Fee Disclosure and BenchmarkingUnderstanding Leads to Action
OCTOBER 16, 2012
Thomas J. Scalici, CFP, CEBS, AIF® CEO
Cornerstone Advisors Asset Management, Inc.
Robert Landau, ESQ., Hay Group
Leslie Richmond, ASA, EA, MAAA, Hay Group
2© 2012 Hay Group. All rights reserved
What are the Duties of a Fiduciary with Respect to Fee
Benchmarking?
ERISA 404(a)(1) – a fiduciary shall discharge his duties with respect to a plan solely in
the interest of the participants and for the exclusive purpose of…providing benefits to
participants and their beneficiaries and defraying reasonable expenses of
administering the plan
408(b)(2) regulations require covered service providers to disclose their status as a
fiduciary or RIA, the form of compensation (direct or indirect), any compensation
between related parties and how the compensation will be received
Certain information required for the 404(a)(5) participant disclosures include the name
of each alternative, type of investment, performance information, benchmarks and fee
and expense information
The words reasonable and reasonableness are used almost 50 times in the regulation
3© 2012 Hay Group. All rights reserved
Defining a Prudent Process
Discharging your fiduciary duty revolves around the management of a prudent process.
There are two key components to this, Procedural Prudence1 and Substantive
Prudence2
Procedural Prudence considers what information is relevant and how to obtain and
analyze the data, and documents the decision-making process
Substantive Prudence revolves around making a reasoned decision that other experts in
similar situations would make
While 408(b)(2) and 404(a)(5) disclosures provide the relevant information, they do little
to determine the reasonableness of the price relative to the services and value being
provided. This is where the majority of plan sponsors need to focus their attention
1Self-Assessment of Fiduciary Excellence, Level 1 Assessment brochure, fi360° Global Fiduciary Insights
2fi360 Annual Conference Presentation, May 2009
4© 2012 Hay Group. All rights reserved
Polling question #1
Have you either benchmarked your defined contribution plan fees, or
gone through a vendor search in the past three years?
Yes
No
5© 2012 Hay Group. All rights reserved
Polling question #2
Please indicate the approximate number of active participants in your
defined contribution plan.
Less than 100
100 to 1,000
1,000 to 5,000
Over 5,000
Sample 408(b)(2) DisclosuresPart 1 – Bundled Provider 408(b)(2) Disclosure
7© 2012 Hay Group. All rights reserved
Component Parts of an Expense Ratio
Expense Ratio: a percentage that represents the cost of owning a fund
Components:
Management Fee: paid to the portfolio management company; these fees make
up a large part of the total expense ratio
12b-1 fees: are marketing fees and commissions
Sub-TA fees: are transfer agent fees paid to the agent who deals with the
paperwork related to asset trades (accounting allowance)
Other fees:
Transaction costs: fees for trading within a fund
Custody costs: charged by the custodian bank that holds the investments
Legal expenses: for the paperwork filed with the SEC and other legal matters
8© 2012 Hay Group. All rights reserved
Fidelity: Plan Summary
Client Name Plan Name
Total Plan Assets: $12,524,138
Total Plan Participants: 86
As of 5/31/2012
Recordkeeping Investment Management and
Other
Total
% Assets $ % Assets $ % Assets $
Investment Option-
Related
Asset-based 0.20% $25,367 0.51% $63,481 0.71% $88,844
Administrative and Other Billable Recordkeeping
Transaction
Other billable
Float
0.00%
0.00%
$0
$0
0.00%
0.00%
$0
$0
0.00%
0.00%
0.00%
0.00%
$0
$0
$0
$0
Total Amount 0.20% $25,367 0.51% $63,481 0.71% $88,844
Pricing Information % Assets $ Per Participant
Total Amount for Record Keeping 0.20% $25,367 $295
Additional Value for Fidelity Products 0.07% $8,312 $97
Total Consideration for Pricing Purposes 0.27% $33,679 $392
9© 2012 Hay Group. All rights reserved
Fidelity: Investment Option-Related Services and Compensation
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Newport Group: Fee Summary
Fee Disclosure Statement (ERISA § 408(b)(2)) Recordkeeping and Administration Services ABC Company 401(k) Profit Sharing Plan
This Fee Disclosure Statement provides the responsible plan fiduciary for the above-referenced plan with sufficient
information to evaluate the reasonableness of the services arrangement between Newport Retirement Services, Inc. (“Newport”) and the Plan. Newport is required to provide you with this information. As the responsible Plan fiduciary, you are responsible for evaluating Newport’s services and fees and for determining whether such arrangement is a reasonable arrangement for the Plan.
Services and Fees Newport provides core and non-core recordkeeping and administrative services. Core services are included in the annual
asset-based and per-participant fees. Non-core services are provided upon request at an additional charge.
Core Services: Implementation (setup and initial enrollment kits), daily valuation of participant accounts, toll-free 24-hour internet and voice response system, processing plan activity (payrolls/loans/distributions, etc.), quarterly reporting, standard compliance testing, preparation of Form 5500 and schedules, preparation of Summary Annual Report, and use of prototype plan documents.
Core Plan Assets: $15,364,627.64 Number of Participants: 367 Per Participant Recordkeeping and Administration Fees: Itemized Fee Annual Fee
Number of Participants 1 and Above $24 Total: $8,808.00
Asset Based Recordkeeping and Administration Fees:
Asset Based Fee All Assets 14.00 bps (0.1400%) Total: $21,510.48
Base Administration Fees: Total: $4,050.00
Grand Total: $34,368.48
11© 2012 Hay Group. All rights reserved
Newport Group: Non-Core Services
Grand Total: $34,368.48
Non-Core Services: Service Itemized Fee/Unit
Distribution Fee $60.00 per payment
Enrollment Kits Fee $6.00 per kit
Enrollment Meeting Fee $450.00 per day plus travel & expense
Non-Standard Administration/Consulting Fee $150.00 per hour
Roth 401(k) Maintenance Fee $750.00 per year
QDRO - Account Split Calculation and Posting $150.00 per hour
Excess Payroll Fee $850.00 (lesser of $50 per payroll over 26 or
$850 annually) Postage All Postage is billed at cost
Manner of Receipt: Annual fees are billed to the Plan in quarterly installments, in arrears. Hourly fees are billed to the Plan in arrears for the quarter in which such services are performed. Transaction fees are billed when the transaction is processed. Newport deducts its fees from Plan accounts as directed by the responsible Plan fiduciary. Transaction fees are deducted from participant accounts as noted above when the transaction is processed. Compensation For Contract Termination Newport receives no compensation in connection with the termination of the recordkeeping and administration agreement with the Plan. Where fees are charged in arrears, Newport will invoice the Plan for services rendered through the termination date of the agreement. Where fees are charged in advance, Newport will refund the unearned portion of fees by multiplying the paid invoice amount by a fraction, the numerator of which is the number of days remaining in the billing period and the denominator of which is the total number of days in such period. The number of days is 90 for quarterly periods, 180 for semi-annual periods and 365 for annual periods.
Indirect Compensation
Newport receives indirect compensation in the form of shareholder servicing fees from certain providers of the investment funds listed on the attached Investment Disclosure. These fees are paid to Newport to provide recordkeeping, administration, communication and other shareholder services on behalf of the funds.
Indirect compensation is not additional compensation to Newport. Newport applies all indirect compensation it receives against its quarterly invoices. If indirect compensation exceeds Newport’s invoice total, the excess amount will be paid to the Plan. If indirect compensation is less than Newport’s outstanding invoice, Newport will bill the Plan for the difference and deduct the amount from Plan accounts as directed by the responsible Plan fiduciary.
12© 2012 Hay Group. All rights reserved
Newport Group: Custodial Fees
Custodial Fees The custodian for the Plan retains custody of the assets of the Plan under a separate agreement with the Plan or Plan sponsor. The custodian invests and reinvests principal and income, records all transactions, including receipts, investments, disbursements, and other transactions, and renders a written report to the Plan.
The custodian charges annual base fees and transactional fees. Base fees are in addition to Newport’s base fee. Routine transactional fees related to non-core services listed above are included in Newport’s fees. The custodian will provide you with a listing of non-core services in its disclosure statement. Fees for certain non-routine custodial services are not included in Newport’s fees. These are charged directly to the Plan. Examples include stop-payment fees, wires, overnight mailing, extra 1099s, etc. Custodian: Charles Schwab Trust Company Annual Fee
Asset Fee : $7,478.48
Trust Fee : $2,500.00
Total: $9,978.48 Fee Summary The following chart summarizes all fees for core services expected to be charged to the Plan. Newport Annual Administration Fee (Core Fees) $34,368.48 Custodian $9,978.48
Total $44,346.96
Less Estimated Indirect Compensation ($46,208.48) Net Fee ($1,861.52) Fee as a percentage of assets (0.01%) Fee per participant ($5.07)
13© 2012 Hay Group. All rights reserved
Newport Group:
Expense Ratios, 12b-1, Sub-TA, and Redemption Fees
Fee Disclosure Statement (ERISA § 408(b)(2)) Recordkeeping and Administration Services ABC Company 401(k) Profit Sharing Plan
Indirect Compensation Newport will receive indirect compensation from the investment providers as set forth below. This amount paid to Newport is the SubTA fee or Shareholder Service fee, as applicable, reduced by the portion of SubTA/SSF fees retained by the custodian. 12b-1 fees are not paid to Newport. They are either (i) paid directly by the custodian to the broker for the Plan or (ii) paid directly by the custodian to the Plan.
Expense SubTA/ Short-term
Ticker Fund Name Ratio 12b1 SSF Redemption Fee ALARX ALGER CAPITAL APPRECIATION 1.17 % n/a 0.48 % n/a ABASX ALLIANCE BERNSTEIN SM-MID CAP 1.27 % n/a 0.38 % n/a AAIPX AMERICAN BEACON INT'L EQUITY 1.08 % n/a 0.38 % n/a RERCX AMERICAN EUROPACIFIC GROWTH R3 1.13 % n/a 0.58 % n/a RNPCX AMERICAN FUNDS NEW PERSPECTIVE 1.11 % n/a 0.58 % n/a CSIEX CALVERT EQUITY PORTFOLIO 1.22 % n/a 0.38 % n/a CSRSX COHEN & STEERS REALTY SHARES 0.97 % n/a 0.38 % 2.00 % URBIX COLUMBIA VALUE & RESTRUCT R 1.44 % n/a 0.73 % n/a SELSX DWS SELECT ALTERNATIVE ALLOC 1.54 % n/a 0.38 % n/a EVBLX EATON VANCE FLOATING 1.01 % n/a 0.38 % n/a HLEMX HARDING LOEVNER EMERGING MKTS 1.49 % n/a 0.38 % n/a KGSCX KALMAR GRTH WITH VALUE SM CAP 1.48 % n/a 0.38 % n/a MEIAX MFS VALUE 0.94 % n/a 0.43 % n/a NPSAX NUVEEN PREFERRED SECURITIES A 1.10 % n/a 0.38 % n/a PASDX PIMCO ALL ASSET FUND 1.29 % n/a 0.38 % n/a PCRDX PIMCO COMMODITY REAL RETURN 1.19 % n/a 0.38 % n/a PHYDX PIMCO HIGH YIELD 0.91 % n/a 0.38 % n/a PTTAX PIMCO TOTAL RETURN 0.85 % n/a 0.38 % n/a PEEAX PRUDENTIAL JENN MID CAP GROWTH 1.09 % n/a 0.48 % n/a SAMFX RIDGEWORTH TOTAL RETURN BOND I 0.35 % n/a 0.13 % n/a RYTRX ROYCE TOTAL RETURN 1.17 % n/a 0.38 % 1.00 % SFENX SCHWAB EMERGING MKTS INDEX 0.60 % n/a 0.10 % n/a SWPPX SCHWAB S&P 500 INDEX FUND 0.09 % n/a 0.02 % n/a SSSFX SOUTHERNSUN SMALL CAP 1.35 % n/a 0.38 % 2.00 % TGSNX TCW SMALL CAP GROWTH 1.49 % n/a 0.38 % n/a VEXPX VANGUARD EXPLORER 0.50 % n/a n/a n/a VIPSX VANGUARD INFLATION PROTECTED 0.22 % n/a n/a n/a
The estimated 12b-1 fees are $0.00.
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Vanguard: All-in Fee Disclosure
15© 2012 Hay Group. All rights reserved
Vanguard: Fee Summary
16© 2012 Hay Group. All rights reserved
Vanguard:Expense Ratios, Morningstar Average Expense Ratio, Recordkeeping Credit
Sample 408(b)(2) DisclosuresPart 2 – Unbundled Provider 408(b)(2) Disclosure
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John Hancock:Recordkeeping Fees
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John Hancock:Expense Ratios, Recordkeeping Fees, AMC
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Cornerstone:Fee Disclosure
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Paragon Alliance Group: Fee Disclosures
SERVICE PROVIDER FEE DISCLOSURE ERISA SEC. 408(b)(2) Plan Sponsor Fee Disclosure
The purpose of this disclosure is to comply with the requirements of Department of Labor Regulation 2550.408b‐2(c) regarding the disclosure of services provided to your retirement plan and the fees received for those services. The terms used in this form are as defined by the regulations, including the term “Covered Service Provider”.
I. Identifying Information
Name of Covered Service Provider: The Paragon Alliance Group, LLC (“Paragon”) Address: 64 North County Line Road, Souderton, PA 18964
Contact Person: Robert C. Wisner, President Telephone #: (215)703-0844 x131
Email Address: [email protected] II. Initial Disclosure
1. Description of Services Provided. Paragon provides Third Party Administration (TPA) services to the plan. Your copy of the Paragon Client Service Agreement and Fee Schedule provides a complete description of the Plan Document, Plan Administration and Other Services Paragon provides for the plan.
2. Fiduciary Status. The Paragon Alliance Group, LLC shall NOT act as an ERISA Fiduciary, in particular, but not limited to, the definition under Section 3(21)(a)1, 2, or 3 of ERISA, nor does Paragon exercise any control over plan assets or discretionary authority or control over the administration of your plan.
3. Paragon Fees and Manner of Receipt of Compensation. The current Fee Schedule, including any subsequent revisions, amendments, attachments, and/or Addendums sent separately via email or other written form, which collectively form the Paragon Client Service Agreement and Fee Schedule, describes the fees billed by Paragon for services Paragon provides to the plan. The fees are stated in Paragon’s service agreement and/or John Hancock Agreement/ TPA Fee Request paperwork. The Employer also has the option to have the plan pay fees on an “as requested” basis, such as PERA with the consent of the Plan Trustee(s), Paragon and John Hancock.
4. PERA Compensation and Manner of Receipt of Compensation. PERA payments from John Hancock may be available as follows: a. Payer: John Hancock to Paragon, if available and typically before Plan year end b. Services: Third Party Administration (TPA) Services for the plan and for the Payer c. Formula: PERA could be available to reduce our billable fee annually. These funds are paid to Paragon
from excess revenue, where available and applicable by John Hancock. d. How used: This payment, when applicable will be used to reduce Paragon’s annual billable administration
fees by the amount received. How reported: Paragon does not have sufficient information to disclose, in advance, the exact amount of PERA
compensation it will receive from the Payer. PERA received by and reported to Paragon, if applicable and if
required, will be disclosed on the plan’s Form 5500 Annual Report for the plan year in which such payments are
made.
1. PERA Compensation and Manner of Receipt of Compensation. PERA payments from John Hancock may be available as follows: a. Payer: John Hancock to Paragon, if available and typically before Plan year end b. Services: Third Party Administration (TPA) Services for the plan and for the Payer c. Formula: PERA could be available to reduce our billable fee annually. These funds are paid to Paragon
from excess revenue, where available and applicable by John Hancock. d. How used: This payment, when applicable will be used to reduce Paragon’s annual billable administration
fees by the amount received. How reported: Paragon does not have sufficient information to disclose, in advance, the exact amount of PERA
compensation it will receive from the Payer. PERA received by and reported to Paragon, if applicable and if
required, will be disclosed on the plan’s Form 5500 Annual Report for the plan year in which such payments are
made.
22© 2012 Hay Group. All rights reserved
Paragon Alliance Group:Fee Disclosures
1. Indirect Compensation. The indirect compensation that Paragon reasonably expects to receive for annual
administration services performed for the plan includes: a. Payer: John Hancock Life Insurance Company to Paragon b. Services: Third Party Administration (TPA) Services for the plan and for the Payer c. Formula: 0.05% of plan assets (5 basis points). These funds are paid from the general funds of John
Hancock; they are NOT paid out of Plan assets. d. How used: Paragon typically assists with communicating, implementing and providing services that the
Payer would normally be responsible for. Additionally we use the compensation for electronic interface of our systems, staff training and participation in product and service enhancement calls/meetings thereby increasing the efficiencies and services we jointly provide to our clients. Indirect compensation or service fee income paid to Paragon is taken into consideration when setting and monitoring the fees Paragon charges as well as taking the payment into consideration before billing for additional services. The receipt of indirect compensation avoids the need for Paragon to continually revise our fees upward as our cost of doing business increases.
e. How reported: Paragon does not have sufficient information to disclose, in advance, the exact amount of indirect compensation it will receive from the Payer. However, the indirect compensation received by and reported to Paragon, if any and as required, will be disclosed on the plan’s Form 5500 Annual Report for the plan year in which such payments are made.
f. Incentive Compensation: i If Paragon meets certain minimum incentive requirements set by the Payer, Paragon may qualify for additional indirect compensation or benefits payable by the Payer to Paragon. Paragon does not have sufficient information to disclose, in advance, the exact amount of indirect compensation attributable to the plan that it will receive from the Payer. However, the incentive compensation received by and reported to Paragon, if any and as required, will be disclosed on the plan’s Form 5500 Annual Report for the plan year in which it is paid.
2. Indirect Compensation from Colonial Surety Company. Paragon receives a one-time commission on a client’s
initial purchase of a surety bond and/or fiduciary liability coverage from Colonial Surety Company, if obtained through Paragon. Paragon will receive 10% of the first year premium amount when a client purchases a surety bond and 5% of the first year premium amount on the purchase of fiduciary liability coverage. While fidelity bond coverage is required by Department of Labor (DOL) regulations, Paragon does not require our clients to purchase this coverage from Colonial Surety Company. Fiduciary liability is not required by the DOL.
3. Related Party Compensation. Since Paragon does not utilize related parties, Paragon will not receive or pay any compensation to or from an affiliate or subcontractor for any services it provides to the plan.
4. Plan Forfeitures. If the plan permits the use of forfeitures to pay reasonable plan expenses, any such forfeiture(s) may be used to pay Paragon’s expenses. Any forfeiture paid by the plan to Paragon will reduce or offset Paragon’s gross annual fees.
5. Self-Directed Brokerage Accounts. If the plan offers self‐directed brokerage accounts, the broker-dealer will be the Covered Service Provider and, as such, will be responsible for providing the appropriate disclosure information to the plan fiduciary, not Paragon.
Termination Compensation. In several instances, Paragon’s fees are billed annually for all services performed for
the prior plan year, following the close of the plan year. Should written notice of termination be provided, our fees
for the prior year are immediately due and payable. In addition, if the notification is for a time period other than
at plan year end, our annual fees for the current plan year will be prorated through the date of receipt of written
notification. Additionally, Paragon reserves the right to bill for additional services rendered during the termination
period, along with additional services performed after the most recent invoice for annual services. Direct
Compensation from plan assets is payable until Payer receives written notice from the plan Fiduciary that the
Employer’s contract with Payer will terminate or Plan fiduciary wishes to discontinue payment to Paragon.
Additionally payment will cease if Paragon elects not to receive compensation from the plan.
i : Upon request, Paragon would be happy to share a complete and detailed description of all possible forms of incentive
compensation that we could potentially receive in advance of ever receiving it.
1. Indirect Compensation. The indirect compensation that Paragon reasonably expects to receive for annual
administration services performed for the plan includes: a. Payer: John Hancock Life Insurance Company to Paragon b. Services: Third Party Administration (TPA) Services for the plan and for the Payer c. Formula: 0.05% of plan assets (5 basis points). These funds are paid from the general funds of John
Hancock; they are NOT paid out of Plan assets. d. How used: Paragon typically assists with communicating, implementing and providing services that the
Payer would normally be responsible for. Additionally we use the compensation for electronic interface of our systems, staff training and participation in product and service enhancement calls/meetings thereby increasing the efficiencies and services we jointly provide to our clients. Indirect compensation or service fee income paid to Paragon is taken into consideration when setting and monitoring the fees Paragon charges as well as taking the payment into consideration before billing for additional services. The receipt of indirect compensation avoids the need for Paragon to continually revise our fees upward as our cost of doing business increases.
e. How reported: Paragon does not have sufficient information to disclose, in advance, the exact amount of indirect compensation it will receive from the Payer. However, the indirect compensation received by and reported to Paragon, if any and as required, will be disclosed on the plan’s Form 5500 Annual Report for the plan year in which such payments are made.
Incentive Compensation: i If Paragon meets certain minimum incentive requirements set by the Payer, Paragon
may qualify for additional indirect compensation or benefits payable by the Payer to Paragon. Paragon does not
have sufficient information to disclose, in advance, the exact amount of indirect compensation attributable to the
plan that it will receive from the Payer. However, the incentive compensation received by and reported to
Paragon, if any and as required, will be disclosed on the plan’s Form 5500 Annual Report for the plan year in which
it is paid.
i : Upon request, Paragon would be happy to share a complete and detailed description of all possible forms of incentive
compensation that we could potentially receive in advance of ever receiving it.
23© 2012 Hay Group. All rights reserved
Polling Question #3
Does your defined contribution plan have either an ERISA budget
account or a Plan Expense Reimbursement Account?
Yes
No
Don’t know
24© 2012 Hay Group. All rights reserved
Do You Know about your Plan’s Revenue Sharing Arrangements?
Society for Human Resource Management (SHRM) 2011 survey of
companies found that:
19% of plan sponsors did not know what proportion of their funds paid revenue sharing
38% that credited excess revenue-sharing back to plan participants did not know how
this happens
16% were uncertain if their plan offered an ERISA Budget Account
25© 2012 Hay Group. All rights reserved
Common Sources of ERISA Budget Account Revenue
Revenue from expense ratio (asset-based fee) in excess of recordkeeper’s fee cap from
12b-1 fees (capped at 1.00%, but commonly in 25 bps range)
Often paid to advisor through ERISA Budget Account or directly to broker of record for placing
clients’ assets with the fund. Used to compensate
broker for participant education
investment consultant or
TPA for plan administration or recordkeeping services
Sub-transfer agent (Sub-TA) fees, most commonly used with non-proprietary funds;
Usually paid to TPA or recordkeeper with an omnibus account at a mutual fund; avoids need
for individual accounts
Sub-TA agent executes, clears, and settles, buys or sells orders, and maintains shareholder
level records of each transaction
Details often not disclosed; sometimes information in footnotes
Shareholder Servicing fees – typically in no-load mutual funds (up to 25 bps). Brokers cannot
receive. Typically paid to TPA for recordkeeping, administration, and education
Wrap fees, which are additional fees that may be used to pay for services at the plan
sponsor level
26© 2012 Hay Group. All rights reserved
Characteristic of ERISA Budget Accounts
Account dollars treated same as “plan assets” and subject to ERISA
Account is within plan
Require documentation authorizing payments by plan sponsor
Reasonable and necessary expenses relating to plan administration (i.e., plan could pay expense
directly), including
Nondiscrimination testing
Plan document, SPD and other required documents, including investment policy preparation
Fee benchmarking study
Vendor search
Plan financial audit fees
Compliance review/audit fees
Investment consultant fees
Legal advice on plan administration
Unused year-end balance must be reallocated to plan participants
Cannot be used for plan design studies (i.e., services that plan could not pay directly)
Cannot be used to offset employer contributions
27© 2012 Hay Group. All rights reserved
Issues Involving ERISA Budget Accounts
Need for written agreement from plan sponsor to document process
How plan sponsor will authorize payment
Timing for payment
Reallocation to Plan Participants
Pro rata
Per capita, or
To accounts that generate revenue sharing
28© 2012 Hay Group. All rights reserved
Plan Expense Reimbursement Accounts (PERA) – Uncharted Territory
Some people use a Plan Expense Reduction Account (PERA) and ERISA Budget
Account interchangeably, but . . .
Others contend a PERA can be established by the recordkeeper outside the plan, with
the following characteristics:
Not “funded”
Not subject to ERISA
Greater range of options (i.e., negotiations with recordkeeper) about how money can
be used
No specific time limits for how long credit is available to be used
29© 2012 Hay Group. All rights reserved
Where is this Leading?
ERISA Budget Accounts are a round-about way of charging participants for plan
services
Greater transparency in ERISA Budget Accounts is still needed
More guidance can be expected about the uses of PERAs
The future may lead to more transparent fixed-fee arrangements for these services
30© 2012 Hay Group. All rights reserved
Observations about Participant 404(a)(5) Disclosures
Some disclosures were extremely lengthy. It appears as though vendors wanted to
cover all required information, but the primary outcome was participant confusion.
Some samples are:
Fidelity – 13 pages
Vanguard – 7 pages
Schwab – 14 pages
Newport Group – 8 pages
John Hancock has 2 documents:
Important Plan Information (IPI), which summarizes all fees (2 pages)
Investment Comparative Chart (ICC), which summarizes how to read the chart, the plan
investment performance and numerous disclosures (15 pages)
TIAA-CREF – 14 pages if the only vendor for a 403(b) Plan, but if multiple vendors are involved, it
could go over 20 pages
Prudential – 16 pages, Glossary of Terms spanned 5 pages
Principal – 16 pages, disclosures are 3 pages long
31© 2012 Hay Group. All rights reserved
Initial Reaction to Participant Disclosures
404(a)(5) participant disclosures have created little reaction.
Most of the attention has been paid to the production and distribution of the notices.
Plan sponsors should keep a copy of the notice, the mailing list and the e-mail
distribution lists in their fiduciary files for audit purposes. This would include any
correspondence from participants, undelivered mail and any updates that result from
fund changes, etc.
32© 2012 Hay Group. All rights reserved
Initial Reaction to Plan Level Disclosures
The information provided in the 408(b)(2) disclosures have already had an impact on
plan sponsor behavior.
The following are actions plan sponsors and the industry have taken since July 1st:
Fee Benchmarking Studies
RFP’s
Renegotiating Service Contracts
Per Head Pricing instead of Asset Based Pricing
Calculating Revenue Sharing Per Participant
Companies Paying Fees Directly
Migration to Institutionally Priced Funds or ETF’s
Unbundling of Services
Updating and Modernizing Investment Policy Statements
33© 2012 Hay Group. All rights reserved
Areas of Weakness that Need Attention
While the disclosures have created greater transparency around price and potential
conflicts of interest, they do little to help the plan sponsor determine reasonableness
Unless the plan sponsor has been recently through an RFP, the documentation around
the selection of service providers is generally weak or non-existent
Reasonableness requires an evaluation of services, value and results, not just price
Service Provider Files should be established and maintained. At the very least they
should include:
A copy of each service provider’s contract and disclosures
An evaluation of each service provider’s performance – Scorecard
Your reasoning for selecting a provider
Documentation of any service provider correspondence and complaints
34© 2012 Hay Group. All rights reserved
Benchmarking Itself is Evolving
As more data becomes available and more plans go through the benchmarking process,
the benchmarking services are evolving and the databases are improving.
Independence is critically important in a database. Historically, the majority of the
databases have been prepared by the major providers, which have inherent biases in
favor of their own pricing.
There are many factors that can influence pricing of the plan:
Services Provided
Asset Allocation of the Plan
Plan Investments – Company Stock, Custom Portfolios
Plan Design or Complexity
Advisor or Direct
Participant Level Services
Communication and Education Strategy
Plan Demographics (# of participants, assets, net cash flow)
35© 2012 Hay Group. All rights reserved
Plan Fiduciaries Need Expert Help
Where a plan fiduciary does not possess the education, experience and skill required to
make a decision regarding the plan, he has an affirmative duty to seek independent
counsel in making the decision. Katsaros v Cody, 744 F.2nd 279 (2d. Circuit) (1984)
The failure to seek outside counsel, “under the circumstances then prevailing…a
prudent man acting in a like capacity and familiar with such matters”, would seek outside
counsel, is imprudent and a violation of ERISA. Katsaros v Cody, 744 F.2nd 279 (2d. Circuit) (1984)
36© 2012 Hay Group. All rights reserved
Concluding Thoughts
The Era of Fee Disclosure is still in its infancy and it is inevitable that best practices will
continue to emerge, ultimately shaped by case law.
Plan audits conducted in 2013 will begin to expose weaknesses in plan sponsor
processes.
These weaknesses almost always revolve around a lack of process and documentation,
which are the basis for making informed decisions.
Plan and participant level fee disclosures create greater transparency around price and
provide most of the raw data necessary for plan sponsors to make more informed
decisions.
A superior process should lead to superior results.
An enhanced process will better protect plan fiduciaries from potential liability and
improve the results for plan participants.
This ultimately is the role of the plan fiduciaries and advisors.
Hay Group and Cornerstone have teams of experts who specialize in all aspects of
retirement plan management. THANK YOU.
37© 2012 Hay Group. All rights reserved
Contact Information
Hay Group
Robert Landau, Esq. [email protected]
703-841-3123
Leslie Richmond, ASA, EA, MAAA [email protected]
201-557-8408
Cornerstone Advisors Asset Management, Inc.
Thomas J. Scalici, CFP, CEBS, AIF® [email protected]
1-800-923-0900
Appendix A
Fidelity
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Bundled Service Provider408(b)(2) Disclosure
40© 2012 Hay Group. All rights reserved
Bundled Service Provider408(b)(2) Disclosure
41© 2012 Hay Group. All rights reserved
Bundled Service Provider408(b)(2) Disclosure
42© 2012 Hay Group. All rights reserved
Bundled Service Provider408(b)(2) Disclosure
43© 2012 Hay Group. All rights reserved
Bundled Service Provider408(b)(2) Disclosure
Appendix B
Vanguard
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Bundled Service Provider408(b)(2) Disclosure
47© 2012 Hay Group. All rights reserved
Bundled Service Provider408(b)(2) Disclosure
48© 2012 Hay Group. All rights reserved
Bundled Service Provider408(b)(2) Disclosure
Appendix C
John Hancock
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Unbundled Service Provider408(b)(2) Disclosure
51© 2012 Hay Group. All rights reserved
John Hancock: Recordkeeping Services Available
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Unbundled Service Provider408(b)(2) Disclosure
53© 2012 Hay Group. All rights reserved
Unbundled Service Provider408(b)(2) Disclosure
54© 2012 Hay Group. All rights reserved
Unbundled Service Provider408(b)(2) Disclosure
55© 2012 Hay Group. All rights reserved
Disclosures
Securities offered through M Holdings Securities, Inc., MEMBER FINRA/SIPC
Investment Advisory Services offered through Cornerstone Advisors Asset Management, Inc. and/or Cornerstone
Institutional Investors, Inc., which are independently owned and operated.
Performance quoted is past performance and is no guarantee of future results.
Cornerstone Advisors Asset Management, Inc. and Cornerstone Institutional Investors, Inc. have exercised
reasonable care in the preparation of this presentation. Several portions of this presentation are obtained from third
party sources. While we have attempted to verify all information within, we disclaim all responsibility for any errors that
may occur due to third party information and data.