Managing Your Future

Transcription

1 Managing Your Future A Guide to Managing Your Firm s Retirement Plan Alex Hargrave Senior Vice President RBC Dain Rauscher (415) alex.hargrave@rbcdain.com Mike Lucey Managing Partner Gordon & Rees (415) mlucey@gordonrees.com

2 Fiduciary Duties What is a Fiduciary? A fiduciary is anyone who is a trustee, sponsor or otherwise exercising any authority or control over any type of employee benefit plan. (ERISA Sec. 404(a)(1)(B)) Likely Candidates Investment Committee Managing Partners

3 Fiduciary Duties What is my Fiduciary Duty? Comply with the Exclusive Benefits Rule Act solely in the interest of plan participants with the exclusive purpose of providing benefits to them and defraying the reasonable expenses of the plan Demonstrate Prudence Act with care, prudence, skill and diligence of a prudent person acting in a similar capacity Diversify Investments Diversify to minimize the risk of large losses Adhere to the Plan Act in accordance with the documents and instruments governing the plan

4 What is my liability? Fiduciary Duties A fiduciary who breaches any of the responsibilities, obligations, or duties of the fiduciary requirements of ERISA is personally liable le for any losses to the plan resulting from that breach. Can I limit my Fiduciary Liability? Section 404(c) of the ERISA provides plan fiduciaries with certain protections for liability with respect to investment decisions made m by plan participants, provided the requirements of Section 404(c) are a satisfied. The regulations limit a fiduciary s potential liability for the investment of plan assets. If the conditions of the regulations are met, the plan sponsor or fiduciary responsible for the selection of the plan's investment options will w not be subject to fiduciary liability for account losses attributable to participants' elections for investment of their account balances.

5 Fiduciary Duties Anyone providing investment advice to the plan for a fee is considered a fiduciary Service Providers as Fiduciaries Plan Providers Generally are not considered fiduciaries if they do not render investment advice (Review engagement documents) Corporate Trustees Directed trustees are generally not considered fiduciaries (Their contract and service agreement limits their liability) Investment Advisors and Brokers Investment Advisors are fiduciaries Brokers operating under the Merrill Lynch rule are not fiduciaries

6 Best Practices Investment Policy Statement Establishes procedures for selecting, monitoring and replacing investment options in the plan Periodically Monitor Investments Evaluate investments relative to appropriate benchmark indexes and a peer groups at least annually Create a committee of senior partners, human resources and finance staff and the plan investment advisor Maintain files of meeting notes and investment evaluation materials als Asset Class (a/o 3/31/06) Investment Option YTD 3 mos 12 mos 3 Years 5 Years 10 Years Large Cap Growth Growth Fund of America 4.37% Index: Russell 1000 Growth Category: Large Cap Growth

7 Best Practices Review Plan Operations Ensure that the plan is being operated in accordance with the plan document Ensure that participant deferrals are segregated in a timely manner Understand Plan Costs DOL Fee Disclosure Understanding Retirement Plan Fees and Expenses Voluntarily Comply with Section 404(c)

8 Managing your plan Best Practices Leverage your vendors, create a partnership Foster a team environment with your vendors and in-house Human Resources, Administration and Finance departments Monitor and evaluate the performance of vendors on a periodic basis

9 Managing Profit Sharing Contributions Methods Percentage of Pay Firm elects to contribute a fixed percentage of pay for all eligible employees (maximum income for calculation purposes is $220,000 for 2006) Integrated with Social Security Employees earning more than the Social Security wage base ($94,200 for 2006) receive a larger contribution than employees under the wage base

10 Managing Profit Sharing Contributions Cross-Testing (New Comparability) Allows employee group to be segregated into rate groups that receive contributions specific to that group. For example: Equity Partners Non-Equity Partners Executive Staff Paralegals Clerical and other staff Requires minimum gateway contributions of at least 5%. Must be tested annually Stable demographic is important

11 Understanding and Controlling the Cost of Your Plan Costs Associated with a Retirement Plan Recordkeeping Administration Corporate Trustee Investment Expense Investment Advisory Services Plan Audit

12 Fee Transparency Revenue Sharing Components of Expense Ratios Investment Management Fees paid to the fund manager or sub-advisor to manage the fund assets 12(b)-1 1 Fees Marketing fees generally paid to broker/dealers to promote sales of the fund Sub-Transfer Agency and Service Fees Fees paid to recordkeepers by mutual fund companies to offset the cost of providing sub-recordkeeping services 12(b)-1 and Sub-Transfer agency fees can be used to offset the cost of operating a retirement plan

13 Revenue Sharing Example: Investment Management 0.55% 12(b)-1 1 Fee 0.25% Sub-Transfer Agency Fee 0.20% Expense Ratio = 1.00% Is your plan getting the benefit of the revenue sharing generated by plan investments?

14 Recordkeeping & Administration Fixed Fee vs. Variable Fee Fixed fees are usually paid directly by the firm or billed pro rata or per capita to plan participants Fixed fees may be paid by the plan sponsor or charged to participant accounts Variable fees are generally paid out of the investment options in the plan and are invisible to the firm and participants The cost of variable fee administration increases as your assets increase

15 Selecting and Monitoring Vendors Is this vendor right for my plan? Bundled vs. Unbundled

16 Fully Bundled Plan Administration Recordkeeping Investment Management Custodial & Trustee Services Education & Enrollment Materials Not Included: Investment Advisory Services Delivery of Education Plan Consulting Pros: Vertically integrated Often Brand name Provider Reduced cost to Plan Sponsor 24 hour live Operator service Legal document preparation Cons: Limited investment options Requirement to invest in proprietary investment options Inflexible operational structure Less experienced account managers and service people

17 Seamless Unbundled Plan Administration & Plan Consulting Recordkeeping Electronically linked on a daily basis Not Included: Custody/Trust Services Trading Access to Investment Options Pros: Seamless interaction of service providers Wide range of investment options Experienced account management Flexible operational structure Legal document preparation & support Cons: Higher cost to plan sponsor Typically not name brand May offer limited live participant support Investment Advisory Services Delivery of Education

18 Retirement Plan Brokers and Advisors Brokers Brokers are responsible for presenting options to the plan sponsor, such as a selection of vendors All plan design and investment decisions are made by the plan sponsor. Brokers may not provide investment advice and are not considered fiduciaries. Investment Advisors Investment advisors are investment fiduciaries and work with the plan sponsor to design the investment strategy and select the investment options. Investment advisors provide advice.

19 Plan Structures: One Plan or Two? Two Plan Structure Often used by firms that have top heavy plans Partners and Staff Plan Generally include employee deferrals, an employer match and a profit sharing provision Associate Plan One Plan Generally are employee deferral only General plan provisions must be the same for all classes of employees. Associates as an employee class may be excluded from profit sharing contributions. (If the plan is deemed top heavy any non-key employees must receive a 3% contribution)

20 Plan Structures: Self-Directed Accounts Limiting Classes of Investments Some plans restrict accounts to mutual funds only or mutual funds, listed stocks and bonds Non-Traditional Investments (private stock, real property, etc.) Require annual valuation by a independent third party Investments should always be reviewed for conflicts of interest and possible prohibited transactions before being accepted by the plan Personal Investment Policies Self-Directed account holders should establish an investment policy and concentrated position policy with their broker or investment advisor

21 Full Scope Audit Plan Audits Third party auditor is responsible for verifying plan financial reports in addition to auditing segregation of assets, distribution and contribution practices, etc. Limited Scope Audit Plan s corporate trustee provides a certified financial statement. Auditor may accept without review. Auditor performs other routine reviews and tests Audit Costs Limited scope audit is much less costly than a full scope audit Consider a local audit firm that specializes in retirement plan audits

22 Summary Operate the plan for the exclusive benefit of plan participants Establish a formal procedure to select and monitor investments Understand the cost structure of your plan Ensure that the plan is operating according to the plan document Consider complying with Section 404(c)