The Effect of the Pension Protection Act of 2006 ' 408(b)(2)

The Pension Protection Act of 2006 seeks to unwind this process and ' 408(b)(2) was introduced to expose the manner in which all these fees and expenses were layered into a plan and to allow for the process of categorizing these fees and benchmarking them. The stated intended result for the Department of Labor, EBSA, and the IRS is to survey and monitor a fairly closed (almost hidden) process while allowing for plan fiduciaries and representatives the opportunity to finally understand their plans' fee structures and begin to make the necessary adjustments to the plans in the best interest of plan participants.

Current Landscape

While this may sound like a noble intent, and the attempt would be a good beginning for plan sponsors and plan fiduciaries, there is a little more to the process and the reality of the current state of affairs. Corporate retirement plans at best have a presence of indifference: to the plan structure, its processes, to the composition and performance of its investments, to participant education, communication, and participation.

Fiduciary ignorance and subsequent fiduciary breaches within the plans are at an all-time high. The reason: Service provider representatives and sales people are advising largely amateur and uneducated plan fiduciaries and decision-makers with no real fear of any real consequence. Financial advisers to plans don't have a clear set of monitored roles and responsibilities for a commensurate level of compensation, and the vast majority of these advisers are not what ' 404 dictates as “prudent experts” in the retirement plan space. Many are life insurance agents, health insurance agents or stock brokers with affiliation to the plan sponsor.

The new law also states that if excessive fees and expenses are found through audit, the difference over and above “reasonable” amounts will have to be paid back to the plan and its participants, and fines could be imposed on financial advisers and plan sponsors.

Unintended Results

While speaking to vast numbers of plan sponsors over the past 18 months in advance of the rollout of the new laws, I have found that three major themes present themselves:

1. The plan sponsors act much like the ostrich that sticks its head in the ground. They are under the impression that a plan audit won't happen to them, or an employee would never question anything about their retirement program, much less seek out an attorney.
2. A certain “wishful delusion” sets in when plan sponsors are given this new regulatory information. They turn to their “trusted” financial adviser who quickly points out to them that they have nothing to be concerned with. Misplaced trust outweighs objective information and nothing happens.
3. Plan sponsors overreact and begin a discussion of what would be the best way to eliminate their current programs to make the problems disappear. Options such as no retirement plan or payroll deduction IRAs come up, and these distractions make it difficult to have any further meaningful discussion on how to manage the new landscape.

I'm sure these are not the desired results that lawmakers had in mind when considering pension and disclosure reform, but nonetheless, they represent real reactions to changes in the law and regulatory practice.

New Paradigm

It's time for the retirement plan industry and its practitioners to take a fresh look at where we are, what we have to work with, and where we need to go in order to make real, necessary changes in how retirement plans function and serve the desired population. First of all, the 401k plan, as suggested by many in politics, is not broken. It simply has never been used properly.

The 401k was never meant to be the all-encompassing replacement for the defined benefit retirement plan. There has been a mass exodus from the plans that were sponsored and completely funded by companies, to the plan that was funded by the employees with a small carrot (corporate matching contribution). These plans today have been all but forgotten as the vast majority of these plans in the state retirement systems are drastically underfunded and in great need of supplementation.

From the corporate viewpoint, the switch to 401k popularity represented a major paradigm shift (and large cost savings to employers). The ugly truth was that employees who didn't understand the mechanics and workings of defined benefit plans completely bought into a program where they deferred their own money and got a corresponding match smaller than their contribution as “free” money from their employer.

The next paradigm shift needed today is one where there is a more paternal approach by the employer (not the government) to make sure the current 401k program has the proper construction and funding, efficacious monitoring and oversight of plan processes, procedures, and investments coupled with quality employee communication and education.

A new and improved version of the company 401k plan would have the following characteristics and results:

High Participation ' Participants who are educated and “touched” consistently in a quality manner participate at higher rates.

Greater (Increasing) Participation ' Consistent education creates trust and spurs participants to increase their contributions in an ongoing fashion.

Proper Asset Allocation ' Quality education of participants increases the likelihood that the asset allocation tools, models and Target Date funds will be utilized.

Re-Balancing ' Effective communication increases the chances that proper re-balancing will occur within participant accounts.

Goal Orientation ' Working with plan sponsors and participants on different levels promotes the satisfaction of meeting proper goals for the plan and retirement accumulation results.

Fee Sensitive ' Continuous fee benchmarking and monitoring the selection/de-selection of plan investments gives participants confidence that the plan sponsor is acting on their behalf.

New Fiduciary Model

Nothing creates more tension in the current environment than mentioning the word “fiduciary.” Fiduciary could be the most over-used and least understood word in retirement plan circles today. The first thing to understand is that there have been roles and responsibilities for fiduciaries of retirement plans since ERISA was enacted in 1974. The changes brought about by Dodd-Frank Financial Regulatory Reform and the Pension Protection Act of 2006 are minor when compared with what ERISA was passed to do. Our issue is that we have let time put distance between all of us and what ERISA states.

An ERISA qualified plan fiduciary (of which there are a few types) is held to a different standard than those who act as service providers (i.e., record-keeper, custodian) to plans and persons of interest (i.e., accountant or attorney) in plans. Without going into a mountainous amount of detail, simply put, a fiduciary is directed to: “act solely in the interests of participants and beneficiaries.” This pertains to plan construction and development, plan processes and procedures, communication and education, as well as investments.

What is different today is that the new laws require that plan fiduciaries are to put their roles and responsibilities in writing. They are also to disclose any direct or indirect compensation they receive for their service to a plan if there is any. This will provide disclosure to the plan sponsor and plan participants as to exactly who is and who is not a fiduciary under their plan. This will also provide the compensation received for services performed (or not performed). What's also new is the amount and level of disclosure that will not only be provided to plan sponsors but also plan participants. Most of this new information will come by the end of the third quarter of 2012 with plan and participant statements from plan sponsors. It is yet to be seen how this new disclosure will be taken as participants see for the first time, just how plan fees and expenses affect their retirement plan. How this affects your own firm, partners and employees is that it also represents an opportunity for employers (and plan sponsors) to reach out to their employees and plan participants and meet this challenge head on. The question is: Will they?

Fiduciary Responsibility And Liability: Outsource?

One of the major considerations of the past several years culminating in the “perfect storm” that Dodd-Frank and the Pension Protection Act of 2006 and some other regulatory changes have created is: Do plan sponsors outsource fiduciary responsibility and liability, mitigate it, or just wait and see what happens? This question has given rise to growth in the number of fiduciary insurance programs, fiduciary warranties, independent fiduciary practitioners, multiple employer plans that cede some fiduciary responsibility from employers, as well as fiduciary breach lawsuits.

With lawsuits increasing even prior to the implementation of the new laws, it would seem prudent that as an employer or plan sponsor, managing partners or committees at law firms should at least assess the level of fiduciary risk that they face with their firm's retirement plans and do some audit or analyses of their plans, plan documents, plan processes and procedures, plan investments and service providers, parties in interest and its fiduciaries in order to measure exposure. When this assessment is complete, it will give the employers or plan sponsor at least some foundation on which to seek advice relating to a plan of action regarding the desired level of exposure they are willing to bear in each area. One thing is certain, in a firm in which the employer sponsors a retirement plan, the people at risk in the company are, at the least, the trustees of the plan and the board of directors, and their potential liability is of a personal nature.

Summary

In conclusion, the world is certainly one of great change where corporate retirement plans are concerned. In order for firms that offer employees retirement plans to protect themselves and their managing partners or committees, an annual retirement plan review performed by a competent expert in the field, with emphasis on issues surrounding plan governance, plan investments, processes and procedures would be a prudent investment. The changing landscape certainly isn't a place to run for cover from, but it also isn't a place to ignore what is going on around all of us.

Charles B. Blanton, Jr., CLU, ChFC, AIF, RF, GFS, is the principal of Independent Fiduciary Consulting, LLC, a Jacksonville, FL based firm. He works with employers and qualified plan sponsors in the areas of fiduciary compliance and investment consulting. He has also worked with and educated financial advisers in the qualified plan arena since 1985.

With the effective date (July 1, 2012) upon us, the uproar surrounding the new disclosure regulations affecting retirement plans is beginning to gain momentum as the definitive question continues to be asked: Will the Pension Protection Act's ' 408(b)(2) be a much-needed addition to the process surrounding opening the veil to plan expenses or will it simply cause further damage to an already weak overall retirement solution for millions of Americans? How do the regulatory changes affect your firm and its approach to retirement plan oversight?

Background

As an answer to the indiscretions of many major corporations in the late 90s and early 2000s (ADT, Enron, Adelphia among others), the Department of Labor has had disclosure reform at the forefront of its campaign to unravel the mystery behind employee benefits such as the corporate retirement plan. With advertising expenses, 12b-1 fees, commissions, revenue-sharing, and direct and indirect compensation being morphed into the undefined ball known as plan fees and expenses, it has never been very clear, even to the most savvy of financial experts, just how to break down fees as necessary or unnecessary, reasonable or excessive, prudent or imprudent.

The Pension Protection Act of 2006 seeks to unwind this process and ' 408(b)(2) was introduced to expose the manner in which all these fees and expenses were layered into a plan and to allow for the process of categorizing these fees and benchmarking them. The stated intended result for the Department of Labor, EBSA, and the IRS is to survey and monitor a fairly closed (almost hidden) process while allowing for plan fiduciaries and representatives the opportunity to finally understand their plans' fee structures and begin to make the necessary adjustments to the plans in the best interest of plan participants.

Current Landscape

While this may sound like a noble intent, and the attempt would be a good beginning for plan sponsors and plan fiduciaries, there is a little more to the process and the reality of the current state of affairs. Corporate retirement plans at best have a presence of indifference: to the plan structure, its processes, to the composition and performance of its investments, to participant education, communication, and participation.

Fiduciary ignorance and subsequent fiduciary breaches within the plans are at an all-time high. The reason: Service provider representatives and sales people are advising largely amateur and uneducated plan fiduciaries and decision-makers with no real fear of any real consequence. Financial advisers to plans don't have a clear set of monitored roles and responsibilities for a commensurate level of compensation, and the vast majority of these advisers are not what ' 404 dictates as “prudent experts” in the retirement plan space. Many are life insurance agents, health insurance agents or stock brokers with affiliation to the plan sponsor.

The new law also states that if excessive fees and expenses are found through audit, the difference over and above “reasonable” amounts will have to be paid back to the plan and its participants, and fines could be imposed on financial advisers and plan sponsors.

Unintended Results

While speaking to vast numbers of plan sponsors over the past 18 months in advance of the rollout of the new laws, I have found that three major themes present themselves:

1. The plan sponsors act much like the ostrich that sticks its head in the ground. They are under the impression that a plan audit won't happen to them, or an employee would never question anything about their retirement program, much less seek out an attorney.
2. A certain “wishful delusion” sets in when plan sponsors are given this new regulatory information. They turn to their “trusted” financial adviser who quickly points out to them that they have nothing to be concerned with. Misplaced trust outweighs objective information and nothing happens.
3. Plan sponsors overreact and begin a discussion of what would be the best way to eliminate their current programs to make the problems disappear. Options such as no retirement plan or payroll deduction IRAs come up, and these distractions make it difficult to have any further meaningful discussion on how to manage the new landscape.

I'm sure these are not the desired results that lawmakers had in mind when considering pension and disclosure reform, but nonetheless, they represent real reactions to changes in the law and regulatory practice.

New Paradigm

It's time for the retirement plan industry and its practitioners to take a fresh look at where we are, what we have to work with, and where we need to go in order to make real, necessary changes in how retirement plans function and serve the desired population. First of all, the 401k plan, as suggested by many in politics, is not broken. It simply has never been used properly.

The 401k was never meant to be the all-encompassing replacement for the defined benefit retirement plan. There has been a mass exodus from the plans that were sponsored and completely funded by companies, to the plan that was funded by the employees with a small carrot (corporate matching contribution). These plans today have been all but forgotten as the vast majority of these plans in the state retirement systems are drastically underfunded and in great need of supplementation.

From the corporate viewpoint, the switch to 401k popularity represented a major paradigm shift (and large cost savings to employers). The ugly truth was that employees who didn't understand the mechanics and workings of defined benefit plans completely bought into a program where they deferred their own money and got a corresponding match smaller than their contribution as “free” money from their employer.

The next paradigm shift needed today is one where there is a more paternal approach by the employer (not the government) to make sure the current 401k program has the proper construction and funding, efficacious monitoring and oversight of plan processes, procedures, and investments coupled with quality employee communication and education.

A new and improved version of the company 401k plan would have the following characteristics and results:

High Participation ' Participants who are educated and “touched” consistently in a quality manner participate at higher rates.

Greater (Increasing) Participation ' Consistent education creates trust and spurs participants to increase their contributions in an ongoing fashion.

Proper Asset Allocation ' Quality education of participants increases the likelihood that the asset allocation tools, models and Target Date funds will be utilized.

Re-Balancing ' Effective communication increases the chances that proper re-balancing will occur within participant accounts.

Goal Orientation ' Working with plan sponsors and participants on different levels promotes the satisfaction of meeting proper goals for the plan and retirement accumulation results.

Fee Sensitive ' Continuous fee benchmarking and monitoring the selection/de-selection of plan investments gives participants confidence that the plan sponsor is acting on their behalf.

New Fiduciary Model

Nothing creates more tension in the current environment than mentioning the word “fiduciary.” Fiduciary could be the most over-used and least understood word in retirement plan circles today. The first thing to understand is that there have been roles and responsibilities for fiduciaries of retirement plans since ERISA was enacted in 1974. The changes brought about by Dodd-Frank Financial Regulatory Reform and the Pension Protection Act of 2006 are minor when compared with what ERISA was passed to do. Our issue is that we have let time put distance between all of us and what ERISA states.

An ERISA qualified plan fiduciary (of which there are a few types) is held to a different standard than those who act as service providers (i.e., record-keeper, custodian) to plans and persons of interest (i.e., accountant or attorney) in plans. Without going into a mountainous amount of detail, simply put, a fiduciary is directed to: “act solely in the interests of participants and beneficiaries.” This pertains to plan construction and development, plan processes and procedures, communication and education, as well as investments.

What is different today is that the new laws require that plan fiduciaries are to put their roles and responsibilities in writing. They are also to disclose any direct or indirect compensation they receive for their service to a plan if there is any. This will provide disclosure to the plan sponsor and plan participants as to exactly who is and who is not a fiduciary under their plan. This will also provide the compensation received for services performed (or not performed). What's also new is the amount and level of disclosure that will not only be provided to plan sponsors but also plan participants. Most of this new information will come by the end of the third quarter of 2012 with plan and participant statements from plan sponsors. It is yet to be seen how this new disclosure will be taken as participants see for the first time, just how plan fees and expenses affect their retirement plan. How this affects your own firm, partners and employees is that it also represents an opportunity for employers (and plan sponsors) to reach out to their employees and plan participants and meet this challenge head on. The question is: Will they?

Fiduciary Responsibility And Liability: Outsource?

One of the major considerations of the past several years culminating in the “perfect storm” that Dodd-Frank and the Pension Protection Act of 2006 and some other regulatory changes have created is: Do plan sponsors outsource fiduciary responsibility and liability, mitigate it, or just wait and see what happens? This question has given rise to growth in the number of fiduciary insurance programs, fiduciary warranties, independent fiduciary practitioners, multiple employer plans that cede some fiduciary responsibility from employers, as well as fiduciary breach lawsuits.

With lawsuits increasing even prior to the implementation of the new laws, it would seem prudent that as an employer or plan sponsor, managing partners or committees at law firms should at least assess the level of fiduciary risk that they face with their firm's retirement plans and do some audit or analyses of their plans, plan documents, plan processes and procedures, plan investments and service providers, parties in interest and its fiduciaries in order to measure exposure. When this assessment is complete, it will give the employers or plan sponsor at least some foundation on which to seek advice relating to a plan of action regarding the desired level of exposure they are willing to bear in each area. One thing is certain, in a firm in which the employer sponsors a retirement plan, the people at risk in the company are, at the least, the trustees of the plan and the board of directors, and their potential liability is of a personal nature.

Summary

In conclusion, the world is certainly one of great change where corporate retirement plans are concerned. In order for firms that offer employees retirement plans to protect themselves and their managing partners or committees, an annual retirement plan review performed by a competent expert in the field, with emphasis on issues surrounding plan governance, plan investments, processes and procedures would be a prudent investment. The changing landscape certainly isn't a place to run for cover from, but it also isn't a place to ignore what is going on around all of us.

Charles B. Blanton, Jr., CLU, ChFC, AIF, RF, GFS, is the principal of Independent Fiduciary Consulting, LLC, a Jacksonville, FL based firm. He works with employers and qualified plan sponsors in the areas of fiduciary compliance and investment consulting. He has also worked with and educated financial advisers in the qualified plan arena since 1985.