Fee Disclosure and Benchmarking - Hay Group Disclosure and Benchmarking... · Fee Disclosure and...

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


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


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


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


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


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


Fidelity: Investment Option-Related Services and Compensation


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


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.


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)


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.


Vanguard: All-in Fee Disclosure


Vanguard: Fee Summary


Vanguard:Expense Ratios, Morningstar Average Expense Ratio, Recordkeeping Credit

Sample 408(b)(2) DisclosuresPart 2 – Unbundled Provider 408(b)(2) Disclosure


John Hancock:Recordkeeping Fees


John Hancock:Expense Ratios, Recordkeeping Fees, AMC


Cornerstone:Fee Disclosure


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.


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.


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


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


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


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


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


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


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


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


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.


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


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


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)


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)


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.


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

mailto:[email protected]





Appendix A

Fidelity


Bundled Service Provider408(b)(2) Disclosure









Appendix B

Vanguard









Appendix C

John Hancock


Unbundled Service Provider408(b)(2) Disclosure


John Hancock: Recordkeeping Services Available








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.

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