Washington Update

1. Washington Update Brian Graff, Esq., ASPPA Executive Director/CEO

2. Focus on 401(k) Fees

3. Focus on 401(k) Fees • 1998 - DOL issues report expressing concern about adequacy of information provided to participants; • 2004 – ERISA Advisory Council Report concludes shift to asset-based fees makes it difficult for plan sponsors to understand fees paid; • 2005 - SEC Report based on industry-wide investigation of mutual fund practices raises concerns about disclosure of potential conflicts of interest; • 2006 – GAO Report states 401(k) participants may be losing thousands of dollars in retirement savings because of fees charged; and • Increased number of class action suits in past year challenging service provider and investment-related fees charged to 401(k) plans.

4. DOL Fee Initiatives • DOL is pursuing a variety of regulatory initiatives focused on fee and expense transparency. • ERISA Section 408(b)(2) proposed regs: • Exemption conditioned on disclosure of provider’s fees—no small plan exemption. • Form 5500 Schedule C Changes (eff. 2009): • Modification schedule C to require explicit reporting of fees—small plans exempt. • Section 404(c)/participant disclosure reg: • DOL to define under 404(c) what fee info must be provided to participants to compare fees between options. • DOL has not stated how this applies to non-404(c) plans.

5. Point of Sale Disclosure • ERISA sec. 408(b)(2) provides PT exemption for plan to contract with service provider. • Contract terms must be “reasonable.” • Proposed regs. issued December 13, 2007, would require new disclosure, of compensation service provider will receive, both directly and indirectly, and potential conflicts of interest. • “sufficiently in advance” of contract • regs. also require contract to be in writing • contract must specify disclosures will be made • regs. effective 90 days after date finalized • unclear how it applies to existing contracts • DOL had two-day public hearing 3/31-4/1

6. Point of Sale Disclosure • Proposal applies to a service provider that: • is a fiduciary under ERISA or securities law; • Provides banking, consulting, custodial, insurance, investment advisory or management, brokerage, recordkeeping, or administration services; and • provides accounting, actuarial, appraisal, auditing, legal or valuation services and receives indirect compensation • Application to mutual funds? • who will be responsible for making disclosures?

7. Point of Sale Disclosure • Disclosure must include: • all services to be provided and whether provider is a fiduciary; • for each service, the compensation to be received; and • probably significant categories of service • both direct and indirect compensation • compensation broadly defined, including non-monetary compensation • received in connection with plan services • how the compensation shall be received. • No required format for disclosure and can be in separate documents. • can be $, %, per capita charge, or formula

8. Point of Sale Disclosure • Special rules for “bundles of services.” • Bundle of services can be provided by one party or by a provider in combination with an affiliates, subcontractor, or other partner. • rule not limited to financial institutions • Under a bundle of services only the aggregate direct and indirect compensation would be disclosed. • includes any fees received by an affiliate, subcontractor, or other partner • no need to disclose allocation of revenue sharing or other payments among affiliates, subcontractors, and other parties • How would this work in practice?

9. Point of Sale Disclosure • Those providing bundles of services generally do not need to break down the aggregate fee among services within the bundle. • There are two exceptions: • separate charges against a plan’s investment reflected in the net value (e.g., mgmt fees, float, and other asset-based fees, including servicing not included in management fee) • Extent of exception unclear • charges that are set on a transaction basis, such as finder’s fees/commissions/soft dollars even if embedded in the management fee • potentially significant impact • external vs. internal commissions

10. Point of Sale Disclosure • Conflict of interests must also be disclosed. • Disclosure required to the extent that service providers (or an affiliate) have an interest in transactions involving the plan relating to the contract. • Disclosure further required of potential conflicts of interest between service provider (and affiliates) and another plan service provider. • Disclosure also required if service provider has the ability to affect their own compensation. • Service providers with a policy to address conflicts would also have to disclosed. • E.g., a policy to offset fees due to revenue sharing

11. Point of Sale Disclosure • Material changes to the terms of the contract would need to be disclosed within 30 days the service provider becomes aware of the change. • unclear how simple changes to expense ratios would have to be disclosed • proposal does not require disclosure to otherwise be made on continuous basis • Open issues: • Who can be treated as a “bundled” provider and what has to be disclosed? • How are brokers not a party to the contract disclosed? • How will open brokerage windows be handled? • Effect of class exemption?

12. 2009 Form 5500—Schedule C • DOL substantially revised Form 5500 Schedule C which requires disclosure of service provider compensation. • Effective for the 2009 plan year. • Still only applicable to large plan filers., , • Identify all service providers receiving, directly or indirectly, at least $5,000 in total compensation in connection with services provided to the plan. • Three sets of disclosure rules apply.

13. 2009 Form 5500—Schedule C • Section 1: Alternative Reporting Option—service providers not receiving any direct compensation and only receiving “eligible indirect compensation” need only provide their address and EIN#s, provided they made the alternative disclosure discussed below. • Eligible indirect compensation is compensation received by the provider from fees charged to the plan’s investments reflected in the ROI (e.g., expense ratio); commissions; soft $, etc. • Basically all investment-based fees

14. 2009 Form 5500—Schedule C • Alternative Reporting Option only available if plan is given other information (written or electronic) on indirect compensation. • Other information must disclose: • the existence of the indirect compensation • the service provided or other purpose for the indirect compensation • an estimate of the compensation or formula • Identity or parties paying and receiving the indirect compensation • Disclosures can be included in plan service contract or other materials and can be provided by multiple sources.

15. 2009 Form 5500—Schedule C • Section 2: Applies to service providers who receive direct compensation or indirect compensation that does not qualify as eligible indirect compensation. • Requires more detailed disclosure of amount of compensation. • Section 3: Service providers listed in section 2 that are fiduciaries or provide administration, consulting, custodial, investment advisory or management, brokerage, or recordkeeping and received non-eligible indirect compensation would have to disclose more information on: • each source of indirect comp at least $1,000 • each source that only provided a formula

16. 2009 Form 5500—Schedule C • The Schedule C would also require disclosure of all service providers who refuse to provide the information discussed earlier. • Also requires reporting of terminated accountants or enrolled actuaries as discussed above.

17. Other DOL Fee Initiatives • The current 404(c) regulations require the plan fiduciary to make certain fee disclosures automatically and on request in order for a participant to make an “informed decision.” • DOL is developing a proposed regulation on participant fee disclosures designed to clarify what fee information must be provided to participants to enable them to easily compare fees among a plan’s investment options. • DOL Formal Agenda targets release by Feb. 2008. • Timing? Limited to 404(c) plans?

18. Other DOL Fee Initiatives • On April 24, 2007, the DOL issued a Request for Information (RFI) regarding the disclosure of plan administrative and fee information to participants in 401(k)-type plans). • Comprehensive ASPPA/CIKR response. • RFI covers all participant-directed DC plans and is not limited to ERISA §404(c)-only plans. • Purpose of RFI is to obtain comments on: • What administrative and investment related fee and expense information participants should consider; • How that information should be provided or made available to participants; and • Who should be responsible for providing the information.

19. Other DOL Fee Initiatives • ASPPA/CIKR Response: • Participant disclosures should be “forward looking” and not participant specific • Cost of after-the-fact participant specific fee statement outweighs any benefit • Fee menu should have 3 categories • Investment-specific fees • Account-based (or wrap) fees • Transaction-based fees (e.g., loan charge)

20. Sample Participant Disclosure

21. Legislative Update • Focus on 401k Fee Disclosure • Multiple hearings in House and Senate • Miller Legislation (H.R. 3185) • New 401 (k) disclosures enforced by DOL • Committee reported out bill April 16th • Ways and Means • Neal bill (H.R. 3765)—401(k) fee disclosures enforced via PT excise tax • Rangel likely to develop committee bill—may also address 403(b) and 457 plans. • Senate Bill (Harkin-Kohl) • Based on Miller bill—introduced in Dec.

22. Miller Bill Summary • Point of Sale Disclosure to Plan Fiduciary • Required at least 10 days in advance of contract • Fees required to be broken down into 4 “buckets” • Recordkeeping and adminstration charges • Transaction-based charges (e.g., commissions) • Investment management fees • Other charges • Estimates permitted based on prior performance • New disclosures required if material changes/annual updates implied

23. Miller Bill Summary • Point of Sale Disclosure to Plan Fiduciary • Uniform rules regardless of how services are delivered—bundled and unbundled disclosures consistent • Recordkeepers can “rely” on mutual fun/insurance company disclosures • Also requires disclosure of conflicts: • Proprietary versus non-proprietary investments • “Pay for play” • Only required if fees received (directly or indirectly) pursuant to contract exceed $5,000 • $1000 per day service provider penalty for compliance failures

24. Sample Service Provide Disclosure

25. Miller Bill Summary • Initial Participation/Investment Election Disclosure • Investment performance data • Fee menu: • Investment-specific fees—expense ratios, investment-specific wraps, redemption fees and possible redemption or surrender charges • Account-based (or wrap) fees • Administrative and other transactional fees that could be assessed against participant’s accounts (e.g., loan fee)

26. Miller Bill Summary • Annual Participant-Specific Detailed Benefit Statement • Everything you would expect plus details on fees that have been incurred by participant during the year • Investment fees per option would need to be broken down • Administration fees incurred would need to be shown • Reasonable estimates allowed

27. Miller Bill Summary • Other Provisions/Issues • New joint Administration--Congressional advisory council • Participant-directed plans required to offer at least one index option • Considered, but did not include, treatment of certain service providers as fiduciaries. • Considered giving plan fiduciaries reliance on service provider disclosures

28. Neal Bill Summary • Participant Fee Disclosure • Upon enrollment: • With info on investment options, disclosure of fees for each investment option, account based fees, and fees for participant-initiated transactions. • Within 90 days after end of plan year. • Actual amounts incurred by participant during the year for the above categories. • Reasonable estimates in both case allowed. • Enforced by service provider excise tax--$100 per day per participant.

29. Neal Bill Summary • Service Provider Disclosure • Initial disclosure (expected amounts): • List of services provided and total fee for such services, including allocation of portion of total fee attributable to investment management and R&A. • Amounts received from third-parties. • Within 90 days after end of plan year. • Actual amounts incurred by plan during the year for the above. • Reasonable estimates in both case allowed. • Enforced by service provider excise tax--$1000 per day per plan.

30. Other Legislative Update • PPA Technicals • Introduced late July • Different versions passed in House and Senate • Pure technicals • Effective dates delay unlikely • Other technical non-technicals • Political provisions • Tribal plans

31. Legislative Update • Cap on NQDC • Concept introduced by SFC to pay for small business tax bill • Originally $1 million dollar deferral cap, including any earnings on previous deferrals • Intense lobbying by corporate and financial services community • Stripped in conference at the request of Ways and Means democrats

32. Legislative Update • Long-Term Retirement Policy Agenda • Automatic IRAs • Brookings/Heritage/AARP proposal • Sessions IRA Plus accounts • Expansion of SAVERS Credit • Government match • Deposited to retirement account/not refunded

33. Changes to Fiduciary Rules • PPA gave DOL authority to establish default investment that satisfies ERISA section 404(c). • DOL issued final regulations on 10/24/07 • Fiduciary relief (404(c)) would be provided if: • Defaulted amounts must be placed into a Qualified Default Investment Alternative (QDIA); • Proper notice is given; • Participants have a right to self-direct; • Information about the QDIA that is provided to the plan (i.e., prospectus) is furnished to the participant; • Participant has right to transfer out of the QDIA consistent with the terms of the plan (but at least without penalty for 90 days); and • At least 3 diversified investment options available with different risk and return characteristics.

34. Changes to Fiduciary Rules • 3 types of QDIAs permitted by DOL • Target-date fund based on participant’s age, retirement date, or life expectancy • Balanced fund—target level of risk based on all participants • Managed account based on participant’s age, retirement date, or life expectancy • Amounts defaulted into stable value investments before 12/24/07 grandfathered. • Stable value products allowed for 120 days. • No employer securities, except through a mutual fund or a match in managed account.

35. Changes to Fiduciary Rules • Notice must include: • Explanation of the circumstances under which amounts will be defaulted and that participant still have right to direct investments, subject to the reasonable terms of the plan; • A description of the QDIA used, including investment objectives and fees, and where info regarding other plan investments can be found; and • Automatic enrollment plans need to include info on amount of deferral, and the right of participants to opt out. • Notice must be given 30 days in advance or date of eligibility for automatic enrollment plans—ACA can give notice upon eligibility.

36. Changes to Fiduciary Rules • 404(c) protection doesn't apply during blackout period—DOL directed to issue guidance on how to satisfy fiduciary requirements during blackout. • One-participant plans not required to give blackout notice • Effective in 2008, 404(c) safe harbor where right to invest affected by change in investment options. • At least 30-60 days in advance of the change, participants are notified and given right to direct among new (or remaining) investments • In the absence of affirmative election, investments are mapped to the new options that are reasonably similar in terms of risk and return • Proposed DOL default guidance allows use of QDIA if no similar investment option

37. Investment Advice • Beginning in 2007, provides a new prohibited transaction exemption for “fiduciary advisers” to provide advice to participants and beneficiaries on their own funds under 2 alternative exemptions: • Does not apply to plan level advice • Joint Tax description indicates this is not intended to circumvent existing guidance (e.g., Sun America) • Fee leveling exemption: fees received by fiduciary adviser are not dependent on the investment selections made. • Application to individual fiduciary adviser versus financial institution? • February 2d FAB clarifies that it applies to employer but not affiliates.

38. Investment Advice • Computer Model Exemption: advice delivered to be generated by computer model certified by independent investment expert. • Computer model must take into account all plan investments and must not be biased in favor of adviser’s own investments • Does not preclude participant from requesting other advice • Unclear whether that allows advice outside of computer model

39. Investment Advice • Detailed disclosures required to be made before the initial advice given, as well as annually thereafter. • The relationship between the fiduciary adviser and the plan investment options and fees that will be received • The past performance of investment options under the plan • Services provided by the adviser and that the adviser is a fiduciary • That the participant is free to engage an independent adviser • Other disclosures required by securities laws • “Fiduciary adviser” defined as an RIA, bank, ins. co., broker/dealer, or an affiliate (any employee).

40. Investment Advice • Transactions must be “arm’s length” and occur solely at participant direction—fees must be reasonable. • Employer liable for prudent selection and periodic review of adviser, but not responsible for monitoring specific advice given to participants. • Both exemptions require independent audit for compliance with requirements—need guidance on extent of audit requirement and whether adviser can pay for this. • DOL to determine feasibility of applying computer models to IRAs and HSAs. • May need technical correction to allow class exemption for advice for IRAs and HSAs—statute would require fee leveling

41. Benefit Statements • New benefit statement requirements for all plans—effective with 07 plan years—DOL will issue model notice. • Benefit statements required (1) quarterly for participant-directed plans; (2) annually for other DC plans; and, (3) every 3 years for DB plans (application of effective dates for DB plans unclear?). • Actual DB not required if participant given annual notice of right to request statement. • Statement must “on the basis of the latest available information” show amount of vested benefits. • JCT description—vesting need only be updated annually if SPD would allow participants to determine updated vested amount. • Issue of multiple statements due to brokerage accounts—can they be delivered separately?

42. Benefit Statements • DOL issued Field Assistance Bulletin (FAB) in December. • Good faith compliance (with suggestions). • DOL informally says use of annual vesting alternative consistent with good faith. • Documents from multiple sources permitted with advance explanation of how benefit statement information will be furnished. • FAB suggests that DC statements should be furnished within 45 days. • Participant directed plans face challenges. • DOL recently clarified that trustee-directed plans have until Form 5500 filed.

43. Benefit Statements • Statements must also include explanation of any permitted disparity or floor-offset arrangement affecting benefits under the plan. • DC plan statements must show assets as of the most recent valuation date (e.g., some plan assets are trustee invested and “hard-to-value”), including employer securities. • Statements for participant-directed plans must include (1) an explanation of any plan restrictions on the right to direct an investment; (2) information on the importance of diversification; and, (3) a statement about the risk of holding more than 20% of a portfolio in the security of one entity. • FAB has model language.

44. Benefit Statements • All statements may be provided in written, electronic, or other appropriate form. • FAB references DOL and IRS existing regulations as constituting good faith. • JCT description suggests benefit statements could be “provided on a continuous basis through a secure plan website for a participant.” • FAB requires annual notice and right to receive paper notice.

45. Washington Update

46. Presented by: Monika Templeman, Esq. Director, Employee Plans Examinations, IRS Monika.A.Templeman@irs.gov

47. EP Priorities in FY 2008 • Expand Compliance Contacts • Examinations • EPCU Contacts & Project Development • Address the Provisions of the PPA • Address Abusive Transactions • Fraud • International • Identify the Next BIG Scheme

48. EP Priorities in FY 2008 • Voluntary Compliance Inventory and Case Processing Time • Keep Staggered Determination Process on Schedule • Develop and Implement a 403(b) Pre-Approved Plan Program • Use of Plain Language Guidance/Information

49. Expand Compliance Contacts New and Continuing Projects Risk Based Targeted exams (RBT) Form 5500 EZ returns LESE (Learn, Educate, Self-Correct, Enforce) projects SARSEP IRA plans 3rd party referrals

50. Expand Compliance Contacts Specialty Work EP Team Audits (EPTA) EPCU Projects Multi-Employer Plans 403(b)/457 Plans