To assist you in documenting and demonstrating a sound fiduciary process, we present you with this Fiduciary Audit File, designed to help you:
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- Duane Powers
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1 Dear Plan Sponsor: As an employer, you are familiar with the complexities of sponsoring a qualified retirement plan. As a plan sponsor, you must also meet certain fiduciary obligations as required by ERISA (Employee Retirement Income Security Act of 1974) and the U.S. Department of Labor. Morgan Stanley Smith Barney has created this Fiduciary Audit File to help retirement plan sponsors like you understand and manage these fiduciary responsibilities. As a fiduciary, you are required to establish and follow a structured, prudent process to manage your responsibilities and then be able to demonstrate your adherence to this process. Failure to comply with the standards required by ERISA may expose you to scrutiny by the Department of Labor and other regulatory agencies. To assist you in documenting and demonstrating a sound fiduciary process, we present you with this Fiduciary Audit File, designed to help you: Organize plan records Identify areas requiring further development Demonstrate the establishment of policies and procedures Document adherence to those policies and procedures Prepare and respond to participant or government inquiries We suggest you keep the file in a binder supplemented with other well-organized files, along with the documentation described on the tabs and inserts. If you have any questions, please contact your Financial Advisor. Thank you for selecting Morgan Stanley Smith Barney to assist you with your retirement plan program. Sincerely, Morgan Stanley Smith Barney Morgan Stanley Smith Barney LLC, its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor Morgan Stanley Smith Barney LLC. Member SIPC. 06/ JV
2 Morgan Stanley Smith Barney Fiduciary Audit File Helping plan sponsors manage their responsibility smithbarney.com
3 IN THIS GUIDE Introduction Documents Government Reporting Service-Provider Agreements Bonding and Fiduciary Liability Insurance Procedures and Minutes Section 404(c) Investment Policy Investment Management Monitoring Investments Miscellaneous
4 introduction The Employee Retirement Income Security Act of 1974, or ERISA, sets the standards for qualified retirement plans.
5 Introduction By making the decision to offer your employees a qualified retirement plan, you have taken a crucial step toward helping them save for a financially secure retirement. With this decision, however, comes certain additional responsibilities. Management of the plan, whether the responsibility of a single individual or a committee, must be performed up to the heightened fiduciary standards established by the Employee Retirement Income Security Act of 1974, or ERISA. Fiduciary Responsibilities The responsibilities of plan fiduciaries include, but are not limited to: Acting solely in the 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. Expert Assistance The duty to act prudently is one of a fiduciary s most important responsibilities under ERISA. It requires expertise in a variety of areas. ERISA encourages plan fiduciaries to hire professional plan advisors, particularly when making plan decisions in areas where the plan fiduciaries lack expertise. However, even when they rely on outside experts, plan fiduciaries are not relieved of their obligations to prudently select and monitor the parties to whom such functions have been delegated. Your plan documents must clearly establish procedures that authorize you to allocate or delegate fiduciary responsibilities. Fiduciary Liability Failure to perform any of the fiduciary duties pursuant to the standards established under ERISA may subject a plan sponsor to: Scrutiny by the Department of Labor; Personal liability for any damages caused to the plan; and Civil penalties. Additionally, under certain circumstances, a fiduciary can be held liable for the breaches of other plan fiduciaries. Enforcement Each of the following parties has the right to file suit to seek applicable remedies for fiduciary breaches: The Department of Labor; Plan participants and beneficiaries; and Other plan fiduciaries. Given this risk exposure and the many legal requirements under ERISA, employers should be diligent about managing their fiduciary responsibilities appropriately. Limiting Liability Plan fiduciaries must become familiar with ERISA requirements and Department of Labor guidelines with respect to plan operation and investment management. Establishing and adhering (and documenting such adherence) to a structured and prudent set of procedures that govern the plan, as well as the decision-making process, is crucial.
6 The Fiduciary Audit File Once a set of procedures has been established, it is critical that plan sponsors create and maintain a set of written records to document these procedures. A fiduciary audit file will help you: For the fiduciary audit file to be most effective, plan sponsors should ensure that the applicable documents referenced under each tab, as well as any other important plan records, be included in this binder (or in a separately accessible file). Organize plan documents and records; Identify areas requiring further development; Demonstrate that policies and procedures were established; Document adherence to those policies and procedures; Manage the plan s administrative and investment issues more effectively; and Respond to participant or government inquiries. Morgan Stanley Smith Barney LLC, its affiliates and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. This Fiduciary Audit File does not constitute tax or legal advice. You should consult your legal and tax advisors regarding all such matters involving the plan or in the event of government or participant action, including the matters set out in the Fiduciary Audit File, which are based upon ERISA, judicial decisions and Department of Labor regulations and rulings in existence on the date hereof. Further, neither Morgan Stanley Smith Barney nor any Financial Advisor is (by virtue of this Fiduciary Audit File or otherwise) a fiduciary with respect to your plan for purposes of ERISA or similar laws. The furnishing of this Fiduciary Audit File is not intended to constitute investment advice, and there is no agreement or understanding between Morgan Stanley Smith Barney, the Financial Advisor, the plan or any plan fiduciary under which the latter receives information, recommendations or advice concerning investments that are to be used as a primary basis for any plan fiduciary s investment decisions relating to the plan.
7 Plan sponsors should periodically review, update and maintain plan documents in an easily accessible file. Documents
8 Documents ERISA requires that plan sponsors provide copies of certain documents to participants and beneficiaries upon request. Additionally, the US Department of Labor or another government agency might request a copy of plan documentation as part of an audit. Failure to provide copies of these documents when requested could result in the imposition of cumulative daily penalties against the plan administrator for each request. In order to be well prepared for any disclosure required to the Department of Labor, participants and/or beneficiaries, it is a good practice to maintain updated versions of plan documents. Include under this section: Plan Document (and any amendments) Adoption Agreement (if prototype plan) Trust Agreement Bargaining Agreements (if applicable) Internal Revenue Service Determination Letter Summary Plan Description Summary Annual Reports Summaries of Material Modifications Notices to Interested Parties Service contracts related to the plan (if not within the scope of any other section of this audit file)
9 Plan sponsors have a responsibility to file certain returns, reports and statements with the agencies that administer the federal pension law. Government Reporting
10 Government Reporting Plan sponsors have the responsibility to file the plan s annual financial report (Form 5500) with the Department of Labor s Employee Benefits Security Administration. Pursuant to ERISA Section 502(c)(2), civil penalties may be assessed against a plan administrator for failure to timely file a complete report. Pursuant to Section 6652(e) of the Internal Revenue Code of 1986, the IRS may also assess penalties for not filing returns for certain plans. Include under this section: Form 5500, including all schedules Audited financial statements that accompany the 5500 and any applicable notes The most recent report must be made available for participant examination or provided to participants upon request (as described in the Documents section).
11 ERISA provides plan sponsors and other fiduciaries with the ability to delegate certain duties to other parties. service-provider agreements
12 Service-Provider Agreements Plan sponsors (and other named fiduciaries) may delegate certain fiduciary and nonfiduciary duties to other parties. ERISA provides that, in some cases, the delegating fiduciary will be shielded from liability for the delegate s breaches. However, fiduciaries are never relieved of their responsibility to prudently select and monitor all vendors hired to act as service providers to the plan. The exercise of this responsibility should also be free from the influence of any conflicts of interest the plan sponsor may have (such as a financial interest in the service provider or serviceprovider arrangement). The Department of Labor has emphasized that plan sponsors should engage in an objective and independent process when selecting service providers, taking into account a variety of relevant factors, including the service provider s qualifications, the quality of services and the reasonableness of fees. Include under this section: Investment-Consulting Agreements Plan Recordkeeping and/or Actuarial- Services Agreements Custodial Agreements Any other agreements relating to plan administration or investment of assets In addition to the agreements listed above, also include here (or in another easily accessible location) any documentation you might have reflecting the selection and ongoing monitoring process, such as: Information regarding competitive bidding Comparisons of service-provider features, costs and breadth of investment offering
13 ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles plan funds or property be bonded. Bonding and fiduciary liability insurance
14 Bonding and Fiduciary Liability Insurance ERISA Section 412 generally requires that every person who handles plan funds or other property be bonded to protect the plan against loss due to fraud or dishonesty. Ordinarily, anyone with duties related to the receipt, safekeeping and disbursement of plan assets will be deemed to be handling funds. Include under this section: Fidelity Bond Fiduciary Liability Insurance Policy The amount of the bond must be at least 10% of the amount of funds handled, but no less than $1,000. An ERISA bond is not required to exceed $500,000 ($1,000,000 for plans that hold employer securities, effective January 1, 2008). Plan fiduciaries may wish to consider the purchase of fiduciary liability or pension-trust liability insurance. This coverage provides protection for losses that the insured is legally obligated to pay because of a claim made for a wrongful act. By most policy definitions, a wrongful act includes any acts, errors or omissions involved in plan administration as well as any violation of the responsibilities, obligations or duties imposed on fiduciaries by ERISA. The policy generally also includes coverage for defense costs in connection with a covered claim.
15 Procedures AND Minutes The existence of written minutes of all important actions helps plan sponsors demonstrate procedural prudence.
16 Procedures and Minutes A plan sponsor may properly execute its fiduciary duties with respect to a plan only by establishing and adhering to a prudent process. At the outset, the plan sponsor must establish an appropriate fiduciary structure (consistent with the provisions of the plan document) for the administration of the plan and the investment of its assets. These functions may be delegated to specific personnel of the sponsor or they may be executed by one or more fiduciary committees, typically a plan administrative committee and a plan investment committee. These procedures may be formalized, such as in the plan document or in the fiduciary committee charter. A charter is a document adopted by the plan sponsor that delineates the fiduciary committee s roles and responsibilities. Plan sponsors might also keep a less formal compilation of relevant plan procedures and maintain them in a centralized plan procedure manual. This manual can simply be a collection of any procedures regarding the administration of the plan. Once procedures are in place, it is also important to demonstrate that the process established is being followed. The best evidence that this is being done is through a written record of fiduciary actions and decisions. Documentation can take the form of committee minutes (if applicable), memoranda or copies of notices to participants regarding plan matters. For instance, a fiduciary should document compliance with claims procedures, rollover procedures or selection and monitoring of investments. Although not required, plan fiduciary committees ideally should have formal meetings and minutes. Include under this section: Fiduciary-Committee Charter (if applicable) Plan Procedure Manual (either included here or noted in another location) to include at a minimum: Plan enrollment procedures and forms; Claims procedures; Loan procedures and forms; Qualified Domestic Relations Order procedures; Hardship withdrawal procedures and forms; and other forms used for plan administration (e.g., rollover requests, plan distributions). Investment-Committee Meeting Minutes (if applicable) Administrative Committee Meeting Minutes (if applicable) Employee/Participant Notices Internal memoranda regarding plan administration
17 When section 404(c) of ERISA is satisfied, plan sponsors responsibility for any loss that results from a participant s investment decisions may be reduced. Section 404(c)
18 Section 404(c) Section 404(c) of ERISA may relieve a plan fiduciary of some of their liability with respect to participant-directed retirement plans. Section 404(c) only applies to a situation where the employer allows the participants to exercise control over the investment of assets in their accounts (participant-directed plans). To the extent the plan complies with the conditions of 404(c) and states such intention to comply, the fiduciary may be afforded relief from liability for losses that result from the participant s exercise of control over the assets in his or her account. In order to be in compliance with 404(c), the plan must (among other things): Offer at least three investment alternatives, each of which is internally diversified, has materially different risk and return characteristics, allows a structured portfolio with aggregate risk and return characteristics within the range normally appropriate for the participant and tends to reduce through diversification the overall risk to participants. Diversification does not ensure against loss. Permit participants to give investment instructions with respect to any investment at a frequency that is appropriate in light of the market volatility to which the investment may be subject, but not less frequently than quarterly for the required three core investment options. Of course, standard market practice is to permit a participant to change investments more frequently than the minimum required by law. Provide to each participant sufficient information to make informed investment decisions, including, but not limited to, the following: An explanation that the plan is a 404(c) plan and that fiduciaries may be relieved of responsibility for losses that are a direct result of participant investment instructions; A description of each investment alternative and a general description of the investment objectives and risk and return characteristics of each alternative, including information on the type and diversification of the portfolio assets of each investment alternative available under the plan; the identity of any designated investment managers (e.g., third-party managers of separate accounts); An explanation of how participants may give investment instructions and any restrictions on investment transfers and restrictions on voting and tender rights on the participant s investments; A description of all transaction fees and expenses that may affect the account balances on purchases or sales including commissions, sales loads, deferred sales charges, redemption fees, etc.; the name, address and phone number of the plan fiduciary (and, if applicable, the person or persons designated by the fiduciary to act on his or her behalf) responsible for providing information; certain information regarding investments in employer securities; and In the case of an investment alternative which is sold by prospectus, a copy of the most recent prospectus must be provided to an investing participant or beneficiary upon initial investment.
19 Section 404(c) Include under this section: List of investments available to participants that constitute a broad range of alternatives Copies of the following required participant disclosures (most of which are included in plan documents or the summary plan description): a description of the frequency of the participant s ability to transfer assets among investments; a statement of intent to be a Section 404(c) plan; a statement regarding the preservation of confidentiality regarding investment and proxy voting of employer securities, if applicable; a description of the investment alternatives, including a description of the investment objectives and risk and return analysis of each alternative*; identification of any designated investment managers; explanation of how participants may give investment instructions, including any limitations; a description of any transaction fees and expenses; instructions on how participants can obtain further information (e.g., contact name, telephone number, address); copies of prospectuses (if applicable); any materials provided to the plan (subsequent to investment) regarding voting rights; and procedures regarding the investment in employer securities (if applicable). Copies of investment information provided to participants Additional optional documentation regarding communication of participant disclosures * Many plans offer self-directed brokerage accounts where there is a broad range of investments available. Under these circumstances, it should be sufficient to provide a list of the types of investments available under the self-directed account. However, in order to not run afoul of the full control requirement of 404(c), the options available under the self-directed brokerage accounts should not be unduly restrictive (e.g., mutual funds only).
20 A carefully designed investment policy statement is an effective way for plan sponsors to defend investment decisions that are consistent with that policy. Investment Policy
21 Investment Policy Having a carefully designed, clearly written investment policy statement may be the best approach to providing quality investment options to participants. Step 1 Preliminary Considerations The fiduciary should ascertain goals for the plan by taking into consideration the following factors: Demographics of the participant population; Overall goals for the plan with respect to the needs of participants; Proper assignments of responsibility and authority for the handling of plan duties; and Establishment of proper monitoring procedures. Step 3 Periodic Review The investment policy statement should be reviewed periodically to assure continued relevance. Include Under This Section: Investment Policy Statement Step 2 Drafting an INVESTMENT Policy Statement Once overall goals are established, a flexible policy should be documented. Flexibility will allow the policy to be updated regularly with ease. A well-structured investment policy statement should contain the following: Statement of purpose and needs of the plan; Roles and responsibilities of all involved parties; Methodology for selecting asset classes and the rationale for each class included; Criteria for selecting individual investments to fill each asset class; and A basis for evaluating investment results and management of plan assets.
22 ERISA provides that plan sponsors, as fiduciaries, select investments with 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. Investment Management
23 Investment Management One of the most important duties of the plan sponsor, as a fiduciary of the plan, is the prudent management of the plan s assets. ERISA does not define what is or is not a prudent investment for plans. Instead, the Department of Labor has adopted a standard that requires a fiduciary to follow a prudent process in making investment decisions. Prudent Management Under this standard, a plan fiduciary must give appropriate consideration to the relevant circumstances of the plan and act accordingly. While neither ERISA nor the DOL regulation specifies the steps to be taken in each instance, a fiduciary should follow a process for plan investments that includes: Formulating an investment policy appropriate for the plan; Identifying asset classes that meet the diversification needs of all plan participants; and Selecting qualified investment vehicles within each asset class. When investments are participant directed, a plan fiduciary may be able to limit liability for investment loss by complying with ERISA Section 404(c) regulations. Under the ERISA Section 404(c) regulations, however, a plan fiduciary is still responsible for prudently selecting investment options offered to participants. Prudent Expert The prudence requirement of ERISA Section 404(a)(1)(B) is often referred to as the prudent expert rule because it requires a fiduciary to act according to the standards of others acting in a like capacity and familiar with such matters. Under this standard, a fiduciary who lacks the requisite education, experience and skill to make investment decisions has a duty to seek qualified expert assistance in making such decisions. Therefore, where a fiduciary lacks expertise in establishing investment and asset-allocation strategies, making investment decisions or selecting investment managers, styles or funds, the fiduciary should seek the advice of professionals. Selection Process Fiduciaries should document the process of investigating, evaluating and making investmentselection decisions. This can be accomplished by documenting adherence to a well-written investment policy statement. Include under this section Information regarding the selection of investment funds - copies of prospectuses (if applicable) - Selection criteria including asset class placement, investment performance, manager tenure, risk characteristics and any other relevant supporting materials - Investment contracts (if any)
24 ERISA requires that plan sponsors conduct ongoing monitoring of investments. Monitoring Investments
25 Monitoring Investments As described in the Investment Management section, the plan fiduciary (with the assistance of a professional if the fiduciary lacks the expertise) should formulate an investment policy, identify asset classes and select investments within each asset class. Once this is done, the plan sponsor has a continuing obligation to prudently monitor the plan investments. The monitoring process should occur periodically. ERISA does not describe any specific measures of performance that will satisfy the prudence requirement. However, a process for monitoring investments should include: Establishing a process that uses objective criteria to effectively measure fund performance (such as the use of benchmarks, comparison against investment policy statement, etc.); Identifying criteria to be used in considering whether to replace a fund, including: Fund-manager changes and/or changes in fund company ownership, Performance and risk relative to appropriate benchmarks, Performance in varying market conditions, and Portfolio changes and/or style consistency; Receiving and reviewing regular comprehensive reports describing the performance of the funds. Include under this section: Periodic reports reflecting recent and historic performance versus benchmarks Information on investment expenses Documentation of any investment-fund change, including supporting information for that decision Documentation of any investmentoriented presentations Documentation of any mapped investment changes including procedures and notices
26 Miscellaneous Plan sponsors should retain any documents demonstrating the existence of a sound process and adherence to that process with respect to the management of their plan. (1803JV)
27 Miscellaneous While the tabs in this binder are designed to establish a comprehensive collection of documents that plan sponsors should retain, also include (or maintain separately in a safe file) any document not previously listed that relates to the administration and investment of the plan. Include under this section: All plan-related forms and notices not previously listed Any relevant information pertaining to the operation and investment of the plan or any other fiduciary responsibilities Nondiscrimination testing records Records used to determine employee eligibility and contributions (including information supporting any exclusions from participation) (1803JV)
28 Morgan Stanley Smith Barney LLC, its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor Morgan Stanley Smith Barney LLC. INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE 1803JV 06/09
29 Morgan Stanley Smith Barney Fiduciary Audit File YEAR
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