Retirement Plan RFPs. John H. McKendry, Jr. & Heidi A. Lyon. Warner Norcross & Judd LLP 2011

Transcription

1 Retirement Plan RFPs John H. McKendry, Jr. & Heidi A. Lyon Warner Norcross & Judd LLP 2011

2 OVERVIEW Legal Background Methods for Selecting Providers RFP Process 22 Steps and Considerations Provider Models Recent Fee Litigation Prudent Provider Selection Criteria 408(g) Compliance Written Agreement Concluding Remarks

3 EMPLOYER IS AN ERISA FIDUCIARY Employer/Plan Sponsor meets 2 ERISA fiduciary definitions: Exercises authority or control - disposition of the plan s assets Discretionary authority or responsibility - administration of the plan 33

4 ERISA FIDUCIARY STANDARDS 44 Solely in Interest/Exclusive Purpose Prudent Expert Care, Skill, Prudence and Diligence. Person familiar with such matters Per the Documents - Plan, Trust, Agreements Investments Diversification, Liquidity, Funding, Risk Avoidance Avoid Prohibited Transactions

5 EMPLOYER/FIDUCIARY DUTIES U.S. DOL VIEWS 55 DOL/EBSA Publication (May, 2004) Understanding and evaluating plan fees and expenses associated with investments, investment options and services is an important part of a fiduciary s responsibility. Establish objective process to evaluate fees, detail specific services requested, consider level of service provider s responsibility, and give identical disclosures to prospective providers for a meaningful comparison.

6 EMPLOYER/FIDUCIARY DUTIES U.S. DOL VIEWS DOL Field Assistance Bulletin (February 2, 2007). Employer retains following fiduciary duties as a prudent expert to select and continue to monitor (as evidenced by procedural due diligence) Investment Menu (including, if desired, a qualified default option) Investment Advisers Qualified Fiduciary Adviser Reasonableness of Fees Charged 66

7 INVESTMENT FIDUCIARIES TWO TYPES 3(38) Investment Manager complete discretion over selection of assets (Registered Investment Advisers) 3(21)(A)(ii) Investment Adviser offers advice for a fee (Broker) 77

8 THE FAUX FIDUCIARY INVESTMENT ADVISERS ACT OF 1940 (SEC) 88 Brokers/Insurance Agents not regulated due to lack of enforcement resources (suitability standard) No established standards of care ( best interests vagary) Focus on individual not retirement plan advice Mandatory FINRA Arbitration (no expertise, panels stacked against investors) No Plan Remedies (only cease and desist and fines to SEC)

9 SERVICE PROVIDER SELECTION Considerations - employer (industry, size), plan design, number of participants, amount and description of plan assets are all relevant Process key to fulfilling fiduciary duty and managing risk Studies Consultant Request for Proposal (RFP) 99

10 REQUEST FOR PROPOSAL (RFP) 2010 DOL STATEMENT Historically, norm for RFPs was every 3 to 5 years, many went much longer than this Preamble to 2010 Service Provider Fee Disclosure Rules - DOL assumes RFPs are conducted every 3 years 10 10

11 RFP RECENT LITIGATION EMPHASIZING PROCESS George v. Kraft Foods Highlights importance of RFP process Lawsuit against plan sponsor Reliance on consultants with no recent RFP may be breach of fiduciary duty Plaintiffs allege RFP should be conducted every three years 11 11

12 OVERVIEW OF RFP PROCESS - STEPS Formulate list of candidates Draft proposal and circulate to candidates Identify and interview finalists Compare and evaluate finalists Written agreement with selected providers

13 OVERVIEW OF RFP PROCESS - CONSIDERATIONS Provider models (Broker, Investment Manager, Financial Services Firm/Bank, Insurer, Mutual Funds) Fee litigation emphasizing process Selection criteria for advisor, recordkeeper, investment menu/provider, and participant education services 408(g) compliance Defective agreement can negate an otherwise effective process

14 PROVIDER MODELS BROKERAGE FIRMS Advise - Menu, Investment Platform (Insurer, Fund, Managers) Compensation Indirect Loads, Trailer Fees, Commission/Fees from Platform Provider Recordkeeper Third Party, Proprietary Investments Non-Institutional Share Classes (broker compensation) Education 14 14

15 BROKERAGE FIRM ISSUES Fiduciary Status - Steadfast Refusal to acknowledge (minor exceptions) Conflicts Desire to maximize indirect revenue Compensation - Opaque compensation Structures (particularly in selling platforms) and Buried in difference between fund fees and price of investment management Higher Costs diminish Investment Returns

16 PROVIDER MODELS INVESTMENT MANAGERS Advise Fund Menu/Manager of Investment Types Compensation Percentage of Assets Recordkeeper Third Party Investments Funds?Institutional, Managers Education? 16 16

17 INVESTMENT MANAGER ISSUES Fee Structures 1% (100 bps) or more Platforms website access for Employer and participant? Education Minimal? 17 17

18 PROVIDER MODELS FINANCIAL SERVICES FIRM/BANK Advice Platform of Options Compensation Indirect Recordkeeper Internal or Relationship Investments Noninstitutional/ Proprietary Education -? Individual Advice 18 18

19 FINANCIAL SERVICES FIRM/BANK ISSUES Fiduciary Status Directed trustee, not menu Opaque Compensation Bundled Arrangements Investments Revenue Driven Education General Individualized? 19 19

20 PROVIDER MODELS INSURER PLATFORMS Advice Menu from Platform Compensation Indirect from investments on menu plus proprietary clone or advised products and overrides (contract, asset charges) Recordkeeping Internal Investments Funds (non-institutional) - Separate Accounts Proprietary Education General

21 INSURER ISSUES Fiduciary Responsibility - Refusal to accept for menu, conflicts Compensation Highest among providers, often Opaque Proprietary Provider favorable documents Investments Clone Funds (not the actually traded funds) proprietary options, stable value, target funds 21 21

22 PROVIDER MODELS MUTUAL FUND FAMILY PLATFORMS Advice Menu Compensation Internal Fees (noninstitutional) Recordkeeper Mix, internal versus third party Investments Funds Education - General 22 22

23 MUTUAL FUND FAMILY - ISSUES Advice Fiduciary Reluctance, Conflicts Compensation Opaque Recordkeeper Third Party Investments Non-institutional proprietary products, or additional charge for non-proprietary options Education Individualized? 23 23

24 IDEAL PROVIDER MODEL Advice Independent Adviser able to select best funds (including exchange traded funds) Fiduciary Status Acknowledges 3(38) or 3(21)(A)(ii) ERISA responsibility Compensation Transparent, each element separately identified Recordkeeping Third Party, Appropriate Standard of Care Investments Institutional, Low Cost funds, Model Portfolios from menu, 404(c) compliance Education General Individualized, conforms to DOL IB 96-1, Individual per 408(g) principles

25 RFP FEE LITIGATION CONSIDERATIONS Cases highlight importance of attention to provider arrangements Interested Parties Participants Plan Sponsor/Employer Service Providers DOL Each group impacted differently 25 25

26 RFP FEE LITIGATION FAVORING PLAN SPONSORS Hecker v Deere No requirement to disclose revenue sharing, 404(c) disclosure and compliance offers defense Loomis v. Exelon Offering retail shares not a breach of fiduciary duty Taylor v United Technologies Proper monitoring, objective selection of mutual funds, recordkeeping fees reasonable against market Renfro v Unisys Reasonable mix and range of investment options

27 RFP FEE LITIGATION ADVERSE TO PLAN SPONSORS George v. Kraft Foods (discussed earlier) Fiduciary aspects of decision to maintain status quo Emphasis on process and documenting decisions Tibble v. Edison Offering retail funds without good reason, breach of fiduciary duty of prudence Waiver of institutional share requirement available, but never requested Braden v Wal-Mart Retail funds, possible evidence of flawed process Settlement for $13.5 million, with plan s service provider paying $10 million

28 RFP FEE LITIGATION ADVERSE TO PLAN SPONSORS Mixed litigation trends create risk Sixth Circuit few cases so far Best way to manage risk is prudent process Focus on appropriate criteria for evaluating each service provided to plan

29 RFP ADVISOR SELECTION CRITERIA Background/Credentials, Registration, Licenses, Reputation Conflict Disclosure Services - Investment Policy, Menu, Monitoring Relevant Expertise Clients Recommendations, Departures Fees RFP, Investment Policy, Menu Selection/Monitoring all disclosed Insurance Sample Agreement 29 29

30 RFP RECORDKEEPER SELECTION CRITERIA Background/Credentials, Registration, Licenses, Reputation Conflict Disclosure Services Timing/Warranties Fees Amount Each element of service complete transparency Protection Bonding, Insurance Sample Agreement Standard of Care/Liability, Dispute Law, Venue, Forum

31 RFP - INVESTMENT MENU/PROVIDER SELECTION CRITERIA Investment Policy Objective, Systematic Measurement Performance/Benchmarks Risk QDIA Recommendation 31 31

32 RFP - INVESTMENT MENU/PROVIDER SELECTION CRITERIA Internal Diligence Process Bonding, Insurance Conversion Services Custodial, Trustee Services Fees Complete Transparency Internal - Offset before performance Additional charges 32 32

33 RFP - PARTICIPANT EDUCATION CRITERIA Guidelines General DOL Interpretive Bulleting 96-1 Individual 408(g) ERISA 404(c)/404(a) Disclosures Plan General Elements, Sample Individual Information Gathering Model Portfolios Schedule Sample Agreement

34 RFP - 408(g) COMPLIANCE Final Regulations Fiduciary Acknowledgment Absence of Conflict Fee Neutral/Computer Model Portfolio Notice Fees, Investment Performance Issue Brokers, Varying Fees (Sales, Trailer Fees, commissions, other incentives) not permitted based on investments selected, conflict disclosure required

35 WRITTEN AGREEMENT Fiduciary acknowledgement (where appropriate) Clear specification of duties and compensation Acceptance of Liability for Breaches ERISA standard of care Dispute Resolution (State Law &Venue) Matches RFP responses 35 35

36 AVOID DEFECTIVE AGREEMENTS Not a fiduciary Cannot/does not rely on advice Advice not tailored to plan Indemnify errors unless negligence, gross negligence, willful misconduct FINRA arbitration Choice of Remote Law and Venue 36 36

37 RFP WELFARE/FRINGE BENEFIT PLANS ERISA PLANS medical, health, disability, life, prepaid legal, unemployment IDENTICAL FIDUCIARY STANDARDS & DUTIES these plans require the same level of due diligence as retirement plans particularly if employee contributions are required IT Corp v General Am Life

38 RFP WELFARE/FRINGE BENEFIT PLANS - TASKS Selection of Providers Broker TPA Benefits Insurers/Funds Documents Plan, SPD, Benefit Summary Cost of Administration/Benefits Monitoring Performance of providers Claims Procedures Per ERISA & PPACA 38 38

39 REWARD DIMINISHED RISK Prudence Clear Established Processes Expertise Documented in Selection and review Documents Established (IPS, 404(c), Agreements allocating Liability) Investment Objective Process satisfies criteria Compliance Review 39 39

40 CONCLUDING REMARKS Plan sponsors/employers have important fiduciary duties Recent legal developments emphasize importance of acting in accordance with ERISA fiduciary standards Protect yourself through steps discussed today, including RFP process Best practices minimize risk and maximize plan benefits 40 40

41 OUTSIDE, OBJECTIVE, EXPERT ASSISTANCE # _v2