23, 2012.

At the ASPPA annual conference on October 28, 2012, Bruce Ashton presented a workshop on the “Non-Investment Fiduciary,” and spoke on October 29, 2012 about “Open MEPs.” Fred Reish presented workshops at the ASPPA conference on “Allocation for Plan Expenses and Revenue Sharing: Fiduciary and Qualifi cation Issues” on October 29 and 30, 2012 and presented on “Retirement Distributions and Lifetime Income” on October 31, 2012.

Bruce Ashton and Fred Reish presented “ERISA Disclosures: Questions Broker-Dealers Are Asking” on November 1, 2012 in a webinar hosted by Financial Services Institute, Inc.

On October 16, 2012, Fred Reish, Brad Campbell and Bruce Ashton sent a letter to DOL Assistant Secretary Phyllis Borzi urging the Employee Benefits Security Administration to create a remedial program for covered service providers under the 408(b)(2) regulation. The proposed program would soften the blow for broker-dealers and other retirement plan providers who may have made mistakes when spelling out their fees and services to plan sponsors.Advisor One, Investment News, Plan Adviser, RIABiz, Plan Sponsor, Fiduciary News and Benefi ts Pro all ran subsequent articles related to this important proposal. See www.drinkerbiddle.com/news/headlines/2012/408b2-Correction-Program for a brief fact analysis and to view a copy of the letter sent to Assistant Secretary Borzi.

http://eventcenter.commpartners.com/se/Meetings/Playback.aspx?meeting.id=195866

www.drinkerbiddle.com/news/headlines/2012/408b2-Correction-Program

Financial Services ERISA Team

© 2012 Drinker Biddle & Reath LLP. All rights reserved. A Delaware limited liability partnership. Jonathan I. Epstein and Andrew B. Joseph, Partners in Charge of the Princeton and Florham Park, N.J., offices, respectively.

This Drinker Biddle & Reath LLP communication is intended to inform our clients and friends of developments in the law and to provide information of general interest. It is not intended to constitute advice regarding any client’s legal problems and should not be relied upon as such.

Employee Benefits & Executive Compensation Practice Groupcalifornia | delaware | illinois | new jersey | new york | pennsylvania | washington dc | wisconsin

Disclaimer Required by IRS Rules of Practice:Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.


Heather B. Abrigo (310) [email protected] D. Ammon(215) [email protected] L. Ashton(310) [email protected] M. Brown(215) [email protected] P. Campbell(202) [email protected] Conley(310) [email protected] C. Faucher(310) [email protected]

Mona Ghude(215) [email protected] L. Jensen (215) [email protected] R. Junge(312) [email protected] L. Klingelsmith(215) [email protected] M. Kong(212) [email protected] J. Levine(312) [email protected] Bassler Millar(312) [email protected]

Joan M. Neri(973) [email protected] Reish (310) [email protected] C. Tzeng (310) [email protected] A. Vanic (310) [email protected] J. Waldbeser(312) [email protected]

Documents

ERISA Retirement Service Providers November 2012