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401(k)plans

Six Disclosure Guidelines for 401(k) Plans

1. Services Disclosure

The service provider must describe its services to the plan. The regulation requires that the disclosures be made to the "responsible plan fiduciary," who is the person with
the power to hire and fire the service provider on behalf of the plan. For small plans, that is typically the plan sponsor, often represented by the president of the company (or
other key officers, or an owner or partner). For mid-sized and large plans, it is usually a plan committee.

The description should have enough detail that you can determine if the provider is delivering the services you expect and need for your plan. If you need more information,
ask for it. In the preamble to the regulation, the DOL makes a point of saying that fiduciaries are responsible for asking for additional information if they need it to properly
evaluate the services and the compensation.

2. Fiduciary Status Disclosure

A statement from the service provider that it is or is not acting in the role of a ERISA fiduciary, and if whether or not the service provider is a registered investment adviser. If the
service provider "reasonably expects" to be a fiduciary to your plan, it must affirmatively say that it is. For example, if an adviser is making recommendations regarding the
selection and monitoring of the plan's investments, it is most likely serving as a fiduciary to the plan and, under the 408(b)(2) regulation, must tell you in writing that he is. On the
other hand, if a service provider is not acting as a fiduciary, it is not required to state that. Thus, if a provider is silent on the issue, you can assume that it is not acting as a fiduciary.

3. Compensation Disclosure

The third disclosure is compensation. Compensation is defined very broadly. It is anything of monetary value, such as gifts, awards, trips, etc. (However, non-monetary compensation totaling $250 or less does not need to be reported to you.) It also includes certain payments to affiliates or subcontractors of your provider (that is, if the payments are transactional, like commissions, or if they are charged directly against the investments).

In the preamble to the regulation, the DOL makes a point that, in addition to determining the reasonableness of compensation, those payments may indicate conflicts of interest that the fiduciaries must evaluate. Compensation is divided into four categories: direct, indirect, related parties and termination.

> Direct compensation: This category covers any payments made directly from the plan or trust. For example, if a service provider sends you a bill and you pay it from plan assets, that is direct compensation.

> Indirect compensation: This category covers all payments from any source other than directly from the plan or the plan sponsor. While direct compensation is fully transparent (e.g., a bill is presented to the plan, reviewed, authorized and paid), indirect compensation was not previously required to be disclosed to plan sponsors. As a result, one of the main reasons for the 408(b)(2) regulation is to make sure fiduciaries are receiving information about indirect compensation.

> Compensation among related parties: As a general rule, your service provider does not need to break out its revenue to show how much each of its affiliates and subcontractors is receiving. However, the DOL believes that you, as the responsible plan fiduciary, need detailed information on certain types of compensation. As a result, to the extent that an affiliate or subcontractor receives "transaction compensation" (such as commissions or incentive compensation based on business placed or retained with your plan) or compensation "charged directly" against the investments (such as 12b-1 fees that might be paid to a recordkeeper or broker-dealer), those types of compensation must be broken out and reported to you separately. The disclosure will tell you how much (as a dollar amount or formula) they are getting, who is paying it and what it is for.

> Compensation on termination: This requires a description of any amounts the plan must pay if the arrangement is terminated. It also includes the treatment of prepaid amounts, i.e., whether they will be prorated if the agreement is terminated and how that will happen. It also includes charges that may be imposed if the plan terminates the service provider or removes an investment (e.g., surrender charges).

> Manner of receipt: The disclosures must also specify how the compensation will be paid. Will the plan be billed? Will it be deducted from the participant's accounts or investments?

4. Recordkeeper Disclosures

> Recordkeeper disclosures: Your recordkeeper will need to make additional disclosures. The recordkeeper, or bundled providers that include recordkeeping services, will need to: Describe all direct and indirect compensation it receives; and if its compensation is offset or rebated, or otherwise adjusted, for any compensation it, or its affiliates or subcontractors, receives.

Recordkeepers must provide a reasonable estimate of what it would charge your plan without those factors. In other words, you must receive a clear statement about what you are paying for recordkeeping—directly, indirectly and through credits for proprietary investments and products. As a fiduciary, your plan committee must then evaluate the reasonableness of the total charges, credits and compensation for these services. The two primary independent methods for doing that analysis are through an RFP (request for proposal) process or a benchmarking service that identifies an appropriate peer group of plans (based primarily on total assets and number of participants).

5. Plan Investments Disclosure

Special disclosures will be made to you concerning your plan's investments. Those are:

> Transaction compensation: Fees that are charged against the investments for, e.g., commissions, redemption fees, surrender charges. Operating expenses: Charges against the investments for their ongoing operation. e.g., expense ratios.

> Other ongoing expenses: Items such as wrap fees, mortality and expense fees.

6. Timing Disclosure

The written disclosures for your current providers must be given by April 1, 2012. Thereafter, as you seek to hire new or additional providers, the disclosures must be given to you reasonably in advance of the time at which the arrangement is entered into. "Reasonably" means that you need time to study the materials and make informed decisions before you sign the agreement. For a straightforward arrangement, that may be just a few days. For a more complex agreement, you may need longer. As a word of advice, make sure these disclosures and the service agreements are reviewed by an experienced benefits attorney. The documents often include provisions that would be unacceptable to a prudent fiduciary, if the fiduciary were aware of them.


401(k)plans

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