On July 15, 2010, the DOL released long-delayed fee disclosure regulations which require retirement plan service providers to provide detailed fee information to plan sponsors. The objective of the rules is to provide retirement plan participants with more information about the fees they are paying. They also aim to help fiduciaries fulfill their obligation to assess the reasonableness of plan fees and to unearth potential conflicts of interest. Service providers have until July 16, 2011 to comply with the new disclosure requirements for both new and existing contracts.

The good news for employers is that these regulations are directed at their retirement plan providers rather than at plan sponsors and should not add to their compliance or reporting workload.

Service providers will have to identify all fees withdrawn from participant accounts, including each fund’s annual expense ratio, wrap fees and recordkeeping charges. They also must disclose sales charges and fees incurred for withdrawals or account surrender.

The new rules mandate disclosure of all direct and indirect compensation. Direct compensation is received from the plan itself, while indirect compensation is that which is received by the service provider from unrelated parties. Disclosure of indirect compensation must include enough detail for the plan sponsor to determine if there are potential conflicts of interest, for example, if one mutual fund family is paying more compensation in return for inclusion in the provider’s menu of available funds.

Services covered by the disclosure rules include the following

1. Recordkeeping services to a participant directed 401(k) or 403(b) plan
2. Brokerage services to a participant directed 401(k) or ERISA 403(b) plan
3. Fiduciary services
4. Certain other services for which indirect compensation is received by the provider, its affiliates and subcontractors. This includes consulting, custodial, recordkeeping and third party administration and a number of other services.

Providers that bundle multiple services for a single charge must itemize separately the cost attributed to recordkeeping.

The interim final regulations fall under Section 408(b)(2) of ERISA and will be administered by the Department of Labor’s Employee Benefits Security Administration. Originally proposed by the Bush administration in 2007, the proposed 408(b)(2) regulations were delayed indefinitely by the Obama administration, and underwent significant revision before this final release.

Target Date Retirement Funds: Part II (continued from July’s Fiduciary Advisor)

Target date funds recently have come under heavy criticism which included comments by SEC Chairman Mary Schapiro and hearings on Capitol Hill. The challenge to these funds is no small matter. Target date funds are very popular with plan participants seeking a hands-off investment approach and frequently are used as Qualified Default Investment Accounts (QDIA’s). At the end of 2008, there was $152 billion invested in target date funds, with projections that they could gather up to $1 trillion in assets by 2012.

Criticism focuses on the following areas:

• Higher than expected risk – On average, 2010 target date funds, managed for participants retiring in the very near future, lost almost 24% in 2008.
• Differences in assumed behaviors in retirement – There are two types of target date funds: Those that anticipate that investors will “cash out” at retirement age and those that assume investors will stay in the fund well into retirement. The latter keep the fund invested more aggressively, assuming that a 10 to 25 year time horizon remains even as age 65 approaches.
• Dissimilarity between funds bearing the same date – Funds bearing the same date (e.g. 2010) vary widely in their equity exposure and risk levels. For example, Vanguard’s Target Retirement 2010 held 54% of assets in stocks as of June 30, 2009, while DWS Target 2010 invested only 22% of in stocks on that same date.
• Lack of participant understanding – The majority of participants do not understand the construction and the risk associated with their respective Target Date funds.

We recommend the following action steps to plan sponsors:

1. Make sure your target date fund selection aligns with your objectives. Do you want funds that assume participants will cash out at retirement or that they will continue a diversified portfolio into retirement?
2. Consider the pros and cons of using target date funds that invest in underlying funds from multiple fund families, versus those invested in a single fund family.
3. Consider the pros and cons of using target date funds that bear a guaranteed income benefit that helps mitigate downside risk as retirement approaches.
4. Consider custom asset allocation models populated by funds of your choosing.
5. Ask your provider to offer more than one choice of target date funds. What if the day comes that you need to replace your target date group for poor performance and there are no alternatives offered by your recordkeeper?

Regulating Target Date funds continues to be at the forefront of the agenda for Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration (EBSA). Recently, federal guidance regarding Target Date funds was released (http://www.dol.gov/ebsa/pdf/TDFInvestorBulletin.pdf ) with additional guidance on the horizon. The degree with which Target Date funds will be regulated is yet to be determined, however, a few things are certain: participants should not merely select a target date fund based on name alone, and further education is needed for both participants and sponsors. Our firm has had success in creating custom target date fund models for our clients. This approach offers transparency to both the participant and plan sponsor, a best in class selection of funds within the models, co-fiduciary status under section 3(38) of ERISA, and glide path flexibility (including independent oversight), but cannot be administered by all recordkeepers.

"But He’s My Brother-in-law!"

As a plan sponsor and fiduciary, it may be tempting to use your brother-in-law, old college roommate or golf buddy as your company’s retirement advisor. After all, you know them well and they would never steer you in the wrong direction, right? However, fiduciary rules are crystal clear: every decision you make as a fiduciary must be in the best interests of plan participants and their beneficiaries and certain relationships may result in prohibited transactions.

Your personal or corporate relationship with your company’s retirement plan advisor may create a conflict of interest. Be especially cautious when your personal financial adviser solicits your company’s retirement business. The fact that he works with you on personal matters could be interpreted as being in conflict with his providing services to your company. And more importantly, such an engagement could result in your having involved the plan in a prohibited transaction. Is he making recommendations on your company’s retirement plan that are benefiting you on a personal level? If so, or if that is even a remote possibility, the engagement may be a prohibited transaction needing correction, filings, and potentially penalties.

If questioned with regard to your selection of your retirement plan advisor, ideally you should cite your advisor’s expertise, independence, proven track record, and the process you undertook in selecting the advisor. You do not want to be perceived as having chosen your retirement adviser because of a personal relationship.

Simplicity: A Best Practice for Retirement Plans

JP Morgan recently published their Insights newsletter with trends in retirement plan design. The findings reveal that “Autos” are growing in popularity. The “Autos”, which are starting to be known as the “Auto-suite”, include Automatic Enrollment, Escalation and Rebalancing. With automatic enrollment, employees begin participating in the plan usually after a grace period. Contributions are made at a pre-determined rate and invested in a default fund. A participant’s active decision, of course, can override any default process. At the end of 2009, 43% of their clients were using automatic enrollment. Additionally, 57% of their clients with automatic enrollment are also utilizing automatic escalation, which is a preset increase in the deferral amount each year. Auto-rebalancing allows participants to have their account rebalanced to a targeted weighting. JP Morgan’s research on participant behavior revealed some interesting information about how participants are not necessarily managing their accounts with retirement in mind.

• 68% of new participants enrolled due to a plan sponsor decision. This shows the importance of automatic enrollment to just get participants into the plan.
• Only about 10% of participants ever made investment transfers, which shows that most participants are not taking an active role in managing their account.
• Contribution levels start low and rise slowly. They find that participants don’t actually reach a 10% contribution level until they reach age 57.

Taken together, certain best practices can simplify the participant experience. JP Morgan suggests the following:

• Utilize automatic enrollment for both current and new employees.
• If an employee opts out of the plan, sweep them back in at regular intervals.
• Use a low default deferral rate to minimize impact on take-home pay.
• Use automatic escalation and require participants to opt out.
• Set the automatic escalation at 2% increments and set the cap at 10% rather than stopping at the match amount.

Inertia is the natural enemy of most employees, who in many cases just don’t know what to do. To learn more about the “auto-suite”, please contact us at
info@m-rpa.com.

Summary Plan Description Reminder

A Summary Plan Description (SPD) describes the key provisions of an employer’s retirement plan and participant rights. SPDs must be disseminated to newly eligible participants within 120 days after a new plan is established or within 90 days after a participant becomes eligible to participate in an existing plan. In addition, SPDs must be disseminated to all participants once every five years unless there have been no amendments to the plan during that period. The DOL issued final regulations on electronic delivery that indicate an SPD can be delivered through an electronic medium if all the requirements are satisfied.

Communication Corner: Financial Hardships

This month’s sample participant communication memo covers the basic Q&A’s of financial hardship withdrawals including the consequences of taking this distribution option. Note: Carefully review the content of this memo before distributing to your employees to ensure that your plan provisions align with the information contained therein. If you are not sure, contact us. If you need an editable version of the memo, please email info@m-rpa.com.

This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

Securities and investment advisory services offered through Financial Telesis Inc. Member FINRA / SIPC. Montgomery Retirement Plan Advisors and Financial Telesis Inc. are not affiliated.