Executive Summary. ERISA allows for the Delegation of Fiduciary Responsibility to independent investment professionals.

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2 Page 2 ERISA allws fr the Delegatin f Fiduciary Respnsibility t independent investment prfessinals. Executive Summary Many wners/executives f businesses that spnsr 401(k) plans dn t have the faintest idea f their fiduciary respnsibilities and liabilities under the Emplyee Retirement Incme Security Act f 1974 ( ERISA ). This lack f knwledge is especially trubling in light f the fact that a breach f these respnsibilities can result in persnal liability. Hwever, it is unlikely that the drafters f ERISA ever imagined that wners/executives f plan spnsrs wuld place their persnal net wrth in jepardy by retaining respnsibility fr the investment f plan assets. ERISA specifically allws fr the delegatin f fiduciary respnsibilities t independent investment prfessinals. The grwth f the 401(k) plan has resulted in a shifting f investment risk and many f the bligatins fr retirement savings t plan participants, hwever, cntrary t ppular belief these changes have nt resulted in changes in the legal respnsibility fr plan investments. Hiring an independent investment fiduciary fr a participant-directed 401(k) plan ffers bth the fiduciary prtectin fr wners/executives intended by ERISA and the unbiased advice needed by America s wrkers t maximize their standard f living in retirement.

3 Page 3 Histry The clsing f the Studebaker autmbile plant in Suth Bend, Indiana, is generally regarded as the pivtal event in the mvement twards cmprehensive federal regulatin gverning private pensin plans culminating in the passage f ERISA. The Studebaker pensin plan was s prly funded that 4,000 emplyees with an average age f 52 and average service f ver 22 years received just 15% f their vested pensin benefits. Thus, ERISA wasn t established t mandate retirement plans r retirement benefits; it was created t regulate the peratin f established retirement plans t ensure that, unlike in the case f Studebaker, emplyees receive their prmised benefits.

4 Page 4 Fiduciaries have a duty t minimize plan expenses. Fiduciary Mandate In crafting ERISA, Cngress lked t the traditinal r cmmn law f trusts simply put, trusts are arrangements where prperty is managed by ne persn (r persns, r rganizatins) fr the benefit f anther. ERISA requires that all plan assets (except insurance cntracts) be held in trust and, as under trust law, thse respnsible fr investing and managing retirement plans must live up t high fiduciary standards including: Duty f Lyalty (Exclusive Purpse Rule) a duty t act slely in the interest f plan participants and beneficiaries and fr the exclusive purpse f prviding benefits and minimizing expenses; Duty t Act Prudently (Prudent Expert Standard) a duty t act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters wuld use the cnduct f an enterprise f a like charter and with like aims; Duty f Diversificatin a duty t diversify the investments f the plan s as t minimize the risk f large lsses, unless under the circumstances it is clearly prudent nt t d s; and Duty t Fllw Plan Dcuments a duty t act in accrdance with the dcuments and instruments gverning the plan insfar as such dcuments and instruments are nt incnsistent with the prvisins f ERISA including the plan s investment management agreements and investment plicy statement.

5 Page 5 Fiduciaries persnal wealth is at risk. Liability fr Breach f Fiduciary Duties ERISA Sectin 409(a) impses persnal liability n fiduciaries that breach their fiduciary duties. In ther wrds, plan fiduciaries put their persnal net wrth at risk, if their cnduct is deemed imprudent. Fiduciaries f an emplyee benefit plan [such as a 401(k) plan] are charged with carrying ut their duties prudently and slely in the interests f the participants and beneficiaries f the plan, and are subject t persnal liability t, amng ther things, make gd any lsses t the plan resulting frm a breach f their fiduciary respnsibilities ERISA Interpretive Bulletin 96-1 In the Enrn settlement utside members f the Bard f Directrs and the chair f the plan cmmittee cntributed t a settlement frm their persnal assets.

6 Page 6 The Shift in Retirement Savings Obligatins In the 35 years since the passage f ERISA there has been a dramatic migratin frm traditinal pensin plans t 401(k) plans and the pace f that transitin is nly accelerating This mve t defined cntributin plans has resulted in bth a shift f investment risk t plan participants, but als a transitin f the fllwing retirement savings bligatins: Management f investments the vast majrity f 401(k) plans are participantdirected Retirement funding the 401(k) plan was created t facilitate and encurage retirement savings by emplyees in the case f matching cntributins, emplyer funding is whlly dependent n emplyee cntributins Payment f plan expenses fees paid frm the trust nw directly reduce a participant s nest egg rather than increase an emplyer s funding bligatin

7 Page 7 The shift in retirement savings bligatins t participants has nt resulted in a change in legal respnsibility Even in a participant-directed plan, it remains the plan s fiduciaries and nt the participants that have the ultimate legal respnsibility fr investing plan accunts. Indeed, curts have held that plan fiduciaries receive the prtectin ffered by ERISA 404(c) nly where the investment ptins ffered t participants are suitable and prudent fr the plan and remain s n an nging basis. Therefre, in a participant-directed 401(k) plan, the critical and inescapable issue fr the plan fiduciaries is fundamentally the same as in a traditinal defined benefit plan, the apprpriate selectin and mnitring f the investment alternatives (r, in the case f a 401(k) plan, the menu ffered fr participant-directin).

8 Page 8 Indeed, shifting the burden t participants may magnify certain fiduciary bligatins The payment f plan fees frm participant accunts has resulted in a heightened level f scrutiny frm bth Regulatrs 2004 ERISA Advisry Cuncil Reprt cncludes that the shift t assetbased fees makes it difficult fr plan spnsrs t understand fees paid SEC Reprt based n industry-wide investigatin f mutual fund practices raises cncerns abut disclsure f ptential cnflicts f interest GAO Reprt states 401(k) participants may be lsing thusands f dllars in retirement savings because f fees charged. And plaintiff s attrneys -- a series f class actin lawsuits have been filed challenging service prvider and investment-related fees charged t 401(k) plans Firms impacted include Internatinal Paper, Deere & Cmpany, Lckheed Martin, Being, Kraft, Caterpillar, General Dynamics, and United Technlgies Crpratin. While these lawsuits have fcused n larger plans an excessive fee lawsuit was recently filed in cnnectin with a $2 millin plan with apprximately 30 participants.

9 Page 9 ERISA encurages delegatin t an independent investment fiduciary ERISA has always prvided a safe harbr which limits fiduciary liability where a qualified investment manager is appinted. A qualified investment manager is a bank, registered investment advisr, etc. wh accepts fiduciary status and discretin ver the assets t be managed in writing. If investment respnsibility is prperly delegated, the plan spnsr will nt be under any bligatin t invest r manage any assets f the plan that the investment manager is respnsible fr investing. If an independent investment manager is nt retained, even a plan spnsr that meets the requirements f Sectin 404(c) remains fully respnsible and liable fr the prudent selectin f the investment ptins that are ffered t plan participants.

10 Page 10 The dangers f a nn-fiduciary mdel Rather than accept delegatin, the 401(k) industry has encuraged a nn-fiduciary service mdel The majr players in the 401(k) industry (mutual fund cmpanies, insurance cmpanies and brkerage firms) have encuraged a nn-fiduciary (suitability) mdel where advisrs are: nt required t act in the best interests f plan participants; and free t earn variable cmpensatin and ther frms f cmmissins In respnse t fiduciary cncerns, the 401(k) industry has prmted reliance n the safe harbr cntained in ERISA sectin 404(c) and encuraged educatin where plan fiduciaries are tld that they can receive cmplete legal immunity fr the cnsequences f investment decisins made by plan participants; fiduciary educatin and mnitring services; and the s-called fiduciary warranty isn t the best warranty that a prvider can ffer the acceptance f fiduciary respnsibility?

11 Page 11 Hiring an independent investment fiduciary fr a participant-directed 401(k) plan ffers bth the fiduciary prtectin fr wners/executives intended by ERISA and the unbiased advice needed by America s wrkers t maximize their standard f living in retirement.

12 Page 12 The AdvisrPlan Prgram the 401(k) platfrm specifically designed fr independent investment advisrs acting as fiduciaries f ERISA-cvered retirement plan Independent Platfrm - with n hidden agenda - a true unbiased investment apprach True pen-architecture and availability f funds ffered thrugh custdial platfrm N investment restrictins -- i.e., n mutual fund revenue sharing requirements fr inclusin n the platfrm Full Fee Disclsure and dllar fr dllar ffset f any mutual fund revenue sharing received t reduce plan and participant expenses Glbal Prtfli Management rebalance r reallcate all managed accunts at nce Availability f exchange traded funds (ETFs) Ability t wrk with yur lcal TPA

13 Page 13 Abut The Advisr Lab The Advisr Lab, LLC is a technlgy and educatin firm dedicated t supprting the needs f fee based financial advisrs. The Lab wrks in affiliatin with Prfessinal Capital Services, LLC., and Efficient Advisrs, LLC. Fr mre infrmatin please visit:

14 Page 14 Abut Mark B. Klein Mark Klein is the Chair f the Emplyee Benefits Grup at Dilwrth Paxsn, LLP and the president f Prfessinal Capital Services, LLC. Mark is a graduate f Gergetwn University Law Schl and cncentrates his practice n verseeing the design, drafting, and implementing qualified and nn-qualified retirement plans and welfare arrangements. He als cunsels clients n ERISA issues in mergers and acquisitins; fiduciary issues; prhibitive transactins; COBRA and HIPPA issues; and plan terminatins. In additin: Mr. Klein s executive cmpensatin wrk includes drafting and advising n qualified and nn-qualified 457 plans, emplyee stck purchase plans, incentive stck ptins, nn-qualified stck ptins, stck appreciatin rights, split-dllar plans, and nn qualified deferred cmpensatin plans (SERPS, pure deferred cmpensatin and mirrr plans). Abut Lawain McNeil Lawain McNeil is ne f the funders f The Advisr Lab and Efficient Advisrs and versees advisr training and develpment. As frmer Executive Vice President f Sales & Marketing fr ne f the largest independent registered investment advisry firms in the United States, Lawain brings a vast amunt f experience in advisr training, educatin and marketing. Thrugh his leadership, Lawain was instrumental in transitining ver $1 billin f assets frm a cmmissin, transactinal mdel t a fee-nly fiduciary mdel. Lawain s tireless advcacy fr investrs has taken him all ver the U.S. speaking at industry and investr events. His passin fr individual investrs is illustrated in his cntinued develpment f investment tls and prcesses designed t educate investrs.