PArticipant Directed / Fee Disclosure

[austin3515]

Client wants to set up 3 pools of money: Conservative, Moderate and Aggressive. The udnerlying securities will be stocks and bonds.

Has anyone figured out how to handle fee disclosures on this?

Note that we will be doing quarterly valuations, and participants can choose to switch quarterly. And it's a small group, almost exclusively investment experts. They're not really worried about would happen if the market tanked kind of a thing.  Maybe they should be, but they know their employees well.

 

[i.e., what I am really interested in here is the fee disclosure requirement].

[RatherBeGolfing]

I'm not super comfortable with it but I have done an almost identical setup for one client with his ERISA atty's blessing.  We treat each option as a Designated Investment Alternative.  The plan information part of the disclosure isn't different from any other disclosure, we have the general information an explanation of the fees associated with the DIA and so on.  The more difficult part is the investment performance related information.  

[Peter Gulia]

If what you’ve described is a plan-invented subtrust that invests in something beyond other designated investment alternatives, the 404a-5 rule tells a plan’s administrator to count such a subtrust’s expenses as if the subtrust were an SEC-registered fund.

 

29 C.F.R. § 2550.404a-5(h)(5)(ii):

(5)   Total annual operating expenses means:

. . . .

(ii)   In the case of a designated investment alternative that is not registered under the Investment Company Act of 1940, the sum of the fees and expenses described in paragraphs (h)(5)(ii)(A) through (C) of this section before waivers and reimbursements, for the alternative’s most recently completed fiscal year, expressed as a percentage of the alternative’s average net asset value for that year—

(A)  Management fees as described in the Securities and Exchange Commission Form N-1A that reduce the alternative’s rate of return,

(B)  Distribution and/or servicing fees as described in the Securities and Exchange Commission Form N-1A that reduce the alternative’s rate of return, and

(C)  Any other fees or expenses not included in paragraphs (h)(5)(ii)(A) or (B) of this section that reduce the alternative’s rate of return ([for example], externally negotiated fees, custodial expenses, legal expenses, accounting expenses, transfer agent expenses, recordkeeping fees, administrative fees, separate account expenses, mortality and expense risk fees), excluding brokerage costs described in Item 21 of Securities and Exchange Commission Form N-1A.

 

Likewise, to display past-performance average annual total returns, one computes these the way a similar SEC-registered investment fund would compute them.

 

29 C.F.R. § 2550.404a-5(h)(3):

Average annual total return means the average annual compounded rate of return that would equate an initial investment in a designated investment alternative to the ending redeemable value of that investment calculated with the before[-]tax methods of computation prescribed in Securities and Exchange Commission Form N-1A, N-3, or N-4, as appropriate[.]

 

Figuring out those methods, applying them in context, and doing the bookkeeping and accounting might be work.

 

Perhaps the plan’s administrator wants to engage a smart guy like austin3515 to do the work.

[austin3515]

Ironically the client happens to be an RIA, so this is much more in their turf.  But they do hire me for all of their top-secret investigations (not just their TPA work!), so they're one of my best clients!

This is a very interesting alternative to a cumbersome daily val platform...  It's probably only right for 1% of the universe of plans, but it's interesting. Ultra low cost being the best part.

[Peter Gulia]

I have investment-adviser clients that do these arrangements.  In my experience:

 

Even when an RIA’s investment analysts have an accounting background, an RIA might want an accountant’s help to translate the cash bookkeeping into accrual accounting under GAAP.

 

If the investor plans all are under-100 plans that don’t engage a CPA for the plan’s financial statements, the investment adviser might engage its accountant’s work without needing any kind of audit, review, or compilation report.

 

An RIA that manages no SEC-registered fund likely is not familiar with the SEC Forms and Instructions that the Labor department set up as the norm for reporting a portfolio’s operating expenses and past performance.

 

Some RIAs feel more comfortable with the 404a-5 communications about past performance and expense ratios if someone with an accounting background checked the work.

 

Those doing these arrangements understand that the RIA is a fiduciary not only under investment-adviser law but also under ERISA.  As an ERISA fiduciary, it is directly responsible for its own communications, and is responsible—at least as a co-fiduciary—for the plan administrator’s communications the RIA enabled or has knowledge of.

[imchipbrown]

Not saying this is right but I've included this with the Summary Annual Report :

YOUR SCHWAB ACCOUNT

 

The (company  name)  pays all expenses associated with the annual administration of the Plan.  None are taken from Plan Assets.

•  Schwab does not currently charge an annual fee for maintaining your account. 

•  There are commissions charged when buying or selling securities, Mutual Funds and Exchange Traded Funds.  These are disclosed prior to making any trade.

•  Mutual Funds and Exchange Traded Funds generally have internal expenses.  The expense ratios are disclosed online on each Fund’s summary page.

 

You may make investments in your account online at www.schwab.com or by phone at (800) 435-4000.