Innovative’s Mark Sulpizio, MS Tax, AIF® and Nicole Offerman, AIF® joined approximately 600 advisors in Chicago for a three-day educational and networking event April 25th-27th.  A full range of nationally recognized speakers such as Harvard Business Review editorial director and author of The Myth of the Rational Market Justin Fox as well as Pulitzer Prize Winner Doris Kearns Goodwin, advocated for a broad acceptance of fiduciary ethics, regardless of regulatory imperative, and a commitment to act in the best interests of investors.

Conference sessions focused on the application of the fiduciary standard for both individual investors and plan sponsors, the investment selection process, ongoing regulatory changes, and other topics related to fiduciary best practices.

Attendees also had the opportunity to attend breakout sessions led by industry luminaries including Dave Gray, Vice President of Client Experience at Charles Schwab; Fred Reish, Partner at Drinker Biddle and Reath; and Ron Rhoades, JD, CFP, Program Chair for the Financial Planning Program at Alfred State College.

“As in past years, our event’s presenters succeeded in educating and inspiring attendees.  In addition to learning a range of practice management strategies, they were encouraged to incorporate fiduciary ethics in all facets of their professional activities,” said Blaine Aikin, CEO of fi360.

Mark and Nicole took advantage of the opportunity to speak directly with other investment advisors, providers and administrators to share ideas about fiduciary best practices including the new fee disclosure regulations that take effect July 1, 2012.

The  Labor Department’s Employee Benefits Security Administration (EBSA) has a long history of protecting the contributions employees make to their 401 (k), health care, and any other contributory plans by investigating employers who delay forwarding these contributions to the appropriate funding vehicle or who convert the contributions to other non-plan uses.   The Contributory Plans Criminal Project, initiated in 2010, is the first solely criminal national enforcement initiative.  The Labor Department’s focus on protecting employee contributions is multi-faceted:

•    Conducting civil and criminal investigations into 401(k) misuse
•    Issuing a regulation to shorten the time for transmission of contributions to the plan
•    Launching an education campaign to inform retirement plan participants about their rights and ways to protect their pensions

By the end of Fiscal Year 2011 there were 1,700 civil cases closed, 1,429 with corrected violations resulting in $58,773,213 in monetary results.

Recently, one such lawsuit was filed against Towson Rehabilitation Center LLC and CEO Howard Neels.  This suit is the result of an investigation by the EBSA which found that, since January 2006, the defendants failed to comply in three areas: failing to remit employee contributions to the plan, remitting certain employee contributions late without interest, and failing to segregate the plan’s assets from the general assets of the company.  The EBSA is intent on holding fiduciaries accountable when they fail to act in the best interest of the plan participants.  This suit seeks to permanently bar the defendants from serving in a fiduciary capacity as well as to restore all financial losses to the plan.

Voluntary Fiduciary Correction Program
In an effort to encourage employers to comply with ERISA, the EBSA adopted the Voluntary Fiduciary Correction Program (VFCP) which allows employers to self-indentify and correct certain violations by plan officials if they meet certain criteria.  On Schedule H of Form 5500 under the Compliance Questions, there is a question asking if there was a failure to transmit to the plan any participant contributions within a specified time period. It is here that employers can “self-identify”.  Employers receive “no action” letters through this process in which most of the applications involve delinquent employee contributions.  The success of the VFCP program frees EBSA investigators to pursue undiscovered violations while self-identified violations are corrected.

Participant Contribution Regulation
The Department’s participant contribution regulation requires employers of all sizes to transmit employee contributions to pension plans no later than the 15th business day of the month immediately following the month in which the contribution is either withheld or received by the employer.  An amendment was issued to create a safe harbor rule under which participant contributions to plans with fewer than 100 participants will be deemed compliant with the law if those amounts are deposited with small plans within seven business days of withholding or receipt.

On Wednesday, February 8, 2012 our own Mark Sulpizio attended Federated Investors’ Retirement Security Symposium at The Harvard Club of New York City. This special event was by invitation only and featured The Honorable Bradford P. Campbell as the Key Note Speaker. Mr. Campbell formerly served as the Assistant Secretary of Labor for Employee Benefits, the head of the Employee Benefits Security Administration (EBSA). He is a nationally recognized figure in employer-sponsored retirement plans. The symposium focused on changing the role of the Financial Advisor as it relates to investment committee best practices, fiduciary status and its implications, and prudent investing in turbulent markets.

After months of delay, the Department of Labor (DOL) has just released final regulations under Section 408(b)(2) of ERISA, requiring retirement plan service providers to disclose information about their services and fees to plan sponsors.  In doing so, the DOL delayed the effective date of those rules and made minor modifications to them.  The final regulations defer the compliance date from April 1 to July 1, 2012.  As a consequence, plan sponsors will also have more time to comply with the related participant-level fee disclosure rules.

In an attempt to arm plan fiduciaries with additional information about the increasingly complex services provided by retirement plan vendors (such as record keepers, third-party administrators, and brokers) and the fees charged for those services, the Section 408(b)(2) regulations impose specific disclosure requirements on those providers.  Under ERISA, fiduciaries must ensure that these arrangements are reasonable, and that only reasonable compensation is paid for them.  As we reported in our May 2011 article, the information that will be provided under these rules is intended to help fiduciaries fulfill that responsibility.

The final regulations published on February 2 replace an interim final rule that was released on July 16, 2010.  In addition to delaying the effective date of the disclosure requirements, the final rule makes a number of minor changes in response to comments received on the interim final rule.  These include:

An exclusion for certain Code § 403(b) annuity contracts and custodial accounts;
Expansion of the information that service providers must disclose about “indirect” compensation they receive;
Changes to the investment-related disclosures to conform to the requirements of the DOL’s participant-level disclosure rules; and
A separate provision for disclosing changes to investment-related information, which must be updated at least annually.
The final regulations “strongly encourage” service providers to offer plan fiduciaries a “guide” or summary of their disclosures. The DOL included a sample guide as an appendix to the final rule. Debate about whether to require such a summary disclosure is rumored to have delayed the release of the final rules. For now, the summary is voluntary, but the DOL strongly hinted that it may make the summary mandatory in future regulations.

These regulations will be effective for contracts or arrangements (whether existing or new) between covered plans and covered service providers as of July 1, 2012. This delayed effective date (from April 1) also will push back the effective date for disclosures that plan administrators must send to participants. Initial annual participant-level disclosures must be furnished within 60 days after the effective date of the Section 408(b)(2) service provider disclosures. For calendar year plans, this means that the initial disclosure of plan- and investment-related information must be furnished to participants no later than August 30, 2012 (rather than May 31), and the first quarterly statement must be furnished to participants no later than November 14, 2012 (rather than August 14).

Innovative would like to thank all of our guests that attended the Fiduciary Luncheons that we hosted last week in Princeton, Parsippany and Philadelphia.  Innovative’s own Mark Sulpizio, Accredited Investment Fiduciary®, discussed the impact of the new 408(b)(2) and 404(a) fee disclosure regulations.  Mark also touched on what fiduciary best practices employers need to implement now in order to properly address employee questions next April when the regulations go into effect.  If you were unable to attend but are interested in learning more about 408(b)(2) and 404(a) please contact us at 856-786-4300.  We would be happy to schedule time to meet with you to review these important new regulations and what they mean to you.

There are a series of notices regarding retirement plans that must be provided to participants as the end of 2011 approaches. Included in these notices are the following:

1)If a plan sponsor makes “safe harbor” 401(k) contributions, the plan sponsor must provide the participants with a safe harbor notice at least 30 (but not more than 90) days prior to the beginning of the plan year.

2) If a plan includes “automatic enrollment”, a participant must receive a notice of the automatic enrollment before the participant is initially enrolled in the plan and again on an annual basis.  The notice should explain that, in the absence of an affirmative election, the plan will make automatic deferrals on behalf of the participant into specified investments.  It should also contain all other pertinent information regarding the right to stop or change deferrals and investments.  The annual notice must be provided at least 30 days before the beginning of the plan year.

3) If a plan includes participant-directed investments, the plan sponsor may have selected a “qualified default investment alternative” (QDIA) in which a participant’s accounts will be invested if the participant fails to make an investment election.  A participant whose accounts have been defaulted in to the QDIA must receive an annual notice regarding the QDIA and the opportunity to make other investment elections at least 30 days before the beginning of the plan year.

4) A plan sponsor of a defined benefit plan must provide an annual funding notice to the participants in the pension plan.  The notice generally must be provided within 120 days after the end of the plan year, but a later due date applies to small plans (less than 100 participants).

When you sponsor a retirement plan you, or someone you appoint, are responsible for making many important decisions associated with the plan such as investment options and service providers.  Informed decision making is reliant upon understanding and evaluating the costs associated with the plan.  One of the costs inherent in most plans is revenue sharing which, generally speaking, refers to payments made by investment providers to other service providers.  Investment providers include mutual fund companies and insurance companies while other service providers are record keepers and third-party administrators.   In some instances these payments are expenses for services that the investment provider would otherwise have to provide itself, such as administrative services.  While there is nothing innately unlawful about revenue sharing, the Department of Labor has proposed a regulation that will require providers to disclose any indirect compensation, such as revenue sharing, made to service providers.

In the of case Tibble v. Edison International important lessons for fiduciaries are introduced pertaining to who is responsible for payment of a 401(k) Savings Plan’s (the Plan) administrative expenses.  In Tibble, it was determined that Southern California Edison (SCE) was responsible for the administrative costs of the plan, “net of any adjustments by service providers”.   The selection and monitoring of the Plan’s investment options was delegated to SCE’s Trust Investment Committee and/or its Benefits Committee by the Board of Directors.  Critical to this assignation is the fact that none of the members of this committee were simultaneously on SCE’s Board of Directors, which was crucial to the court’s decision.

Hewitt Associates, LLC, as the Plan’s record keeper, received certain revenue sharing payments which they, in turn, used to reduce administrative fees to SCE.  The reduction of administrative expenses is a benefit that SCE received as a result of the mutual funds that were offered as investments.

In the Tibble case, plaintiffs suggest that SCE “received consideration” from Hewitt because the revenue sharing payments were used to reduce the fees that would otherwise have been charged to SCE.  The court disagreed.  The fact that the committees that were assigned the fiduciary obligation to select specific investments options were never simultaneously members of SCE’s Board of Directors, demonstrates that SCE did not directly receive the benefit of the transaction.  There also wasn’t any evidence proving that SCE had any influence on whether to enter into the contracts with the mutual funds.  Based on these two findings, SCE could not have violated 406(b)(3) which prohibits a fiduciary from receiving consideration “for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”

Important lessons can be learned from this case for all plan sponsors.  The decision to pay all administrative expenses, while generous, may not be prudent given the arguments made by the plaintiffs and DOL in Tibble.  If the Plan document stated that all expenses would be paid from plan assets, then SCE would not have been accused of benefitting from the investment selections because the plan itself would have received the benefit.  Tibble is currently on appeal to the U.S Court of Appeals for the Ninth Circuit.

The Agencies published in the Federal Register a request for information (RFI) regarding whether, and, if so, how, by regulation or otherwise, it would be appropriate for them to enhance the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement.

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As you may already be aware, new regulations were recently passed requiring all sponsors of qualified plans to file their Form 5500 and accompanying schedules electronically beginning January 1, 2010.  Hard copies will no longer be accepted, rather will need to be submitted via the Department of Labor’s EFAST2 electronic on-line filing system.  We will still be preparing your filing as in previous years.

To comply with these regulations and to update and streamline the ERISA filing process, the DOL has created a new, web-based electronic filing system known as EFAST2. The EFAST2 system provides all of the basic functionality required to fulfill annual reporting requirements from the website www.efast.dol.gov.

For the sake of accuracy, security, and timeliness, you must complete the registration process in a single session. Incomplete registration forms will not be saved in the EFAST2 database. If you end the session prior to completing the registration form, you will need to start the process over from the beginning. Below are the six steps to complete EFAST2 registration:

1. Read and accept the privacy statement
2. Provide contact information and select user type(s)
3. Select challenge question and answer
4. Verify registration information
5. Receive a credentials email notification
6. Retrieve and activate credentials

To register with EFAST2, you will need to log onto the EFAST2 web site, located at http://www.efast.dol.gov. On the navigation panel on the left side of the Welcome screen, you will click on the “Register” link.  Complete instructions for obtaining your credentials are attached.