FIDUCIARY INSIGHTS & UPDATES

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1 FIDUCIARY INSIGHTS & UPDATES Did You Know? Fiduciaries have important responsibilities and are subject to high standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. 1 In This Issue Retirement Plan Committees and Fiduciary Status...2 Fiduciary Governance Structure...3 Case Study: The Fiduciary Duty To Know...4 Who is Plan Fiduciary?...5 Fiduciary Definitions...6 This issue sheds light on best practices around managing an effective fiduciary process that s free of conflicts of interest to help an employer reduce risk and maximize its retirement plan. Many organizations have come to realize that a retirement plan committee comprised of qualified internal representatives, aided by independent fiduciary advisors, can bring a diversity of knowledge, insights, and ideas to help mitigate a plan s fiduciary and compliance challenges while driving better outcomes for the plan and its participants. Increasingly, lawyers are bringing lawsuits on behalf of plan participants against fiduciaries including the company executives responsible for running 401(k) plans suing to recover losses incurred by plan participants. And right behind the private litigators are agents from the Department of Labor, state and local agencies, as well as the media shedding light on how employers are too busy and unknowledgeable of the nuances of the retirement plan industry. Not surprisingly, these events have drawn the focus of many plan sponsors toward issues of fiduciary responsibility and the need to reduce risk in this area. Although the increased attention on fiduciary issues has created new complexities for plan sponsors, new approaches to fiduciary risk management and retirement plan governance have evolved over recent years. We are often asked about the types of liabilities assumed by plan sponsors. These liabilities can be significant, and we expect there will be greater scrutiny around the following areas as pension litigation evolves in the 21 st century: Plan administration issues; Investment fees and performance; and Enabling plan participants to achieve their retirement income needs. We believe the plan sponsors who manage a documented, prudent fiduciary process that drives improvements across these areas to satisfy the best interests of their participants are less likely to have former employees or the Department of Labor bring lawsuits against them. Please contact Walt Melcher, QPFC, AIFA at for more information of any topics in this journal.

2 Retirement Plan Committees and Fiduciary Status Retirement Plan Committees and Their Fiduciary Status Establishing and managing a Retirement Plan Committee to oversee your organization s retirement plan can be an effective way to reduce risk and unnecessary legal expenses related to potential retirement plan lawsuits while ensuring optimal services and investments are being provided to plan participants. You can t overstate the importance of identifying who owns the fiduciary responsibilities for overseeing an organization s retirement plan because they hold the highest duty to plan participants and beneficiaries and are personally liable for it. As a result, convincing certain people within your organization to nobly serve on the Retirement Plan Committee is no easy task. Although ERISA and the Department of Labor don t require a committee or a certain frequency of committee meetings, it s a best practice for all committee members to be present at periodic meetings and keep meeting minutes to help demonstrate that a prudent process is being followed. When selecting committee members, it s important to take a realistic account of their necessary time commitment. It s also helpful to have an odd number of committee members who are executive-level decision-makers and can act independently, without necessarily consulting with superiors. Furthermore, adopting a retirement plan committee charter is a good way to clarify their roles and responsibilities. With serving on such a committee comes a legal obligation and the potential threat of personal liability for losses resulting from a breach of such duties (members continuously missing committee meetings may be considered breaching their fiduciary duties). ERISA 409 says that [a]ny person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach.... The committee members are also expected to attend committee meetings and always act in the best interests of the plan s participants and beneficiaries. Members of senior management Periodic committee meetings Decisions made in the best interests of plan participants Ensure plan is managed in accordance with ERISA Keep meeting minutes to prove a prudent process is followed Within a qualified ERISA retirement plan, the employer, through its officers, controls the decisions of which plan service providers and investment options should be selected. That control is a fiduciary function and the officers who exercise the control, as well as the directors who oversee their conduct, may be considered fiduciaries under ERISA. Where the responsibility for making these decisions and overseeing the investments is not assigned, it remains with the employer. That could mean that the officers or board of directors are now responsible for the prudent management and oversight of the plan and become ERISA fiduciaries. If the committee members do not have the education and experience to handle these responsibilities, then expert assistance should be provided for them. 2 Periodic fiduciary education and training can be provided to committee members to help them fulfill their fiduciary duties and reduce risk of a breach. RMB Retirement Plan Solutions doesn t provide legal advice and encourages plan sponsors to seek assistance from ERISA attorneys for legal advice on their retirement plans. 2

3 Structure of Fiduciary Oversight Fiduciary Governance Structure Each retirement plan arrangement has a certain fiduciary structure that requires ongoing coordination and monitoring by the Plan Sponsor or appointed Retirement Plan Committee. Within this structure, the executives at a plan sponsor are able to make what are called business decisions (settlor decisions) that may not be considered fiduciary decisions. Examples of this include whether to offer a retirement plan, the level of employer contributions, decisions to amend the plan, etc. These are not subject to ERISA fiduciary rules. However, fiduciary activities typically begin once those decisions involve participant assets and require several fiduciary decisions on how plan assets are invested (e.g. hiring service providers, determining types of investments to offer, specific investment selection, sending required disclosures to participants, and evaluating and negotiating plan expenses). Plan Sponsor (Employer) Executives Settlor Role Establish plan Match or P.S. contributions Vesting Amendments Retirement Committee Fiduciary Roles Independent Fiduciary Advisor Employees serving on committee Hiring, monitoring, replacing plan recordkeeper and other service providers Investment selection, monitoring and replacement decisions Fulfillment of compliance activities Distributing required notices Remitting $$ into plan trust timely Benefits Staff Administration Role Daily plan administration items Processing plan contributions and distributions Distributing education materials Service provider liaison Plan Documents Adoption Agreement Amendments Service Agreement Trust Agreement Summary Plan Descript. Investment Policy Statement Committee Charter Committee meeting minutes Investment performance reports Fee disclosure statements DoL & SEC fiduciary guidance / updates Plan recordkeeper TPA Investment managers Directed trustee Custodian 3

4 A Tale of Two Plan Sponsors That Thought They Were Covered The Fiduciary Duty To Know Employers cannot rely upon non-fiduciary service providers that have conflicts of interests to accept responsibility for their service model and investment recommendations. Plan sponsors should be skeptical of and scrutinize all non-fiduciary service providers managing plan assets and plan administration. A plan fiduciary is responsible for understanding the structure of their service provider relationships, identifying their fiduciary status and accountability to the plan, and recognizing all conflicts of interest and how those may impact their plan participants and beneficiaries (fees and performance). Below, we use two real-life examples to help shed light on how less obvious conflicts of interest can impact a plan sponsor, their participants, and beneficiaries. We Already Use an Independent Advisor Advisor is part of an investment brokerage firm or an insurance company Claims to be independent Friendly and personable Receives soft-dollar compensation We Work Directly w/the Recordkeeper No independent advisor or consultant used Employer meets regularly with representatives of the recordkeeper Recordkeeper provides performance reports, highlights performance issues, provides investment alternatives for replacement What this Plan Sponsor Needs to Know This advisor is actually an investment broker This broker isn t an ERISA fiduciary to the plan and cannot provide objective advice because he doesn t have an arm s length relationship to the plan; therefore, all fiduciary responsibilities and liabilities rest with the Plan Sponsor His compensation is based on the mutual funds he recommends to the plan His recommendations are limited by what his broker-dealer firm allows him to suggest His broker-dealer firm receives certain bonuses and incentives for selling certain amounts of an investment depending on the sales promotion going on at that time (including gifts, trips, seminars, and other incentives) As a result of these conflicts of interest, plan decisions weren t made solely in the best interest of plan participants or their beneficiaries as required by ERISA What this Plan Sponsor Needs to Know This recordkeeper is also a broker-dealer so they can collect compensation from fund co s They are not an ERISA fiduciary to the plan; therefore, all fiduciary responsibilities and liabilities rest with the Plan Sponsor Their profitability is impacted by which investments they suggest to their clients Recordkeepers can t independently benchmark themselves and won t fire themselves Recommendations are limited by what their broker-dealer allows and what agreements they have in place with the fund companies The broker-dealer firm may receive certain bonuses and incentives for distributing certain funds through their retirement plans As a result of these conflicts of interest, most plan decisions weren t made solely in the best interest of plan participants or their beneficiaries as required by ERISA 4

5 Fiduciary Definition & Responsibilities Who is a Plan Fiduciary and What are Their Responsibilities? Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person s title. A plan must have at least one fiduciary (a person or entity) named in the written plan document, or through a process described in the plan, as having control over the plan s operation. The named fiduciary may be identified by office or by name. For some plans, it may be an administrative committee or a company s board of directors. A plan s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan. ERISA requires that, in performing these duties, fiduciaries act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 4 Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: Acting solely in the best interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; Carrying out their duties prudently; Following the plan documents (unless inconsistent with ERISA); Diversifying plan investments; and Paying only reasonable plan expenses. The duty to act prudently is one of a fiduciary s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection. 1 5

6 Types of Fiduciaries Types of Retirement Plan Fiduciaries Fiduciary Roles Definition 3 Plan Committee Member Limited Scope ERISA 3(21) Full Scope ERISA 3(21)(A) Limited Scope ERISA 3(38) Fiduciary Full Scope 3(38) Fiduciary Plan Administrator Full Scope 3(16) Fiduciary Members of a committee that could be appointed by the board of directors of the plan sponsor or the Named Fiduciary as well as others who may be acting in some fiduciary capacity under ERISA due to their actions. Fiduciary Advisors accepting 3(21) responsibility for a limited number of fiduciary activities that have been delegated to them on behalf of the plan sponsor. However, the Plan Sponsor retains the ultimate responsibility and must monitor the performance of the 3(21) fiduciary. For instance, an investment advisor accepting ERISA 3(21) responsibilities may recommend a potential menu of investment options for the plan, but it is still up to the Plan Sponsor to accept or reject those investment options. The employer / Plan Sponsor begins as the original full scope 3(21) fiduciary until they make the decision to delegate certain responsibilities to service providers. Typically, the named fiduciary starts with having 100% fiduciary responsibility and retains the status of Plan Sponsor. This type of fiduciary has all of the responsibilities of a 3(21) fiduciary but limited by scope of the services they are proposing (e.g. selecting and replacing investment managers). This type of fiduciary assumes the legal responsibility and liability of investment decisions. Bringing forward our previous example, the investment advisor accepting ERISA 3(38) responsibilities may recommend a potential menu of investment options for the plan; however, neither the Plan Administrator nor the Plan Sponsor would have a say in the ultimate investment of the funds. A full scope 3(38) fiduciary goes beyond the limited scope fiduciary and takes on more responsibility than just selecting and replacing fund managers. This may include discretion over hiring / firing any service provider to the plan and determining if the fees charged by the services providers are reasonable, their services competitive, etc. The Plan Administrator is responsible for the day-to-day duties of administering the plan, including determination and transmittal of contributions, distributions, loan approval processing, annual compliance testing, Form 5500 and sending required notices to plan participants. Unless a service provider specifically accepts fiduciary status for performing all these tasks as an ERISA 3(16) fiduciary, the Plan Sponsor is still liable for fulfilling these duties. Performs all functions required of the Plan Administrator as defined by ERISA (typically, this is the employer or Plan Sponsor). 6

7 Conclusion Working Together For the Success of The Plan A Retirement Plan Committee is in the bests interests of the plan There s an old joke in business that a camel is a horse designed by a committee. While this may be true in some situations, an effective 401(k) plan committee is the exception to this rule. No single individual possesses all of the legal, investment, and administrative knowledge needed to master the administrative and fiduciary complexities of managing 401(k) plan on their own. Bringing the knowledge and expertise of a qualified team together to provide oversight of your plan will not only reduce legal and fiduciary risk but will reinforce the idea that helping employees save for retirement to achieve their retirement income goals is everybody s business. When employees are more confident about their retirement readiness, they are also more productive at work and become more profitable workers. A retirement plan committee working closely with their fiduciary advisory and their recordkeeper can achieve unique goals for the plan sponsor and the employees when they work together. Sources 1 Department of Labor: Meeting Your Fiduciary Responsibilities Ninth Circuit decision in Howard v. Shay 100 F. 3d 1484 (9 th Cir. 1996), the judge said: ERISA fiduciaries are held to the standard not of a prudent lay person but rather of a prudent fiduciary with experience dealing with a similar enterprise. If they do not have all of the knowledge and expertise necessary to make a prudent decision, they have a duty to obtain independent advice. 3 American Society of Pension Professionals and Actuaries and fi360 4 ERISA 404(a)(1)(B) 7

8 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. 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. Registration of an investment adviser does not imply any level of skill or training. The oral and written communication of an adviser provide you with information about which you determine to hire or retain an adviser. Walt Melcher, QPFC, AIFA V.P., Director of Retirement Plan Solutions P E wmelcher@rmbcap.com 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