UNDERSTANDING RETIREMENT PLAN FEE DISCLOSURE

1. UNDERSTANDING RETIREMENT PLAN FEE DISCLOSURE How our products have evolved to meet the changing needs of the markets that we serve Prepared by: Chuck Coldwell, Senior Consultant July 2012

2. Plan Sponsors Have a Fiduciary Obligation to Review Plan Fees • All plan sponsors have a fiduciary responsibility to ensure that a retirement plan is being operated in the best interests of plan participants • A critical part of that responsibility includes evaluating plan fees and expenses, and determining if plan costs are fair and reasonable

3. What do the new Fee Disclosure Rules do? • Under the current rules, it has been difficult, if not impossible, for 401(k) participants to determine how much they are paying in plan fees • The new fee disclosure rules are designed to make this process easier for plan sponsors and participants to compare plan costs and fees, and whether these fees represent good value for the services being provided

4. Understanding retirement plan fees and expenses begins with plan structure • Understanding plan fees starts by determining the parties that are providing services to the plan, and the compensation that they are receiving for the services provided to the plan • Service arrangements often combine several providers in servicing a 401(k) plan, including a Third Party Administrator (“TPA”), Recordkeeper, Trustee and Custodian, Investment Manager, and Legal Counsel

5. Bundled Approach • Many 401(k) service providers play most or all of these roles • These firms are often referred to as full-service providers • There are other firms that also offer all of these services, but may have alliances or other arrangements to fill-in for a function that they don’t provide directly • A fully-bundled 401 (k) plan will typically obtain all the services needed from one firm, streamlining administration for the plan sponsor

6. Unbundled Approach • Alternatively, 401(k) plans may take the unbundled approach and fill the roles with multiple firms • Plan functions are outsourced to multiple parties, which may include a third party administrator (“TPA”) and/or record-keeper, investment manager, trustee, custodian and legal counsel

7. Which Approach is Best? • Bundled arrangements often provide a simpler approach for the plan sponsor • Typically, a fully bundled provider will also be less expensive • One of the disadvantages of an unbundled approach is that there will be too many parties involved in the process, complicating administration and fees for the plan sponsors, and increasing costs because of the many parties that have to be compensated

8. What Are the Different Types of Fees and Expenses? • Regardless of which approach a plan uses, there are generally three different categories of plan fees • One-time fees • Ongoing fees • Investment fees

9. One-time Fees • Initial plan fees for set-up and conversion • Cover the cost of setting up or transitioning a plan from one provider to a new provider • Other one-time fees may also include: • Enrollment expenses • Plan design fees • Initial Document drafting fees • Typically paid by the plan sponsor

10. Ongoing Fees • Include the cost of the day-to-day administration and recordkeeping of the plan and maintenance of participant accounts • These fees may be paid by the plan sponsor, the participant, or both, depending on how they are structured

11. Types of Ongoing Fees • Plan Administration • Transaction Processing Services • Recordkeeping Services • Custodial Services • Trustee services • Legal services • Plan Design Services • Document Updates (for regulatory and discretionary modifications) • Compliance Services • Plan Audit Services • Communication and Education Services

12. Investment Management Fees • Investment management fees are the fees charged for managing a retirement plan’s investments • These include the management, operations, and marketing of investment funds • There may be fees charged when a fund is purchased or at the time of sale, such as a front-end or back-end load, or fees charged for sales commissions, such as a 12(b)-1 fee, or fees charged for insurance products, such as a wrap fee • With defined contribution plans, these fees are typically paid by the participant, but sometimes by the plan sponsor

13. How Are Fees Assessed? • There are essentially four different types of ways that plan fees are structured • Asset-based • Per person • Transaction – based • Flat rate

14. How are Administrative Fees Structured? • Administrative type fees are paid directly by the plan sponsor as billed by the service provider and/or by the participant as a deduction from the participant’s 401(k) account

15. How are Asset Based Fees Structured? • Asset based fees typically represent the greatest share of retirement plan expenses   • Asset based fees can also be referred to as investment or asset management fees, or expense ratios • They represent the fees paid by the investors who invest in a particular fund to manage and operate an investment fund • Asset Based fees may sometimes cover administrative expenses

16. How are Asset Based Fees Structured? • Asset based fees are expressed in terms of basis points (bp). 1 basis point = 1/100 of a percentage point • For example, if 1 basis point equals 0.01% or 0.0001, then an investment fund with an expense ratio of 50 basis points would cost $500 annually based on a $100,000 account balance in your retirement plan $100,000 retirement plan account x 0.005 (50 bps = 50/100% or 0.005) = $500 annually • Asset based fees are charged as a percentage of your account balance • The higher your balance, the more you will pay

17. How are Asset Based Fees Structured? • Investment management fees can vary significantly from one investment fund to another based on the complexities involved in operating an investment fund • For example, fees for indexed investment options are typically lower than those for actively managed funds, because there is less “management” of an indexed fund as compared to an actively managed fund • Income investments typically cost less than equity investments, but fees for different types of equity investments vary widely based on whether they are domestic equities, international equities or sector funds

18. Service or Transaction Fees • Service or transaction fees, are charges for plan features that you may use • They are typically based on how often a transaction is processed • The plan sponsor may pay for most of these fees, but there are sometimes occasions when you will pay for a particular transaction, such as a plan loan, or self-directed brokerage feature

19. The New Fee Disclosure Rules • Effective date for service provider disclosure to plan sponsors is July 1, 2012 • If your plan operates on a calendar-year basis, the latest date for furnishing participants with their initial participant disclosures (all disclosures other than disclosures required at least quarterly) is August 30, 2012; for plans that operate on a fiscal-year basis, you have until the later of (1) 60 days after the first day of the first plan year beginning on or after November 1, 2011, or (2) August 30, 2012 • The first quarterly disclosures are required 45 days after the end of the quarter in which the initial disclosure is required (for calendar year plans November 14, 2012)

20. Which Plans do the Disclosure Rules Apply to? • The rules apply to 401(k) plans, profit sharing plans, money purchase plans, pension plans, and 403(b) plans that are subject to ERISA • The rules do not apply to non-ERISA employer-sponsored plans, SIMPLE plans, SEPs or IRAs

21. What’s Involved—Part 1 • The first part of the new rule will provide plan level fee information to plan sponsors • The rule requires plan service providers to disclose the fees charged to manage your plan • Service providers are required to provide plan sponsors with a detailed “Fee Disclosure Statement” that details all of the fees that are charged for the management of your retirement plan

22. Plan-Related Information • General plan information • A current list of investment options • An explanation of how individuals provide investment instructions under the plan • If applicable, descriptions of a brokerage option and/or similar types of outside investments available under the plan

23. Plan-Related Information • Administrative expense information: • An explanation of fees and expenses that may be charged to or deducted from all individual accounts (e.g., plan audit fee, recordkeeping fee) • Individual expense information: • An explanation of fees and expenses that may be charged to or deducted from an individual’s account based on his or her actions (e.g., loan origination fee, qualified domestic relations order (QDRO) fee, hardship withdrawal fee, distribution processing fee)

24. Plan-Related Information • Investment related information • One-, five-, and 10-year returns for all mutual funds and other plan investment options that do not have a fixed rate of return • Annual rate of return and investment term for fixed-rate investments

25. What’s Involved–Part 2 • The second part of the new rule will requires plan sponsors to provide detailed information to participants about fees, expenses and investment performance

26. Participant Level Disclosures • Benchmark data—one-, five-, and 10 year returns for appropriate benchmark indexes (to match plan investment performance data periods) • Fee and expense information • Non-fixed-rate investments: Total annual operating expenses expressed as a percentage and as a dollar amount per $1,000 invested; any shareholder-type fees or restrictions on purchases or withdrawals must also be provided • Fixed-rate investments: Any shareholder-type fees or restrictions on purchases or withdrawals

27. Participant Level Disclosures • Internet Resources—addresses of websites that can provide additional detailed information about the investment options • Glossary—a general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options or the address of a website that can provide access to a glossary

28. Participant Level Disclosures • Additional quarterly disclosure—quarterly statements that report the dollar amount of any fee or expense deducted from their account along with a description of the services related to the fee or expense • This information will most likely be incorporated into quarterly participant statements

29. Participant Level Disclosures • DOL model chart • The DOL has issued a model chart to help satisfy the new requirement that plan investment options be provided in a comparative format • The chart is broken down into several tables that focus on comparing investment returns, fee and expense information, and annuity options

30. Tips for Handling Participant Questions on Fees • Depending on the size of your organization, you may want to designate and train one or more people to answer questions about fee disclosure and your retirement plan • Service providers can also help by providing you with Q&As for your employees

31. Plan Sponsors Have Fiduciary Responsibilities When it Comes to Plan Fees • Ultimately the plan sponsor determines how fees are paid • All plan sponsors have a fiduciary responsibility under ERISA to ensure that a retirement plan is being operated in the best interest of plan participants • A critical part of that responsibility includes evaluating plan fees and expenses, and determining if plan costs are fair and reasonable

32. Fee disclosure is a good thing • Increased disclosure will give employers more control and leverage to negotiate better deals • The new rules are also expected to put downward pressure on fees industry-wide • Greater transparency will encourage employers to do more due diligence