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New DOL Regulations:The Road to

Reasonableness

Dennis Gogarty, Chase DetersDecember 11, 2012

Raffa Wealth Management, LLCPresents:

New DOL Regulations: The Road to Reasonableness

Dennis Gogarty, CFP®, AIF®

President, Raffa Wealth Management

Chase Deters, CFP®, ChFC®

Portfolio Manager, Raffa Wealth Management

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The Department of Labor’s New Regulations• Disclosure to Plan Sponsors – 408(b)2

─ Service Description─ Compensation for services (direct and indirect)─ Fiduciary status of service provider

• Disclosure to Plan Participants – 404(a)5─ Mutual fund related disclosures─ Comparison chart – fees and rates of return

Force Transparency - Require Disclosure

New Regulation Requirements

The DOL believes that plan fiduciaries need this information, when selecting and monitoring service providers, to satisfy their fiduciary obligations under ERISA section 404(a)(1) to act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.

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• DOL Regulations state that plan fiduciaries must: – “…ensure that arrangements with their service

providers are ‘reasonable’ and that only ‘reasonable’ compensation is paid for services.”

• Failure to comply can result in prohibited transactions with legal liability exposure

The Challenge

Number of times “reasonableness” or “reasonable” is mentioned in the 22 page long DOL regulation?

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• DOL Regulations cannot define a figure• Doesn’t have to be the least expensive option• Expenses will vary based on:

– Number of Participants– Total Plan Assets– Number and Complexity of your plan(s)– Annual Salary Deferrals– Other services being provided (bundled or unbundled TPA, one-

on-one educational meetings, etc.)

• Smaller plans may pay more in a percentage of assets, than larger plans, but much less in a total dollar amount– Making determining what “reasonable” is, very difficult to

determine

What is “Reasonable?”

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Evaluating Plan Fees and Expenses

You have two avenues to examine to determine if your plans fees are truly reasonable:1. Distribute a RFP: send a proposal request to several

other investment advisors to survey the marketplace on what else is available

2. Peer Benchmark Assessment: use an independent third party to provide you a report of an apples-to-apples benchmark comparison of your plan’s fees in relation to other plans of similar size and structure

The Road to Reasonableness

Your current retirement plan investment advisor might not be equipped to help you independently access your plan’s fees due to a natural conflict of interest.

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Distribute a Request For Proposal (RFP)

• Begin by establishing an objective process to aid in your decision making

• Think about the specific services you would like (e.g., tax, trustee/custodian, recordkeeping, investment management, investment education or advice)…

• Consider the level of responsibility you want the prospective service provider to assume…

• Give all prospective service providers complete and identical information about your plan. This information should include the number of plan participants and the amount of plan assets as of a specified date.

The Road to Reasonableness

The following excerpt is directly from the DOL’s guide “Understanding Retirement Plan Fees and Expenses”

2011 Dept. of Labor

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The Road to Reasonableness

1. Administrative Fees:─ Custodial fees – who holds the plan assets─ Administrative fees – files tax forms, processes

distributions and loans─ Record keeping fees – day to day transactions and

statements

2. Investment Advisory Fees 3. Weighted Average Mutual Fund Fees

─ Net amount paid to the mutual fund managers, weighted by the percentage of plan assets in each fund

Determine Your Plan’s Total Fees

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The Road to ReasonablenessStart by understanding your total plans costs segmented

by service provider

Current Scenario - - Plan assets $2,034,300Participant Accounts - - 101RWM/XYZ Retirement Percent DollarCustodian State Street Global Adv (SSgA) 0.00% $0Adminstrator XYZ Retirement $336.66/mo 0.20% $4,036Recordkeeper XYZ Retirement 0.58% $11,799

Total Admin Fees 0.78% $15,835

Investment Advisor RWM 0.35% $7,120Mutual Fund Company Multi-Family* 0.50% $10,172Total Investment Expenses 0.85% $17,292

Total - ABC Foundation 403b Retirement Plan 1.63% $33,126

ABC Foundation 403b Retirement Plan

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The Road to ReasonablenessIssue an RFP to consultants or advisors that offer

a comprehensive retirement plan solution

1. Conduct an initial group call to communicate your needs and preferences.

2. Request a single “recommended” solution either bundled or unbundled

─ Custody─ Recordkeeping─ Administration─ Investment advisory

3. Ask for a description of services, fees, and fiduciary status:4. Ask for fund expenses and what portion of fund expenses pay

for any of the services above.─ US stocks─ Intl Stocks─ Bonds─ Stable Value or Guaranteed Contracts

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Difference in Fiduciary StatusNone 3(21) Fidcuiary 3(38) Fiduciary

Description

Duty of loyalty to serve the exlusive best interest of the plan participants and beneficiaries

Duty of care to exercise the skill, diligence and prudence of a professional

Shall have reasonable grounds for believing recommendations are suitable

Description

Makes recommendations to plan sponsor

Maintains discretion to make decisions and implement changes

Level of Fiduciary Responsibility

Level of Fiduciary Authority

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The Road to ReasonablenessSet up a scoring system to compare the RFP responses by each investment advisor:

• Firm Experience

• Key Personnel Experience

• Quality of References

• Educational Event

Offerings

• Level of Fiduciary Status

• Administrative Cost level

• Advisory Fee level

• Investment Expense level

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The Road to Reasonableness

Plan BPeer Benchmark Assessment

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Peer Benchmark Assessment

The easiest way to independently verify if your plan’s fees and expenses are in line with industry standards is to perform an independent benchmark assessment of your current plan that contains:

1. Database for fee comparisons should be derived directly from industry service providers

2. Your plan’s fees should be normalized• Adjusting for bundled and unbundled plans (Custodian,

Recordkeeper, TPA, Advisor, and Money Managers)• Normalizing percentage, flat, and per participant fees• Adjusting for ERISA Spending Account Credits (i.e. AFCA)

3. Resulting in a simple, transparent & practical report

The Road to Reasonableness

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Fiduciary Benchmarks: The Output

The following topics should be included in your assessment and a review of your plan relative to your peers :

1. Total Plan Fees• Review fees by source of funds and service provider being

compensated

2. Investments• Comparison of the fees being paid for every investment option in the

plan relative to your peer group’s expenses

3. Value- Add by Provider• List of services being provided that help a Plan Sponsor administer the

plan fulfill their Fiduciary Duties • Metrics to help determine participant utilization of the plan, or

“Retirement Readiness”

The Road to Reasonableness

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Fiduciary Benchmarks, Inc. was launched to support plan sponsors, advisors, recordkeepers and other plan service providers in addressing the new DOL regulations.

They have partnered with many of the prominent service providers for a comprehensive database that contains greater detail than what can be found using 5500 reports.

www.fiduciarybenchmarks.com

Fiduciary Benchmarks, Inc.

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Benchmark Peer Group

Fiduciary Benchmarks: The Output

Your plan is compared against

53 other retirement plans of similar size

and structure

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Plan Fees Summary

Fiduciary Benchmarks: The Output

Your plan’s total fees are itemized by service provider and compared to the benchmark group.

• This plan’s annual fees are 1.06% per year

• This is 0.07% higher, or $7,000

more per year than the average• This equates to $45 more per

employee per year

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Service Providers’ Fee Disclosure

Fiduciary Benchmarks: The Output

Service providers’ fees are compared to the benchmark group, allowing you to easily identify the service provider who’s fees are over/under average

• Recordkeeper• Third Party Administrator• Advisor/Consultant• Investment Manager

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Investment Lineup Summary

Fiduciary Benchmarks: The Output

Each investment’s expense in the plan is compared with the benchmark group to determine the source of any outliers.

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Plan Success Measures

Fiduciary Benchmarks: The Output

10 recognized industry standards measure how well your plan helps participants prepare for retirement in comparison to the benchmark group.

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Final Results

The Road to Reasonableness

Upon completion of your benchmark assessment, the final task is to summarize the various aspects of your plan in an internal memo, and outline the reasons for keeping/changing your plan.

Based on the enclosed analysis comparing our plan with xx similar plans, we find that our plan’s fees are reasonable for the following reasons:

1. All service providers’ fees are ____ with the average peer expenses2. The average investment expense ratio is ____ with the average3. The plan participants are taking advantage of the benefits being

offered

Analysis conducted on x/x/xx by _________ and subsequent review is scheduled in 3-5 years.

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The Road to Reasonableness

1. Confirm receipt of the 408(b)2 disclosures from service providers.

2. Understand the fees (direct and indirect) being paid by your plan for the services being provided and the fiduciary status of the service providers.

3. Measure reasonableness– Have an independent analysis of your plan’s fees/services/fiduciary

status performed– Conduct an RFP for a comprehensive retirement plan solution

4. Maintain all documents in a fiduciary file5. Summarize the procedures and result in a memo

and retain for your files

Summary

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Questions?

Dennis Gogarty, CFP®, AIF® Chase Deters, CFP®, ChFC® (202) 955-6734 (202) 955-7217dennis@raffawealth.com chase@raffawealth.com

www.raffawealth.com

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Disclosures

All economic and performance information is historical and not indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management or any other investment professional.  Further, the charts and graphs contained herein should not serve as the sole determining factor for making investment decisions.  To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Raffa Wealth Management.  All information, including that used to compile charts, is obtained from sources believed to be reliable, but Raffa Wealth Management does not guarantee its reliability.   All performance results have been compiled solely by Raffa Wealth Management, are unaudited, and have not been independently verified. Information pertaining to Raffa Wealth Management’ advisory operations, services, and fees is set forth in Raffa Wealth Management’ current disclosure statement, a copy of which is available from Raffa Wealth Management upon request. Past performance is not a guarantee of future results and any investment can lose value.

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