Jon Chambers

Try CyberActuaries, Inc. at 760-200-9277, or http://www.CyberActuaries.com.

Moe, the penalties described above are IRS levies. It is also possible that the DOL could require the advisor to repay the plan all fees paid, plus a 20% civil penalty.

Let's assume that the investment advisor is a disqualified person, and consequently, the investment advisor's compensation constitutes a prohibited transaction (PT). For all transactions occurring after 8/5/97, the Code imposes a 15% penalty tax on a disqualified person for each year or part thereof that the transaction remains uncorrected. Thus (for example), the tax would equal 15% of the 1997 PT compensation for 1997, 15% for 1998, 15% for 1999, 15% for 2000 and 15% for 2001. A similar fact pattern would apply to 1998 PT compensation. Finally, the IRS can impose an additional tax of 100% of the uncorrected PT. I would observe (without any legal argument) that the issue may turn on who pays the compensation. If the compensation is paid from plan assets, it's almost certain that there is a PT issue. If the employer is paying the advisory fee, there may or may not be a PT. I'd suggest contacting legal counsel for a definitive opinion on the matter.

OK pax, I did copy from the following website: http://www.dol.gov/dol/pwba/public/adcoun/srvpro.htm but the cited stuff, which was relevant to the question, is buried in the text. You caught me!

In my opinion, revenue sharing is just a way to shift fees to participants, when those fees could have been paid by participants anyway. In most cases, you could find a low cost fund that would provide better expected returns than the revenue share fund, pay plan expenses from plan assets as a direct charge, and come out better off than if you had used the revenue share fund. And 12b-1 fees aren't capped at 0.75%--I've seen plenty at 1.00%, and some may be higher still. Revenue sharing introduces a host of fiduciary and disclosure issues that are typically not well understood by most plan sponsors (or by most providers for that matter). In 1997, the DOL issued two Advisory Opinion letters, 97-15A ("Frost") and 97-15B ("Aetna") outlining when these revenue sharing arrangements might become prohibited transactions, and what disclosure was required to avoid PT concerns. I've seen numerous revenue share programs; very few meet the standards outlined in the Advisory Opinion letters. In general, I suggest that sponsors should keep revenue share to a minimum--the problem is that as assets increase, any fee expressed as a percent of assets also increases, and before long, the cost may lose all relationship to the service provided.

I don't see why not, but why would the plan want to accept rollovers from former participants? To build assets for economies of investment scale?

Here are a series of questions that the DOL's ERISA Advisory Committee suggests that should be asked: A. ISSUES FOR FIDUCIARIES WHO ARE HIRING A SERVICE PROVIDER 1) What service or expertise does the plan need? Is the service or expertise necessary and/or appropriate for the functioning of the plan? 2) Does this service provider propose to provide the service that is necessary or appropriate for the plan? 3) Does this service provider have the objective qualifications to properly provide the service that is necessary and/or appropriate for the plan? Generally, the fiduciary should seek the following information that will vary with the type of service provider being retained: n business structure of the candidate n size of staff n identification of individual who will handle the plan's account n education n professional certifications n relevant training n relevant experience n performance record n references n professional registrations, if applicable n technical capabilities n financial condition and capitalization n insurance/bonding n enforcement actions; litigation n termination by other clients and the reasons 4) Are the service provider's fees reasonable when compared to industry standards in view of the services to be performed, the provider’s qualifications and the scope of the service provider's responsibility? 5) Does the plan have a conflict of interest policy that governs business and personal relationships between fiduciaries and service providers and among service providers? Does the plan require disclosure of relationships, compensation and gifts between fiduciaries and service providers and among service providers? 6) Does a written agreement document the services to be performed and the related costs? B. ADDITIONAL ISSUES WHEN HIRING AN INVESTMENT MANAGER 1) Does the Plan have a Statement of Investment Policy? Some or all of the following issues may be addressed by a Statement of Investment Policy: (See Department of Labor Interpretive Bulletin 94-2.) n Evaluation of the specific needs of the plan and its participants n Statement of investment objectives and goals n Standards of investment performance/benchmarks n Classes of investment authorized n Styles of investment authorized n Diversification of portfolio among classes of investment, among investment styles and within classes of investment n Restrictions on investments n Directed brokerage n Proxy voting n Standards for reports by investment managers and investment consultants on performance, commission activity, turnover, proxy voting, compliance with investment guidelines n Policies and procedures for the hiring of an investment manager n Disclosure of actual and potential conflicts of interest 2) What is the position to be filled? Why is the Plan hiring an additional investment manager? Is the Plan replacing a terminated manager with a manager of the same investment style or hiring an additional manager with a different investment style? Is the hiring of this manager consistent with the Statement of Investment Policy? 3) Does the Investment Manager have the objective qualifications for the position being filled? (See questions concerning qualifications above.) Does the candidate qualify as an investment manager pursuant to ERISA section 3(38)? 4) How does the investment manager manage money? What is the manager's performance record and how does the manager achieve his performance? What are the risks of the investment manager's style and strategy compared to other styles and strategies? Do you understand what the manager does and the risks involved? Is this risk level acceptable in view of the return? How do this manager's investment style and strategy fit into the portfolio as a whole? (See Department of Labor Regulation 29 CFR 2550.404a.1, Investment Duties, and letter from Olena Berg, Assistant Secretary for Pension and Welfare Benefits Administration, to Honorable Eugene A. Ludwig, Comptroller of the Currency concerning the Department of Labor's views with respect to the utilization of derivatives in the portfolio of pension plans subject to the Employee Retirement Income Security Act.) 5) How does the investment manager measure and report performance? Does the process ensure objective reporting? 6) Is the investment manager a qualified professional asset manager? What is the investment manager's process to comply with the prohibited transactions provisions of ERISA? 7) What is the investment manager's process to insure compliance with the plan's investment policy and guidelines? 8) What is the investment manager's record with respect to turnover of personnel? 9) Has the manager's investment style been consistent? 10) Has the investment manager been terminated by plan clients within a relevant time period and why? 11) Has the ownership of the investment manager changed within a relevant time period and how will this affect the ability of the manager to perform the services needed by the plan? 12) What are the investment manager's fees? Are the fees reasonable in comparison with industry standards for the type and size of the investment portfolio? Does the fee structure encourage undue risk taking by the investment manager? 13) Does the investment manager have a personal or business relationship with any of the plan fiduciaries, or with another service provider recommending the investment manager? If a relationship does exist, how does it impact on the evaluation of the objective qualifications of the investment manager and the recommendation? 14) If the plan has adopted a directed brokerage arrangement with a broker affiliated with the plan's investment consultant, how does the investment manager determine when to use broker affiliated with the investment consultant? What are the per share transaction costs? 15) Does the investment manager have insurance which would permit recovery by the plan in the event of a breach of fiduciary duty-by the investment manager? What is the amount of the insurance? Who is the insurance carrier? C. ADDITIONAL ISSUES WHEN HIRING AN INVESTMENT CONSULTANT. 1) What is the role of the investment consultant? Are the investment consultant's duties clearly stated in the Statement of Investment Policy and/or the contract with the Investment Consultant? 2) Does the Investment Consultant: n Monitor and advise concerning asset allocation n Monitor and advise concerning riskiness of investment strategies, styles and individual investment managers n Monitor and advise concerning the performance and riskiness of Investments under the direct investment control of the fiduciaries n Monitor and advise concerning the compliance of the investment managers and direct investments with the Statement of Investment Policy and Investment Guidelines n Accept fiduciary responsibility in writing for all or some of the services it performs? Does the contract state specifically for which services the consultant accepts fiduciary responsibility? 3) Is the investment consultant's fee reasonable when compared to industry standards in view of the services to be performed and the scope of the consultant's fiduciary responsibility? 4) What are the investment consultant's performance measurement process and techniques including the performance data base used to evaluate the investment manager's performance? Do you understand the process? Are these processes and techniques appropriate? 5) Does the investment consultant have a personal or business relationship with any of the plan fiduciaries, or with one or more investment managers? Does the consultant receive compensation from investment managers either through the sale of services or through directed brokerage arrangements? If a relationship does exist, how does it impact on the evaluation of the consultant's recommendation of the investment manager? 6) What investment managers were recommended by the investment consultant in recent searches for other clients? 7) Does the investment consultant have insurance which would permit recovery by the plan in the event of a breach of fiduciary duty by the investment consultant? What is the amount of the insurance? Who is the insurance carrier? D. ADDITIONAL ISSUES WHEN HIRING A BUNDLED SERVICE PROVIDER 1) Is the bundled service provider financially stable and committed to the defined contribution business for the long term? 2) What is the bundled service provider's track record for delivering accurate and timely record keeping, and other administrative services, and insuring regulatory compliance?. 3) Does the bundled service provider offer a wide range of investment options that will allow participants to make appropriate asset allocation decisions and achieve their investment objectives? 4) Has the bundled service provider demonstrated the ability to generate superior investment performance over time? 5) Does the bundled service provider have the administrative capability to provide assistance with employee enrollment, investment education and ongoing plan communication? 6) Does the bundled service provider have knowledgeable and dependable service representatives available to consult with plan participants? 7) Has the plan sponsor been provided with advance written disclosure indicating the expenses and commissions, if any, that the bundled service provider will receive? 8) Are the bundled service provider's expenses reasonable in relation to the level of services provided? 9) Has the plan sponsor received sufficient information to make a true comparison of the services provided by the various bundled service arrangements available to select from? 10) What procedures or mechanisms are in place to assure that any mistakes that may be made by the bundled service provider will be disclosed to the plan sponsor and corrected? 11) Does the plan sponsor understand its role in monitoring the bundled service provider? 12) Has the bundled service provider disclosed in writing the capacity in which it is acting, and has the plan fiduciary acknowledged its understanding of this role? 13) Has the bundled service provider disclosed any potential conflicts of interests? Hope this helps.

Without attempting to sound self-serving, I suggest you should hire a good consultant to help with the vendor search. This is a decision you need to make properly, and it's virtually impossible to just throw out names of plan vendors without knowing more about your company, your plan and your objectives. You may be interested in an article I wrote on the topic. This is a link to a PDF version of the article. http://www.advisorsquare.com/advisors/schu...ns/82713132.pdf Good luck with your search. I hope this helps.

I'm not sure what you define as "large", but most of our clients are $10MM and up, and I would assume that Andy's plan (a 300 life DB plan) is at or near that range. I'd suggest that a plan this size could engage passive trust services for about 10 basis points (0.10%). This is almost certainly less that the implicit cost of the annuity contract, for a higher level of protection. The sponsor could probably engage an RIA AND a trustee for less than the cost of the annuity contract, and be done with investment management responsibilities as well, but that's a different thread.

PSP's id is ok.

Andy, I see a few potential issues with your example. How comfortable are they with their "highly rated" insurance company? Mutual Benefit, Executive Life and General American were all "highly rated" before going into receivership. Just because they are permitted to not have a trust, that doesn't mean it's prudent to not have a trust. How is the portfolio managed? Is it prudent and well-diversified with just insurance company assets? A corporate trustee will be a plan fiduciary, and will likely be named in any potential lawsuit against the plan. Whether or not the suit has merit, the corporate trustee will mount a vigorous legal defense, in many cases, permitting the plan sponsor to "piggyback" on the defense. In many cases, the presence of a corporate trustee with a strong legal staff is enough of a disincentive to cause the potential plaintiff to not file the suit in the first case. It's unclear whether assets with an insurance company would offer the same legal protection.

There is no legal maximum. It depends on how your former employer's plan is operated. If the plan is annually valued (i.e., they only determine how much each person's 401(k) account is worth once each year), it can take over a year for payment to be processed. I suggest that you follow up with your former employer and ask them when you should expect your payment.

Bill, I think that making the president a fiduciary in an additional capacity sounds good but is fraught with potential issues. See the following paper: http://www.advisorsquare.com/advisors/schu...ns/82713136.pdf I've seen "no trustee" plans with insurance companies that had participant loans, which weren't a fully insured asset, and weren't trusteed. Definitely a qualification issue. I agree with the comment that moving to a trusteed arrangement is the right call. But unless the plan is tiny, I'd suggest that a corporate trustee makes sense unless cost is prohibitive. There are so many providers that essentially give away trust services, that I can't see why you wouldn't want to engage a professional trustee.

I've heard DOL opine that education is a permissible plan expense, as long as fiduciaries determine that education is necessary or desirable and cost of education is reasonable.

Could you please restate the question? Are you asking how soon you should receive a 401(k) distribution after terminating employment and submitting paperwork? Or do you mean how soon any trailing contributions should be deposited to the trust and then paid out after a participant has withdrawn the bulk of their account? The current phraseology is unclear.

Think you've got the basic ERISA rules straight. Note that there are a separate set of SEC rules to be concerned with (primarily relating to insider trading and the possibility that the plan needs to file an 11K), as well as the fiduciary considerations that MGB notes. Furthermore, the plan may need to provide info for the company's annual proxy filings. In general, employer stock significantly complicates the plan's regulatory and compliance burden. I'd estimate the overall burden is roughly doubled.

Assuming the 401(k) is structured as a profit sharing plan, it's exempt from the 10% rule, as long as appropriate language permitting employer stock is part of the plan and trust documents. So it's probably not a problem.

Check out this link (BTW, I'm not a "product person"). http://www.groom.com/Ar&Br_PT_non-fiduciaries.html

The answers to Bill's questions are actually pretty clear, at least from a regulatory (i.e., DOL) perspective. The judiciary (i.e., courts) could interpret the facts differently in any potential litigation. But from the DOL's perspective, 404© represents the only exception to the general prudent investment standards under ERISA 404(a). So if a participant makes investment decisions in a participant directed plan that cause the account to be invested imprudently or inappropriately, and consequently the participant incurs losses, if the plan does not satisfy 404©, plan fiduciaries are responsible for making the participant whole. It's hard to conceive of a participant directed plan where it would be impossible for a participant to make an imprudent decision. Even a decision to invest 100% of the account in a money market fund could be imprudent for a young participant. Consequently, as a practical matter, this means plan fiduciaries that don't want liability for poor participant investment decisionmaking need to take one of three positions with respect to 404© compliance: 1) Review all participant investment decisions, and overturn any decisions that are deemed to be imprudent (I've never seen anyone actually do this); 2) Only offer investment choices that satisfy ERISA 404(a) prudence requirements (this is an argument for only offering lifestyle type funds, or diversified portfolios); or 3) Satisfy the 404© standards. Note that satisfying the 404© standards is simply an investment structure and information dissemination issue. It has nothing to do with whether or not participants understand the implications of their decisions. DOL has gone on record that while investment education is highly encouraged, it is not required for 404© purposes or otherwise. Thus, Bill's mentally retarded mail room clerk could incur significant losses in a 404© plan, and the fiduciaries would face no liability (assuming other responsibilities were met. Hope this helps clarify the discussion,

I understand the operational difference between a TPA recordkept plan and a bundled plan directly with the investment provider. In my experience, the bundled investment provider typically follows the procedure I described above for prospectus distribution, which, in my opinion, provides for better 404© compliance. Thus (sorry k man), an advantage for the bundled investment provider. Of course, the TPA offers other advantages. This is just one of the many factors that needs to be considered by the sponsor during the vendor selection process.

I recommend sending updated prospectuses to all participants IN THE FUND FOR WHICH THE PROSPECTUS HAS BEEN UPDATED. Participants transferring into the fund for the first time should also get the updated prospectus. In my opinion, this gets pretty solid 404© protection. I'm assuming that this procedure can be done in a reasonably automated manner, and that it doesn't introduce large costs or an unreasonable administrative burden. If it does, other methods could be considered.

I'm not sure why an asset based fee would be a prohibited transaction. Of course, the aggregate fee needs to be reasonable. We do numerous vendor searches for recordkeepers and other administrative service providers. We generally don't recommend providers proposing asset based fees for administrative services, because these fees will grow over time, and may go from reasonable to unreasonable without the Committee noticing it.

We are an investment consultant, and we work with about 20 DC plan sponsors. In general, we report quarterly on performance and other fiduciary issues, most committees meet semi-annually, and simply review the report the other two quarters. We write investment policy for all clients. An IPS typically runs 12-15 pages. Below is a typical table of contents: I. INTRODUCTION 1 A. PURPOSE OF THE PLANS 1 B. QUALIFICATION UNDER THE INTERNAL REVENUE CODE AND ERISA 1 C. GENERAL FIDUCIARY RESPONSIBIILITIES 1 D. PURPOSE OF THE INVESTMENT POLICY STATEMENT 2 II. ALLOCATION OF RESPONSIBILITIES 3 A. PLAN OPERATIONS AND POLICYMAKING DECISIONS 3 B. PLAN INVESTMENTS 3 C. THE CORPORATE TRUSTEE 3 D. RECORDKEEPING AND ADMINISTRATION 4 E. INVESTMENT ADVISORY FUNCTIONS 4 III. SELECTING INVESTMENTS 6 A. INTENT TO CONFORM WITH ERISA SECTION 404© 6 Broad Range of Investments 6 Core Investment Categories 7 Recommended Non-core Investment Categories 7 B. RATIONALE FOR SELECTING NON-CORE INVESTMENT CATEGORIES 7 Small Capitalization Stocks 7 International Stocks 8 International Small Capitalization Stocks 8 Value-Oriented Stocks 8 International Emerging Market Stocks 8 Global Fixed Income Securities 8 C. MODERN PORTFOLIO THEORY 9 D. RATIONALE FOR SELECTING PASSIVELY MANAGED FUNDS 10 E. SELECTING SPECIFIC FUNDS FOR INVESTMENT 10 IV. MONITORING INVESTMENT PERFORMANCE 12 A. COMPARISON WITH CATEGORY AVERAGES 12 B. COMPARISON WITH RELEVANT BENCHMARKS 12 C. MONITORING OTHER RELEVANT CRITERIA 13 IV. EXECUTION 14 APPENDIX A: DESIGNATED INVESTMENT ALTERNATIVES 15 A. CORE INVESTMENT VEHICLES 15 B. NON-CORE INVESTMENT VEHICLES 15 Committees generally have 3-10 members, including representatives from HR, Finance and Treasury. Hope this helps,

In the list of information needed to be provided automatically, note a clause (paraphrased) "...if investment funds are subject to SEC registration rquirements, a copy of the MOST RECENT prospectus provided to the plan must be provided immediately beforme or after a participant's initial investment in the fund.." In the list of information needed to be provided on request "Copies of any prospectuses...provided to the plan." In practice, we recommend sending updated prospectuses to participants. The cost is low, who knows or really cares whether the prospectus gets read, and the information dissemination requirement is satisfied definitively.

Bill, remember that we started with bargained and non-bargained employees. The bargained plan will have lots of union input regarding management, the non-bargained plan none. In many cases, investment options may be different between the two plans--one with a set of union friendly choices, the other not considering this element. The participant changing employment status will want to transfer their account, to avoid the hassle of managing their account in two plans, as new contributions stream into the new plan. I agree that the forfeiture transfer is a little strange, but I bet that this is something that the union required, so that "union" forfeitures are reallocated to union members. I think you have a pretty legitimate argument that you can have two plans, that are generally parallel in structure, but cover different populations and may have some other minor differences. You might face even worse problems covering bargained and non-bargained employees under a single plan.