©2003 – 2013 Multnomah Group, Inc. All Rights Reserved.

Best Practices for Ensuring Retirement Plan Fee Reasonableness

Agenda

Best Practices for Ensuring Retirement Plan Fee Reasonableness

• Context and Historical Overview• Legislative• Regulatory• Judicial

• Preparing for a DOL Audit• Most frequently requested information• Case study

• Step-by-Step Guide to Fee Reasonableness• Fee reasonableness “to-dos”

3

Context & Historical Overview

Best Practices for Ensuring Retirement Plan Fee Reasonableness

What is “reasonable”?• Intangible no bright line• Agreeable to sound judgment or logic• That which is appropriate for a particular situation• Not excessive relative to circumstancesDetermining reasonableness requires comparison of alternatives and evaluation of processes used

Under ERISA section 408(b)(2), retirement plan fees must be reasonable in light of the services being rendered• But, no specific codified definition of what constitutes fee reasonableness

per se• Impossible to be absolute about reasonableness determinations• Follow prudent process that contemplates alternatives

- Using prudent process to negotiate/compare fees/services promotes improved participant outcomes

• Must know and understand applicable fees to determine reasonableness• Where can plan sponsors find comprehensive fee information?

4

Context & Historical Overview

Best Practices for Ensuring Retirement Plan Fee Reasonableness

Regulations under ERISA section 408(b)(2) require annual covered service provider-to-employer disclosure of fees

• First-year deadline July 1, 2012• Empower plan sponsors to better comply with the fee reasonableness

standard under ERISA section 408(b)(2)• Must terminate non-compliant covered service providers

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 than ever

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

5

Context & Historical Overview

Best Practices for Ensuring Retirement Plan Fee Reasonableness

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 of investments 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

• No requirement to choose lowest-cost services and investment options, just act prudently and pay reasonable fees

6

Preparing for a DOL Audit

Best Practices for Ensuring Retirement Plan Fee Reasonableness

• 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

7

Preparing for a DOL Audit

Best Practices for Ensuring Retirement Plan Fee Reasonableness

What will DOL request?

• Service provider information• Accountants, actuaries, administrators, attorneys, brokers, consultants, contract

administrators, insurance companies, investment advisors, investment managers, recordkeepers, TPAs, valuation appraisers

• Service agreements/contracts• Describing services, duties, obligations, responsibilities, fee / compensation /

commission schedule• Service provider reports

• Investment performance reports, audit reports, actuarial reports• Fee assessment and payment documents

• Invoices, cancelled checks• Service provider selection documents

• RFP, proposals, comparative evaluation analysis, negotiation communications, assessment of fees relative to quality of service

• 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

8

DOL Audit Case Study: Fee Reasonableness

Best Practices for Ensuring Retirement Plan Fee Reasonableness

Context:

• 403(b) Plan Sponsor• 2012 investigation• January 1, 2007 to present

investigation period

Response / Outcomes:

• Submitted requested information, including annual fee benchmarking, search effort documentation, fee policy statement

• No requested follow-up information regarding the DOL’s evaluation of fee reasonableness

9

Step-by-Step Guide to Fee Reasonableness

Best Practices for Ensuring Retirement Plan Fee Reasonableness

Fee reasonableness to-do list:

Maintain a Fee Policy Statement and other proper fiduciary governance documents (e.g. Committee Charter, Investment 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

10

Step-by-Step Guide to Fee Reasonableness

Best Practices for Ensuring Retirement Plan Fee Reasonableness

Fee reasonableness to-do list (cont.):

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 the prequalified recordkeeper universe every 5-6 years

• Coincides with typical statutes of limitations• Document the effort, resulting decisions and rationale

Gather appropriate documentation in preparation for DOL investigation

• Expect an audit and prepare to avoid scramble for documents (typically, 15-day response period allowed)

• Organize service, investment and fee information requested in the event of an investigation

11

Disclosures

Best Practices for Ensuring Retirement Plan Fee Reasonableness

Multnomah Group, Inc. is an Oregon corporation and SEC registered investment adviser.

Any information and materials contained herein or on our website are provided “as is” for general informational purposes only. It is not intended to be comprehensive for any particular subject. While Multnomah Group takes pride in providing accurate and up to date information, 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.

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.

12