Morningstar Investment Management Morningstar Fiduciary Services FAQs For Financial Professional and Plan Sponsor Use Only. Not for Public Distribution.
Who is Morningstar? Morningstar s mission is to help investors reach their financial goals. We were founded on the simple idea that when people have good investment information, they make better choices that lead to better outcomes. Our advocacy for the individual investor extends to the workplace market, where the responsibility for investing and saving for retirement now rests with employees and where we re committed to helping those employees achieve financial freedom. Morningstar helps people improve their financial health and prepare for retirement by offering financial wellness, investment advice and managed accounts, target-date solutions, and fiduciary services to plan providers and employers. Available to more than 25 million participants and more than 300,000 plans, our suite of offerings is supported by our database of more than half a million investments, independent research that informs and shapes the financial industry, and a valuation-based approach to investment management. 1 What is Morningstar Fiduciary Services? Morningstar Fiduciary Services makes it easier for you to manage your business by providing institutionalquality diversified plan lineups and comprehensive, plan-level reports for your clients. We also supplement our reports with commentaries, additional investment analysis, and forward-thinking research to help you stay abreast of market trends and best practices. In offering this service, our objective is to help you and your clients make it easier for plan participants to create well-diversified portfolios using any combination of available funds. To fulfill this objective, we employ behavioral finance concepts, keep in mind fiduciary concerns, and use the full depth of our manager research capabilities. Our dedicated investment team applies both qualitative and quantitative measures to identify the funds within your clients investable universe that meet our screening and selection criteria, and that we believe will work well in combination. The same methodology that we use to select the funds also guides our ongoing monitoring of the lineup. It serves as the cornerstone of our investment recommendations. Morningstar Fiduciary Services also can help you meet your responsibilities; we act as an investment advisor, so you can focus on other aspects of your business. As part of the service, we provide: r Investment selection from a truly objective third party r A fully diversified menu of investment options including both proprietary and third-party funds r An investment policy statement r Plan-level fund reports, performance reports, and annual summary reports r Monitoring and due diligence of investment options using our expertise in fund analysis 1 Data as of September 30, 2015. Page 2
In what capacity will you act as a fiduciary to the plan? We will act as a fiduciary as defined in Section 3(21)(A)(ii) or 3(38) of ERISA. As a 3(21) fiduciary, we serve as aninvestment advisor with respect to the investment selection and monitoring we provide, but the advisor (or plan sponsor) retains responsibility for investing the plan assets according to our recommendations. As a 3(38) fiduciary, we are an investment manager with discretionary responsibility for the advice and for investing the plan assets. Is the fiduciary status limited in any way? Yes. Our fiduciary status is limited to the investment advice we render under Section 3(21)(A)(ii) or investmentmanagement under 3(38) of ERISA. The named fiduciary as identified in the plan documents retains fiduciaryresponsibility for all other aspects of the plan. Why do I need fiduciary services? A plan fiduciary is responsible for completing a number of activities including: 1. Acting in the sole interest of participants 2. Ensuring fees are reasonable 3. Selecting suitable investments and administering the plan 4. Providing a lineup of diversified investments 5. Following plan documents Not managing these responsibilities in a diligent manner can result in lawsuits, fines, and even loss of personal assets. Morningstar Fiduciary Services can help mitigate the risk a plan fiduciary takes on by providing an investment selection process, a diversified plan lineup, regular documentation, monitoring capabilities, and additional fiduciary support. Why choose Morningstar Fiduciary Services? To help ensure that they are meeting their responsibilities, plan fiduciaries need a consistent, prudent, and well-documented process for selecting funds. It takes experience, resources, investment expertise, and time to design and monitor a plan lineup. Few fiduciary programs offer the depth of service that Morningstar Fiduciary Services does, which means with our service, you can leave the lineup to us and focus on other important aspects of your business. Our fiduciary services program applies a consistent and thoughtful process to selecting and monitoring the fund lineup. When a plan is enrolled in our program, we apply our prudent investment management process, which entails an analysis of the participant base, selection of the most appropriate asset classes for that participant base, identification of what we believe to be high quality funds, and ongoing monitoring of the funds. With Morningstar Fiduciary Services, we provide comprehensive documentation of the diligent process that all parties have undertaken to select, review, monitor, and update the funds in the plan. Included in the service are: r r Workforce profiles designed to help advisors and plan sponsors consider the demographics and investment knowledge of the participant base A methodology document to help advisors and plan sponsors understand our lineup design and investment selection process r An investment policy statement that outlines the plan s goals and objectives, and quarterly individual fund reports that summarize each of the funds in the service Page 3
r Quarterly plan performance reports that summarize our evaluation of each fund in the plan lineup r An annual summary report that includes the plan performance report and additional information on how the funds fit together within a lineup r Memos that provide notice if certain funds are not meeting our requirements and how to take action r An advisory agreement that outlines each party s responsibilities Built on a mission of helping individual investors make better-informed decisions, Morningstar, Inc. and its registered investment advisors that offer Morningstar Fiduciary Services are recognized and trusted leaders in the marketplace and are known for independence and objectivity. We have substantial experience in offering fiduciary services. For over 10 years we ve offered this service and have accumulated more than $28 billion in assets under advisement and more than 12,000 plans use our fiduciary service. 2 Additionally, our research shows that we recommend funds that have performed above average with less risk and below-average expenses. For example, an analysis completed with one of our existing plan provider clients indicates that the funds on this client s Select List: 3 Performed Better Had higher returns than 64% of their respective Morningstar Category peers over the past five years Cost Less Had net expense ratios 30% lower than the average category peer, according to prospectus reports Had Less Risk Displayed less risk than 59% of their category peers over the past five years Our depth of resources helps ensure that when it comes to choosing funds for a plan s lineup, our process follows the prudent methods that ERISA standards mandate and that we select what we believe to be the highest quality funds available to the plan. With approximately 100 dedicated investment professionals conducting fund research and analysis daily within the Morningstar Investment Management group, access to Morningstar, Inc. s comprehensive database of more than 500,000 3 investment offerings, and extensive access to investment managers, we are widely recognized for our in-depth investment selection process. Our investment process combines science and art. We apply quantitative methods to gauge an investment s quality and apply qualitative criteria. These may be difficult or even impossible to evaluate using quantitative processes, but are equally important to driving a fund s performance. We use quantitative criteria such as management, style and performance consistency, and expenses to conduct an initial screening of the funds. Then, we draw on the extensive experience of our investment professionals to consider qualitative aspects of the fund, including investment process, manager skill, historical style-box placement and drift, portfolio turnover, and management structure and turnover. We use the same quantitative and qualitative processes to review and monitor funds. 2 Data as of September 30, 2015. 3 Data as of September 30, 2015. Page 4
How does the Morningstar Fiduciary Services program work? It s easy to enroll in the service by following the below process: Choose a Workforce Profile The workforce profile is a set of characteristics that most accurately describes a plan and its participants. We can work with you and your clients to identify the appropriate asset classes for the plan. The workforce profile includes factors such as participant demographics, participant education levels, the degree of investment sophistication within the workforce, plan participation rates, and more. Select a Fund Lineup Each workforce profile maps to a lineup. Sign the Agreement Once the workforce profile is selected, the plan sponsor will need to sign the advisory services agreement. This agreement provides an overview of the service and outlines the roles and responsibilities of all parties. Monitor notifications and reports We will provide quarterly and annual plan-level reports. These important materials document our ongoing evaluation of the funds in the plan lineup. In addition, you and your clients may receive notifications if funds need to be added to or removed from the lineup. If the demographics of the plan change, how would that affect the workforce profile selected? We have designed the workforce profiles so that the small changes that typically occur each year within a plan s workforce should not change the plan s fund lineup. However, a significant change in the plan sponsor s workforce demographics from one year to another could result in a different profile being more appropriate. You can review the workforce profiles with your clients annually. What happens if a fund is selected that is not included in the fund-specific lineup? If you or your client makes a change to the plan s lineup by adding a fund that is not part of the fund-specific lineup, or deleting a fund that is required by the fund-specific lineup, we will no longer assume fiduciary responsibility under ERISA for the investment oversight of any individual investment option or for the overall menu and the advisory agreement will be terminated. How do company stock and self-directed brokerage account options fit into Morningstar Fiduciary Services? You can include these investment options in the lineup. However, under no circumstances will we have any fiduciary responsibility for the offering or monitoring of such options. What happens when a fund needs to be added or removed from a plan lineup? We may add or delete funds from the plan lineup if such changes are necessary. In this case, plan sponsors will be notified through written communications. If your client does not make the required change, we will no longer assume fiduciary responsibility under ERISA for the investment oversight of any individual investment option or for the overall plan lineup and the Morningstar Fiduciary Services will be discontinued. Page 5
Is Morningstar a registered investment advisor? Morningstar Investment Management LLC is a registered investment advisor and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Will you provide indemnification? Yes, Morningstar Investment Management will acknowledge its fiduciary role in writing and provide indemnification forbreaches of its duties. That means we may pay legal defense costs and any damages awarded for covered claims under the Advisory Services Agreement. Does Morningstar have insurance policy protection? Morningstar, Inc. maintains investment management insurance coverage on behalf of its registered investment advisors subsidiaries. Page 6