ERISA Fee Compliance Audit Report - July Business …

1 ERISA Fee Compliance Audit Report Prepared for: Sample Co., Inc. The Plan : Sample Co., Inc. 401(k) Plan Report Date: February 29, 2012 Examination and Opinion of the Reasonableness of Vendors Arrangements and Fees Plan Contact Address: Robert Sample CFO SAMPLE CO., INC. 999 Any Street Any Town, USA 99999 THIS Report IS A SPECIMAN AND IS INTENDED FOR ILLUSTRATION PURPOSES ONLY Questions about the contents of this Report may be directed to Roland|Criss at 1 800 440 3457 Roland|Criss Your partner in fiduciary excellence ERISA Fee Compliance Audit Report Prepared for: Sample Co., Inc. Plan Name: Sample Co., Inc. 401(k) Plan Report Date: February 29, 2012 Copyright 2012 Roland|Criss 2 Roland|Criss Executive Summary.

2 3 Findings and Opinion .. 4 Method of Examination .. 7 Performance and Expense Comparison .. 9 Service Category Benchmarking Summary .. 11 Benchmarking Services Rendered .. 12 Disclosures .. 15 TABLE OF CONTENTS ERISA Fee Compliance Audit Report Prepared for: Sample Co., Inc. Plan Name: Sample Co., Inc. 401(k) Plan Report Date: February 29, 2012 Copyright 2012 Roland|Criss 3 Roland|Criss In recent years, there have been a number of changes in the way services are provided to employee benefit plans and in the way service providers are compensated. Many of these changes may have improved efficiency and reduced the costs of administrative services and benefits for plans and their participants. The complexity resulting from these changes, however, also has made it more difficult for plan sponsors to understand what service providers actually are paid for the specific services rendered.

3 Consequently, the Department of Labor commissioned a change to the Employee Retirement Income Security Act ( ERISA ) that requires much more disclosure about fees by vendors that serve ERISA retirement plans. That change is defined in Regulation 408(b)(2). The Plan Sponsor s Duty under Regulation 408(b)(2) Fiduciaries of retirement plans must evaluate the expenses paid by their plans for services and investments. In fact, it is both a fiduciary breach and a prohibited transaction to allow your plan to pay more than reasonable expenses. The preamble to Regulation 408(b)(2) states that once the responsible plan fiduciaries receive their vendors fee disclosures, they have a duty to evaluate them, assess their adequacy, and determine the reasonableness of the vendors arrangements and fees.

4 The Supply Chain In effect, the Regulation is a supply chain management rule. The supply chain for ERISA retirement plans includes the vendor types shown in the image to the right. Not every ERISA plan hires and or even requires the services of all vendor types. For example, many plans are not served by an investment consultant or investment advisor for participants. Another example is actuaries that serve only defined benefit plans, not defined contribution plans like 401(k) and 403(b). This Report reveals the findings of an independent examination of the Plan s vendors arrangements and fees they charge to your retirement plan. The Report also contains Roland|Criss opinion of whether the arrangements and fees are reasonable as required by the Regulation.

5 EXECUTIVE SUMMARY ERISA Fee Compliance Audit Report Prepared for: Sample Co., Inc. Plan Name: Sample Co., Inc. 401(k) Plan Report Date: February 29, 2012 Copyright 2012 Roland|Criss 4 Roland|Criss The Plan s Gross Fees Comparison Fees The Plan s Projected Annual SERVICE CATEGORIES VENDORS Total % $ Per Total % $ Per Total $ Investment Management Mutual Funds $ $ $4, Custody/Trust Services XYZ Trust 2, Recordkeeping/Administration ABC, Inc. 4, Advisor Services AnyAdvisor 7, Communication/Education Trainer Implementation/Termination N/A TOTAL $ $ $18, Key Criteria The key criteria used during the examination of the Plan s vendor arrangements and the vendors pricing are shown in the table to the right.

6 The Plan s Vendor Categories Retirement plan sponsors are not required by federal pension law to hire the lowest cost service providers. There is, however, a catch. Irrespective of how high or low a vendor s fees might be the actual services it delivers must meet or exceed a commensurate level of quality. Consequently, service quality is an irreplaceable ingredient in determining if a vendor s arrangement and fees are reasonable. The fees that the Plan s vendors charge its participants are shown in the table to the right. Uncovering Reasonableness If uncovering the reasonableness of vendor arrangements and fees could be performed by simply comparing the Plan s vendors gross fees to their competitors gross fees, then benchmarking would provide the answer.

7 In order to comply with federal pension law, however, plan sponsors are required to assess the value of their vendors services, which, naturally, includes benchmarking vendors fees. The next page of this Report shows the results of our assessment of the service quality that each of the Plan s vendors deliver in light of their arrangements and fees with the Plan. FINDINGS AND OPINION EVALUATION CRITERIA The Plan The Plan s Peers No. of Peers Plan Type 401(k) Participants 40 <100 246 Assets in the Plan $1,000,000 $1mm $10mm 181 ERISA Fee Compliance Audit Report Prepared for: Sample Co., Inc. Plan Name: Sample Co., Inc. 401(k) Plan Report Date: February 29, 2012 Copyright 2012 Roland|Criss 5 Roland|Criss Administration Services (sample)Vendor Value IndexTM909294969810010210410620062007200 820092010 Fee IndexServicing Index Turning Apples into Oranges Comparing subjective items like service quality to objective items like dollars and cents can be like comparing apples to oranges.

8 In order to make such a comparison more accurate, the Vendor Value Index converts the current status of the services the Plan receives from its vendors into a numeric value using in the calculations the dollars that the vendors were paid. The result can be used then to show if fees are appropriate in light of how well the actual level of services are being delivered. The Vendor Value Index produces a scoring scale that has a range of 1 to 5, with 5 the least desirable value. A vendor s arrangement and fees that are properly aligned would look like the chart to the right. Notice how the servicing values equal or exceed the fee values. What the Audit Revealed During the Audit , the Vendor Value Index system produced the scores shown below for each of the Plan s vendors by category and are reflected in the chart above.

9 Current Year SERVICE CATEGORIES VVI Score Fee Index Servicing Index Investment Management 2 102 98 Custody/Trust Services 1 101 101 Recordkeeping/Administration 1 105 105 Advisor Services 1 110 110 Communication/Education 1 106 106 Implementation/Termination 1 100 100 VENDORS AVERAGE FINDINGS AND OPINION ERISA Fee Compliance Audit Report Prepared for: Sample Co., Inc. Plan Name: Sample Co., Inc. 401(k) Plan Report Date: February 29, 2012 Copyright 2012 Roland|Criss 6 Roland|Criss Audit Report TYPES Unqualified OpinionAn opinion is unqualified when the auditor concludes that a plan s fees are reasonable. This is a clean opinion that enables the plan sponsor s exemption from the prohibited transaction rule for parties in interest as described in ERISA Section 406(a).

10 Qualified Opinion A nearly clean opinion that is subject to the correction of an exception in the plan s fee monitoring process. Adverse Opinion Issued when the auditor determines that a plan s fees cannot be substantiated by a level of service that complies with ERISA s guidelines. Denial of Opinion The auditor refuses to present an opinion because a conclusion could not be formed based on the information provided by the vendor and/or the plan s sponsor. The Audit Report The auditor's Report is a formal opinion, or denial thereof, issued by Roland|Criss as an independent external auditor. The Report may be subsequently provided to a user (such as an individual, a group of persons, a company, a government, or even the general public, among others) as an assurance service in order for the user to make decisions based on the results of the Audit .