New Participant Disclosure Requirements - Are You Ready?
Authored by Valerie R. Leonard, AIF® - August 3, 2011

Like it or not, 401(k) Plan Sponsors are about to face added pressure from their participants like never before.In less than a year, your employees will receive new annual and quarterly statements outlining the fees they are paying in their retirement accounts along with specific investment information, leaving many Plan Sponsors concerned about how they will handle “hard questions” regarding lackluster or poor investment performance and “new” fees that may have previously gone unnoticed.

In an effort to simplify your understanding of the new final regulations, this article attempts to outline the nuts and bolts of what you need to know.

1.  The new disclosure requirements only apply to participant-directed plans, such as 401(k) plans, and they do not concern plans with employer-directed investments.

2.  These disclosures are not optional.You must comply regardless of whether you choose to act in accordance with ERISA Section 404(c), a voluntary safe-harbor protection against investment performance liability.

3.  You will be required to provide notices to your entire eligible employee population, not just participants who have actually enrolled in the plan.

4.  The deadline for providing the initial annual disclosure for most plans is May 31, 2012.

5.  All disclosures must be written in a manner that can be understood by the average participant.

6.  Two types of disclosures will be required, an annual notice and a quarterly statement.

7.  The annual notice must be provided prior to the date on which a participant can direct investments and annually thereafter.It must include the following:

• An explanation of how participants may give investment allocation instructions.
  
• An outline of the general administrative service fees that may be assessed against participant accounts.
  
• An outline of any transactional expenses that may be charged for individualized services (e.g., loan processing fee).
  
• Investment related information presented in a comparative format including the name and type of investment option, investment performance data, benchmark performance data, fee information for each investment (including shareholder-type fees and total annual operating expenses), and the internet website address at which additional information is available.

8.  A quarterly statement must be distributed at the conclusion of each quarter and must include the following:

• The quarterly dollar amounts actually charged to each participant's account as general administrative services and a description of those services.
  
• The quarterly dollar amounts actually charged to each participant's account as individual expenses (e.g., loan processing fee).
  
• Disclosure of any fees for general administrative services that are paid from the total annual operating expenses of any of the plan's investments (e.g., through revenue sharing or 12b-1 fees).As a practical matter, this can be difficult for Plan Sponsors to discern and is likely to confuse many participants.

9.  In the past, prospectuses were required to be given prior to the date in which a participant could direct investments.However, the new regulations only require prospectuses to be provided upon request by the participant.

10.  The new regulations will clearly have the greatest impact on Third Party Administrators (“TPAs”) and bundled service providers, many of which are simply not yet prepared to comply.Plan Sponsors should ensure their vendors will be able to meet the required deadlines.

11.  The Department of Labor has not yet determined whether electronic delivery of these disclosures will be allowed but is expected to provide guidance later this year.

Have you begun to educate your participants about what to expect in the coming year?Are you prepared to address their questions and concerns?

At Grinkmeyer and Leonard Wealth Management, we strive to help our plan sponsor clients sort through the maze of new regulations in the pipeline and help prepare participants for the glut of information they will receive.The new participant disclosure regulations are one of six retirement plan areas the Department of Labor and Obama Administration are currently targeting.To learn more about how we can help ensure you and your participants are prepared, visit www.retirementplanpros.com or contact us today.

Trent Grinkmeyer and Kimberley Fulcher Earn Accredited Investment Fiduciary^® Designation from fi360

Trent Grinkmeyer and Kimberley Fulcher of Grinkmeyer and Leonard Wealth Management have been awarded the Accredited Investment Fiduciary^® (AIF^®) designation from Fiduciary360 (fi360), an organization offering training, tools and resources to promote a culture of fiduciary responsibility and improve the decision making processes of fiduciaries.  The AIF designation signifies knowledge of fiduciary responsibility and the ability to implement policies and procedures that meet a defined standard of care.  The designation is the culmination of a course and examination.  

Fi360 is the first full-time training and research facility for fiduciaries, and conducts training programs at universities throughout the United States and abroad.  It licenses the Prudent Practices for Investment Fiduciaries from the Foundation for Fiduciary Studies. Fi360 provides investment education and training programs and awards the Accredited Investment Fiduciary^® (AIF^®) and Accredited Investment Fiduciary Analyst™ (AIFA^®) professional designations through the Center for Fiduciary Studies. It develops sophisticated Web-based tools and reporting, including the innovative Fiduciary Score™ and the Family Fund Fiduciary Rankings™ for trustees and investment professionals through Fiduciary Analytics. For more information on future events, training programs and fiduciary products, visit www.fi360.com.

As a retirement plan fiduciary, the task of overseeing your plan's target date investments has recently become even more complex. Yet, most plan sponsors don't even know it.

Once the SEC and DOL caught wind of the large unexpected losses suffered by participants in 2008 who were invested in many “2010” target date vehicles, more questions were raised about the oversight, selection and breakdown of investment options that, in theory, seemed to be age-appropriate. As a result, these agencies have issued two pieces of guidance to assist plan sponsors in fulfilling their fiduciary obligations and more guidance and proposed amendments are likely to follow suit. In the meantime, we feel it is crucial that plan sponsors consider the following at their next investment committee meeting:

1. Does your suite of target date investments manage “to” or “through” retirement? The first step in overseeing your target date options is to determine exactly how they are managed. Since each target date product is managed according to a different philosophy and glidepath, plan sponsors must be aware of the implications that may result from their manager's unique approach. For instance, are your target date options managed to the investment's stated retirement date, or through that date? Many vendors take the approach that participants may leave their money in the plan or live another 15-30 years past their anticipated retirement date which creates a need to invest a bit more aggressively in order to outpace inflation and keep up with participants' retirement income needs. Other vendors assume that participants wish to become conservative at their actual retirement date and that their money may be rolled over to an IRA where it can be managed more actively or by a trusted financial advisor throughout retirement.
   
   
2. Do your target date offerings utilize an appropriate glidepath? To understand whether your product's glidepath is suitable you must first consider the equity exposure at various time periods throughout the life of each target date investment. For instance, at what age does the equity exposure begin to decrease and by how much each year? Additionally, what is the overall equity exposure today and also at age 65? Some products tend to be more aggressive than others because managers feel that participants are likely to be underfunded and need to make up ground. Other products may be very well diversified and utilize an average glidepath while still others may produce an overall conservative equity exposure at age 65. At the end of the day, the glidepath you select must be suitable for your specific participant demographics and include a strategy that most closely aligns with your participants' needs.
   
   
3. What investment strategies and underlying investments are utilized within your target date family? Three other often controversial considerations are whether your managers are utilizing a passive versus an active strategy, whether the underlying investments are limited to proprietary products, and whether the strategy should include alternative asset classes such as REITs or high yield bonds. Many products utilize index funds with the thought that some managers cannot beat their benchmark and that lower expenses result in greater returns. However, evidence suggests that a good manager who utilizes an actively managed approach can add more value when disciplined strategies are consistently applied. Neither strategy is inherently better than the other, but plan sponsors are responsible for selecting a strategy that is in the best interest of participant's needs. Likewise, it is important to know whether your target date product is limited to the underlying proprietary vehicles produced by your vendor. If so, you could be limiting performance by not allowing outside non-proprietary investment vehicles. Finally, be sure to consider whether your target date strategy should include alternative asset classes that could help provide diversification and a more appropriate asset allocation. Given the poor results participants experienced in 2008, some managers have increased their global exposure or introduced derivatives, Treasury Inflation Protection Securities and commodities in an effort to reduce the volatility within their portfolios. Regardless of which strategies you use, you must closely monitor the results and the continued appropriateness of the approach.
   
   
4. Are your target date investments a suitable choice for your plan's Qualified Default Investment Alternative (QDIA)? At this point the DOL has not issued specific guidance as it pertains to the use of target date vehicles as a plan's default investment option. We expect that amendments to ERISA 404(c)(5) will be made later this year and will hopefully provide some greater clarity. In the meantime, keep in mind that if you wish to take advantage of 404(c) protection, you must offer a default investment that meets acceptable QDIA safe-harbor provisions. An argument can be made for the use of Target Date vehicles as the plan's QDIA but the decision to do so should most certainly involve a prudent and documented process.

To find out more about the selection and oversight of target date products, visit www.retirementplanpros.com or contact Grinkmeyer and Leonard Wealth Management today.

1. Do we have a written contract in place that shows you are serving in a fiduciary capacity on our plan? Because of the litigious nature of the retirement plan industry, most investment advisory and brokerage firms will not allow their advisors to take on any fiduciary responsibilities in writing. However, this is a critical step in ensuring you are protected. The most reputable firms that are known for their defined contribution plan services actually encourage their advisors to do so and provide them with the specific tools they need to adequately meet their obligations. This contract should detail the specific role of the advisor, the scope of services they will provide, and the compensation they will receive. We find that most brokers trip over retirement plans in the course of their careers yet carry no special credentials or training to adequately service those plans. You should know that your advisor's motivations align with yours. If they are willing to sign on the dotted line, you can reasonably assume they have your plan's best interests at heart.
   
   
2. What compensation do you receive from our plan? If you want to know someone's motivations, ask them how they get paid. The retirement plan industry is notorious for burying fees, and it can be extremely difficult to identify the compensation your broker actually receives from your plan. You should be familiar with various broker compensation arrangements such as 12-b-1 fees, asset based compensation, “wrap” fees, and revenue sharing agreements. Because of new fee disclosure regulations, many leading investment advisors typically work on a consulting basis and are compensated through a fee-for-service arrangement. These fees can be paid directly by the company or built in o the plan so that they are passed along to plan participants. Regardless of how your broker is paid, you need to be able to identify the total amount of compensation he or she receives on an annual basis.
   
   
3. What is the process you use and how do you document the research and investment recommendations you make? We believe a thorough investment due diligence process includes a written Investment Policy Statement (IPS). Although an IPS is not a requirement, a lack of an IPS can demonstrate violation of the Prudent Man Rule¹ outlined in ERISA. Your IPS should include a quantitative and qualitative approach to selecting and monitoring your investments. This means that you should look at factors other than performance or peer rankings. You should carefully evaluate the actual risk factors associated with each investment available to your participants. Your investment advisor should follow the IPS and have a comprehensive process for retaining all research files and minutes from your meetings. Furthermore, all research files and meeting minutes should be forwarded to you after each meeting and maintained in your 401(k) file to demonstrate your commitment to oversight of that advisor.
   
   
4. How do you ensure that the advice you provide is independent, objective and that conflicts of interest do not exist? One of the best ways to ensure your advisor maintains his or her objectivity is to hire an expert that is truly independent. This means that their broker/dealer does not manufacture any proprietary products and that the advisor does not receive any direct or indirect compensation from investment or administrative service providers for “pushing product.” It is their responsibility to act solely in the interest of the participants and plan beneficiaries and pressure from outside influences to insert a specific investment into your lineup can create questions from regulators or open the door to potential litigation.

Over the past twenty-four months the debate has heated over whether the 401(k) plan is still a viable investment vehicle for America's retirement savings.Obviously, recent stock market conditions have created additional concerns as to whether plan sponsors are doing their job.Since we are on the front lines every day, we've compiled a list of three things we often see plan trustees overlook.

1.  Investment Policy Statement (IPS) - The Department of Labor does not require a written IPS.However, case law has dictated that a lack of an Investment Policy Statement can show evidence of a violation of the Prudent Man Rule.Additionally, your IPS should outline clear standards for choosing investments, how investments are monitored, watch list investments and replacement triggers.

2.   Quantitative and Qualitative Investment Process - As part of your ongoing investment monitoring process, ERISA guidelines suggest the need for a quantitative and qualitative process when evaluating investments and managers.Often times, plan sponsors rely on tools that account only for risk adjusted returns.Remember, the Department of Labor judges fiduciaries on the processes they follow, not the results that are achieved (performance).

3. Broad Array of Investment Selection - Often times we encounter plan sponsors who feel they're meeting this requirement because of the number of investments they offer their participants.However, you must ask yourself, “Can my participants truly build a diversified portfolio?”To answer this question, you must understand the research behind asset allocation models.If your plan offers less than 13 choices (excluding target date or asset allocation investments), your employees are likely missing out on some very important opportunities.