Bullet Proof. A Fiduciary s Guide to Oversight

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Erik Norton
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1 Bullet Proof Your Retirement Plan: A Fiduciary s Guide to Oversight Financial Executives International Northeastern Wisconsin Chapter Professional Development Session January 20, 2011

2 Francis Investment Counsel Michael J. Francis, CIMA, JD President Senior Consultant Kelli B. Send, CFP, M.Ed. Senior Vice President Client Services Joseph J. Topp, CPA Vice President Investment Consulting Services W. Capitol Dr., Pewaukee, WI, 53072, (866)

Send, CFP, M.Ed. Senior Vice President Client Services kelli.send@francisinvco.

3 Consider this.... Total U.S. retirement plan assets = $15.7 trillion* ERISA breach of duty lawsuits The Next Tobacco ** ERISA allows aggrieved to pierce the corporate veil*** *As of 6/30/10 according to Investment Company Institute (ICI) ** NY Times Article, April 12, 2005 *** ERISA Sec. 409(a)

allows aggrieved to pierce the corporate veil*** *As of 6/30/10 according

4 Bullet Proof Your Retirement Plan: A Fiduciary s Guide to Oversight Building an Investment Oversight Process Understanding and Managing Plan Costs Improving Participant Results

5 Building an Investment Oversight Process Understanding ERISA Prudent process best practices Case study

6 Building an Investment Oversight Process Understanding ERISA of 1974 Studebaker Jimmy Hoffa stock market collapse

7 Building an Investment Oversight Process ERISA Creates PBGC Defines responsible parties (fiduciary) Defines fiduciary duties Creates penalty for fiduciary breach of duty

8 Building an Investment Oversight Process Who is a fiduciary? Named in the plan document Fee-paid investment advisor Anyone with discretionary authority over the plan or plan assets

9 Building an Investment Oversight Process ERISA s fiduciary duties Duty of loyalty Duty of prudence Duty to follow plan document

10 Building an Investment Oversight Process Fiduciary breach of duty rules Liability limited to one s responsibility Personal liability Make the plan whole for losses caused by fiduciary breach

11 Prudent Process Best Practices Identify plan fiduciaries & define duties (Inv. Policy Stmt.) Control costs through competitive bidding Regularly monitor results and fees Document all fiduciary decisions Comply with available safe harbor rules Be on the look out for conflicts of interest Protect fiduciaries with insurance/letter of indemnification

) Control costs through competitive bidding Regularly monitor results and fees

12 Case Study: Tibble v. Edison Decided July, 2010 Typical large-plan circumstances Excessive Fee case Court ruling discussed Proper delegation of duties Selection of investment advisor Duty of prudence Damages

13 Bottom Line Expectations are high Process is key

14 Bullet Proof Your Retirement Plan: A Fiduciary s Guide to Oversight Building an Investment Oversight Process Understanding and Managing Plan Costs

15 Understanding and Managing Plan Costs Fee litigation sparks DOL initiatives Issues for plan fiduciaries Understanding and managing your plan s cost structure Best practices plan cost management

16 Understanding and Managing Plan Costs Fee litigation sparks DOL initiatives

17 Understanding and Managing Plan Costs Issues for Plan Fiduciaries Negotiating reasonable compensation for plan service providers Equitably allocating plan costs to participants Communicating plan costs to participants

plan service providers Equitably allocating plan costs

18 Understanding and Managing Plan Costs Negotiating reasonable compensation for plan service providers Asset-based (pro rata) fees Per participant (per capita) fees

19 Understanding and Managing Plan Costs Asset-based (pro rata) fees Investment management expenses Trustee fees Fiduciary advisor fees

20 Understanding and Managing Plan Costs Per participant (per capita) fees Recordkeeping fees Participant education fees Plan transaction (loans, QDRO, etc.) fees

21 Understanding and Managing Plan Costs Equitably allocating plan costs to participants Use of revenue sharing payments

22 Understanding and Managing Plan Costs Forms of revenue sharing payments 12(b)(1) fees Sub transfer agent / shareholder servicing fees Finders fees / sales charges / loads Trade execution (commission) payments Shelf space / conference sponsorship

23 Understanding and Managing Plan Costs Improper use of revenue sharing payments Forcing participants to pay more than their fair share of plan costs Only an issue if avoidable

24 Understanding and Managing Plan Costs Communicating plan costs to participants New DOL fee disclosure requirements Implementation 1 st Quarter 2012 Compliance is the responsibility of the plan sponsor not the recordkeeper

25 Understanding and Managing Plan Costs Plan related disclosures General plan information Administrative expenses Individual participant expenses Investment related disclosures Fund identification Performance & benchmark data Fees & expenses

26 Bottom Line Negotiate per participant recordkeeping fee Utilize lowest cost available share class of all desired investment options Return any revenue sharing to participants Communicate cost information to participants Monitor and benchmark plan costs at least annually

27 Understanding and Managing Plan Costs Participants need protection from unreasonable fees

28 Bullet Proof Your Retirement Plan: A Fiduciary s Guide to Oversight Building an Investment Oversight Process Understanding and Managing Plan Costs Improving Participant Results

29 Despite Years of Participant Education.... Participants still not saving enough Most are improperly invested Financial in-security rampant

30 Q. According to a recent study by Hewitt, what percentage of participants are on track to meet their retirement goal? a. 62% b. 18% c. 43% d. 27%

31 A. According to a recent study by Hewitt, what percentage of participants are on track to meet their retirement goal? a. 62% b. 18% c. 43% d. 27%

32 How Participants Wish to Receive Help

33 Two Schools of Thought on Participant Education.... Our people need help; let s give it to them. We can t risk the liability.

34 Pension Protection Act Clears the Way Creates Safe Harbor allowing plan sponsors to offer advice From expert source Delivered by non-conflicted advisor Periodically reviewed

35 How to Deliver Participant Advice Delivered online - but does this drive change?

36 Q. According to a study sponsored by Charles Schwab, 74% of 401(k) plans offer online advice. What percentage of participants use it? a. 32% b. 18% c. 10% d. 45% *Source: Francis Charles Investment Schwab, Counsel New Rules LLC of Engagement all rights reserved Study, 2010

37 A. According to a study sponsored by Charles Schwab, 74% of 401(k) plans offer online advice. What percentage of participants use it? a. 32% b. 18% c. 10% d. 45% *Source: Francis Charles Investment Schwab, Counsel New Rules LLC of Engagement all rights reserved Study, 2010

38 How to Deliver Participant Advice Delivered online - but does this drive change? Delivered face-to-face but by whom?

39 Advice Works Multiple studies have found that advice works: Number of funds held significantly increase Annual returns improve an average of 200 bps.

40 Another Solution... Do it for them Studies from Behavioral Finance field

41 Today vs. Tomorrow: Will people make the right choice? One week from now 26% 74% *Source: Alliance Bernstein, Behavioral Francis Investment Finance Counsel Research LLC Digest, all Videoconference, rights reserved 2/13/07, Shlomo Benartzi

42 Today vs. Tomorrow: Will people make the right choice? One week from now 26% 74% Today 30% 70% *Source: Alliance Bernstein, Behavioral Francis Investment Finance Counsel Research LLC Digest, all Videoconference, rights reserved 2/13/07, Shlomo Benartzi

43 Industry Solutions... Do it for them Studies from Behavioral Finance field Resulted in invention of the Auto-401(k)

44 Auto-401(k) Programs Auto-enrollment Auto-escalation Target retirement date funds Managed accounts

45 Bulletproof Education Programs: They must drive change Provides advice Includes auto-programs

46 Bottom Line: Best practices drive behavior change Your education/advice provider should be held accountable for results These services should more than pay for themselves Happy people are productive people

47 Improving Participant Results Best practices programs drive change

48 Bottom Line: Bullet Proof Your Plan Expectations high Process is key Participants need protection against unreasonable fees Best practices programs drive change

49 Your Next Steps: Use Fiduciary Checklist to evaluate your current practices Create an action plan to address shortcomings Seek expertise where needed

Understanding Plan Fees and Expenses

Understanding Plan Fees and Expenses Susan M. Wright, CPA, APM Executive Director, Consulting Topics of Discussion Fiduciary Responsibilities Settlor vs. Non-settlor Expenses Revenue Holding Accounts Questions