MEMORANDUM - SEC · MEMORANDUM . To: Public Comment File on proposed Regulation Best Interest (File No. S7 -07 -18) From: Elizabeth Blase, Counsel to Commissioner Elad L. Roisman

MEMORANDUM

To: Public Comment File on proposed Regulation Best Interest (File No. S7-07-18)

From: Elizabeth Blase, Counsel to Commissioner Elad L. Roisman

Re: Meeting with Fiduciary Benchmarks (“FB”)

On October 22, 2018, Commissioner Elad L. Roisman and his counsels (Elizabeth Blase, Christina Thomas, Matthew Estabrook, and Nicholas Losurdo) met with the following representatives from FB:

• Tom Kmak (CEO);

• Fred Reish (Partner at Drinker Biddle & Reath LLP, Outside Counsel); and

• Jim Lundy (Partner at Drinker Biddle & Reath LLP, Outside Counsel).

The participants discussed a number of issues, including the Commission’s proposed Regulation Best Interest. In particular, FB presented the materials attached here.

Fiduciary Benchmarks

i ndependent ~ C

omprehensive ~ Informative

October 2

018


„~~pe„a~~~ i ~omo~~h


Independc~. ~.

~ -~i p

rehensive~in(ormativc

R ecommenc(a.~r'on

3 •

~'

~%o'Uc

a ~1 ',

0

• ~ -ar

—

'i ~~

Cash Outs

Recommendation -this is w

here the Advisor wishes to really help the

participant understand the alternatives on an apples-to-apples basis

consistent with FINRA 13-45 a

nd the revoked Fiduciary Rule.

Education -this is w

here the Advisor provides education of the s

ame factors

that exist in the Recommendation. In this case, however, the participant is

left to sort through the issues on their o

wn.

Hire M

e -this is w

here the participant has already m

ade a decision to rollover

their balance from a plan to a

n IRA. A

n example would be a participant

wishing to rollover a small balance in a plan to a

n IRA with large balances that

is already managed by their Advisor.

Unsolicited R

equest -this is w

here the participant has assets that C

ANNOT

remain in the qualified plan because of the cash-out rules for the plan (e.g.

$1,000 or $5,000). While similar to Hire M

e, FBi tracks separately for

reporting, management and regulatory purposes.

02017 Fiduciary B

enchmarks Insights, LLC. All rights reserved.

2


i ~~~, p",a~,,: ~ comp~~ne~:rv~ ~ i~ro~>u~~

Figure 2

Assumed to b

Percentage of Lump-Sum Recipients b

y Amount of

Most Recent Distribution, A

ges 21 and Over, 2012

Recommendati

~~

21.4

•~C1~'

C,I~r';

_~~,Assumed to be

2̀-"~

~ ~''t` t~' ~" '.•d' 50% Education

UU~Ia, 3

50%Hire Me

~o~ Assumed to be

Cash-Outs -Hire M

e15.846

t 5.8'11. 15.5'X

t 596 t 3.9'%

12.946

11.5'16

11.14is

10.1

10'0

5°fb

s.8% 5.2'16

~.t%

3 .4

Q96b t-5 9

9

5500-$9~9

51.000-52.499

52 500-5~ 9~9~9

35.O~Oa~i9.9S9 51U,000-519999 X20 000-~37 et9~9 5

37 500 Or M

Or~

Amount Of D►

StriDuRrDn

~ ouree _ m

ployee f~enebt Rese~rC

h InatRute estim

ates rrom ,20(18 P

anel d trie S

urvey of h~oorne arYd Prtigram

Parsgpa¢pn Zpp~C

al lAp

di~

11,V o!e

The cntnbuc~on amp~

nq are sop -cooed a~ 33

' SOCK

eon

02017 Fiduciary B

enchmarks Insights, LLC. A

ll rights reserved. 3


~ ~,a~pe„ae.~~ ~ comp~~ne~:~.~ ~ i~to~,~~~~

• Based o

n Multiple Data Points f

rom BDs that process h

undreds of t

housands of rollovers per

y ear, the average advisor will encounter about 15 Rollover Opportunities per year

• Combining this data point with the prior p

age provides a distribution of rollover types as s

hown

b elow

Type of RalloWer

Percent

Per Year

Recommen anon

27%

4

Education

22%

3

Hire M

e21%

3

Cash but

30%

5

Rcall~verTy~~s key Advi~c~r per~e~r

■ RP- cr~~~iendaGi~n

■ Edutatian ■

Hire Me

tatil~ ~~_r.

OO 2017 Fiduciary B



i; ~:iepc~~.u~_:,c ~ Comprehensive ~ Informacivc

j~~

Sometimes aeople need to take early withdravaals f

rom their retirement accounts for living expenses, but it is important to s

ee vahat y

ou might be giving u

p if y

ou

,~

do so. T

ake a look at the examples belote~, which reflect your account balance, income, federal a

nd state tax brackets and age, but not your specific account

investments. If you don't n

eed any cash n

ow, you can g

o to Step 3.

Cash Now

Taking $50,000 in C

ash Now

If you were to fake 5

50,000 of your ~efiremeri

account a

s cash right n

ow, the chart b

elow

es:imotes that you woz•!d only receive about

$28,500 becouse o

f taxes a

nd penalties.

State 55.000 l(►

~61R5 Penalty

Taxes5 1. Soo

Fede►al

Cash

Taxes ~

~a~

5 14.000 128,500

Value o

f $50,000 Rollover a

t Retirem

ent

~

`If, however, you chose to rollover the $SQ

000, anoyour account earned 7~e per year until you reach yourn orm

al retirement dote of I2/1/2a27, you w

ould haveX95,358 at retirem

ent uersus the $28,500 ycu would

ecei~e in cash today.

Cash Today$28,500

"Note that this exam

ple assumes an annual com

poundedearnings rote of 7%

, which is consistent (historically] w

ithreturns in on account invested m

ostly in equities.

Page 3 of 1:

02017 Fiduciary Benchm

arks Insights, LLC. All rights reserved.

Retirem

ent 12/1/2027$98,358


i~dep~~dG~~ ~ ComP~~h~~~rve, ~~~o~„azi~~

~ ~ ,

~

D~StIAiMER: A

remmmendadon about your dlstri6uifon options, Indudlnq a

ro lbver recommendation, k Hdutiary a

dvke and %VZ Cansu~Hnt. w

hen making a

recommendation, F~ac a duly ro evaluate

your options and make a prudent a

nd sultabk r

ecommmdallonon your behaH. To help You with this d

echbn, 7M ConwlNng has hired Flducfary B

enchmarks - a Ieading

bcncbmarking service for defined contribution plans and IRAs.

Bebw, Fiduciary B

enchmarks presents the key characteristics of the various options available for your rollover B

ASED ON YOUR DATA AND PREFERENCES. This information will help X

YZ Consu king m

ake a prudent a

nd witabie

r ecommendation on your behaN. a

nd help y

ou make an informed dedslon about that recommendation.

Optia~ 1

Option 2

Rdfover Decision D

rne►r.

Your D

ata

an

d P

re%rences:

XY

Z Consulting

OR

EG

ON

CH

ER

RY

GR

OW

ER

S, /N

C.101(K

) PR

OFfT

SHA

RIN

G P

LAN

1

Financial Planning N

eeded:B

road financial planning• B

road fenancial planningR

etirement planning

~

Contact. M

ethod:Face to face

Rhone/em

ail/web conference

•Prim

arily w

eb, phone &p

rint

jr

psseis Consolidated:

Som

ewhat im

portant•Y

es -rxcept new

401ik}s•A

ssets not consolidated

~

f R

oth Option:

Som

ewhat im

portant•R

oo

t Conrersion A

vailable•R

ath

cornersion not available

p~pnnin~

+' Tax O

Dti~~zation A

lgorithm:

Som

ewhat im

portant•Y

es, offered

+ No, no[ offered

f G

oncemO

utliveAssets:

Very w

orried• Lum

Dsum

/installmentsJannuities

• Lum

p sum

°""" "" '

r

Irroesting Help N

eeded:A lot {delegatorj

• G

enerel advisor service team• 6nline &

800M support

~ P

referred Advisor:

Financial advisors A

dvisor -Firs[ choice

•Prio

r employer not prcterred

r

Investment flcxibiH

ty:Rca11Y im

portant• Ind"ruidual isw

es icash. bonds. stocksl• P

lan investment (in

rup

ETFs, Mutual Fvndz

l f1VlS

tliMnt

• Unit investm

entbusts arid/orSMAs

OpliW

ls. AlcernativeassetrLasses

• Annuities

~

Cash N

ow.

No

• Taw

s and Penally m

ay aPt~Y• Taxes and penalty m

ay a~P~V

✓ Prr59 ~4 W

ith~dravrals:Somewhat important

• No 1U% Lax for [gllege e

xpenses

•Pay 10~; tax for college r

xpenscs

• Pay 109ti tax if rclirc 5

5+

• No 1096 tax ii retire 5

5+

✓ loans Later:

Not important

• Loans not available b

y law

• No loans

~ Withdrawal

r

Bankruptcy Protection:

Not important

+Same as the plan f

oryour state

•More proration

Options

r Fee PrefererKe:

~eve~ teeAccount Fees:

% veor

s month

Account Fees:

E¢„~g$_ 3 month

i nvestment fees:

0.2746 f250

irrvestrt~ent fees: O.Si,6

5743

adman fees:

0.0094 44

adman ices_

0.05%

E46

advice fees -ongoing=

0.5996 f34Z

total fees: 0.86%

f788

Foes

tata~ees:

0.&'796 f746

~ Recommendatlon:

a RoNovat to IRA

xYZ tonwf[ing aril T

om Kmok4 make tMe re c

ommmdatbn above after taking irrto a

uount the pnslidtwnt'c o(ten+atives !

o a rouove.. incluJing kwving the m

oney in

the plpn If permitteA. the evalua[bn o(!he participant's allernatiwe5 took into accotmt, a

mong other things. the (ees a

nd expenses associateQ w

Rh both the pkrn a

nd

R c~ammertding ldvisor. fDateJ

~ ~Rp; wheth~~ tJ~ e

mpbyer pays (or sornt a

all of Ehe plan § adminisbative e

xprnxs: anti the difiorrtt kvcJs ofservices a

nd lrtvesimmts available under such

option. SpecfimPy. the reasons w

hy the recanmertdvtion is in the best interest a

( the participant are:

- Imes[or Nelp Needed - A

lot fdefegata), Imestmen[ Flexi6iltty -Realty important. Financial Planning N

eeded ~ Broad hrroncla! planning, Roth Option -

Reviewed mid Apprrovrd by Investor:

(pivtrJ~++~~f lmportanl, a

nd Concern Over Oufliv~ny Assets - Yery w

orded.

!'?ll1E Kidiriary P~.rhmariz. 4A M,}✓..

pnxr~.~.

02017 Fiduciary Benchmarks Insights, LLC. All r

ights reserved.


i~aep~~a~,~e ~ como~~he~:~~~ ~ ioro~su~~

1. There are 4

different types of Distribution/Rollover Services

2. Fee Differences can b

e substantial —

thus use real data

3. Recommendation can b

e done quickly a

nd easily

4. FINRA 13-45 & DOL Fiduciary Rule are a

solid regulatory approach

OO 2017 Fiduciary B


~`


In dependent ~ C

omprehensive ~ informaxivc

Range of Fees for $

5mm Plan, A

vg Balance $

70k

Low

Medium

Hieh

Fixed Income

50%

0.30%

0.45%

0.67%

Large Cap Value

10%

0.41%

0.57%

0.79%

Large Cap Growth

10%

0.39%

0.61%

0.89%

Large Cap Index

10%

0.06%

0.10%

0.21%

Mid C

ap Value

5%

0.48%

0.69%

0.90%

Small C

ap Value

5%

0.62%

0.82%

1.09%

Foreign/International10%

0.46%

0.65%

0.91%

Investment Fee

Advice F

ee

Recordkeeping Fee

Total F

ee

0.34%

0.49%

0.72%

0.00%

0.63%

0.78%

0.14%

0.36%

0.69%

0.47%

1.48%

2.18%

Above example does not include T

PA fees or Advisor fees, w

hich

could exacerbate the difference in fees.

In addition, fo

r a participant a

pproaching retirement, t

he 50%

allocation to Fixed I

ncome could h

ave these differences:

• Stable Value o

r General Account earning 3

.00%

• Money Market Fund earning 0

.75%

FEE"The 1 percent

difference in fees a

nd

expenses wouldreduce your account

balance at retirement

by 2

8 percent."

02017 Fiduciary B



1. There are 4



e substantial —

thus use real data


e done quickly a

nd easily


solid regulatory approach

02017 Fiduciary B


Recommenc(~.~+'on

?

r

i1

~~U~a

~'`.. X10 r,

,.

_

~~ _

Cash Outs


Inecper.denc ~ Comprchcnsivc ~ Informacivc

Recommendation

• Old Qualified Plan —Participant Statement, 404(a)(5) Statement, 9

questions

• New Qualified Plan —Participant Statement, 404(a)(5) Statement, 9

questions

• IRA —

Can be customized for type of customer with o

ne click

Education•

Old Qualified Plan — Benchmarking data based o

n plan size with o

ne click

• New Qualified Plan —

Benchmarking data based on plan size with o

ne click

• IRA —

Can be customized for type of customer with o

ne click

Hire M

e• No data is necessary

Unsolicited R

equest

• No data is necessary

02017 Fiduciary B



i,~a~p~„v~„~ ~ comp~~n~~~~.~ ~ i~ro~a~n,~

..R.c..wrru on«asu~E:..1cr,~.rt

cwodawn ~0/1~1 s

a~^P~ stn ~"rvw~"~

~pM ae.lot~

w

p,..........,

Participant Statement:

RolloverAmountRoth or Pre -TaxRenew: Each T

ime

*~.soae.n ar~.e~. ~.o.,aaar~«~s+~~~~.m.,• ~~r,~,

~r~*+w ~e, •c.T nIMwlm~P~~atln~OntlMbleOK

s-rar...,n.

~ n.~-.~.. lk4n~WecMafy•tmH

Unv..

.ti M1m

~►]n n

M fU

Mm

~M ~f i~

MM

x M

tti,Yv~

+aT

.a

404(a)(5) Statem

ent:■ Investm

ent fees■

Advice Fees■

Admin Fees

■ Renew

: Calendar Year

Every Recordkeeper th

at FB

I has surveyedhas the 404(a)(5) inform

ation imm

ediatelyavailable via the Recordkeeper's Internetw

eb site.

~~

~

_ ..

~1. (111 ~ ;

~~..

~ ,- (t

M~

.

Plan Questions:

• R

eviewed 500+ Provisions

■ 9 questions

NO

T on 404(a)(5)m

NO

T on Part S

tatement

NO

T on Form 5500

Tested with M

ajor RKsRenew

: Calendar Year

These provisions seldom change and

should be answered 1

time per year.

02017 Fiduciary Benchm

arks Insights, LLC. All rights reserved.


~,:d~F~nd~„~ ~ C

omp~ehe~irve, ~~fortnatrv~

1. There are 4



e substantial —

thus use real data


e done quickly a

nd easily


so lid regulatory a

pproach

02017 Fiduciary B


y~


~ ~, ,gyp


i„d~p,..,a~~~ ~ comp~~n~~:~.~ ~ i~ro.,n~o.~

These rollovers, which will be one-time a

nd not "on a

regular basis"

and thus not covered b

y the 1

975 standard, will b

e the m

ost

important financial decisions that m

any consumers make in their

lifetime. An ERISA plan investor w

ho rolls h

er retirement savings into

an IR,4 could lose 1

2 to 2

4 percent o

f the value o

f her savings o

ver 30

years of retirement b

y accepting advice f

rom a conflicted financial

advisor.

Timely regulatory action to redress advisers' conflicts is

warranted to avert s

uch losses.

OO 2017 Fiduciary B


15


Independent ~ C

omprehensive ~ Informacivc

Q14. C

an an adviser a

nd financial institution rely o

n the level fee provisions o

f the B

IC

Exemption for investment advice to roll over f

rom an existing plan to a

n IRA if the adviser

does not h

ave reliable information a

bout the existing plan's expenses a

nd features?

As described in Q

13, in the case of investment advice to roll over assets f

rom an E

RISA plan to

an Ilt

A, the streamlined level fee provisions o

f the B

IC Exemption require advisers and financial

institutions to document the reasons w

hy the advice w

as considered to be in the best interest o

f

the retirement investor. The documentation m

ust take into account the fees and expenses

associated with both the existing plan and the IRA; whether the employer pays for s

ome or all o

f

the existing plan's administrative expenses; and the different levels o

f services and investments

available under each option.

To satisfy this requirement, the adviser and financial institution m

ust make diluent and prudent

efforts to obtain information on the existing plan. In general, such information should be readily

a vailable as a result o

f DOL regulations mandating plan disclosure o

f salient information to the

plan's participants (see 2

9 CFR 2550.404a-5). If, despite prudent efforts, the financial institution

is unable to obtain the necessary information or if the investor is unwilling to provide the

information, even after fair disclosure of its significance, the financial institution could rely o

n

alternative data sources, such as the most recent F

orm 5500 or reliable benchmarks o

n typical

fees and expenses for the type and size of plan at issue. If the financial institution relies o

n such

alternative data, it should explain the data's limitations and the written documentation should

also include an explanation of how the financial institution determined that the benchmark or

other data were reasonable.

Although the documentation requirement is only specifically recited in the level fee provisions o

f

the BIC Exemption, the documented factors and considerations are integral to a

prudent analysis

of whether a

rollover is appropriate. Accordingly, any fiduciary seeking to m

eet the best interest

standard as set out in the exemption would engage in a

prudent analysis of these factors and

considerations before recommending that an investor roll over plan assets to a

n IRA or other

investment, regardless of whether the fiduciary w

as a "level fee" fiduciary or a

fiduciary

complying with the full BIC Exemption.

02017 Fiduciary B


1(


Independent (Comprehensive ~ Informative

Q26. I

participated in a ~O1(k) plan at a

n old joU. C

an I get in~-estment ad~~ce o

n ~vhat to

do «ith m

~ account in the ~Ol(k) at m

~ old e

mployer'

A. Yes. Deciding h

ow to handle yow.- 401(k) account a

nd whether to lease the account in yotu•

old employer's plan, take a distiYUution and piuchase an aimuity or roll it over into another plan

or IRA is o

ne of the m

ast iuigortant financial decisions that y

ou can m

ake. Yoiu fuiancial

adviser is actuig as a fiduciary and must act iu yotu best interest if she provides advice about

takuig money out o

f the plan a

nd rolling it into another plan or IR.A. or about leaving yotu

money iu the plan. even if there is n

o specific recouuneudariou o

u how to invest the assets.

If yoiu• fuiancial adviser recoiuuieuds that y

ou roll over a 401(k) plan accotuit to a

n IRA that

titi-ill result in couipensatiou to lulu or her. special protecrions apply. Yrnu financial adviser

must consider yotu alternatives to the rollover. iuchidiug leaving the m

oney ui yoiu 401(k)

a ccotmt at yotu old eiuployer. Yoiu financial adviser should ask y

ou for information o

n tl~e

fees and expenses charged b

y yoiu 4

01(k) plan ni order to c

ompare it to fees that will b

e

cUar~ed for voiu IRA.

02017 Fiduciary Benchmarks Insights, LLC. All rights reserved.

17


Independent ~ C

omprehensive ~ Informative

This material has b

een prepared solely for

informational and educational purposes. It is

not intended to provide, and should not b

e

relied upon for, investment, accounting, legal

or tax advice.

www.fiduciarybenchmarks.com5335 Meadows Road, Suite 2

10

~ Lake O

swego, OR 97035

~ 866.516.4909

MEMORANDUM - SEC · MEMORANDUM . To: Public Comment File on proposed Regulation Best Interest (File No. S7 -07 -18) From: Elizabeth Blase, Counsel to Commissioner Elad L. Roisman

Documents