1 401(k) Fiduciary Briefing 7 Steps to Help Plan Sponsors Mitigate Risk Presented by: John A. Frisch, CPA/PFS, CFP, AIF, PPC TM President, & Managing Partner, Qualified Plans
2 Common 401(k) Plan
3 Objectives Help you understand: Who are the plan fiduciaries Responsibilities Why should you care! Personal liability Litigation on the rise US Department of Labor How you can minimize fiduciary risk Follow the Seven Steps
4 Why Should You Care? Background on ERISA (Employee Retirement Income Security Act) Litigation US Department of Labor
5 ERISA Background ERISA - Employee Retirement Income Security Act Protects plan participants by putting responsibilities on those in charge of the plan. Retirement plans covered: Any defined benefit plan and IRC 401(K), 403(b), profit sharing, money purchase defined contribution plans Not covered: IRAs, ROTH IRAs, SIMPLE IRAs, SEP IRAs, solo-401(k)
6 Litigation on the Rise Liability Relating to Duty to Pay Reasonable Plan Expenses Only Increased interest in 401(k) fees has resulted in lawsuits against employers and providers Types of claims made by participants Plan fiduciaries failed to monitor indirect compensation from plan s investment providers to other service providers (fee/revenue sharing) Selection of inappropriate fund share class Selection of active funds instead of lower cost passive Failure to follow investment policy statement
7 AYE, AYE, SIR! WE CHECKED OUT THE 401(K) FEES AND THERE S NOTHING TO BE CONCERNED ABOUT. 401(K) FEES
8 Litigation on the Rise (cont d) High Profile Cases Walmart: retail funds Proprietary funds Ameriprise Cigna Fidelity MassMutual Tussey v. ABB, Inc March 31, 2012 $36.9 Mil ABB never calculated the $ amount of their plan fees Record keeping fees hidden from participants Revenue sharing for recordkeeping exceeded value Violated prudence when it replaced the Vanguard Wellington Fund with the Fidelity Freedom Funds Violated their Investment policy statement Didn t document why they switched funds Used high cost mutual fund classes when lower cost were available
9 Litigation on the Rise (cont d) Example: Tibble v. Edison $371,000 against personal assets of fiduciaries (HR Director and C level managers) Allowed fee creep, defendants failed to show they had considered institutional and other lower cost funds
10 DOL Actions on the Rise 65% of 3,928 plans the DOL audited for year ending 09/2014 were fined, received penalties or had to make reimbursement to the plan. DOL collected > $600 Million Average award $235, ,000 employee complaints = 687 investigations Very small % bad guy situations
11 Example DOL Action Contractor to restore more than $460,000 to employee profit-sharing plan US Labor Department s investigation finds plan trustee mismanaged investments Reef Development - Investigators found that Aguirre neglected his fiduciary responsibilities by not acting carefully in the selection and monitoring of investments made on behalf of the profit-sharing plan. Restore $463k + $92k Penalty
12 Liability for fiduciary breach is personal, not at company level
13 Liability for fiduciary breach is personal, not at company level Restore plan losses (including Interest) Bear expenses for corrections process (e.g., appraisals, calculations)
14 On DOL s Radar Documentation Vendor Selection Or not selecting: Hartford to Mass Mutual Fees and Fee Disclosure Fiduciary Roles Missed/late disclosures & reporting Investment Selection TDFs New rules
15 It s Not That Complicated.
16 It s Not That Complicated By Focusing on the Right Things, a Plan Sponsor Does Not Have to Know EVERYTHING. Delegation is KEY. Know the (7) Steps to Mitigate Risk.
17 The (7) Steps to Mitigate Risk 1. Yes, It s True. You are a FIDUCIARY 2. You CAN Delegate Your Fiduciary Responsibilities 3. You MUST Understand Your Plan s Fees. ALL Fees 4. Ask The RIGHT Questions of (Benchmark) Your Current Provider 5. MAINTAIN Your Investment Policy Statement 6. Form an Investment Committee and MEET Regularly 7. MONITOR Your Plan!
18 Most Plan Sponsors are unaware of the many duties required of them as a fiduciary.
19 1 Yes, It s True, You Are a Fiduciary ERISA Defines Fiduciary as: Any person (with respect to a TRUST) exercises any discretionary authority or discretionary control regarding management of the plan, or exercises any authority or control regarding management or disposition of its assets; or Has any discretionary authority or discretionary responsibility in the administration of such plan; or Renders investment advice regarding plan assets for a fee or other compensation, direct or indirect, or has any authority or responsibility to do so.
20 1 Types of Fiduciaries Named Fiduciary Actually named in a plan document Governing Board of Directors Not covered by Directors and Officers Insurance Functional Discretion or control
21 1 Yes, It s True, You Are a Fiduciary What are Your Fiduciary Duties? Act solely in the interest of Plan Participants and their beneficiaries and with the exclusive purpose of providing benefits to them; Paying ONLY reasonable expenses Carrying out your duties as a prudent expert (or hire one); Following the Plan Documents (unless inconsistent with ERISA); Diversifying Plan Assets. The duty to act prudently is one of the central responsibilities under ERISA.
22 2 You CAN Delegate Your Fiduciary Responsibility ERISA s original intent was for retirement plan investments to be managed and run by experts Delegating investment responsibility to outside experts, insulates a plan sponsor from both responsibility and liability. REPEAT: If investment discretion is taken away from a plan sponsor If there is No Responsibility for specific investment decisions there is no liability. By delegating, plan sponsors minimize risk related to the plan AND maximize the wealth for their participants. Delegation to an investment fiduciary offers REAL VALUE for the plan sponsor.
23 2 You CAN Delegate Your Fiduciary Responsibility Forget the Warranty Hire an outside Fiduciary. - Warranties offered by MassMutual and John Hancock exclude fee-based allegations of misconduct 404(c) is not ENOUGH. Discretion is the primary trigger of fiduciary responsibility and liability. No discretion = no responsibility = no liability
24 2 Investment Management Delegation Sponsors may hire an ERISA Section 3(38) Fiduciary Investment Manager. Acts as the Investment Fiduciary to the plan Makes all investment decisions for the plan (has discretion) Only type of Investment Manager who can remove all investment liability from Sponsor Bank, insurance company or Registered Investment Advisor. Cannot be a brokerage firm. And rarely bank or insurance company. Beware of 3(38) Lite
25 2 Investment Management Delegation (cont d) Step down from 3(38) is 3(21) fiduciary A 3(21) will act as a co-fiduciary and will help the sponsor select the investment options and monitor the investments in the plan. Sponsor ultimately responsible for investment selection and monitoring. Step down from 3(21) fiduciary is no fiduciary (conflict of interest) Brokers Most insurance agents Most bank programs
26 2 Santomenno v. John Hancock Life Ins. Co., (3d Cir. 09/26/14) the question is whether John Hancock acted as a fiduciary to the Plans with respect to the fees that it set... [E]ven if they were incentivized to select certain funds by John Hancock's promise of indemnification... the trustees still exercised final authority over what funds would be included... Nothing prevented the trustees from rejecting John Hancock's product and selecting another service provider; the choice was theirs... [We] do not see how monitoring the performance of the funds that it offers and relaying that information to the trustees, who retain ultimate authority for selecting the funds to be included... gives John Hancock discretionary control over anything, much less management of the Plans."
27 2 Investment Management Delegation (cont d) DOL booklet Meeting Your Fiduciary Responsibilities A fiduciary can also hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. If an employer appoints an investment manager that is a bank, insurance company, or registered investment adviser, the employer is responsible for the selection of the manager, but is not liable for the individual investment decision of that manager.
28 Common 401(k) Plan
29 401(k) Plan with 3(38)
30 2 Plan Administrator Delegation Sponsors may hire an ERISA Section 3(16) Fiduciary Plan Administrator. Acts as the Administrative Fiduciary to the plan Supervises all service providers Ensures reasonable fees Approves all participant distributions Signs the Form 5500 (tax return) Beware of 3(16) Lite
31 401(k) Plan with 3(38) & 3(16) & Directed Trustee
32 3 Fees Department of Labor has articulated 3 guiding principles for plan fiduciaries to satisfy ERISA fee-related duties Compensation paid directly or indirectly by the plan to its investment and service providers must be reasonable Fiduciary must obtain sufficient information Fiduciary must engage in an objective process to determine quality and fee reasonableness
33 3 Understand Your Plan s Fees While the law does not prescribe a specific level of fees, it does require that fees charged to a plan be reasonable. Types of fees: Explicit Fees Implicit Fees Administrative Cost Recordkeeping Fees Custody Fees Trustee Fees Brokerage Fees Investment Cost Investment Management Fees Expense Ratio Bid - Ask Spread Cost Short term Trading Fees
34 3 Understand Your Plan s Fees Most recent litigation has focused on plan fees Complaints generally allege that plan fiduciaries violated various fiduciary duties owed to the plan and its participants by: Permitting the plan to pay excessive fees and expenses Failing to monitor fees and expenses Failing to discover, disclose and stop hidden and excessive fees charged to the plan Failing to know the industry trends, developments, practices and policies that affect plans Failing to understand
35 4 Ask the Right Questions of your Current Provider (BENCHMARK) Ask the right questions of your service providers: Insurance Companies Mutual Fund Companies Brokers Investment Professionals Banks Third Party Administrators You have a DUTY to KNOW.
36 4 Ask the Right Questions of your Current Provider (BENCHMARK) Common Misconceptions About Benchmarking It s not necessary because we are with the leading provider the biggest provider the low cost provider It s too much work, not critical and just too expensive Our provider does this for us Facts About Benchmarking Benchmarking requires some effort but not nearly as difficult as you would expect If done properly and fully documented, it significantly reduces fiduciary liability Always results in a greater understanding of plan fees and services Almost always lowers costs, increases service and reduces fiduciary exposure Often yields surprises -- disparity between what you think about your plan and reality
37 4 Ask the Right Questions of your Current Provider (BENCHMARK) Proper benchmarking involves a review of: ALL FEES Investments Plan provisions Participant needs Comparison of similar types of plans Are the investment offerings mutual funds or group annuities? Can participants transfer monies out of the fixed accounts without penalty? Are there MVA s or M&E charges? Are the investment offerings proprietary? Mutual Funds Are the offerings active or passive? What are the TOTAL fund expenses? Can we get non-proprietary funds?
38 4 Ask the Right Questions of your Current Provider (BENCHMARK) Brokers How do you get paid? How were the investments selected that you are offering? Do you earn dealer concessions on the fund purchases? Do you offer investment advice? Are investments proprietary? Are you a Fiduciary? Banks Is the bank acting as a trustee, if not, why not? Are you an investment fiduciary? Are the investments proprietary?
39 4 Ask the Right Questions of your Current Provider (BENCHMARK) Third Party Administrators Do you receive asset based compensation from the investment provider? Do you make QDRO determinations? Do you make hardship determinations? Will you act as named fiduciary?
40 5 Maintain Your Investment Policy Statement The Most Important Duty of the Fiduciary is Procedural Prudence (Investment Policy Statement). ERISA 402(b)(1) Every employee benefit plan shall provide a procedure for establishing and carrying out a funding policy Uniform Prudent Investor Act The trustee must give reasonably careful considerations to both the formulation and the implementation of an appropriate investment strategy, with investments to be selected and reviewed in a manner reasonably appropriate to the strategy. Investment Policy Statement Structure: Purpose & Background Statement of Objectives Guidelines & Investment Policy Securities Guidelines Selection of Money Managers Control Procedures
41 5 Maintain Your Investment Policy Statement Advisory Council to the DOL on Employee Welfare and Pension Benefit Plans Nov 2006 Report Of The Working Group On Prudent Investment Process If an investment policy statement has been properly formulated and memorialized, all prudent procedures covered will fall into place. This is predicated upon the fact that liability usually occurs when the fiduciary has failed to act in this area as opposed to acting improperly.
42 6 Form an Investment Committee (and MEET Regularly) The purpose of the Committee is to establish, execute and interpret the Investment Policy Statement or the plan. The selection of the investment managers, custodians, and advisors to the plan (delegate). Monitor investments/managers Formalize the process. Establish these procedures in writing. Document.
43 6 Form an Investment Committee (and MEET Regularly) DOL booklet Meeting Your Fiduciary Responsibilities regarding a 3(38) However, an employer is required to monitor the manager periodically to assure that it is handling the plan s investments prudently and in accordance with the appointment.
44 7 Monitor Your Plan x Plan & Trust Documents Summary Plan Description The Plan Sponsor Checklist Audited Financial Statements Third Party Service Providers Adoption Agreement Summary Annual Reports Trustee Reports Resolutions Form 5500 Journal, Ledgers, Account Statements Copy of Fidelity Bond Policy 401(k) Plan Promotional Materials Investment Options Participant Communications Prospectus Account Statements Safe Harbor Notices Qualified Default Investment Alternative Notices Executed IPS Investment Management Agreements Due Diligence Documentation Investment Manager Reports Plan Sponsors Periodic Review Request for Proposals Competitive Bid Documentation Copies All Service Agreements Investment Committee Meeting Minutes Investment Committee Charter Investment Committee Member Acceptance Letters Administrative Committee Meeting Minutes Enrollment Forms & Procedures Loan & Hardship Withdrawal QDRO & Claim Procedures
45 The (7) Steps to Mitigate Risk 1. Yes, It s True. You are a FIDUCIARY 2. You CAN Delegate Your Fiduciary Responsibilities 3. You MUST Understand Your Plan s Fees. ALL Fees 4. Ask The RIGHT Questions of (Benchmark) Your Current Provider 5. MAINTAIN Your Investment Policy Statement 6. Form an Investment Committee and MEET Regularly 7. MONITOR Your Plan!
46 Suggestion Consider Fiduciary Liability Insurance to cover all plan fiduciaries. Contact your Property & Casualty agent for more information.
47 Advantage of Compliance: A Successful 401k Plan Lower plan costs Experts manage plan investments Follow Plan Documents Put your employees best interest first More at retirement Better investment options and returns Better designed and implemented plan Avoids conflicts or interest. Best decisions.
48 Your Questions?
49 Thank You! For Further Information: Alexandria Capital Washington Office: Prince William Office: th Street, NW 4008 Genessee Pl., Ste 200 Washington, DC Prince William, VA Tel John Frisch: Laurie Wieder: