FIDUCIARY INSIGHTS & UPDATES

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1 FIDUCIARY INSIGHTS & UPDATES Did You Know? There are two types of advice services that can be offered in retirement plans: conflicted and nonconflicted. Conflicted advice means that the provider of advice can, directly or indirectly, increase its compensation based on the recommendations that are made. For example, if a fiduciary adviser recommends investments that pay a higher commission to the adviser or an affiliate business, but could have recommended investments that pay a lower commission, the advice is considered to be conflicted. In This Issue What s the difference between advice and guidance?... 2 Commission-based brokers vs. fee-based advisers... 3 How to provide advice while following ERISA guidelines... 4 More participants in 401(k) and 403(b) plans want to be told how to investment their retirement savings account. This report will explore who s able to provide that kind of advice and what plan sponsors need to do to determine the best way to provide investment advisory services. More employers are considering adding these services to their retirement plans. However, many aren t equipped to ensure this fiduciary decision follows the numerous Department of Labor requirements that dictate how to provide this type of advice in a participant-directed retirement plan without causing a prohibited transaction. Until recently, the prohibited transaction provisions of the Employee Retirement Income Security Act (ERISA), prevented an investment adviser from recommending investment options to participants in 401(k) or 403(b) plans. If a retirement plan provided an ineligible advisory service within their retirement plan, the plan may have been disqualified, thus jeopardizing all of the participants pre-tax retirement savings. Finalized in 2011, the Pension Protection Act of 2006 introduced a way for a plan sponsor to make advisory services available to their participants without causing a prohibited transaction. Unfortunately, most 401(k) and 403(b) plan participants are naïve about making investment decisions for their own retirement assets. They are expected to become experts on how to effectively invest and grow their retirement nest egg by reading an enrollment kit or browsing a website. Numerous studies have shown how professional investment help, including personalized advice, can help to improve a retirement plan participant s investment return. Advisory services come in different forms: in-person consultations, phone conversations, and web-based tools. Each has unique benefits. Getting help from an Independent Fiduciary Advisor to determine which type of advisory service is most appropriate for retirement plan participants may help reduce fiduciary risk and control costs while also helping participants meet their retirement savings needs.

2 Differences Between Advice and Guidance How Can Employers Distinguish Between the Two? Employers sponsoring a retirement plan have a fiduciary duty to understand the difference between guidance and advisory services provided to their participants. In June 1996, the U.S. Department of Labor issued Interpretive Bulletin that clarified what constitutes both guidance and advice. Key Differences Definition Guidance The act or process of guiding; implies intimate knowledge of the right way and of all difficulties and dangers that might result Advice Specific recommendation regarding a decision or course of conduct Held to ERISA Fiduciary Standard of Care? Explanations Fiduciary Responsibilities Plan Sponsor: Yes Provider of Guidance: No Guidance services provide participants with information to help them make decisions: 1) Plan specific information: explain the advantages of participating in the 401(k) plan 2) General financial & investment education: describe investment concepts (risk, inflation, diversification, etc.) 3) Asset allocation modeling: provide examples of diversified portfolios Ensure the materials and services provided are accurate, appropriate, and not considered advice. Expanding beyond guidance to investment advice causes some employers to worry about fiduciary liability for this activity. Plan Sponsor: Yes Provider of Advice: Yes Advisory services come in two forms and are personalized based on age, income, account balance, retirement age, risk tolerance, and other factors. 1) Provide participants with specific recommendations on how to invest their individual portfolios [considered ERISA 3(21) advice] 2) Provide a service that manages participants portfolios for them based on their unique needs [considered ERISA 3(38) advice] After the adviser has been selected through a prudent process, the firm must be willing to accept an ERISA fiduciary role for the advice they provide, compliant to a written agreement and for a reasonable fee. 2

3 Brokers vs. Advisers: What You Should Know Commissioned Brokers vs. Fee-Based Advisers Employers also have an ERISA fiduciary duty to act in the best interests of their participants and to know the differences between the types of service providers with whom they work. This includes the distinction between fee-based advisers/consultants and commission-based brokers. Key Differences Compensation Standard of Care Accountability Disclosures Commissioned Broker Brokers are representatives of a broker-dealer firm and are compensation with commissions based on securities they sell. The commissions may be different depending on what each brokerdealer allow its brokers to sell to clients. The broker-dealer may receive special incentives for encouraging its brokers to sell more of a certain product. Brokers are only held to a suitability standard. Because of ERISA s fiduciary responsibility and prohibited transaction rules, a broker generally can t serve as a fiduciary to a plan. Instead, the broker provides guidance but not advice. Because brokers are generally not fiduciaries to their clients, they can make decisions that pay higher commissions to themselves and are not necessarily in clients best interests. Brokers are not typically required to provide clients with disclosures of conflicts of interest. Fee-Based Adviser Investment adviser representatives of a Registered Investment Adviser firm are typically paid directly by their clients, pursuant to a written agreement outlining the terms of the fee for services provided. This could be a flat fee or one based on the value of assets under advisement. Fee-based advisers are not allowed to receive commissions or incentives from investment companies to which they allocate assets. Investment advisers are almost always considered an ERISA fiduciary to a plan and typically agree in writing to serve in that capacity. They are held to a fiduciary standard of care, required to act in the best interest of each client and governed by the U.S. Securities and Exchange Commission. Investment advisers have a fiduciary duty to act in the best interest of their clients at all times placing clients interests above their own. Advisers are required to provide their clients with very specific disclosures. 3

4 How to Provide Advice in Accordance with Guidelines Preventing an ERISA-Prohibited Transaction with Advice Participants in 401(k) and 403(b) plans are asking for more help with investing their retirement plan assets. Many of them that don t receive personalized investment advice are investing either too aggressively or too conservatively. This can negatively impact their ability to successfully invest clients assets in a way that ultimately meets each participant s retirement income needs. Because of these concerns, the Pension Protection Act of 2006 included a provision that permits advisers to provide investment advice to plan participants if appropriate safeguards are in place. Previously, the prohibited transaction provisions of the Employee Retirement Income Security Act (ERISA) prevented an investment adviser from recommending investment options to participants in 401(k) or 403(b) plans. If a plan sponsor wants to make investment advice available to participants, the plan sponsor needs to make practical and legal decisions in fulfillment of its fiduciary responsibilities. These decisions include: 1. Discretionary or non-discretionary advice There are two basic forms of investment advice for participants. One is nondiscretionary investment advice. In this circumstance, the fiduciary adviser makes investment recommendations to the participant, but only the participant can actually implement the recommendations. The other form is discretionary advice, which may be referred to as investment management. In this case, the participant hires the investment manager to make decisions about the investments of the account and to implement those decisions. 2. Conflicted vs. non-conflicted advice Conflicted advice means that an adviser of a retirement plan recordkeeper can, directly or indirectly, increase its compensation based on the recommendations that are made. For example, if a recordkeeper has proprietary mutual funds, and the recordkeeper advises that the plan or participants invest in those proprietary funds, the advice is conflicted. This is because an affiliate would make more money if the participants follow the advice. Similarly, if a fiduciary adviser recommends investments that pay a higher commission to the adviser or an affiliate business, but could have recommended investments that pay a lower commission, the advice is considered conflicted. If the conditions of the new prohibited-transaction exemptions are not satisfied, the plan will enter into a prohibited transaction, which may cause the plan to become unqualified. Alternatively, if the fiduciary adviser does not have any proprietary investments, or cannot cause itself or an affiliate business to make more money through the advice, then the advisory firm is a pure level-fee provider of advice. It s not conflicted because it doesn t have the potential to increase the income for the adviser or affiliates, and the conditions imposed by the Department of Labor regulation do not apply because appropriate safeguards are in place. This approach to providing advice has gained popularity in the market place for a variety of reasons. 4

5 How to Provide Advice in Accordance with Guidelines (continued) Preventing an ERISA-Prohibited Transaction with Advice 3. Prudent selection and monitoring of an adviser The DoL has provided guidance on the selection of an investment adviser for participants. A plan s retirement plan committee is required to engage in a prudent process by obtaining and reviewing the relevant information and then reaching a reasoned decision. As with any fiduciary decision, the relevant factors are those that a person who is an expert in such matters would consider in making such a decision. After the initial selection is made, the services of the fiduciary investment adviser must be periodically monitored, considering the same factors, but also considering the actual performance of the adviser and other factors, such as any participant complaints. Once the adviser has been prudently selected, the committee is not responsible for and does not generally need to monitor the investment recommendations given to participants. However, this is considered a best practice. Both the selection process and the monitoring process should be documented in writing and recorded in written minutes of committee meetings. In addition, any of the documentation that was reviewed for those purposes should be included in the committee s due diligence file. The committee should seek assistance in determining the completeness and relevance of that data. In other words, the plan committee has a responsibility to make sure that it has received all of the information that it needs to make a prudent decision and that appropriate weight is given to the information. If the committee decides to use advice that is potentially conflicted, the committee should review the regulation and the information provided by the adviser to make sure that the participant advisory program fits within one of the two regulatory exemptions. The first exemption is referred to as the level-fee exemption. The level-fee exemption permits an adviser to set up a separate entity (for example, a Registered Investment Adviser firm), which charges a level fee for its advice. The second exemption is called the computer model. In this case, the adviser must have a qualifying computer model for developing the advice and is limited to providing the advice that is generated by the computer model. However, the computer model can recommend that a participant invest in affiliated products and/or that the participant invest in products that pay higher commissions to the adviser. To protect participants, the computer model exemption is subject to a number of conditions. The following are some of the conditions that apply to these arrangements. If all the conditions are not satisfied, the investment advice arrangement is a prohibited transaction. a) Conditions that apply to both the computer model and the level-fee exemptions: o The adviser must acknowledge fiduciary status. o The fiduciary adviser must provide an annual audit, by an independent auditor, of its investment advisory service. 5

6 How to Provide Advice in Accordance with Guidelines (continued) Preventing an ERISA-Prohibited Transaction with Advice o Disclosures must be made to the participants about a variety of matters, including the fees and other compensation of the fiduciary or affiliate business. o The advice must be based on generally accepted investment theories. o The advice must take into account investment management and other fees and expenses. o The fiduciary adviser must request additional information about the participant (e.g., age, risk tolerance, income, etc.) and, if that information is provided, the adviser must take it into account b) Other conditions that apply only to the level-fee arrangement: o Neither the adviser nor any employee or representative of the adviser can receive any compensation that varies depending on a participant s selection of investments. c) Conditions that apply only to computermodel arrangements: o The computer model cannot make investment recommendations that inappropriately favor investment options offered by the fiduciary adviser or an affiliate business. (Note: it s helpful if the plan sponsor requests this of a level-fee advisor.) o The computer model must be certified by an independent eligible investment expert. The job of the plan committee is to determine whether these conditions are satisfied, so that the plan can enter into the transaction without committing a prohibited transaction. At a minimum, the committee should obtain at the outset, and then annually thereafter, the following: o The certification of computer-model advice, if this is the type of advice being given; o The annual audit of its investment advice service; o The notice being provided to the participants; and o A written representation by the adviser that it is providing advice consistent with the requirements of the regulation. By providing fiduciary investment advice to participants, employers can take significant steps to improve the probability that plan participants successfully invest to meet their future retirement income needs. However, the plan s fiduciaries are required to make this decision consistent with their fiduciary obligations. 6

7 About RMB Retirement Plan Solutions Institutional Retirement Plan Advisory Services As ERISA retirement plan and investment specialists, we have the expertise and resources to drive improvements across all aspects of a retirement plan. Fiduciary SafeGuard RFP Vendor Searches & Benchmarking Participant Experience Investment Due Diligence RMB Capital Management is an independent Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. We combine the high-touch service of a boutique firm with the discipline, broad expertise, proprietary investment research, state-of-the-art technology, and seasoned professionals that are usually associated with much larger firms, to help our clients achieve their unique goals. Our firm is structured to ensure clients best interests are the driving force behind all our decisions. Retirement Plan Solutions Our Retirement Plan Solutions unit is an experienced team of high-caliber retirement plan and investment specialists that deliver holistic ERISA fiduciary advisory and consulting services to employers. Our goal is to drive measurable improvements across all aspects of their retirement plans. As an independent firm, we are unbiased and product neutral while leveraging years of experience to become an extension of our clients finance and human resources departments. Our depth and breadth of experience enable us to help our clients tackle all of the issues they face related to their retirement plans. Walt Melcher, QPFC, AIFA V.P., Director of Retirement Plan Solutions P E RMB Capital Offices 210 University Blvd, Ste. 750, Denver, CO S. LaSalle St., 34 th Floor, Chicago, IL N. Pines Way, Ste. 102, Wilson, WY 83014

8 FIDUCIARY INSIGHTS & UPDATES Disclosure Objectives: The primary objective of this newsletter is to help the Plan Sponsor and its Retirement Plan Committee become more aware of issues related to fulfilling their fiduciary duties. Past performance does not guarantee future returns and retirement plan fiduciaries should consult their advisors and consider additional information before making any decisions. Sources: 1. The Pension Protection of 2006; 2. U.S. Department of Labor issued Interpretive Bulletin 96-01; 3. Fiduciary Investment Advice for Participants, Drinker Biddle, 2011; 4. Final Rule to Increase Workers Access to High Quality Investment Advice Fact Sheet, U. S. Department of Labor 2011 Research and Analytics: The opinions and analyses expressed in this presentation are based on RMB Capital Management, LLC s research and professional experience, and are expressed as of the date noted. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this presentation. The information and data in this presentation does not constitute legal, tax, accounting, investment, or other professional advice. 8

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