401(k) Fees What You Need to Know

1. 401(k) Fees What You Need to Know Celia Rafalko Piedmont Independent Fiduciaries, Inc. Celia@PIF401k.com 804-888-7765

2. The 401(k) Landscape • There are over 72 million 401k participants in America invested in more than 483,000 plans which contain over $3 trillion in assets. • 71% Believed they paid no fees • 81% Believed it was very important/somewhat important in making investment decisions 401(k) Participants’ Awareness and Understanding of Fees,AARP, 2011 • 48% of plan sponsors did not know if their service providers had revenue sharing arrangements with other providers. Government Accounting Agency, April 2012 2

3. Litigation Numerous lawsuits have been filed against employers and investment providers charging they breached their fiduciary duties by failing to monitor hidden fees and to determine whether such fees were reasonable. 3

4. Newark Star-Ledger August 2010

5. Why Do You Care About Fees? • A plan sponsor is required by ERISA to know all the fees paid to service providers to the plan and must be able to make an informed decision that they are reasonable for services provided. • Failure to do so makes the plan sponsor personally liable for any losses the plan incur. • Fee Disclosure Rules went into effect last year requiring full disclosure. (ERISA 408(b)) • A plan sponsor fiduciary is PERSONALLY liable for losses incurred by the plan for a failure.

6. Tussey v. ABB, Inc, Fidelity Trust and Fidelity Management, Et Al. • Alleged that the Plan Fiduciaries failed to discharge their obligations by not properly documenting and monitoring Fidelity’s fees • ABB, Inc., the ABB pension and benefits committees, and the individuals serving on these committees (collectively “Plan Fiduciaries”) were found jointly and severally liable for $35.2 million in damages for violations of their fiduciary duty under ERISA • Fidelity was liable for $1.7MM in lost income related to float income it retained

7. What is the Impact of Fees? 1% in excess fees over the average American’s working lifetime, reduces their nest egg at retirement by 28%. DOL, EBSA Website An example: • A 35 year old investing $800 a month until 65, with average annual return of 7% net of fees will have $1,048,500. • If fees were 1% less, return would be 8% per year for $1,278,850. Eliminating 1% of fees makes a $230,256 difference in the long run!

8. Who are the Players? Every plan has four major functions • Record Keeper • Custodian • Third Party Administrator • Investment Manager and/or Advisor All All can be paid in a variety of ways, both direct and indirect 8

9. Record Keeper The Record Keeper is the Accountant for the Participants • Track contributions by participant and type of contribution • Record and implement investment choices and changes • Provide statements to participants • Provide a web site for participants to view and change their accounts • Work with the Custodian to initiate and execute investment changes

10. Third-Party Administrator The Administrator designs to plan to meet the company’s goals for the plan and is also responsible for compliance testing. • Recommend plan design choices • Safe Harbor, Profit Sharing, etc. • File the Form 5500 annually • Perform compliance testing • Assist with remedial actions if needed All those services can be discrete companies or bundled together by one company

11. Investment Manager and Advisor The Investment Manager is usually the Mutual Fund or Exchange Traded Fund manager. There can also be an Investment Manager or Advisor to the Plan. • Manage Investment Assets (Mutual Fund, ETF or Pooled Fund) • Provide advice to the plan on investment choices • Provide investment portfolios for participants • Select and monitor investments on behalf of the plan sponsor (3(38) fiduciary

12. Types of Providers • A 401(k) Plan can come from many types of providers • Banks • Brokers, both insurance and securities • Registered Investment Advisors $839,126 $520,692

13. The Rules Differ per Provider • Brokers are regulated and managed on sales • Suitability Standard of Care based on time horizon and risk tolerance • No fiduciary responsibility • Paid on sales commissions from product providers and transaction costs. • Banks are regulated by the OCC and are generally exempt from SEC oversight. • Work for and represent their bank • Paid by fee, payments from product providers 13

14. Registered Investment Advisors • RIA’s are held to a Fiduciary Standard • Must act solely in the interests of participants and beneficiaries • Duty of loyalty • With the care, skill, prudence and diligence of a prudent expert • Diversify investments so as to avoid the risk of large losses • Follow the plan • Paid by fee from the client

15. Insurance 401(k) Plan Generally Group Annuity Plans Bundled with Administration, Custody and Record-keeping Contract Asset Charge Annual Charges& Fees Inv Mgmt & Admin Charge No fiduciary services Fees are generally hard to find Expense Ratio & Transaction Costs

16. Insurance Example Transamerica Partners Mid-Cap Value* 1.30% Total Expense Ratio 1.21% Investment Management & Admin Charge 0.37% Annual Charges & Fees 0.25% Contract Asset Charge 1.51% Transaction Cost** 4.64% Actual Cost *This is an actual example from a Transamerica plan. **All mutual funds have transaction costs

17. Where is the Disclosure? • Prospectus – 72 pgs • 9 pgs reference fees, compensation or conflicts of interests • Statement of Additional Information– 285 pgs • 17 pgs reference fees, compensation or COIs • Annual Report – 44 pgs • 6 pgs reference fees, compensation or COIs • Semi-Annual Report – 36 pgs • 8 pgs reference fees, compensation or COIs • Group Annuity Contract – 33 pgs • 5 pgs reference fees, compensation or COIs • Plan Level Documents – 58 pgs • 9 pgs reference fees, compensation or COIs • Administrative Service Agreement – 11 pgs • 2 pgs reference fees, compensation or COI

18. Securities Broker • Typically a bundled product with all services included • Paid by Investment Share Class • Commission (up to 5.75%) • Annual 12-b1 fees (distribution fees) • Annual Sub Transfer Agent fees • No fiduciary services • Can provide investment advice to plan but not management for either plan or participants • Suitability Standard 18

19. Investment Costs American Funds EuroPacific Fund

20. Another Example

21. How Do Those Fees Look? • $7,726.30 Management Fees • $11,141.38 12(b)(1) fees • $3,941.08 Sub-TA fees • $22,808.76 Total (67.7% higher ) • $15,082.46 .75% for other fees 21

22. Banks • Typically a bundled product with all services included • Paid by a fee and Investment Share Class • Negotiated Record-keeping/Admin fee • 12-b1 fees (distribution fees) • Sub Transfer Agent fees • No fiduciary services • Can provide investment advice to plan but not management to plan or participants • Some banks credit back 12b-1 fees, others add on fees where there is no 12b-1 22

23. A Bank Example

24. Registered Investment Advisor • An independent model with each service provider a separate company • Paid by fees negotiated with the plan sponsor • No sales commissions or product fees so not tied to product sales agreement • 12b-1 fees credited back to the plan • Fiduciary services available to plan and to participants • Fiduciary Standard of Loyalty and Care

25. An RIA Example

26. Conclusions The way a 401(k) is purchased determines how fees are structured and now easy it is to find them. It is a requirement that plan sponsors know the fees charged and understand the value for the services provided. Failure to do so can result in significant penalties for the plan sponsor.

27. Piedmont Independent Fiduciaries is a Registered Investment Advisory Firm that specializes in Deferred Compensation Plans. Investment management for Plan Sponsors Portfolio management for participants Service provider recommendations Plan expense consulting Plan review consulting Ongoing participant support and education

28. Contact Information PIF401k.com Info@pif401k.com 10900 Nuckols Rd, Suite 200 Glen Allen, VA 23060 800-767-8772 Celia Rafalko, CEO Celia@PIF401k.com 800-767-8772, ext. 103 Sue Davis, Vice-President, Client Service Sue@PIF401k.com 800-767-8772, ext. 102