INSIGHTS SERIES Perspectives and viewpoints on investing in today s market Understanding fiduciary responsibilities A guide for retirement plan sponsors Offering a retirement savings opportunity in the workplace is good for employees and it can be good for business. Recent studies indicate that many workers today are not saving enough for retirement. According to one study, 45% of working-age households do not own any retirement account assets. 1 But there is much you, as an employer, can do to improve your workers chances for a financially secure retirement. Access to an employer plan has a big impact on how much employees save. Research from the Employee Benefit Research Institute (EBRI) indicates that one of the most significant factors in having enough retirement income is the number of future years that a worker is eligible to participate in a defined contribution plan (e.g., 401(k) plan). 2 By making a plan available, you are taking one of the most important steps toward more positive savings outcomes for your employees. Offering a retirement plan may also be good for business. A retirement plan can help you achieve your business goals. There are many different types of retirement plans and an extensive menu of plan features from which to choose. These options allow you to tailor a plan s features to drive savings behaviors that align with your business objectives for the plan. For example, a plan can be designed to help attract and retain employees, reward long-term employees, or encourage healthy staff turnover by allowing senior employees to retire at a reasonable retirement age. A financial advisor can help you select a plan type and plan features that suit your employee demographics and business objectives. FOR PLAN SPONSOR USE ONLY.
Your role as plan sponsor As the adopting employer, you have an important role to play at every stage of the plan s life cycle. In addition to aligning the plan design with your business objectives and the needs of your workforce, as the plan sponsor, you are responsible for: n n Administering the plan in compliance with the rules Safeguarding the retirement savings of your employees Plan administration When it comes to adopting and operating the plan, as plan sponsor, you play a principal role: Providing employee education opportunities Delivering notices and disclosures Selecting and monitoring investment options Selecting and monitoring service providers Managing and administering the plan in compliance with the laws and regulations ERISA fiduciary standard In your role as plan sponsor, you will be making decisions and taking action on behalf of your employees who choose to participate in the plan. ERISA provides a set of standards for you to follow. You must: 1. Act in the best interests of participants 2. Act prudently 3. Diversify investments 4. Follow plan documents 5. Pay only reasonable fees from plan assets Your role as a fiduciary does not end when the plan is established and rolled out to participants. It is an ongoing responsibility and one that you will want to take seriously. In recent years, the Department of Labor (DOL) has intensified its regulatory and enforcement focus on plan fiduciaries in an effort to better protect participants retirement savings. Sponsoring a plan is an important job and a big job with a lot of moving parts but you don t have to do it alone. Your advisor s role Advisors can be a critical ally in supporting your retirement plan needs. Before you even adopt a retirement plan, an advisor, such as a consultant can help you define your long-term, strategic goals for the plan. What do you hope to accomplish? What level of contribution will you make? Who will be allowed to participate in the plan? Once you have defined your plan objectives, a consultant can help you tackle the real-world, practical aspects of setting up and managing a retirement plan in accordance with the ERISA fiduciary standards. Support may include: Assisting you in selecting the initial menu of plan investments and providing ongoing investment information and support Along with your legal advisor, educating you about your fiduciary responsibilities with respect to the plan and plan participants Introducing you to solutions and additional service providers to help you administer the plan Providing employee enrollment support and investment education for participants Some advisors also take on an ERISA fiduciary role when providing investment support. The guide The purpose of this guide is to help you better understand your role as a plan fiduciary and to highlight how an advisor can help drive the success of your plan. The guide consists of two sections. Section 1. Understanding the plan sponsor fiduciary role provides a basic primer on your fiduciary responsibilities as an adopting employer. This section also highlights some common missteps made by plan fiduciaries and highlights some DOL enforcement trends. Section 2. Advisor support to help plan sponsors meet fiduciary responsibilities provides a high-level overview of how a consultant can help you meet your fiduciary responsibilities. This section also provides practical strategies to discuss with a consultant to help manage fiduciary risk and tailor your plan to meet your business needs and objectives. By deciding to adopt a retirement plan with the support of a consultant, you can have a positive impact on your workers abilities to save for retirement. 2
1. Understanding the plan sponsor fiduciary role Purpose of the rules The Employee Retirement Income Security Act (ERISA) is a federal law that governs those who manage an employee benefit plan and its assets called fiduciaries. The fiduciary rules under ERISA require that plan fiduciaries act solely in the interest of plan participants and handle plan assets in accordance with certain rules. ERISA requires that retirement plan assets be held for the plan participants benefit and not diverted for use by the plan sponsor or any other party. The ERISA fiduciary rules apply to a broad range of employersponsored plans, including 401(k) plans and other defined contribution plans, defined benefit plans, and 403(b) plans that are subject to ERISA. The DOL is the government agency responsible for enforcing the ERISA fiduciary rules. The DOL has the authority to develop regulations that interpret and guide plan sponsors and retirement professionals in complying with ERISA. It also has the power to enforce the rules. Plan sponsor fiduciary oversight What does all of this mean to employers who adopt a plan? Under ERISA Section 402(a), every plan must have at least one named fiduciary, that is a person or an entity named in the written plan document (or through a process identified in the plan). The plan sponsor typically serves as the named fiduciary with overall responsibility for the plan. For a small business, the business owner or officers of the business may be the named fiduciary. Other businesses appoint a plan committee to fill this role. The plan must also designate an ERISA plan administrator, sometimes referred to as an ERISA Section 3(16) fiduciary because that is the section within ERISA that outlines the plan administrator s role. This fiduciary has discretion over how the plan is operated and may hire service providers to help administer the plan and assist with proper delivery of plan notices and disclosures to participants. A plan sponsor may engage an investment advisor or consultant to help create a menu of investment options for the plan. Many advisors provide this support as a non-fiduciary. Other advisors assume the role of an ERISA Section 3(21) investment advisor or ERISA Section 3(38) investment manager (discussed later in this paper) to serve as a fiduciary to the plan when providing investment support. The role an outside advisor or consultant may play is discussed in more depth in Section 2 Advisor support to help sponsors meet fiduciary responsibilities. The named fiduciary and the ERISA plan administrator may hire service providers, such as recordkeepers and thirdparty administrators (TPAs) to help the plan sponsor meet its fiduciary plan administration responsibilities. Most recordkeepers and TPAs, perform their services as non-fiduciaries. That is, they are hired and perform their services at the direction of the plan sponsor, typically in accordance with a plan service agreement. Arrangements with service providers must be for a reasonable fee and terminable on short notice. Selecting and monitoring these service providers is a fiduciary oversight function. Even though a named fiduciary or ERISA plan administrator engages support, they remain plan fiduciaries, ultimately responsible for the following roles: Selecting and monitoring investment options. As the plan sponsor of a defined contribution plan with elective deferrals, you will typically be responsible for selecting a menu of investments that will be available to employees who choose to participate in the plan. You are also responsible for monitoring and adjusting the investment options, as needed. Selecting and monitoring service providers. Many plan sponsors lack all of the resources to administer a plan on their own or choose not to. Providing employee education and disclosures. You must educate employees about their right to participate in the plan and explain plan features through various notices and disclosures. Plan sponsors may engage an advisor to deliver investment education to participants. Providing ongoing administrative oversight. While thirdparty administrators and recordkeepers are an essential component of most retirement plan arrangements, you still play an important role in monitoring these service providers. Providing accurate employee data and other information to service providers to enable them to do their job is another important task for plan sponsors. You also have a responsibility to file an annual Form 5500, if applicable, and authorize distributions and loans. 3
Fiduciary standards of conduct As a fiduciary, a plan sponsor must meet strict standards of conduct in fulfilling their responsibilities to the plan and plan participants. There are five cornerstones at the base of the ERISA fiduciary framework. Acting solely in the interests of participants. An ERISA fiduciary who manages a retirement plan or investments must act solely in the best interests of the plan participants (and their beneficiaries) and avoid conflicts of interest with the exclusive purpose of providing benefits to them and defraying plan expenses. Carrying out duties prudently. Fiduciaries must carry out their duties with the care, skill, prudence, and diligence that a person familiar with the matter at hand would use. This standard is sometimes referred to as the prudent expert rule. If a fiduciary does not have the expertise to handle their responsibilities, they may need to hire professionals who have that expertise. Diversifying investments. Plan assets must be diversified to reduce the risk of large investment losses, unless under the circumstances it is clearly prudent not to. Following the plan document. Interpreting the document and providing administrative direction is a fiduciary function. Fiduciaries must follow the terms of the plan document insofar as they are consistent with ERISA. Paying only reasonable plan expenses. Fiduciaries must ensure that any plan expenses paid from plan assets, including investment-related expenses, are for services that are necessary for the administration of the plan and that the fees are reasonable. Adopting prudent practices and plan governance Prudent process is key Following a prudent decision-making process is vital to complying with the list of ERISA fiduciary duties. Different fiduciaries may make different decisions based on the same set of facts, but if they follow established procedures and document the basis for their decisions, they can demonstrate that they have acted prudently. One effective way to manage fiduciary responsibility is to document plan governance procedures, documentation that outlines the various roles and responsibilities for plan oversight and administration and identifies the steps and timing for fulfilling those responsibilities. For example, some plans adopt an Investment Policy Statement (IPS) to document the plan s investment objectives and the criteria that will be used to evaluate investment options, including the frequency of the reviews. Documenting fiduciary compliance Fiduciaries should keep written records of important plan decisions and the primary factors and information that formed the basis of those decisions. For example, your advisor can help you document the process you followed in hiring service providers and monitoring their performance to demonstrate that you acted prudently. It is a good practice to retain a copy of any reports or other information that you relied on in making plan decisions. Examples of documents to retain in the plan file include information about service providers and a copy of service agreements, invoices and fee disclosures, service provider performance reports, and any participant complaints. Similarly, meetings with a consultant or an advisor and other service providers should also be documented. You should keep meeting minutes for all plan committee meetings and other significant plan decisions approved by a board of directors or other governing authority (such as authorization for plan amendments). To keep all plan information together and easy to find, consider storing a copy of the meeting minutes and all collateral material with your plan document and other plan information. Advisor assistance managing investment risk Managing investment risk is an important focus for plan fiduciaries. You may want to discuss various strategies with your advisor to help you manage your investment responsibilities. Your advisor is a resource to help you identify prudent practices and policies that will help keep you on track in administering your plan for compliance. For example, your advisor can help you adopt an IPS to guide your investment selection and monitoring. While an IPS is not required by ERISA, it is a tool that some plan fiduciaries find helpful in providing both guidelines and timelines for investment oversight. 4
Fiduciary liability Under ERISA, fiduciaries may be personally liable for plan losses caused by a breach of their fiduciary duties, whether intentional or not. Participants have the right to initiate lawsuits to enforce their rights under ERISA. The DOL has authority to enforce the fiduciary rules through civil and criminal actions, and may require plan fiduciaries to restore plan losses (including interest), return money or other compensation, and pay the expenses related to correcting a fiduciary breach (e.g., appraisals and calculations). Following are some examples of fiduciary missteps that have been addressed by the DOL and the courts: Excessive fees Unquestionably, one of the DOL s primary initiatives in recent years has centered on plan fees. Paying only fees that are reasonable and necessary from plan assets is an express fiduciary duty under ERISA. The DOL has made fee disclosure practices a key audit and enforcement focus. At the same time, participant claims of fiduciary breach for allowing excessive fees to be paid by the plan have become one of the dominant trends in ERISA litigation. Correcting common fiduciary breaches The Voluntary Fiduciary Correction Program (VFCP) allows fiduciaries to voluntarily correct a variety of common ERISA prohibitions, including: Improper loans Delinquent participant contributions and loan repayments Improper payment of plan expenses Prohibited purchases, sales, or exchanges The correction must generally restore the plan to the condition it would have been in had the failure not occurred, including restoring lost earnings. VFCP is available to anyone who would be liable for fiduciary violations under ERISA, unless the plan is under investigation or the application contains evidence of a potential criminal violation, as determined by the DOL. Delinquent plan contributions Another primary DOL audit focus is ensuring the timely deposit of employee deferrals. You may want to work with your internal payroll group or payroll service to ensure all of your employee deferrals and loan repayments are deposited as soon as administratively feasible. If you identify late deposits, you may be able to self-correct the mistake through the DOL s Voluntary Fiduciary Correction Program (VFCP). Stock drop cases If a plan sponsor elects to offer company stock, they should consult with legal and tax professionals about the rules and fiduciary considerations that apply to this type of investment. A fair amount of litigation has been directed at plan sponsors who offered company stock as a plan investment, and the stock dropped substantially in value. The premise of these lawsuits, referred to as stock drop suits, is that the plan sponsor violated its fiduciary obligations to plan participants by allowing company stock as an investment option when the plan sponsor knew about business factors that could cause the stock value to drop. 5
2. Advisor support to help plan sponsors meet fiduciary responsibilities Advisor investment support A financial advisor can provide important guidance and support at every stage of the plan s life cycle. Investment support is at the foundation of most plan sponsor/investment advisor relationships. An investment advisor should have the expertise to assist you in selecting the initial menu of plan investments and provide ongoing investment information and support that will enable you to adjust the investment line-up as needed to satisfy your fiduciary responsibilities. Non-fiduciary advisor Following is a list of some common advisor support services that by themselves will not cause an advisor to become a plan fiduciary: Investment selection support (as distinguished by the broader role of a 3(21) investment advisor) Investment monitoring and reporting Generic (non-personalized) investment education for participants (DOL Interpretive Bulletin 96-1) Educating plan sponsors about their fiduciary responsibilities Plan reporting and analysis of key plan performance metrics Assistance with vendor searches, including outsourced fiduciary investment services Fee benchmarking support Generic enrollment services ERISA 3(21) investment advisor Some plan sponsors seek to obtain assistance with investment selection. Under ERISA, there are two principal types of investment fiduciary. The first is an advisor or other service provider who will share fiduciary responsibility with you (the plan sponsor) as an ERISA 3(21) investment advisor. An advisor who provides investment advice is considered a fiduciary to a plan under Section 3(21) of ERISA if he is paid to provide investment advice to the plan. The DOL has added thorough regulations that to be a 3(21) investment advisor, the advisor must also either (i) have discretionary authority or control to purchase and sell securities or other property for the plan; or (ii) give investment advice on a regular basis that is individualized for the plan and serves as a primary basis for investment decisions. As a fiduciary, such an investment advisor must follow the strict standards of fiduciary conduct mandated by ERISA and must disclose any conflicts of interest, but may leave the ultimate decision regarding which investments to include in the plan line-up to the plan sponsor. The selection of an ERISA 3(21) investment advisor is a fiduciary function and is typically documented in a service agreement between the plan sponsor and the investment provider. The plan sponsor has a fiduciary responsibility to monitor the actions of the investment advisor. ERISA 3(38) investment manager A second option is to hire an ERISA 3(38) investment manager. These individuals or entities assume discretionary control of the plan investments selecting, monitoring, and replacing investments. The plan sponsor has a fiduciary duty to select and monitor the investment manager to ensure that the investment manager continues to be a prudent selection as a service provider to the plan. There are, of course, fees for this level of investment support, and the plan sponsor and the investment manager must agree, in writing, to the appointment as a fiduciary. Only a bank, insurance company, or registered investment advisor can serve as an ERISA 3(38) investment manager. 6
ERISA fiduciary advisor services Non-Fiduciary Services ERISA 3(21) Investment Advisor ERISA 3(38) Investment Manager Introducing investment options and monitoring investment performance Delivering generic investment education and providing enrollment services Providing plan reports and analytics Helping plan sponsors understand their fiduciary responsibility Shares fiduciary responsibility for selecting and monitoring plan investments Typically, a non-discretionary fiduciary; ultimate investment decisions made by plan sponsor Often also provides non-fiduciary support services Services subject to the fiduciary standard, and non-fiduciary services are typically identified in a service agreement Investment manager fiduciary role Discretionary control over plan investments Requires a written agreement Must be a bank, insurance company, or RIA Often also provides non-fiduciary support services If you have an interest in securing fiduciary support for handling plan investments, a retirement plan consultant may be a helpful resource to explain the types of support services available through a consultant or through outsourced solutions that your consultant can suggest and the associated fees. Fiduciary support strategies A consultant can help you establish and follow sound procedures to make certain you are monitoring and evaluating the appropriate issues to satisfy your fiduciary responsibilities. Consider discussing these practical strategies with a consultant to help you manage fiduciary risk and tailor your plan to meet your business needs and objectives. Delegating investment responsibility to participants (ERISA 404(c)) A strategy some plan sponsors adopt to manage their fiduciary risk is to delegate some investment responsibility to plan participants. Under ERISA Section 404(c), a sponsor of a defined contribution plan with elective deferrals can shift its fiduciary responsibility for investment performance (but not of the selection of the choices on the investment option menu) to plan participants by allowing participants to choose from the menu of investment options available in the plan. Selecting a QDIA as the default investment If a plan allows participants to select investments, the plan sponsor must select a default investment for participants who do not make an investment selection for their plan contributions. If a plan sponsor chooses an investment that meets the DOL s requirements to be a Qualified Default Investment Alternative (QDIA), the plan sponsor will be relieved of fiduciary liability for the performance of the default investment. Three investment vehicles qualify as a QDIA: Life-cycle or targeted-retirement-date funds Professionally managed accounts Balanced funds To obtain the fiduciary relief associated with having a QDIA investment, plan sponsors must meet certain disclosure requirements with respect to participants, including a written notice to participants describing the circumstances under which a participant s account may be invested in a QDIA, the participant s right to select an alternative investment, a description of the QDIA, and an explanation of where to obtain additional information. Information on the QDIA, such as a prospectus, also must be provided to participants. 7
Advisor as portal to other service providers As discussed in Section 1 of the guide, most plan sponsors opt to engage service providers to help them administer their retirement plan and manage the investments. An advisor often provides support for vendor searches to help plan sponsors hire and monitor third-party service providers. For example, a consultant can help you with the due diligence process for assembling the best line-up of service providers, which typically involves looking at a number of providers, comparing the same variables with respect to each candidate, and benchmarking whether the fees are reasonable for the services provided. Following is a list of some of the service providers a consultant may introduce to help you fulfill your plan responsibilities. Participant support services provided by advisors Your employees need information and education to help them make savings and investment decisions. Your advisor is a portal to these important services. Many advisors provide a broad menu of educational support services. While some advisors conduct the education programs themselves, others may introduce you to outsourced educational resources. In addition to educational support, some advisors also provide investment advice services, serving as an ERISA fiduciary to participants. Even if an advisor does not provide participantlevel advice services, they can introduce you to service providers who do offer that service, if that is a need for your plan. Service providers and services Administrator (TPA) Monitor new legislation and regulations Help ensure the plan operates in compliance with the rules Conduct compliance testing Prepare Form 5500 (the plan s annual return) Provide plan design and amendment services Prepare participant notices Calculate contributions, eligibility, and vesting Consult with plan sponsors on corrective actions for plan errors Administer distributions and loans Recordkeeper In some cases, the TPA and recordkeeper will be separate entities, and in other cases, the same entity. Maintain records of participant and plan activity (e.g., investment elections, contributions, distributions and investment gains and losses) Process plan and participant transactions (e.g., distributions and investment transfers) Prepare plan reporting and participant account statements Provide a web site or call center for participants, plan sponsors, and advisors Attorneys and Accountants Provide legal support Provide accounting, tax, or auditing support 8
Advisor services Selecting an advisor whose skills and service model align with your retirement plan objectives is one of the most significant decisions you will make as a plan fiduciary. As you consider advisor candidates, you will need to evaluate whether a non-fiduciary support model is the best fit for your plan or whether you would benefit from fiduciary services provided by a plan fiduciary, such as an ERISA 3(21) investment advisor or ERISA 3(38) investment manager. There is no universally recognized best solution. Your due diligence process should compare the benefits associated with each model to determine the most suitable solution for your plan. The following chart lists some of the support functions commonly associated with the different service models. Some of the non fiduciary activity listed may be considered as fiduciary activity under the new DOL proposal. Services Non-Fiduciary ERISA 3(21) Investment Advisor ERISA 3(38) Investment Manager Investment Education Investment Performance Reports Fiduciary Education Vendor Search Assistance Fee Benchmarking Plan Performance Reports and Analytics ERISA Fiduciary Responsibility Investment Advice Investment Selection 9
Summary As an employer and plan fiduciary, you play a key role in the success of your retirement plan. In addition to selecting investments and overseeing plan administration, you will want to monitor plan metrics to make sure the plan is meeting your overall business objectives and producing positive retirement savings outcomes for your employees. This can seem like a daunting task when the regulatory landscape is constantly changing and new retirement plan products and tools are frequently introduced to the retirement plan marketplace. An advisor can be a critical ally in supporting your retirement plan and helping you meet your fiduciary responsibilities on multiple levels, including: Assisting you in selecting the initial menu of plan investments and providing ongoing investment information and support Educating you about your fiduciary responsibilities with respect to the plan and plan participants Introducing you to solutions and service providers to help you administer the plan Providing employee enrollment support and investment education for participants It is important to evaluate advisor service models and select an advisor with the skills and support services that align with your goals and objectives for the plan. With the support of an advisor, you can have a positive impact on your workers abilities to save for a financially secure retirement. 1. National Institute on Retirement Security, The Retirement Savings Crisis: Is It Worse Than We Think? June 2013, www.nirsonline.org. 2. EBRI Notes, Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model, May 2012, Vol. 33, No.5, www.ebri.org. 10
Multi-Boutique Investments Long-Term Perspective Thought Leadership For more information Defined Contribution Investment Only (DCIO) 877-742-6951, option 1 mainstayinvestments.com/dcio MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds are managed by New York Life Investment Management LLC and distributed through NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, NJ 07054, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC. Neither New York Life nor its agents or affiliates provide tax, legal, investment or accounting advice. Plan sponsors should speak to their own tax, legal, or investment advisor or accounting professional regarding their specific situation. The information contained herein is general in nature and is provided solely for educational and informational purposes. Not FDIC/NCUA Insured Not a Deposit May Lose Value No Bank Guarantee Not Insured by Any Government Agency NYLIM-1636720 MS397-14 MS38tIO-04/15