Under ERISA Section 408(b)(2), retirement plan fees must be reasonable in light of the services being rendered. Retirement plan fees are also a hot target in the courts, most notably with last year's Tussey vs. ABB, Inc. decision. In this presentation, we discuss just what the reasonableness standard means for today's retirement plan sponsors, and an action plan for employers.

1. Retirement Plan Fees
Best Practices for Plan Sponsors
©2003 – 2013 Multnomah Group, Inc. All Rights Reserved.

2. John Chavez, MBA
John is a Regional Director for the Multnomah Group responsible for client
service and business development in Southern California. John works with a
wide array of organizations, including colleges and universities, non-profit
hospitals, and corporations. John consults with plan sponsors on fiduciary
governance, plan design, vendor contract structure, vendor fees/services, and
investment menu construction.
Prior to joining Multnomah Group in 2011, John served as a Director of
Consultant Relations for the West Coast for a national retirement services firm
specializing in healthcare, research and higher education organizations. Prior
to that, John was Vice President of Business Development and Assistant Vice
President of Client Services for several other retirement services firms.
John is involved in the Los Angeles Chapter of the Western Pension & Benefits
Council and he is a member of the National Association of Governmental
Defined Contribution Administrators. John holds a B.A. in Communications from
California State University at Fullerton and a MBA from University of La Verne.
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3. Gina Gurgiolo, JD, LL.M
Gina Gurgiolo is a Senior Consultant for the Multnomah Group responsible for
the firm’s ERISA technical and recordkeeping vendor search consulting
services. Gina consults with plan sponsors on plan design, fiduciary
governance, and vendor fees/services.
Prior to joining the Multnomah Group in 2010, Gina managed the product
portfolio for a national retirement services firm and directed the firm’s plan
administration unit serving its largest clients. Prior to that, Gina managed the
retirement plan compliance and regulatory policy functions at another national
retirement services firm. In all, Gina has over 13 years of holistic retirement
plans experience.
Gina earned her JD from the University of Pittsburgh and her LL.M in Taxation
with an emphasis in retirement plan and executive compensation law from the
University of Denver. Gina is a member of the Portland Chapter of the Western
Pension & Benefits Council, and has been a conference speaker at multiple
industry events
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4. Agenda
Building Foundation
Defining the Fee Universe
The Reasonableness Standard
Compliance Enforcement
Recent Trends
Observations on Fee Compression
Consequential Considerations
Roadmap to Reasonableness
Fee Reasonableness “To-dos”
Best Practices Checklist
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5. Building Foundation
Three important questions all plan sponsors should know how to answer:
1. What fees apply under the plan?
2. How are the fees paid?
3. Are the fees reasonable in light of services rendered?
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6. The Fee Universe
Asset-based Fees
Calculated as a percentage of all or a portion of plan assets
Typically assessed through the investment product
Types:
Expense ratio (mutual funds, collective/commingled investments)
Market value adjustment (stable value products)
Variable (variable asset charge, mortality & expense, surrender)
Wrap (administration, education/communications, custodial)
Other (short-term trading/redemption, front-end, back-end, CDSC, put)
Revenue sharing:
Payment to selling agent/broker
Can include commissions, 12-b-1/marketing, shareholder
servicing, sub-transfer agency fees
For services including recordkeeping/administration,
education/communications, compliance testing/reporting
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7. The Fee Universe
Participant-based Fees
Calculated based on the number of participants in or eligible for the plan
Could be a base fee (example: $7,500 per year) or per-unit fee (example: $15
per active participant and $25 per terminated participant)
May be assessed to the plan sponsor or to plan assets/participants in addition
to applicable asset-based fees
Services covered:
Education and communications
Participant statements
Participant website access
Call center availability
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8. The Fee Universe
Itemized Fees
Calculated on a per-instance/as-incurred basis for a particular service
Typically fixed
May be assessed to the plan sponsor or plan participants
Examples:
Contract implementation/termination fees
Ad hoc/special services fees, such as 5500/compliance testing,
plan mergers, customized plan documents/amendments
Professional services, such as TPA, auditor, attorney, consultant,
custodian/trustee
Transactional services, such as loans, distributions, QDROs
Optional participant services fees, such as brokerage window,
managed accounts
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9. The Reasonableness Standard
What is “reasonable?”
Agreeable to sound judgment or logic
That which is appropriate for a particular situation
Not excessive relative to circumstances
Under ERISA section 408(b)(2), retirement plan fees must be reasonable in
light of the services being rendered
No specific codified definition of what constitutes fee reasonableness per se
Determining reasonableness requires comparison of alternatives and
evaluation of processes used
Must know and understand applicable fees to determine reasonableness
Follow prudent process that contemplates alternatives
Where can plan sponsors find comprehensive fee information?
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10. The Reasonableness Standard
Regulations under ERISA section 408(b)(2) require annual covered service
provider-to-employer disclosure of fees
Intended to empower plan sponsors to better comply with the fee
reasonableness standard under ERISA section 408(b)(2)
First-year deadline was July 1, 2012
Plan sponsors must terminate non-compliant covered service providers and
have a duty to inspect the notice for accuracy and follow up accordingly
408(b)(2) notice information is needed to complete the plan’s Form 5500
Schedule C
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11. The Reasonableness Standard
Tussey, et al. v. ABB, Inc.
Federal district court in Missouri; appeal to Eighth Circuit Court of Appeals
Case originated in 2006 from 15 separate complaints filed by ABB, Inc.
employees
Separate actions certified as a class in 2007 → first instance of a plan fee
related class action suit
Plaintiffs awarded $37M because:
401(k) plan fees subsidize corporate services benefiting executives
A lower cost share class was available, but was not being used
Policies/process not being followed
Failure to pass excess investment revenue sharing back to the plan
Reaffirmed fee reasonableness standards under ERISA section 408(b)(2)
Similar litigation is looming
At issue is whether the plan fiduciary used a prudent reasonableness
evaluation process, had the right level of expert assistance, and/or
documented the process steps
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12. The Reasonableness Standard
Summary timeline:
1974: ERISA is enacted, including section 408(b)(2)
2007: Proposed fee disclosure regulations are issued
2009: Revised 2009 Form 5500 Schedule C requests more fee information
reporting than ever before
2010-
2012: Fee disclosure regulations are finalized and become effective; DOL
investigation and enforcement activity increases
2012: First retirement plan fee class action suit decided (Tussey, et al. v.
ABB, Inc.); similar litigation looming
2013: DOL announced intention to propose regulations clarifying 408(b)(2)
notices; initial proposed version expected in May
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13. Compliance Enforcement
The DOL has the responsibility to enforce ERISA’s standards, including
ensuring fee reasonableness
DOL investigation/enforcement activity is on the rise since 408(b)(2) regulations
were proposed and fee litigation trend began
How are plans are selected for investigation?
Randomly
For cause/“red flag”
5500 reports late deferral remittance
Independent auditor issues qualified report
Participant complaints
Up to 6-year investigation period
Penalty is commensurate with harm caused
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14. Compliance Enforcement
What will DOL request?
1. Service provider information
Accountants, actuaries, administrators, attorneys, brokers, consultants, contract
administrators, insurance companies, investment advisors, investment managers,
recordkeepers, TPAs, valuation appraisers
2. Service agreements/contracts
Describing services, duties, obligations, responsibilities,
fee/compensation/commission schedule
3. Service provider reports
Investment performance reports, audit reports, actuarial reports
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15. Compliance Enforcement
What will DOL request?
4. Fee assessment and payment documents
Invoices, cancelled checks
5. Service provider selection documents
RFP, proposals, comparative evaluation analysis, negotiation
communications, assessment of fees relative to quality of service
6. Investment documents
Revenue sharing information, share class identification, stable value fund
illiquidity/redemption or surrender fees
Rebate information
12-b-1 fees, sub-transfer account fees, marketing/services fees, expense
reimbursement account deposits
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16. Recent Trends
Hottest trend:
Unmistakable recent recordkeeping fee compression in the marketplace
Provides current pricing renegotiation leverage
Focus on value and watch for service descoping/unbundled pricing
Expect heavier utilization of online service protocols
On the rise:
Fees-at-risk clauses in service agreements
ERISA or other expense reimbursement accounts funded with excess
revenue sharing dollars
Service unbundling
Levelized per-participant pricing
Must be solved:
Plans with multiple vendors receive 408(b)(2) disclosures in different
formats, which have proven difficult to understand or consider collectively
DOL will somehow address this in proposed regs expected May, 2013
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17. Roadmap to Reasonableness
Be able to answer our three foundational questions:
1. What fees apply under the plan?
 Review service contracts, annuity contracts, fee agreements, investment fees
 List all applicable fees in a Fee Policy Statement
 Inspect vendor-to-sponsor fee disclosure notices and follow up as necessary
2. How are the fees paid?
 Find fee allocation provisions in agreements, contracts
 Make decisions within plan sponsor discretion
 Memorialize allocation information in Fee Policy Statement
3. Are the fees reasonable in light of services rendered?
 Compare your plan fees to the marketplace in some meaningful way
 Renegotiate fees with vendors based on benchmarking/proposal results
 Focus on value not the least expensive solution
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18. Best Practices Checklist
 Maintain a Fee Policy Statement
 List applicable fees under the Plan
 State whether the employer, forfeiture account, or participants pay the fees
 State intent to ensure fee reasonableness
 Timely receive and review/analyze annual covered service provider-to-
employer fee disclosure notice
 Know your plan’s fees and understand how they work
 Follow-up with questions as needed
 Benchmark recordkeeper’s fees to the market annually
 Plan is not required to select the recordkeeper with the lowest fees
 Fees must be reasonable in light of services rendered
 Negotiate incumbent recordkeeper’s fees if they are higher than benchmarked
range
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19. Best Practices Checklist
 Request lowest-cost share class of investment options
 Document the process and decision whether to implement
 Issue request for bid or request for proposal to prequalified vendors every
5-6 years
 Coincides with typical statutes of limitations
 Document the process, evaluation criteria, resulting decisions and rationale
 Gather appropriate documentation in preparation for DOL investigation
 Expect an audit and prepare/organize information to avoid scramble for
documents (typically, 15-day response period allowed)
 Provide information requested in the event of an investigation
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20. Disclosures
Multnomah Group, Inc. is an Oregon corporation and SEC registered
investment adviser.
Any information and materials contained herein or on our website are provided
for general informational purposes only and are not intended to be
comprehensive for any particular subject. Multnomah Group utilizes information
from third party sources believed to be reliable but not guaranteed, and as a
result, information is provided to you "as is." We do not represent, guarantee, or
provide any warranties (either express or implied) regarding the completeness,
accuracy, or currency of information or its suitability for any particular purpose.
Multnomah Group shall not be liable to you or any third party resulting from any
use or misuse of information provided.
Receipt of information or materials provided herein or on our website does not
create an adviser-client relationship between Multnomah Group and you.
Multnomah Group does not provide tax or legal advice or opinions. You should
consult with your own tax or legal adviser for advice about your specific
situation.
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