Fiduciary Duties and Responsibilities

Transcription

1 Be a Prudent Fiduciary How to Select, Monitor and Assure That Your Providers Properly Exercise their Responsibilities and Assume Appropriate ERISA and Contractual Liability John H. McKendry, Jr.

2 WHO IS A FIDUCIARY? 22 Exercises authority or control - management or disposition of the plan s assets Renders investment advice for a fee (advice regarding value or recommendations regarding investment in purchasing or selling, advice is primary basis of investment and is suited for particular needs of plan, investment policies or strategy, overall portfolio composition or diversification) Discretionary authority or responsibility - administration of the plan

3 INVESTMENT FIDUCIARIES TWO TYPES 3(38) Investment Manager complete discretion over selection of assets (registered investment advisers) 3(21)(A)(ii) Investment Adviser for a Fee (Broker) 33

4 THE FAUX FIDUCIARY INVESTMENT ADVISERS ACT OF 1940 (SEC) Brokers/insurance Agents not regulated (suitability standard) No established standards of care ( best interests vagary) Focus on individual not retirement plan advice 44

5 THE FAUX FIDUCIARY INVESTMENT ADVISERS ACT OF 1940 (SEC) Emphasis on self-regulation (due to lack of enforcement resources) Mandatory FINRA Arbitration (no expertise, panels stacked against investors) No Plan Remedies (only cease and desist and fines to SEC) 55

6 EMPLOYER/FIDUCIARY DUTIES U.S. DOL VIEWS 66 DOL Field Assistance Bulletin (February 2, 2007). Employer retains following fiduciary duties as a prudent expert to select and monitor (evidenced by procedural due diligence) the following (and if not qualified to obtain expert advice) Investment Menu (including, if desired, a qualified default option) Investment Advisers. Qualified Fiduciary Adviser Reasonableness of Fees Charged

7 EMPLOYER/FIDUCIARY DUTIES U.S. DOL VIEWS 77 DOL/EBSA Publication (May, 2004) Understanding and evaluating plan fees and expenses associated with investments, investment options and services are an important part of a fiduciary s responsibility. Requires an objective process to evaluate fees, detailing specific services, level of responsibility of service provider, and identical disclosure to prospective providers for a meaningful comparison. Sample fee disclosure forms are provided at

8 ERISA FIDUCIARY STANDARDS 88 Solely in Interest/Exclusive Purpose Prudent Expert Care, Skill, Prudence and Diligence. Person familiar with such matters Per the Documents - Plan, Trust, Agreements Investments Diversification, Liquidity, Funding, Risk Avoidance Avoid Prohibited Transactions

9 SERVICE PROVIDER PATTERNS BROKERAGE FIRMS Advise Menu, Investment Platform (Insurer, Fund, Managers) Compensation Indirect Loads, Trailer Fees, Commission/Fees from Platform Provider Recordkeeper Third Party Investments Non-Institutional Share Classes Education 99

10 BROKERAGE ISSUES Steadfast Refusal to acknowledge fiduciary status (minor exceptions), conflicts maximize indirect revenue Opaque compensation Structures (particularly in selling platforms) Compensation buried in difference between fund fees and price of investment management Higher Costs diminish Investment Returns

11 SERVICE PROVIDER PATTERNS INVESTMENT MANAGERS Advise Fund Menu/Manager of Investment Types Compensation Percentage of Assets Recordkeeper Third Party Investments Funds?Institutional, Managers Education? 11 11

12 INVESTMENT MANAGER ISSUES Fee Structures 1% (100 bps) or more Platforms website access for Employer and participant? Education Minimal? 12 12

13 FINANCIAL SERVICES FIRMS Advice Platform of Options Compensation Indirect Recordkeeper Internal or Relationship Investments Noninstitutional/ Proprietary Education -? Individual Advice 13 13

14 FINANCIAL SERVICE ISSUES Reluctant Fiduciary Opaque Compensation Bundled Arrangements Investments Revenue Driven Education Individualized? 14 14

15 INSURER PLATFORMS Advice Menu from Platform Compensation Indirect from investments on menu plus overrides (contract, asset charges) Recordkeeping Internal Investments Funds (non-institutional) Proprietary Education General

16 INSURER ISSUES Refusal to accept fiduciary responsibility for menu, conflicts Compensation Highest among providers, often Opaque Proprietary Provider favorable documents Investments Clone Funds (not the actually traded funds) proprietary options, stable value, target funds 16 16

17 MUTUAL FUND FAMILY PLATFORMS Advice Menu Compensation Internal Fees (noninstitutional) Recordkeeper Mix, internal versus third party Investments Funds Education - General 17 17

18 MUTUAL FUND FAMILY - ISSUES Advice Fiduciary Reluctance, Conflicts Compensation Opaque Recordkeeper Third Party Investments Non-institutional proprietary products Education Individualized? 18 18

19 IDEAL Advice Independent Adviser able to select best funds Compensation Transparent, each element separately identified Recordkeeping Third Party Investments Institutional, Low Cost funds, Model Portfolios from menu Education General materials plus individualized advice

20 IDEAL STRUCTURE/ADVANTAGES Capped, Declining Asset-based fee for investment advice Fixed per participant, Capped/Declining Recordkeeping fee Pay only for investment management for funds Individual Advice shielded from Employer Liability at Fixed Price or Included in Investment Adviser fee 20 20

21 EMPLOYER PROTECTION Objective, Prudent Process in selecting and Monitoring Providers Adviser Fiduciary Status without conflicts Compensation Transparent for each element of service Recordkeeper appropriate Standard of Care Investments 404(c) Compliance Education General Conforms to DOL IB 96-1, Individual per 408(g) principles

22 REQUEST FOR PROPOSAL (RFP) Background. Employer (Industry, Size) Plan Design, Number of Participants, Amount and Description of Plan Assets Preconditions Investment Adviser fiduciary acknowledgment, ERISA standards of care, Liability acceptance (no/reasonable indemnification) Expert Guidance Competent Counsel Adviser without conflicts, fiduciary status Cooperation

23 RFP ADVISOR SELECTION Background/Credentials, Registration, Licenses, Reputation Conflict Disclosure Services Relevant Expertise Clients Recommendations, Departures Fees RFP, Investment Policy, Menu Selection/Monitoring all disclosed Protection insurance Sample Agreement Fiduciary Acknowledgment Services, Compensation

24 RFP RECORDKEEPER Background/Credentials, Registration, Licenses, Reputation Conflict Disclosure Services Timing/Warranties Fees Amount Each element of service complete transparency Protection Bonding, Insurance Sample Agreement Standard of Care/Liability, Dispute Law, Venue, Forum

25 RFP RECORDKEEPER SERVICES Remission/Investment Splits Testing Identify each element Distributions Processing, Reporting Loans Processing, Reporting 5500/SAR Preparation Fees Complete Transparency 25 25

26 REQUEST FOR PROPOSAL INVESTMENT MENU/PROVIDER SELECTION Investment Policy Objective, Systematic Measurement Performance/Benchmarks Risk QDIA Recommendation 26 26

27 REQUEST FOR PROPOSAL INVESTMENT MENU/PROVIDER SELECTION Internal Diligence Process Bonding, Insurance Conversion Services Custodial, Trustee Services Fees Complete Transparency Internal - Offset before performance Additional charges 27 27

28 REQUEST FOR PROPOSAL PARTICIPANT EDUCATION Guidelines General DOL Interpretive Bulleting 96-1 Individual 408(g) 404(c) Disclosure Plan General Elements, Sample Individual Information Gathering Model Portfolios Schedule Sample Agreement

29 REQUEST FOR PROPOSAL 408(g) COMPLIANCE Proposed Regulations Fiduciary Acknowledgment Absence of Conflict Fee Neutral/Computer Model Portfolio Notice Fees, Investment Performance Issue Brokers, Varying Fees (Sales, Trailer Fees, commissions, other incentives) not permitted based on investments selected, conflict disclosure required

30 RFP WRAP UP READ THE CONTRACT Fiduciary acknowledgement Clear specification of duties and compensation ERISA standard of care Matches RFP responses 30 30

31 AVOID DEFECTIVE CONTRACTS Cannot/does not rely on advice Advice not tailored to plan Indemnify errors unless negligence, gross negligence, willful misconduct FINRA arbitration Choice of Law and Venue 31 31

32 ANNUAL MONITORING AND MEASUREMENT Adviser IPS Adherence, Revision Investment Monitoring Objective, Systematic Process against identified Criteria Recordkeeper Performance Participant Education Review, feedback Plan Design, Required Updates compliance review Agreements Review/Update

33 ANNUAL MONITORING INTERNAL REVIEW Document Compliance Interim Amendment, Restatement, SPD/SMM Contribution Timing, Accuracy Notices QDIA, Auto-enrollment, Safe Harbors 33 33

34 ANNUAL MONITORING INVESTMENT ADVISER Review/Update Investment Policy Investment Due Diligence Reports Review/Update 404(c) Disclosure Statement Compliance with Agreement Fiduciary Status Confirm/Renegotiate Fee Structure Update Bond/Liability Protection 34 34

35 ANNUAL MONITORING RECORDKEEPER Audit Contribution, Investment, Split, Distribution, Loan Accuracy Review/Affirm Compliance Testing Confirm Benefit Statements Confirm/Renegotiate Fee Structure Update Bon/Liability Protection 35 35

36 ANNUAL MONITORING PARTICIPANT EDUCATION Develop Participant/Administrative Feedback Mechanism Confirm Compliance/Update Education Plan Confirm/Renegotiate Fee Agreement Legal Compliance IB 96-1(general) 408(g) for Participants, Agreement (for Employer, Fiduciary Status) 36 36

37 REWARD DIMINISHED RISK Prudence Clear Established Processes Expertise Documented in Selection and review Documents Established (IPS, 404(c), Agreements allocating Liability) Investment Objective Process satisfies criteria Compliance Review 37 37

38 PROOF OF REWARD FEE LITIGATION RESULTS Hecker v Deere No requirement to disclose revenue sharing, 404(c) Disclosure and Compliance 38 38

39 PROOF OF REWARD FEE LITIGATION RESULTS Kanawi v Bechtel No Duty to disclose revenue sharing Taylor v United Technologies Proper monitoring, objective selection of mutual funds, recordkeeping fees reasonable against market 39 39

40 DANGER DEFECTIVE PROCESS Braden v Walmart Court looked behind process at retail mutual fund pricing result failure of effort and competence, breach of duty of loyalty solely to Participants 40 40

41 FORECAST PROPOSED LEGISLATION FAIR DISCLOSURE FOR RETIREMENT SECURITY ACT OF Written Agreements detailing Services, Discounted Services, and Revenue Sharing Disclosure Aggregate Fees applied against Participant s Accounts Disclose Four categories of Fees Administrative Transaction Other Offer One Low Index Fund Investment Management Advice Not based on Advisers Interest, Independence Disclose Share Class Comparisons

42 PROPOSED LEGISLATION INVESTMENT DISCLOSURES Charges for Each Option Investment Objective Risk Level Diversification Active v Passive Management Investment information All disclosures permitted by electronic media

43 OUTSIDE, OBJECTIVE, EXPERT ASSISTANCE #216556