New Retirement Plan Fee Disclosure Requirements: What You Need to Know and Do Now

1. New Retirement Plan Fee Disclosure Requirements:What You Need toKnow and Do Now Edward P. SmithMarjorie M. GloverDavid GallaiRachel M. Santangelo May 23, 2012

2. Agenda • Overview of Recent DOL Fee Disclosure Initiatives • Service Provider Fee Disclosure Requirements • Participant Level Fee Disclosure Requirements • Electronic Delivery of Fee Disclosure

3. Recent DOL Fee Disclosure Initiatives

4. Service Provider Fee Disclosure • Purpose • Legislative History • Covered Plans • Covered Service Providers • Required Disclosure • Timing • Penalties • Corrective Action • Employer Action Required

5. Service Provider Fee Disclosure- Purpose • ERISA Section 408(b)(2) • Generally prohibits provision of goods and services or facilities between parties in interest and service providers unless arrangement and compensation for services are “reasonable” • ERISA 408(b)(2) Regulations • Requires Service Providers to Disclose Information to Plan Fiduciaries to Help Plan Fiduciaries – • Assess reasonableness of compensation paid to service providers • Determine whether there are any actual or potential conflicts of interest that affect service provider’s performance of services • Satisfy reporting and disclosure requirements under ERISA

6. Service Provider Fee Disclosure - History Interim FinalRegulationsIssuedJuly 2010 ProposedRegulationsIssuedDecember 2007 Final Regulations Issued February 2012 2007 2008 2009 2010 2011 2012

7. Service Provider Fee Disclosure – Covered Plans • Which Plans Are Covered by Fee Disclosure Requirements? • Defined contribution and defined benefit plans • Exceptions: • Frozen 403(b) plans (entered into, frozen and benefits fully vested before 2009) • SEPs, Simple IRAs and IRAs • Non-Employee KEOGHs and HR 10 • DOL intends to issue separate regulations covering welfare plans in future

8. Service Provider Fee Disclosure – Covered Service Providers • Which Service Providers Are Required to Provide Fee Disclosure to Plan Fiduciaries? • Certain service providers who reasonably expect to receive $1,000 or more (directly or indirectly) as a result of providing “covered services” • Entity entering into arrangement is responsible for making service provider fee disclosures (even if entity provides multiple services to plan)

9. Covered Service Providers (CSPs) Fiduciary Services Provided to Plan Fiduciary Services Provided to Investment Contract, Product, Entity That Holds Plan Assets and In Which Plan Has Equity Interest Registered Investment Advisory Services Recordkeeping or Brokerage Services Provided to Participant-Directed Individual Account Plan (if one or more investment options are made available in connection with such services) ( “Platform Providers”) Accounting, Auditing, Actuarial, Appraisal, Banking, Consulting, Custodial, Insurance, Investment Advisory, Legal, Recordkeeping, Securities or Other Investment Brokerage, Third-Party Administration or Valuation Services, Where Service Provider, Affiliate or Subcontractor Reasonably Expects to Receive Indirect Compensation or Other Compensation Service Provider Fee Disclosure – Covered Service Providers

10. General Disclosure Services – Description of Services Provided to Plan Status – Statement That CSP Will Provide Services to Plan as Fiduciary or Registered Investment Advisor (If Applicable) Compensation – Description of any “Direct Compensation” or “Indirect Compensation” That CSP Reasonably Expects to Receive “Direct Compensation” is any compensation received from plan “Indirect Compensation” is compensation received from any source other than plan, plan sponsor, service provider, affiliate or subcontractor (for example, revenue sharing, commissions) Service providers who disclose indirect compensation must identify service for which indirect compensation is received and payer of indirect compensation and describe arrangement with payer of indirect compensation Compensation on Termination – Description of Any Compensation Due in Connection With Termination of Arrangement Method of Payment – Whether Billed to Plan or Paid from Plan Assets Service Provider Fee Disclosure – Required Disclosure

11. Service Provider Fee Disclosure – Required Disclosure

12. Service Provider Fee Disclosure – Required Disclosure

13. Service Provider Fee Disclosure – Form and Delivery • Disclosure Must Be Made to Responsible Plan Fiduciary (RPF) - • Plan fiduciary with authority to cause plan to enter into services arrangement

14. Service Provider Fee Disclosure – Form and Delivery • Form of Disclosure • Written • Electronic • No Prescribed Form • Guide, Summary or Similar Tool Encouraged • DOL has issued model or sample guide • DOL may publish rules in future requiring use of guide

15. Service Provider Fee Disclosure – Form and Delivery

16. Service Provider Fee Disclosure • Compliance Deadlines • Deadline for initial disclosures by current CSP is July 1, 2012 • Deadline for disclosures for contracts with new CSP is effective date of contract • Must be provided reasonably in advance of entering into contract • Ongoing Disclosure • Changes to initial disclosure must be disclosed as soon as CSP is informed of change • Annual disclosure of changes to investment information required

17. Service Provider Fee Disclosure • Service Provider - Correction of Errors • CSP may correct error by disclosing corrected information as soon as practicable, but not later than 30 days after CSP knows of error • CSP must act in good faith and with reasonable diligence

18. Service Provider Fee Disclosure • Consequences of Failing to Make Disclosure • Prohibited transaction to both CSP and RPF • Both parties subject to excise taxes (15% to 100% of amount involved) and other adverse consequences

19. Service Provider Fee Disclosure – PT Class Exemption Prohibited Transaction Class Exemption Requirements (Exempts RPF but not CSP from Prohibited Transaction) • RPF did not know that CSP failed or would fail to provide disclosures and reasonably believed required disclosures were provided • At a minimum, DOL expects RPF to compare disclosures it receives from service providers with requirements contained in regulations to ensure all required information has been included • Upon discovering failure, RPF requested in writing that CSP make disclosure • If CSP fails to comply with request within 90 days or indicates earlier that it will not supply the disclosure, RPF must notify DOL of failure • RPF must then determine whether to terminate arrangement with CSP consistent with duty of prudence • If failure relates to future services and is not disclosed promptly after end of 90 day period, RPF must terminate arrangement as quickly as possible, consistent with duty of prudence • Must still disclose prohibited transaction on Plan’s annual Form 5500 filing

20. Service Provider Fee Disclosure • Action Required by Employers • Establish Team to Review and Monitor Service Provider Fee Disclosure • HR, Benefits, Finance • Coordinate Team with Participant Level Fee Disclosure Team • Establish Service Provider Fee Disclosure Review Timeline and Procedures, Including Procedures for • Reviewing Initial, Quarterly and Annual Fee Disclosure • Monitoring Changes to Previously-Disclosed Information • Addressing Non-Compliance • Negotiating New, Extended and Renewed Contracts • Documenting Compliance with ERISA Section 408(b)(2)

21. Service Provider Fee Disclosure • Action Required by Employers – Initial • Identify All Covered Plans and CSPs • Review All Service Contracts and Fee Disclosure Received To Date • Determine Whether Any Follow Up or Corrective Action is Needed and Take Such Action • Contact All CSPs That Have Not Yet Provided Required Disclosure • Maintain Records to Document Initial Review Process and Results

22. Service Provider Fee Disclosure • Action Required by Employers – Ongoing • Review Quarterly and Annual Fee Disclosure • Monitor Changes to Previously-Disclosed Information • Address Non-Compliance • Reduce Fees, Change CSPs, DOL Report • Negotiate New, Extended and Renewed Contracts • Incorporate Required Service Provider Fee Disclosure • Identify Responsibility for Participant-Level Fee Disclosure • CSP Representations and Warranties • CSP/RPF Indemnification • Document Ongoing Compliance with ERISA Section 408(b)(2)

23. DOL’s Participant-Level Disclosure Regulations • ERISA Section 404(a)(1) contains ERISA’s fiduciary obligations • Requires plan fiduciaries to act prudently and solely in the interest of participants and beneficiaries • When a plan gives participants the ability to direct investments, DOL believes that Section 404(a)(1) requires plan fiduciaries to disclose certain information to participants to allow them to make informed investment decisions • DOL issued regulations under Section 404(a) detailing what information must be disclosed to plan participants and when (the “participant-level disclosure regulations”) • While this disclosure obligation overlaps with information that must be provided to participants under ERISA Section 404(c), this disclosure obligation is independent of Section 404(c) • In other words, this disclosure obligation may apply even if a plan is not intended to be a “404(c) plan”

24. Who Must Provide the Disclosures? • The plan administrator of a “covered individual account plan” is responsible for making complete and accurate disclosures • A covered individual account plan is any participant-directed individual account plan, but excluding IRA-based SEP plans and SIMPLE accounts • Disclosure rules apply regardless of the number of participants in the plan – no “small plan” exception • Pursuant to FAB 2012-02, certain pre-2009, “frozen” 403(b) contracts are exempt from the requirement to provide Investment-Related Information • If the plan administrator, in making the disclosures, relies on information received from a plan service provider or an issuer of a designated investment alternative, the plan administrator will not be responsible for the completeness and accuracy of that information as long as the plan administrator’s reliance was reasonable and in good faith • What is “reasonable”?

25. Who Must Receive the Disclosures? • Each participant or beneficiary who, pursuant to plan terms, has the right to direct the investment of his or her plan account • Only beneficiaries who actually have the right to direct investments must receive disclosures (for example, due to death of participant or alternate payee under a QDRO) • Includes employees that are eligible to participate, even if they do not in fact participate and have no intention of participating

26. What Types of Information Must be Disclosed? • General Plan-Related Information • These are annual disclosures • Administrative Expenses • These are a mix of annual and quarterly disclosures • Individual Expenses • These are a mix of annual and quarterly disclosures • Investment-Related Information • These are generally annual disclosures, but some information must be updated periodically via a website and some information must be disclosed upon request

27. General Plan-Related Information • What must be disclosed: • Explanation of circumstances under which participants and beneficiaries can give investment instructions • Explanation of any plan limits on such instructions, including plan limits on transferring to or from a designated investment alternative • Description of plan provisions (including restrictions) relating to exercise of voting, tender, and similar rights related to an investment • Identification of each designated investment alternative offered under the plan • Identification of any investment managers • Description of any brokerage window offered under the plan • FAB 2012-02 – at a minimum, must explain how the window works and whom to contact with questions

28. AdministrativeExpenses What must be disclosed annually: • Explanation of fees and expenses for general plan administration that may be charged against individual accounts (e.g., recordkeeping) • Not disclosed here if the fee/expense is included within the “total annual operating expenses” of the investment • FAB 2012-02 – reasonable disclosure still required even if specific fees/expenses are not known in advance (e.g., legal fees for the year) • Explanation of how these fees/expenses will be allocated among the individual accounts (e.g., pro rata) What must be disclosed quarterly: • Dollar amount of above fees/expenses actually charged against the individual account during the preceding quarter • Disclosure of aggregate amount is sufficient; not required to provide service-by-service breakdown • Description of the services to which those charges relate • If applicable, statement that some or all of the plan’s administrative expenses for the preceding quarter were (or will be) paid from the annual operating expenses of one or more investments (i.e., revenue sharing payments) • FAB 2012-02 – do not need to disclose the specifics of the revenue sharing payments for purposes of these disclosures

29. Individual Expenses What must be disclosed annually: • Explanation of fees and expenses that may be charged on an individual basis against individual accounts (e.g., plan loan fees, brokerage window fees, commissions, investment advice fees) • Not disclosed here if the fee/expense is included within the “total annual operating expenses” of the investment • FAB 2012-02 – guidance for disclosures for brokerage windows; general statements with instructions about how to obtain more information may suffice in some cases What must be disclosed quarterly: • Dollar amount of above fees/expenses actually charged against the individual account during the preceding quarter • Description of the services to which those charges relate Quarterly disclosure not required if (1) fees/expenses are otherwise disclosed during the quarter (e.g., via a confirmation statement) or (2) no such fees/expenses incurred during the quarter

30. Investment-Related Information What must be disclosed annually for each “designated investment alternative”: • Name of each investment alternative • Inclusive of “closed” investments, but may limit provision of those disclosures about that investment alternative to those invested in that alternative • Type/category of each investment alternative (e.g., large-cap stock fund) • No longer required to disclose type of management (e.g., passive); requirement was contained in the proposed regulations but now deleted • Performance data for 1, 5, and 10 year periods (or for the life of the investment alternative, if shorter) • Must include a statement that past performance is not necessarily indicative of future performance • For fixed-return investments, only need to disclose the fixed rate of return and the term of the investment in lieu of performance data • If the rate is adjustable, must disclose that fact as well as current rate of return and minimum guaranteed rate of return • Preamble makes clear that money market mutual funds and stable value funds are not fixed-return investments

31. Investment-Related Information (continued) What must be disclosed annually for each “designated investment alternative”: • Name and performance data for appropriate benchmarks • “Appropriate broad-based securities market index” • Performance data must be for the same performance periods as the comparator investment alternative • Benchmark generally cannot be “related” to the comparator investment alternative (unless widely recognized and used) • Benchmark not required for fixed-return investments

32. Investment-Related Information (continued) What must be disclosed annually for each “designated investment alternative”: • Fee and expense information for non-fixed-return investments • Amount and description of shareholder-type fees not included in total annual operating expenses of the investment alternative • Description of restrictions applicable to purchase, transfer, or withdrawal from the investment alternative • Total annual operating expenses of the investment alternative expressed as a percentage (i.e., expense ratio) • Total annual operating expenses of the investment alternative expressed as a dollar amount for a $1,000 investment over a 12-month period • Statement that fees/expenses are only one of several factors to consider when making investment decisions • Statement that cumulative effect of fees/expenses can substantially reduce the growth of the account and that participants can visit the EBSA website for an example • For fixed-return investments, only need to disclose the first two sub-bullets above

33. Investment-Related Information (continued) What must be disclosed annually for each “designated investment alternative”: • Website address that provides access to the following: • Name of issuer of each investment alternative • Investment alternative’s objectives/goals, principal strategies and risks, portfolio turnover rate, performance data updated at least quarterly, and fee and expense information • FAB 2012-02 – above information does not have to be contained on the “landing page” of the website address, but website must be user-friendly and information easy to find • According to the preamble, DOL expects this website to be accurate and updated “as soon as reasonably possible” • FAB 2012-02 – website should be “accurate and reasonably current” • Plan administrator/sponsor may create and maintain the website or may contract with TPA or recordkeeper to do so

34. Investment-Related Information (continued) What must be disclosed annually for each “designated investment alternative”: • Glossary of terms to help participants and beneficiaries understand the investment alternatives (or a website address that that provides access to such a glossary) • DOL considered publishing a sample glossary but decided against it

35. Investment-Related Information (continued) Format: Investment-related information must be disclosed in the form of a comparative chart • DOL has issued a model chart • Chart must also include contact information, note that additional information is available at a website, and note about how to receive paper copies of various items free of charge • Additional information can be added to the chart as long as not inaccurate or misleading • FAB 2012-02 – multiple charts from service providers/issuers can be furnished – single chart is not required – as long as furnished at the same time and charts are designed to facilitate comparison • This relief is particularly important for 403(b) plans. • Chart need not be provided more frequently than annually, as website will be updated more often • However, DOL states that, under extraordinary circumstances, ERISA fiduciary duties may require that participants be affirmatively notified of important changes before the next chart is to be provided

36. Investment-Related Information (continued) Special Rules for Employer Securities • Instead of describing principal strategies and risks, need only explain the importance of a well-balanced and diversified investment portfolio (see DOL’s FAB 2006-03 for sample language) • Not required to disclose portfolio turnover rate • Not required to disclose annual operating expenses unless participants acquire units of the stock fund as opposed to actual shares • With respect to disclosure of performance data, different definition of “average annual total return” unless participants acquire units of the stock fund as opposed to actual shares

37. Investment-Related Information (continued) Special Rules for Annuity Options • “Annuity” defined by reference to purchase of a stream of retirement income payments guaranteed by an insurance company • Regulations provide for alternative disclosures for the Investment-Related Information, including alternative requirements for the information to be provided through website access • Comparative chart format still required Special Rules for Fixed-Return Investments • Alternative requirements for the information to be provided through website access Special Rules for Target Date and Similar Funds– not yet; DOL expressly reserved this for future rulemaking

38. Investment-RelatedInformation (continued) Additional Disclosure Obligations of Investment-Related Information • Modeled after obligations already in place under Section 404(c) regulations • Once a participant has invested in an investment alternative, if voting, tender, or similar rights are passed through under the terms of the plan, then must send to the participant any materials received by the plan regarding those rights • Must provide the following information annually or upon request: • Prospectuses or similar documents (or proper summaries) for an investment alternative • FAB 2012-02 provides further guidance as to which documents satisfy this requirement • Financial statements/reports or similar materials for an investment alternative provided to the plan • Value of a share/unit of an investment alternative and date of valuation • List, value, and proportion of assets in an investment alternative which constitute “plan assets”

39. What is a “Designated Investment Alternative”? • Generally, any investment option into which participants may direct the investment of assets held in their plan accounts • Does not include: • Brokerage windows • Investment management service where investment manager is selected to allocate assets among the plan’s investment options • Model portfolios made up of the plan’s underlying investment options, unless participant acquires an interest in that portfolio • Exception does not apply if model portfolio includes investment options not otherwise available under the plan • Investment platform where the platform provider selects investment options that are not specifically identified as available under the plan must be considered carefully • Underlying investment options may be “designated investment alternatives” • FAB 2012-02 – DOL provides safe harbor if the platform holds more than 25 investment options; will need to make disclosures for some but not all of those investment options • FAB 2012-02 – DOL cautions about giving participants who are not financially sophisticated too many investment options (more than “a manageable number”), particularly options about which disclosures would not be required • FAB 2012-02 – if enough participants invest in an investment option that is not otherwise a “designated investment alternative” (e.g., via a brokerage window or platform), may need to treat that option as a “designated investment alternative” for disclosure purposes • Suggests need to monitor participant investments made through a brokerage window

40. How Must the Disclosures be Provided? • Need not be provided as stand-alone document, but best practices may evolve this way • The annual disclosures of General Plan-Related Information, Administrative Expenses, and Individual Expenses can be provided as part of the SPD or the ERISA Section 105 pension benefit statement • Distribution of the SPD or the pension benefit statement must continue to meet the disclosure frequency requirements of these rules • The quarterly disclosures of Administrative Expenses and Individual Expenses can be provided as part of the ERISA Section 105 pension benefit statement • Above examples are not exclusive means by which disclosures can be made • Disclosures must be written in a manner calculated to be understood by the average plan participant • DOL has issued limited relief to allow these disclosures to be made electronically

41. When Must the Disclosures be Provided? ANNUAL DISCLOSURES • Annual disclosures must be provided on or before the date on which a participant or beneficiary can first direct his or her investments and then annually thereafter • For plans with immediate eligibility, these disclosures may need to be provided with any enrollment forms/papers on the first day of work • If there is a change in the information in the annual disclosures for General Plan-Related Information, Administrative Expenses, or Individual Expenses, then generally must disclose that change 30 – 90 days before the change is effective • There is an exception if such advance notice cannot be provided due to unforeseeable circumstances or circumstances beyond the control of the plan administrator (in which case as much notice as “reasonably practicable” must be provided) • First annual disclosures (for calendar year plans) must be provided by August 30, 2012 QUARTERLY DISCLOSURES • Must be provided each quarter and must cover the prior quarter (e.g., disclosure covering January – March provided during April – June timeframe) • “Quarter” refers to any three-consecutive-month period • First quarterly disclosures (for calendar year plans) must be provided by November 14, 2012 (covering the July 2012 – September 2012 timeframe)

42. Takeaways • No automatic penalty for non-compliance, but non-compliance is a breach of fiduciary duty • Potential civil liability if damages could be tied to the lack of disclosures • Potential criminal liability for willful violations (would be reserved for rare cases) • Non-compliance will result in loss of Section 404(c) protection for plan fiduciaries • Section 404(c) otherwise protects fiduciaries from investment losses incurred by participants as a result of their investment decisions • Regulations expressly provide that compliance with these Section 404(a) disclosure requirements does not relieve fiduciaries of their duty to prudently select and monitor a plan’s investment options • DOL has also made clear its position that the Section 404(c) regulations do not relieve fiduciaries of this duty to prudently select and monitor investment options – this point has been the subject of a number conflicting court decisions in recent years • Fiduciaries should continue to monitor the plan’s investment options to determine if they are appropriate, including brokerage windows • If not already in process, determine who will be responsible for drafting and begin that process ASAP • Review draft disclosures with ERISA counsel before they are finalized and distributed • Who will distribute them and how will they be distributed? • Review (and renegotiate?) agreements with service providers to allocate and/or clarify responsibilities related to these disclosures

43. Electronic Delivery of Participant Fee Disclosures • Final DOL regulations on participant-level fee disclosures reserve section on manner of disclosure • DOL has issued interim guidance on how participant-level fee disclosures can be made electronically • DOL guidance provides two separate rules for electronic disclosures: IN PENSION BENEFIT STATEMENT ALL DISCLOSURES • Rule for disclosures of plan-related information included in pension benefit statement (e.g., general plan-related information, administrative expenses and individual expenses) • Rule for all disclosures, including investment-related information and other information not included in pension benefit statement

44. Disclosures of Plan-Related Information Included In Pension Benefit Statement • Disclosures of plan-related information included in pension benefit statement may be furnished electronically in same manner as other information in same pension benefit statement • Three options for furnishing pension benefit statement electronically: • DOL electronic delivery safe harbor rule • IRS electronic delivery rule • FAB 2006-03 electronic delivery rule (continuous access websites)

45. DOL Electronic Delivery Safe Harbor Rule

46. IRS Electronic Delivery Rule

47. FAB 2006-03 Electronic Delivery Rule

48. Disclosures Provided Separately From Pension Benefit Statement • Disclosures that are provided separately from pension benefit statement cannot be furnished electronically under IRS rule or FAB 2006-03 • Instead, disclosures may be made: • Using existing DOL electronic delivery safe harbor rule; or • Under temporary guidance under DOL Technical Release 2011-03R for electronic delivery

49. DOL Technical Release 2011-03R Pending further guidance, plan administrator may furnish fee disclosures through electronic media (including a continuous access website) in accordance with the following conditions: • Voluntary Provision of E-Mail Address:Recipients must voluntarily provide e-mail address for purpose of receiving disclosures • Initial Notice: Initial notice must be clear and conspicuous, provided contemporaneously and in same medium as request for e-mail address, and contain the following information: • Statement that providing e-mail address is entirely voluntary, and that as result of providing e-mail address, required disclosures will be made electronically • Brief description of fee disclosure information that will be furnished electronically and how it can be accessed • Statement that paper copies may be requested and will be provided free of charge • Statement that individual may opt out of receiving electronic disclosures at any time • Procedure for updating e-mail addresses

50. DOL Technical Release 2011-03R • Annual Notice: Same information provided in initial notice must be provided to participants annually • Annual notice must be furnished on paper unless there is evidence that participant interacted electronically with plan since prior annual notice was provided • Delivery: Plan administrator must take measures reasonably calculated to ensure actual receipt of transmitted information (e.g., return receipt or notice of undelivered mail) • Confidentiality: Plan administrator must take measures reasonably calculated to ensure that electronic delivery system protects confidentiality of personal information • Calculated to be Understood: Notice must be written in manner calculated to be understood by average plan participant