Compliance July 14, 2008

EBSA Issues Schedule C Fee Disclosure Guidance

Federal regulators released additional guidance about rules for reporting service provider fees and compensation on Schedule C of Form 5500 for plan years beginning on or after January 1, 2009.
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A news release from the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) said the additional guidance to help plan administrators and service providers complies with the new reporting requirements. The guidance is in the form of 40 frequently asked questions (FAQs) developed in response to questions from the employee benefit community on the new Schedule C requirements, EBSA said.

The FAQs cover such issues as the alternative reporting option for eligible indirect compensation, electronic disclosure of fee information by service providers, fee reporting for brokerage window options in participant directed plans, and reporting on gifts, entertainment and other non-monetary compensation.

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The department is not requiring plan administrators to report service providers on the Schedule C as failing to provide fee and compensation information if the service provider furnishes the plan administrator with a written statement that the service provider made a good faith effort to make any necessary recordkeeping and information system changes in a timely fashion, and despite such efforts, was unable to complete the changes for the 2009 plan year.
Questions discussed in the new EBSA document include:

  • Is the Schedule C information on service provider indirect compensation required to be reported based on the plan’s year or can the information reported be based on the service provider’s fiscal year?
  • Are all the fees and expenses charged against an investment fund and reflected in the value of the plan’s investment – such as an investment fund’s payments for legal services provided to the fund, fees paid to the fund’s accountant, and expenses associated with SEC filing requirements – reportable indirect compensation for Schedule C purposes?
  • A recordkeeper may enter into an “alliance” arrangement with a broker/dealer to provide services offered together as a “package” sold by agents of the broker/dealer. The recordkeeper and broker/dealer are not affiliated to one another and each has a separate contract or arrangement with the plan. In connection with this alliance arrangement, the broker/dealer pays compensation to the recordkeeper. The compensation may be flat per-participant fees or asset-based fees based on the value of plans’ investments in mutual funds or other investment vehicles offered to the plans by the broker/dealer. The broker/dealer pays the compensation for plan administration and recordkeeping services the recordkeeper provides to the broker/dealer’s plan clients. Is the compensation paid by the broker/dealer to the recordkeeper “eligible indirect compensation?”

The FAQs are available here.

Data & Research July 14, 2008

Middle Class Retirees Must Modify Living Standards

Retirees will outlive retirement savings if they continue at the same speed of spending, an Ernst&Young study found.
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Almost three out of five new middle-class retirees will outlive their financial assets if they attempt to maintain their pre-retirement standard of living, according to the study by Ernst & Young LLP, on behalf of Americans for Secure Retirement.

In a telephone press conference, primary study author Tom Neubig, national director of quantitative economics and statistics, Ernst & Young, said the study finds that middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24% to minimize the likelihood of outliving their financial assets. Those who are seven years out from retirement will have to reduce their standard of living by an average of 37%.

Joe Reali, Chairman of Americans for Secure Retirement, clarified that while experts say retirees can maintain the same standard of living with income equal to 59% to 71% of their pre-retirement wages, the study findings mean current retirees can only consume an annual income 24% lower than these levels to make their retirement savings last.

Neubig also noted that the study found a guaranteed source of retirement income beyond Social Security, such as an annuity or defined benefit plan, better prepared retirees to have a financially secure retirement. As an example, he said married couples who have a guaranteed source of retirement other than Social Security income making $75,000 at retirement have a 31% chance of outliving their financial assets if they retain their pre-retirement standard of living, compared with a 90% chance for those with Social Security as their only guaranteed income.

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Stated Differences

The study found that married couples are more likely to outlive their financial assets, due to their longer joint life spans, than single households.

Citizens of Montana, Wyoming, and South Dakota have the highest likelihood of outliving retirement savings. Citizens of Washington, D.C., Rhode Island, Utah, and New York have the least likelihood of outliving retirement savings.
Neubig pointed out that many D.C. residents are more financially prepared for retirement because they participate in the federal defined benefit plan.

The Ernst & Young study evaluates retirement vulnerability for 36 different types of typical middle-class households, defined by three income levels ($50,000, $75,000 and $100,000 of pre-retirement income); for married couples, single males and single females; by employer-provided defined benefit pension coverage status; and by age (near-retiree new retiree). The near-retiree is age 58, and planning to retire at age 65. The recent retiree is age 65.

The complete report is available at www.paycheckforlife.org.

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