What s the ROI of an Independent ERISA Fiduciary Expert? There are at least six key benefits that employers and their employees may receive with their retirement plans after hiring a skilled and experienced Independent ERISA Fiduciary Advisor: 1) Reduced fiduciary risk and personal liability 2) Reduced plan expenses 3) Improved participant investment returns 4) Improved participant retirement savings rates 5) Improved participant retirement account value 6) Improved loyalty, productivity and profitability A skilled and experienced Independent ERISA Fiduciary Advisor knows how to reduce risk to employers, identify and remove conflicts of interest among service providers, enable plan participants to maximize their company s retirement plan benefit, design the plan so it s aligned with the management team s overall goals, and ultimately, save time for everyone responsible for overseeing their organization s retirement plan. The decision to hire an Independent ERISA Fiduciary Advisor can be an excellent insurance policy for a plan sponsor. Like hiring a skilled physician or legal counsel, an Independent ERISA Fiduciary Advisor is a logical and intelligent solution to dealing with the fast-changing, litigious retirement plan environment. Perhaps, more importantly, this decision may be the difference between a successful retirement and one where participants can t afford to pay their bills or fulfill their dreams. Who wouldn t want thousands of dollars in additional retirement income at retirement? This may be the real value of an Independent. 2 What is an ERISA Fiduciary? As a starting point, it s important for a retirement plan sponsor to understand that the Employee Retirement Income Security Act of 1974 (ERISA) imposes a duty on those responsible for running a retirement plan that is, the plan fiduciaries (typically, the plan committee members or officers of the company) are required to act prudently as an expert in such matters, and for the exclusive benefit of the plan s participants and beneficiaries. This is sometimes referred to as the prudent expert standard. An ERISA Fiduciary is typically personally responsible and liable for all decisions made related to the company s retirement plan. The corporate veil doesn t protect them. Where fiduciaries are not prudent experts that is, where they lack the expertise and access to data that are needed to fulfill their fiduciary duties ERISA requires that fiduciaries hire independent experts to help them. 7,8,9 This requirement has two separate obligations: first, there is the requirement to engage an expert where the fiduciaries lack the expertise; second, there is the requirement that the expert be independent, which means that it cannot benefit from the advice it gives (an advisor receiving any compensation from the vendors it recommends may not qualify as independent). Hiring an independent fiduciary expert is a fiduciary decision that requires the plan sponsor to act prudently in selecting the expert, to monitor their activities and the process used by the expert in developing its advice, and to evaluate the advisor s reports and recommendations.
1 Reducing Fiduciary Risk and Personal Liability How can you quantify the value of how an Independent can reduce fiduciary risk and personal liability? It depends. Employers and their officers can outsource and delegate almost 100% of their retirement plan fiduciary responsibilities to an Independent by hiring an Independent 3(38) ERISA Investment Advisor. This enables them to substantially reduce their personal financial risk, liability, and time spent related to overseeing the retirement plan while enabling them to spend more time on their professional responsibilities and personal endeavors. However, if the entity that provides investments to a retirement plan is also providing advice or recommendations regarding investments on which the fiduciaries are seeking to rely, there is an inherent conflict that may cause an ERISA prohibited transaction. The following table highlights key differences. Non-Fiduciary Service Providers 3(21) ERISA Investment Advisor 3(38) ERISA Investment Advisor Service Provider Type Non-fiduciary service providers may include recordkeepers, TPAs, and most brokers. They aren t independent, and they typically receive compensation based on their recommendations. A 3(21) advisor provides independent advice to the employer on items such as hiring/firing and monitoring service providers. Also can provide individualized investment advice to participants. A 3(38) advisor takes 3(21) advice a step further by doing all of the research required to appropriately exercise their discretion of hiring, monitoring and firing service providers and fund managers for the employer. Plan Sponsor Items Employer may consider their recommendations but are still required to independently evaluate the information before making a decision as it s not from an independent source. Employer still makes the final decision but relies on this advice as the basis for their decisions because it s independent and free of conflicts of interest. Employer delegates almost 100% of fiduciary responsibilities, depending on the agreement, to the advisor but still periodically monitors the advisor s activities. Key Issues These service providers aren t held to ERISA fiduciary standards and may not be accountable for the information or recommendations they provide because it s not independent and free of conflicts of interest. The scope of the advisor s services is defined in a service agreement which explains that the advisor is held to ERISA s fiduciary standards and accountable for the research and advice provided to the employer or individual participant. The scope of the advisor s services is defined in a service agreement which explains that the advisor is held to ERISA s fiduciary standards and accountable for the decisions made for the employer and plan participants. 3
2 Reducing Plan Expenses Small Differences in Fees Have a Big Impact It is almost impossible for most employers to determine how much compensation their retirement plan recordkeepers receive or what the total amount of fees are related to their retirement plan. That s because the most recent fee disclosure requirements from the Department of Labor (DoL) in 2012 don t require that every fee or compensation amount be disclosed. However, ERISA still says that employers sponsoring a retirement plan have a responsibility to ensure that the compensation received for the services provided is reasonable and the services are necessary. Lawsuits against large, high-profile companies and small companies, along with the DoL fee disclosure requirements, have caused this area of the retirement plan industry to receive the most attention. Chart 1 illustrates the impact that reducing a participant s fees by 0.50% can have on a 37 year old participant earning $45,000 with 2.5% annual pay increases and contributing 9% (6% savings rate + 50% employer match) to his account. It assumes a starting balance of $74,600 (2012 U.S. average 401(k) account balance 1 ) and a 6% annualized net return. In 2011, approximately 91% of plan fees were paid by participants, compared to only 78% in 2009, according to an industry study. 2 Some ERISA attorneys think retirement plan litigation may become the fastest-growing area of the legal industry because participants in retirement plans may claim that their employer didn t effectively fulfill their fiduciary responsibilities. Chart 1 Participant Cost Savings (Fee Reduction) $393 $2,697 $7,852 $16,865 $31,796 $55,649 $92,767 4
3 Improved Investment Returns Naïve Investment Decisions Can you become a physician after reading a brochure on medicine and the human anatomy? Of course not. So, why do most employers and their retirement plan service providers think retirement plan participants can become experts on how to effectively invest their retirement assets to meet their spending needs in retirement after reading an enrollment kit or browsing a website? Unfortunately, most 401(k) and 403(b) Plan participants are naïve about making investment decisions for their own retirement assets. Compare this to employers that sponsor a Defined Benefit Pension Plan who hire experienced investment advisors and consultants that provide the latest research and technology to perform a comprehensive investment and funding liability analysis to ensure the plan s assets are effectively invested to meet the employer s objectives. There are numerous retirement industry studies that have evaluated how the investment returns and levels of risk for participants that use professional investment help compare to those who try to do it themselves. The Burgess/John Hancock study 3 identified a difference of 1.72% annualized return over ten years (2001-2010) and the Financial Engines/AON Hewitt study 4 identified a difference of 2.92% annualized over five years (2006-2010). Reasons behind underperformance for those who try to do it themselves include inappropriate risk levels, inefficient portfolios, and lack of rebalancing. Chart 2 below continues with the participant described in Chart 1 but assumes an improved annualized investment return of 1.72% (7.72% vs. 6.00%). Chart 2 Participant Benefit (Fee Reduction + Improved Returns) $1,746 $12,354 $37,361 $83,326 $163,155 $296,695 $514,214 5
4 Improved Retirement Savings Rate Planning for 25 Years of Expenses in Retirement Unfortunately, most participants don t take the time or have access to the resources necessary to complete a retirement plan funding liability analysis on themselves to determine how much they need to save and invest to fund their own retirement. Americans life spans are increasing, meaning we ll need our retirement savings to last longer. In the last 30 years, the number of Americans over age 90 has almost tripled to nearly 2 million raising a real risk that even those who think they re ready for retirement might outlive their savings. According to McKinsey & Company, the average American working household has a retirement readiness index of 63 out of 100. That means the average household may face a retirement savings shortfall of nearly $250,000. 5 Depending on a participant s age and circumstances, 401(k) Plan experts report a wide range of pre-retirement income savings rates necessary (10-20%) to help participants afford the expenses they ll incur in retirement, including the growing cost of healthcare. 6 The employer match is an influencing factor in a participant s decision when determining how much they defer from their paycheck into the plan. Eighty percent of 401(k) plans include some degree of match, with the most common matching formula being 50% of the first 6% deferred in to the plan. 6 Chart 3 builds on Chart 2 by increasing this participant s plan contributions by 1% each year for four years to a maximum of 13% (6% + 3% match + 4% of added savings). Chart 3 Participant Benefit (Fee Reduction + Improved Returns + Improved Deferral Rate) $2,231 $20,412 $62,452 $134,884 $255,093 $449,455 $757,740 6
5 Greater Assets in Retirement Small Changes Add Up to Big Returns Industry research beyond what has been reported in this case study paints a bleak picture of Americans saving for retirement. Few Americans are saving quickly enough to be financially secure in retirement. According to recent industry studies, nearly 50 million Americans have 401(k) accounts, with assets totaling about $3 trillion. But three out of four participants aren t on track for a comfortable retirement. Almost 90% don t think they ll have enough money saved when they get to retirement. And 20% of American workers are planning to delay retirement. 5 Are they getting the help they need to help them identify and achieve their retirement savings goals? Chart 4 illustrates the difference in how the growth of retirement plan assets for our Improved Participant compares to our Original Participant. By retirement, the Improved Participant has approximately twice the amount of assets in his 401(k) savings account as a result of the improvements made as described earlier in this case study. If he retires at age 67 and lives until 90, instead of having approximately $34,000 of annual income for 23 years of retirement, he now has $67,000 of annual income. Chart 4 Participant Account Balance (With Improvements vs. Without Improvements) $85,207 $142,914 $250,846 $413,113 $654,940 $1,013,009 $1,540,636 $82,976 $122,502 $188,394 $278,229 $399,846 $563,553 $782,896 7
6 Successful Retirement Plans Yield Added Benefits All Plan Participants Can Benefit Plan sponsors and plan participants share many objectives, but of course, have very different roles and responsibilities within their organization s retirement plan. Plan sponsors must act in a fiduciary capacity and seek to provide a valuable employee benefit. As ERISA says, a plan sponsor must act in the best interests of the plan s participants and their beneficiaries. 7 Participants are the end users and beneficiaries of a retirement plan. As a result, the overall plan can only achieve maximum success after each participant has identified and implemented improvements that benefit them based on their unique circumstances. There are many benefits an employer may realize when its employees understand that their employer has hired an Independent ERISA Fiduciary Advisor to help ensure the plan is as competitive as it can be and each employee is on track to reach their retirement objectives. These added benefits include loyalty, increased productivity, and increased profitability. Chart 5 illustrates the impact of applying all improvements made to the Original Participant in this case study to all participants in a retirement plan with 100 participants. Over a thirty year period, this plan s assets are almost twice the size they would have otherwise grown to as a result of working with a skilled and experienced Independent ERISA Fiduciary Advisor. Chart 5 Employer s Retirement Plan Total Assets (With Improvements vs. Without Improvements) $8,520,652 $14,291,374 $25,084,573 $41,311,309 $65,493,969 $101,300,857 $154,063,594 $8,297,575 $12,250,218 $18,839,401 $27,822,934 $39,984,637 $56,355,349 $78,289,597 8
Summary and Conclusions Benefits of Hiring an Independent As illustrated in this report, there are many ways to quantify the return on investment of hiring an Independent to help drive a wide range of improvements across all aspects of a retirement plan. There is a special fiduciary science behind achieving optimal results in a retirement plan. Many people in the financial services industry claim to be able to help an employer with their retirement plan but few actually have the experience, knowledge, ongoing training and resources necessary to achieve optimal results without creating more fiduciary risk for the employer. In addition to the improvements described in this report, a highly skilled Independent ERISA Fiduciary Advisor is able to save an employer time while driving improvements with the oversight and selection of investments, ongoing compliance, and the daily operation of a retirement plan. This is more difficult to quantify but is equally important as this area of sponsoring a retirement plan may have the greatest amount of fiduciary risk and liability for the employer, depending on the accuracy and effectiveness of operating the plan in accordance with the plan documents and complying with the IRS and DoL retirement plan regulations and guidelines. DISCLOSURE Objectives: The primary objective of this newsletter is to help the Plan Sponsor and its Retirement Plan Committee become more aware of issues related to fulfilling their fiduciary duties. Past performance does not guarantee future returns and retirement plan fiduciaries should consult their advisors and consider additional information before making any decisions. Sources: 1. Fidelity Investments Reports 8% Increase in Average 401(k) Balance to $74,600 based on 11.8 million retirement plan accounts; 2. Inside the Structure of Defined Contribution / 401(k) Plan Fees: A Study Assessing the Mechanics of the All-In Fee, Deloitte Consulting / Investment Company Institute, November 2011; 3. Outcomes of Participant Investment Strategies 2000-2010 by Burgess + Associates, 2011; 4. Help in Defined Contribution Plans: 2006 through 2010, Financial Engines/AON Hewitt Study 2011; 5. Bridging the Gap Between 401(k) Sponsors and Participants, Charles Schwab 2012; 6. Save More Tomorrow, Shlomo Benartzi, 2012; 7. Department of Labor Reg. 2509.95-1(c)(6); 8. The Fiduciary Duty to Ask For Help, Fred Reish and Joe Faucher, 2004; 9. 401(k) Investments; A Roadmap for Managing Fiduciary Risk, Fred Reish Bruce Ashton, 2005; 10. American Society of Pension Professionals and Actuaries. Research and Analytics: The opinions and analyses expressed in this presentation are based on RMB Capital Management, LLC s research and professional experience, and are expressed as of the date noted. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this presentation. The information and data in this presentation does not constitute legal, tax, accounting, investment, or other professional advice. 9
About RMB Retirement Plan Solutions Institutional Retirement Plan Advisory Services As ERISA retirement plan and investment specialists, we have the expertise and resources to drive improvements across all aspects of a retirement plan. Fiduciary SafeGuard RFP Vendor Searches & Benchmarking Participant Experience Investment Due Diligence RMB Capital Management is an independent Registered Investment Adviser regulated by the U.S. Securities and Exchange Commission. We combine the high-touch service of a boutique firm with the discipline, broad expertise, proprietary investment research, state-of-the-art technology, and seasoned professionals that are usually associated with much larger firms, to help our clients achieve their unique goals. Our firm is structured to ensure clients best interests are the driving force behind all our decisions. Retirement Plan Solutions Our Retirement Plan Solutions unit is an experienced team of high-caliber retirement plan and investment experts that deliver holistic ERISA fiduciary advisory and consulting services to employers. Our goal is to drive measurable improvements across all aspects of their retirement plans. As an independent firm, we are unbiased and product neutral while leveraging years of experience to become an extension of our clients finance and human resources departments. Our depth and breadth of experience enable us to help our clients tackle all of the issues they face related to their retirement plans. Walt Melcher, QPFC, AIFA V.P., Director of Retirement Plan Solutions P 303.801.3608 E wmelcher@rmbcap.com RMB Capital Offices 210 University Blvd, Ste. 750, Denver, CO 80206 115 S. LaSalle St., 34 th Floor, Chicago, IL 60603 3485 N. Pines Way, Ste. 102, Wilson, WY 83014