FAQ: Independent Advisor Model

Transcription

1 FAQ: Independent Advisor Model 1. What is an Independent Advisor Model? TIAA-CREF offers a platform for independent registered investment advisors that allows a plan sponsor to offer their employees the opportunity to work with an independent RIA of their choice to receive investment management services. This service is an additional retirement beneft that a plan sponsor can offer that complements any advice or guidance offered through TIAA-CREF as your provider. As a plan sponsor, you have three options to choose from when adding access to independent registered investment advisors: Participant Choice your employees can work with any Securities & Exchange Commission (SEC) or state-registered investment advisor of their choice as long as they are in good standing with the appropriate federal or state regulatory agencies and are operational with TIAA-CREF s Advisor Services. Participant Choice plus the Advisor Network your employees still enjoy the fexibility of choosing their own advisor as explained above, and have access to the TIAA-CREF Advisor Network. The Network is a list of independent advisors that have been screened against industry-minimum standards for providing general communication and education services and participant-level investment advisory services. Advisor Network Only The Network only option allows you to ensure that your employees are only working with those advisors that have been prescreened against industryminimum standards through the TIAA-CREF Advisor Network in order for the advisor to be paid out of plan assets for participant-level investment advisory services. Whichever model you choose, the participant provides the advisor with the appropriate authorization to manage their account and pays for the advisors services directly out of their retirement plan accumulations. There is no additional cost to the plan as only those participants that choose to work with an independent advisor pay for the service. A plan sponsor can also hire an advisor for plan-level services including general communication and education services and participant-level advisory services and have the advisor s fees paid out of assets at the plan level. Fees for the advisor s plan-level services are charged to all participants with accumulations in the plan. 2. Why does TIAA-CREF offer this service to plans? Over the last ten years, TIAA-CREF has seen double-digit growth rates year-over-year in the number of participants choosing to work with independent fnancial advisors. We believe that offering participants choices for accessing advice will result in a greater acceptance of advice services across a plan. This is important because research has shown that participants using professional advice services such as target date funds, online advice, or managed account services show stronger performance than those participants who do not use any professional advice service. Investors on their own do not always make good fnancial decisions, and the presence of an advisor can sometimes help them make better decisions. Investors who use a fnancial advisor are more likely to adhere to long-term investment decisions despite market volatility and to engage in proper asset allocation. 1 There is some evidence that, compared with their non-assisted investor counterparts, professionally-assisted investors have more diversifed portfolios and experience better rates of return. 2 In addition, there are a number of converging trends that are reshaping the market. In today s challenging economic environment, there is a greater focus on fduciary responsibilities for plan sponsors and new regulations requiring greater fee transparency. Given these factors, along with the fact that more participants are seeking independent advice, an independent advisor model is an important part of TIAA-CREF s service offer that supports our goal to improve participant retirement outcomes.

2 3. In what manner is the Independent Advisor Model different or redundant with the participant advice services currently offered by TIAA-CREF? Access to advice is important to ensure positive retirement outcomes for all participants. While we offer several levels of advice that are unbiased, many participants have existing relationships with independent advisors or they may choose to work with such advisors in the future. We view independent advisors as complementary to the advice services that we currently offer. Regardless of a participant s decision on how they choose to receive advice, TIAA-CREF offers a platform that is fexible and able to accommodate their advice needs. 4. Does TIAA-CREF recommend advisors? TIAA-CREF does not recommend advisors. While advisors in our Advisor Network have been pre-screened, we recommend participants conduct their own due diligence before hiring an advisor. With respect to the Network, TIAA does not accept and is not a fduciary under the Employee Retirement Income Security Act of 1974, as amended (ERISA) or state laws and does not accept fduciary liability with respect to the choice of advisors offered under its Advisor Network. Advisor Profles provided through the Network are designed only to assist participants with the selection of an advisor who meets certain industry standards. 5. What legal precedent allows the use of third-party advisors for advice? Both Congress and the Department of Labor (DOL) have provided that the offering of participant investment advice is a legitimate plan service and expense but only if done properly. Congress, in the Pension Protection Act of 2006 (PPA), added two new exemptions from ERISA s prohibitions on self-dealing that are designed to avoid conficts of interest in rendering participant investment advice. The DOL, in its guidance and rulings on participant investment advice, has made it clear that in order to avoid violating ERISA, participant investment advice must be provided in an unbiased and objective way. The process for choosing an advisor under applicable DOL rulings and the PPA must, accordingly, avoid self-dealing, conficts of interest or other improper infuences. In addition, the DOL has stated that the fees for participant investment advice services, like any other service provider fee, must be reasonable in amount. The use of independent, objective, third-party advisors who charge reasonable fees to provide plan participant advice is certainly in keeping with the policies expressed by Congress and the DOL. In addition, the IRS has provided in private letter rulings that fees paid to an RIA retained by a participant and paid from participant retirement accounts will not be treated as a taxable distribution if certain conditions are met: W The plan treats these fees as plan expenses W The payments are for expenses that are ordinary and necessary W The payments are only made from accumulations in the participant s retirement account, not directly by the participant or by the plan W The services of the RIA must be provided through a formal arrangement If these provisions are followed, participants can hire independent fnancial advisors and pay their fees with assets in their retirement plans. 6. While our plan is not subject to ERISA, it does follow certain guidelines as industry best practice. Consistent with this logic, is the service consistent with current ERISA guidelines? Yes it is. In a Field Assistance Bulletin issued in 2007, the DOL described the procedures that an ERISA fduciary should follow concerning plan service providers that provide advice. The FAB noted, that with regard to the prudent selection of service providers generally, a plan fduciary should engage in an objective process that is designed to elicit information necessary to assess the providers qualifcations, quality of services offered and the reasonableness of the fees charged for the service. The process must avoid self-dealing, conficts of interest or other improper infuences. In applying these standards to the selection of investment advisors for plan participants, the process must take into account the experience and qualifcations of the investment advisor, including the advisor s registration in accordance with applicable federal and/or state securities laws, the willingness of the advisor to assume fduciary status under ERISA and whether the advice provided will be based upon generally accepted investment theories. The FAB also noted that monitoring advisors will require a review of, among other things, the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment advisor. The Advisor Network helps plan fduciaries meet these requirements by ensuring advisors have met certain specifc industry standards described in 9 and that the advisors are monitored annually to ensure that they continue to meet those standards. 2

3 7. How is the service marketed to participants? If the participant requests an advisor in their area, how is that referral processed? Depending on the advisor model chosen, TIAA-CREF will work with a plan sponsor to develop a communication plan that works best for their plan. For the Advisor Network, we offer a web-based tool that allows participants to search for participating advisors in the Network. This search tool can be integrated seamlessly into a plan s microsite. 8. Can the plan sponsor terminate its participation in the program at any time? If so, what steps are required, what costs are incurred and what happens to participants currently using a third party advisor? Yes. The plan sponsor can terminate participation in the Advisor Network at any time. There is no cost to the plan sponsor to offer this service and no cost to terminate participation. At the time of termination, the plan sponsor and TIAA-CREF would need to discuss how to handle existing relationships between participants and their advisors. 9. What minimum criteria are required for an advisor to participate in the Network? TIAA-CREF has developed the Advisor Network to provide plan sponsors and plan participants with access to advisors. Advisors in the Network have been prescreened by an independent third party against industry-minimum standards developed by independent industry experts from Fiduciary Risk Assessment and the Center for Due Diligence and TIAA-CREF. Primary services delivered by Network Advisors include communication and education services and participant-level advisory services. Two step process In order to participate in the Advisor Network, the Investment Advisor Representative s (IAR) Registered Investment Advisor (RIA) frm must have an operational relationship with TIAA-CREF and have completed a frm level review. To meet these requirements, an RIA frm must have a Master Agreement in place with TIAA-CREF for a period of time. The required period of time of the operational relationship between the RIA and TIAA-CREF may vary depending on the frm s size, years of experience, and level of business activity with TIAA-CREF. RIA frm review Once a frm has established an operational relationship with TIAA-CREF, a frm-level due diligence review is performed. The review includes general business practices, organizational structure, compliance and oversight procedures, regulatory history, revenue sources and insurance coverage. The process is completed through the submission of a questionnaire with supporting documents and a frm-level interview. Once a review of the RIA has been completed and the RIA frm has been accepted into the Advisor Network, IARs of the approved RIA frm can apply for participation in the Advisor Network. The RIA review includes, but is not limited to, the following: Firm overview W Years registered as an RIA W Assets under management W Organizational structure, including material changes in the last year W Number of clients W Number of clients that have terminated their agreements in the last year W Advisor hiring standards W Review of fee structure and revenue sources W Type of advisory services offered Legal and compliance W SEC/State and/or FINRA examinations W Compliance policies and procedures W Chief Compliance Offcer experience and organizational role W Insurance coverage W Insurance claims for last fve years W Material litigation or administrative actions during the last fve years W Centralized or decentralized advice, trading and billing processes IAR review An IAR may apply for participation in the Advisor Network as an individual or as a team. Teams may not have more than fve members, including the primary advisor, and they must be affliated with the same RIA. Primary Advisors must meet minimum IAR standards jointly developed by Fiduciary Risk Assessment, the Center for Due Diligence and TIAA-CREF. A nonrefundable background check fee (see question 13 for additional information) will be assessed for each advisor and/or team member. The 3

4 background check includes an evaluation of bankruptcy/ foreclosure, fnancial liens/judgments, civil and criminal background, regulatory and government agency reviews and SEC/State securities department reviews. The IAR review includes, but is not limited to, the following: Experience W Must have at least one recognized industry designation and been providing advisory and/or fnancial planning services for at least fve years; or W No industry designation, but must have been providing advisory and/or fnancial planning services for the last ten years; or W A recognized industry designation or ten years of related experience in the fnancial services industry as a registered representative or advisor and be affliated with a centralized frm. Assets W Must have at least $20 million in assets under advisement and at least 20% (or more than $4 million) in retirement plan assets; or W Be affliated with a centralized frm with at least $150 million in assets under advisement and at least 20% (or more than $30 million) in retirement plan assets. Fee structure At least 50% of total compensation and 100% of retirement business is derived under a fxed fee that does not vary based on the investments recommended to plan participants, a graded fee schedule with a maximum fee of 1.25% on employer-sponsored retirement plan assets. Agreements and investment process W Disclosure is required for all material conficts of interest that could negatively affect advisory relationship with clients. W When acting as an ERISA fduciary, material conficts must be eliminated or covered by a Department of Labor Prohibited Transaction Exemption (PTE). W Must have a written investment policy customized for each client and an advisory agreement that includes: Fee structure and formula for computing fees Description of services provided ERISA fduciary advisor status Identifcation of any material conficts of interest Duration of contract and termination rights Disclosure and disciplinary history W Must be free of any disciplinary action or settlements in the last ten years W Any open disclosure events or investigations are subject to review and could be grounds for disqualifcation Insurance coverage W Must maintain at least $1 million in E&O insurance coverage W Affrmative fduciary coverage required when acting as an ERISA fduciary W ERISA bond required when acting as an ERISA fduciary with discretionary control W Must maintain Employee Dishonesty Insurance W No paid E&O insurance that exceeds $10,000 in the last fve years In addition, each IAR must accept and adhere to the TIAA-CREF Advisor Network Code of Conduct. 10. Do third-party advisors serve as fiduciaries with regard to the services they provide to the participant? If so, in what form does this acknowledgment take place? Any advisor being paid out of retirement plan assets on the TIAA-CREF platform acts as a fduciary under the Investment Advisors Act of As such, the advisor has a legal obligation to put the interests of the participant ahead of its own. In addition, an advisor participating in the Advisor Network would be acting as an advice fduciary under ERISA with respect to ERISA-covered plans. This information is outlined in the advisor s Investment Advisory Agreement, the advisor s disclosure document (Form ADV Part 2), and its Network Profle. 11. Can a plan sponsor monitor and track participant utilization of the service? If so, please describe the breadth, depth and level of data customization available in reports. Yes, TIAA-CREF can provide periodic reports showing the number of participants using an advisor, as well as the name of the advisor. We also can report on the fees paid to the advisor at the plan level, participant level and by advisor and, we are willing to discuss any additional reporting requests. 12. Does TIAA-CREF receive any compensation from this service? No, TIAA-CREF does not receive any compensation from advisors. 4

5 13. Do advisors pay any fees to participate in the Advisor Network? Yes, advisors participating in the Network have two options when paying fees directly to our third-party partner: Option A: Up front Fee W An initial fee of $1,500 is assessed to the advisor for their initial review and background check. For each subsequent year, the advisor pays a $1,250 fee to complete their annual review and background check to continue participating in the Network W Team members are charged an initial fee of $500 for their background check. For subsequent years, each team member pays a $250 fee to complete their background checks to continue to be included on the advisors network profle Option B: Fee Deferred W An initial fee of $200 is assessed to the advisor for initial review and background check. For each subsequent year, the advisor pays between $200 - $1700 for the frst two renewal years and then a fat $1,700 starting in year three. The renewal fee in the frst two years is the same initial fee of $200 plus $100 per Network participant (capped at 15) that has engaged the advisor. In addition, there is an annual $300 fat fee for background checks on each team member. W Team members are charged an initial fee of $300 for their background check. For subsequent years, each team member pays $300 to complete their background checks and to continue to be included on the advisors network profle. TIAA-CREF does not receive any portion of the fees paid to our third-party partner. 14. What is the participant fee for advisor services? Can this fee be capped to ensure reasonableness? Participant fees vary by advisor, but the plan sponsor may impose a ceiling on the fees charged by advisors to ensure reasonableness. Advisor fees generally average 1% for investment advisory services. As a guideline, many in the industry consider that a reasonable cap would range between 1.25% and 1.5%. Advisors participating in the Network have agreed to limit their fees to no more than 1.25% of assets under management. 15. What is the form of the fee (e.g., asset-based, hard dollar, combination)? The form of the fee is generally asset-based, but it will be limited by the amount of assets in the account. Network Advisors have the option of charging a fat fee, but it must be less than the ceiling set by the plan sponsor. 16. Do advisors receive 12b-1 fees or any other form of compensation in addition to the fees paid by participants? No, the only fees paid out of plan assets to advisors are asset-based fees that are level and do not vary depending on the investment advice provided by the advisor. 17. How is the fee disclosed to and agreed upon by the participant? Fee arrangements are fully transparent from the beginning of the relationship. Prior to any fees being deducted from the participant s account, a Fee Billing Agreement is signed by the participant. Once that is complete, a confrmation is sent to both the participant and the advisor confrming the fee arrangement between the two parties. Each time a fee is deducted, a confrmation is sent to the participant. In addition, a participant s quarterly statement will show any fees paid as a line item identifed as Advisor Fees. A participant can terminate their relationship with an advisor at any time. 1 Winchester, D., Huston, S., & Finke, M. (2011). Investor prudence and the role of fnancial advice. Journal of Financial Service Professionals, 67(4). 2 Danielle D. Winchester, May 2011, Texas Tech University, Dissertation, Three Essays on the Impact of Financial Advice; Chapter IV: The Impact of Financial Advice on Middle-Class Households. The TIAA-CREF Advisor Network (Network) is a service that provides plan sponsors and retirement plan participants with information to assist them in selecting independent investment advisors (Advisors) to provide communication, education and participant-level advisory services. Participating Advisors are not employees or agents of Teachers Insurance and Annuity Association of America (TIAA), College Retirement Equities Fund (CREF) or any of their respective affliates or subsidiaries. TIAA-CREF acts as recordkeeper for institutional plans and is not a fduciary to any plan or its respective participants. TIAA-CREF is not making a recommendation or acting as a fduciary when plan sponsors or participants select an Advisor from the Network, nor is it responsible for the investment advice and other services provided by participating Advisors. Participating Advisors are required to meet certain minimum criteria developed by the Center for Due Diligence/Fiduciary Risk Assessment and TIAA-CREF. However, participation in the Network should not be construed as an endorsement or guarantee by TIAA-CREF of the services provided by any Advisor. Plan sponsors and participants are free to select an Advisor outside of the Network to provide participant advice or other services. Plan sponsors and participants should do their own due diligence before hiring an Advisor or any other fnancial professional. TIAA-CREF shall have no liability or responsibility for any losses arising out of or relating to a plan sponsor or participant s decision to engage an Advisor. TIAA-CREF does not receive any compensation or referral fees from the Advisors participating in the Network. TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details. TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY C For Institutional Investor Use Only. Not For Use With Or Distribution To The Public. A240522_ (02/13)