ERISA DOL and Fiduciary Standards What to Expect by Ax4F0n


									             January 24, 2012

ERISA, DOL & Fiduciary Standards –
         What to Expect

      Kurt Johansen   Ameriprise Financial
      Jason Roberts   Pension Resource Institute
      Mark Smith      Sutherland
                           U.S. Retirement Market
                                                 EOY $ Trillion
                                                                              4.7                 4.7
     14.0                                                               4.2
     12.0                                                3.3                         3.6

                    2.7                           3.0                         4.4                 4.4
     10.0                          2.6
              2.2                                                 3.8
                                                         3.6                         3.5
      8.0           3.1      3.1                  3.4
                                   3.1     2.9
              2.8                                                             4.5
      6.0                                                         3.6
                                                         3.3                         3.5
                     3       3                     3
      4.0     2.6                  2.7     2.5

                                                                  2.3   2.4   2.4                 2.2
                                                         2.2                         2      2.1
      2.0     1.8   2.1      2     1.8     1.8    1.7
                             1        1     1     1.1    1.3      1.4   1.5   1.7    1.4    1.4   1.6
              0.8   0.9
            1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

                          Annuities       DB Plans      DC Plans        Govt Plans       IRAs

Source: Insurance Information Institute, Investment Company Institute
        Drivers of DOL Initiatives
Indirect Compensation
   Form 5500/Schedule C revisions
   Service provider disclosures for retirement plans
   Participant disclosure
   Service provider disclosures for welfare plans
   Consultant/Adviser Project

Reconsider/Update Prior Policies


•   New ERISA Disclosure Requirements
•   Proposed ERISA Fiduciary Redefinition:
    Status and Consequences
•   Roadmap to ERISA Compliance

       New ERISA Disclosure Requirements
                          First day of first plan year beginning on or after 11/1/2011

                      11/1/2011    1/1/2012    4/1/2012       7/1/2012       10/1/2012

Plan-level service
provider disclosure

Initial participant
                                  5/31/2012                  8/30/2012      11/30/2012

Initial quarterly
participant                       8/14/2012                  11/14/2012      2/14/2013

            Plan-Level Disclosure
Must provide disclosure if providing services in ERISA
401/403(b) retirement market (not applicable in IRA market):

A.   As ERISA fiduciary or RIA directly to plan or ERISA
     fiduciary to plan asset vehicle in which plan directly holds
     an equity interest
B.   As recordkeeper/broker providing at least one investment
     option to participant-directed plan
C.   As specified service provider that receives/reasonably
     expects indirect compensation
      •     Investment consulting
      •     Investment advisory
      •     Securities or other investment brokerage

             Plan-Level Disclosure
Disclosure requirements
•   Description of services
•   Statement of ERISA fiduciary status
•   Compensation
    •   Direct and indirect compensation
    •   On termination
    •   Manner of receipt
•   Unbundled cost of recordkeeping (if applicable)
•   Designated investment option disclosures, from
    recordkeeper/broker or from fiduciary to plan asset vehicle

            Participant Disclosure
Plan administrator to participant-directed ERISA 401/403(b)
plan must:

•   Provide quarterly statements of plan fees and expenses
    deducted from participant accounts
•   Provide plan and investment disclosure, prior to initial plan
    investment and at least annually thereafter
•   Use prescribed methodologies when calculating and
    disclosing expense and return information about
•   Use Model Comparative Chart or similar format
•   Provide access to certain additional investment information
    when received by the plan or on request

          Proposed Fiduciary Redefinition
•   October 31, 1975 – DOL “final” rule defining “fiduciary”
•   June 11, 1996 - Interpretive bulletin relating to 401(k) participant
    investment education.
•   August 17, 2006 – Pension Protection Act (PPA) investment advice
•   July 21, 2010 – Dodd-Frank Wall Street Reform and Consumer
    Protection Act includes SEC study
•   October 22, 2010 – DOL proposes new “fiduciary” definition
•   January 2011 – SEC study on Investment Advisers and Broker-Dealers
•   September 19, 2011 – DOL to re-propose a new definition of “fiduciary” in
•   October 2011 – DOL Final Rule on PPA investment advice

      Definition of Investment Advice
      Fiduciary Proposed Regulation
Services triggering advice fiduciary:

  •    Advice, appraisal or fairness opinion about the value of

  •    Recommendations about whether to invest in, purchase
       or sell securities

  •    Advice/recommendations as to the management of
       securities, including recommending investment

          Definition of Investment Advice
          Fiduciary Proposed Regulation
Status triggering advice fiduciary:

Service provider who directly or together with or through an affiliate:

   •   Represents or acknowledges fiduciary status

   •   Is otherwise an ERISA fiduciary (e.g., investment manager)

   •   Is a registered investment adviser, or

   •   Has an agreement, arrangement or understanding with the plan,
       participant, or individual that the advice “may be considered” in
       connection with plan investments, and will be individualized.

         Definition of Investment Advice
         Fiduciary Proposed Regulation

Seller’s Limitation –Recipient knows or should know provider is a
“seller” and provider’s interests are “adverse” to advice recipient.
Unavailable if provider has acknowledged “fiduciary status” orally or in
writing. May not be available for agency-based transactions.

Investment education & Investment platforms – participant
directed individual account plans only.

Valuations provided to comply with reporting requirements (e.g. 5500
reporting, participant statements). Not available if valuation used as
a basis for plan distributions.

    Definition of Investment Advice
    Fiduciary Proposed Regulation

•   Fiduciary duties—place interest of the plan over your own –
    but only for ERISA accounts

•   Compensation from rollovers may be prohibited

•   Personal liability for breach of duties – but only for ERISA

•   Prohibited transactions

    Definition of Investment Advice
    Fiduciary Proposed Regulation

•   Receipt of “additional” compensation as a result of fiduciary
    advice is prohibited under ERISA/Code unless exemption

•   Result: investment advice fiduciary must receive level
    compensation approved by plan (or other independent
    fiduciary) or fit within an exemption

      Definition of Investment Advice
      Fiduciary Proposed Regulation
Exemptions for the receipt of variable compensation:

PTE’s: 75-1 (principal trades, unaffiliated mutual funds), 84-24
(affiliated mutual funds, annuities), 86-128 (agency trades,
unaffiliated mutual funds)

All have specific conditions and only exempt certain
compensation types

     Definition of Investment Advice
     Fiduciary Proposed Regulation
Other alternatives means of compliance:

SunAmerica Letter—financial intermediary can receive variable
compensation that is not result of financial intermediary’s

DOL Interpretative Bulletin 96-1 related to investment
education safe harbor: Limit activity to participant investment
education—investment information is not specific to participant,
no investment recommendations

                Consequences of
              Proposed Regulations
•   Investment Advice Fiduciary cannot recommend a product
    that pays more compensation than another.

•   Scope of rule would potentially impact non-IRA
    recommendations, cross-marketing?

•   IRAs must be sold through “wrap” accounts or no service

•   Annuities and other products that can’t be sold in wrap
    accounts can’t be sold.

                  Impact upon retail investors: Illustrative Examples
Example 1: DOL Fiduciary Regulations vs. Securities Laws
• Broker working with 25 year-old IRA Owner in a Mutual Fund Account
• She asks her broker to help her diversify her account
 • Remember: If a fiduciary recommends an investment product that pays her more, that fiduciary would be
   committing a self-dealing prohibited transaction; on the other hand, if the broker recommends the product that
   pays him the least, that might not be a suitable investment
Example 2: DOL Fiduciary Regulations vs. Non-Qualified Accounts
• Client wants to use his three (3) brokerage accounts to save for his eventual retirement:
      • Self-directed brokerage window through his employer’s 401(k) plan
      • IRA brokerage account funded from a rollover from his former employer
      • A non-qualified brokerage account funded with after-tax savings
• Broker recommends a stock for NQ brokerage account and client purchases it but funds IRA instead.
• Is the Broker a fiduciary?
Example 2A: DOL Fiduciary Regulations vs. Non-Qualified Accounts
• Client wants to purchase a municipal bond for his IRA brokerage account funded from a rollover
• Broker advises as to taxable consequences
• Is the Broker a fiduciary?

                 Impact upon retail investors: Illustrative Examples
Example 3: DOL Fiduciary Regulations vs. Guaranteed Lifetime Income
• Examples 1 and 2 show that brokers will be unable to sell mutual funds or service commission-based accounts
  holding ERISA or IRA assets.
• Instead clients will be obligated to establish an advisory wrap account where the broker can be paid an asset-
  based fee
• Annuities are not usually sold in wrap accounts for various reasons
       • Clients tend to hold annuity investments for a longer period of time
       • Instead of an IRA owner paying a 5% fee once up-front, she might pay 1% per year for 20 years
       • An ongoing advisory fee may not be appropriate
Example 4: DOL Fiduciary Regulations vs. Small Business Owners
• Small employer wants to set up a 401(k) plan for her employees
• Asks broker to help her decide on investments and services
• Finds out that before regulations, she could have paid for it through commissions on investments and now must
  pay a substantial up-front advisory fee to set up the plan
• Must decide between spending her money on investment in her business versus starting a 401(k) plan

            Advice Exemption for
             Qualified Accounts
•   Applies to participant/IRA owner level non-discretionary
    advice only

•   Allows provision of advice through level fee or computer
    model arrangement

•   Level fee arrangement does not require level fees at
    affiliate level

•   Extensive disclosure, procedural and audit requirements

            Advice Exemption for
             Qualified Accounts
Expected Impact:


•   Sun-America Opinion contains far fewer requirements for
    those inclined to use a computer model.

•   Fee-leveling exemption contains too many conditions, not
    enough relief

                  2012 and Beyond

•   DOL Fiduciary “Re-Proposal”

•   DOL claims early 2012

    •   May include PT exemption specific to revenue sharing

    •   May include other PT exemptions

    •   Will continue to apply to IRAs

       Impact Analysis of New Regulations
•   Increased DOL enforcement
•   Disclosures create a roadmap for regulators and potential plaintiffs
•   Unless an exemption applies, potentially conflicted advisers (unlevel
    12(b) fees, broker-dealer revenue sharing, affiliated funds, etc.) will
    have to limit investment-related functions to monitoring and education,
    and plan sponsors will be on notice of such limitations
•   Bottom-up pressure on fees and services from participants
•   Potential issues with solicitor programs and TPAM revenue sharing
    under proposed definition
•   Potential prohibited transaction exposure for fiduciaries who cross-sell
    and capture IRA rollovers

                     Cross-Selling & Prohibited
                                 Most Protection*            Proceed with Caution*              Most Risk

Is the Adviser Rendering    No; individualized advice      Yes; individualized advice
Investment Advice to the    is not provided to the plan;   is provided to the plan
Plan Sponsor?               the adviser provides only      sponsor.
                            education and non-
                            fiduciary support.

Is the Adviser Rendering    No; adviser’s role is          No; adviser’s role is        Yes; the adviser should
Investment Advice to Plan   limited to investment          limited to investment        refrain from capturing
Participants?               education and                  education and                rollovers or engaging in
                            standardized materials are     standardized materials       other cross-selling activity
                            used.                          are used.                    and existing arrangements
                                                                                        should be examined for

                            * For maximum protection,      * For maximum protection,
                            consider “outsourcing”         consider “outsourcing”
                            advice to a third party.       advice to a third party.

           Roadmap to ERISA Compliance
1.    Determine which accounts are “covered” plans under the new regulations.
2.    Determine whether the services provided are “covered” by the new
3.    Evaluate the impact of covered services on fiduciary status.
4.    Analyze all arrangements for compensation received in connection with
      covered services for prohibited transactions.

Section 406(b) of ERISA prohibits a fiduciary with respect to a plan from:

      a) dealing with assets of the plan in his own interest or for his own
      b) acting on behalf of or representing a party dealing with the plan in a
         transaction involving the assets of the plan; or
      c) receiving any consideration for his own personal account from any party
         dealing with the plan in connection with a transaction involving the assets of
         the plan.
        Roadmap to ERISA Compliance
5.   Determine whether PT Exemptions are available, for example;

     2006-16    Loans of Securities by Plans
     2002-12    Cross-Trades of Securities
     1997-11    Relationship Brokerage
     1996-23    In-House Professional Asset Managers
     1986-128   Agency Transactions Executed by Fiduciary BDs
     1984-46    Recapture of Commissions Re Ins. Co. Pooled

     Separate Accounts
     1982-63 Provision of Securities Lending Services
     1979-13 Closed-End Mutual Fund In-House
     1979-01 Broker-Dealer Agency Transactions
     1977-04 Open-End Mutual Funds Investment Adviser
     1975-01 Securities Transactions
         Roadmap to ERISA Compliance
6.    Amend the firm’s policies and procedures to comply with ERISA;
7.    Develop disclosures describing covered services that align with the
      firm’s desired posture, including an acknowledgement of fiduciary status
      under ERISA and/or the Investment Advisers Act if/where required;
8.    Determine how to obtain the compensation-related information required
      to be disclosed;
9.    Develop procedures to ensure effective delivery of the disclosures and
      required updates when there is a change in covered services or
      compensation; and
10.   Educate home office and field personnel on the new requirements and
      any changes to the firm’s policies and procedures.

                Filling the Advice “Gap”
•   ERISA 402(c)(3) allows Plan Fiduciaries to delegate responsibility for
    managing, acquiring and disposing of plan assets (e.g., the plan’s DIAs) to an
    “investment manager” that meets the requirements of Section 3(38) of ERISA.
•   The term “investment manager” means any fiduciary (other than a trustee or
    named fiduciary) that has the power to manage, acquire, or dispose of any
    asset of a plan; is an RIA, bank or certain types of insurance companies; and
    has acknowledged fiduciary status in writing.
•   ERISA 405(d)(1) provides that if an investment manager is properly appointed,
    then “no trustee shall be liable for the acts or omissions of such investment
    manager or managers, or be under an obligation to invest or otherwise
    manage any asset of the plan which is subject to the management of such
    investment manager.”
•   In other words, so long as the plan fiduciaries prudently select and monitor a
    3(38) manager, they are not liable for any losses in investments that are
    managed by the 3(38) manager.

            Redefining Value Beyond Investments

                   Non-Fiduciary Services Post Fee Disclosure

•   Disclosure Support – assisting sponsors with selection and monitoring of
    service providers through education, process, benchmarking, and vendor
•   Participant inquiry support – risk management through education and
•   Committee support – assist in the formation of effective committees beyond
    investment (only through education,) process and document retention;
•   Outcome orientated enrollment and education – driving and reporting on
    participant successes through education, retirement income planning,
    monitoring, and reporting; and
•   Exam readiness support – introduction of exam ready approach to fiduciary
    file maintenance through education, process and mock exams.

                BDs, RIAs, TPAs and Recordkeepers

       Disclosures provided “reasonably in advance” of entering
       into a service contract/agreement, but no later than April
       2012. For changes to the disclosed information, notification
       is required as soon as practicable, but no later than 60
       days from the date the covered service provider is notified
       of such change.

                      PLAN SPONSOR
                                         Disclosures provided on or before
Disclosures provided annually.           first ability to direct investments
                                         and at least annually thereafter.



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