A World of Change and Opportunity in 401(k) Plans

Transcription

1 A World of Change and Opportunity in 401(k) Plans Steven Kaye, CFP, ChFC, CLU, CEBS, RHU, AAMS, CRC, AIF President AEPG Wealth Strategies 25 Independence Blvd. Suite 102, Warren, NJ Phone: Fax:

2 Key Changes and Trends That Are Creating Opportunity in 401k Plans Litigation March 2008 supreme court ruling Tibble v. Edison International breached duty of prudence by investing in retail verses institutional share classes American Funds - Growth Fund of America Share Class 4th Qtr Return 1-Year Return 3-Year Return 5-Year Return 10-Year Return Expense Ratio Revenue Sharing R R R R R R

3 Key Changes and Trends That Are Creating Opportunity in 401k Plans Fee disclosure 408(b)(2) disclosure to sponsors effective July 1, (a)(5) disclosure to participants effective August 30, 2012 Understanding Plan Costs and Whether They are Reasonable Plan Sponsor Recordkeeping Accounting Plan Reports Daily Processing Quality Assurance Checks Compliance Support Plan Document, SPD Annual 5500 Filings Nondiscrimination Testing ERISA Services Revenue Sharing Arrangements Asset Based Fees Billed Fees Investment Management Fees Investment Management Core Investment Line-up Design Performance Benchmarking Qualitative Analysis Quantitative Analysis Technology Web-based Access Participant Call Support Online Processing Tools Enrollment Materials Communications Education Sessions Online Communication Pieces Participant Statements Advice Solutions Participant

4 Key Changes and Trends That Are Creating Opportunity in 401k Plans Governance Plan operations Changing focus of D.O.L. audits Mission statement/business plan Investments Decumulation funds Lifestyle & Lifecycle Funds To vs. thru Glide paths ETF s DB Buckets Contingent Deferred Annuities New tools Brokerage Accounts

5 Who is a Plan Fiduciary? The Employer/Plan Sponsor is the named fiduciary and ultimate fiduciary Fiduciaries who can be appointed by Plan policies and/or document Trustee(s) Investment Managers Plan Administrator (of the Employer) Corporate Officers may be fiduciaries if they assist in making decisions for the plan Such as: Selection of funds, plan design options, service provider selection, hiring of investment managers Board of Directors may be responsible for the selection or retention of the plan fiduciaries If so, they have discretionary authority or control of the plan However, their responsibility and liability is limited to such Appointed Retirement/Investment Committee Should be established with a committee charter Defines the extent of which they have discretion over the plan

6 Key Areas of Fiduciary Responsibility Ensure operation of the plan is in accordance with the terms of the plan document 9 out of 10 times, the Third Party Administrator (TPA) screws up Why not? They do the bulk of the work Rules are technical, errors happen Ensure there is a diversified and appropriate line-up of investments offered in the plan Are expenses of the plan reasonable 408(b)(2) disclosure effective July 1, 2012 Benchmarking plan expenses Are they reasonable for the level of service being received? Lowest cost is not always the best Operate under the Prudent Man Rule (ERISA 404(a)(1)(b)) Conduct all dealings of the plan with care, skill, prudence and diligence Last and Most Important Operate the plan for the exclusive benefit and in the best interest of the plan participants and their beneficiaries

7 Fiduciary Standards Have Not Changed, They are Just Becoming More Important to Follow Have regular retirement/investment committee meetings Recommend holding at least quarterly meetings Add more as needed depending on economy, changing regulations, important plan decisions Face-to-face meetings ideal. Conference calls just as good. Establish agenda, review investment performance, plan statistics, operation and administration functions Leverage vendor quarterly/annual reports and conduct thorough review of them Pull out Investment Policy Statement (IPS) and ensure it is still in line with plan s investment goals and being followed Consider and investigate reports that the fees paid by the plan may be subsidizing corporate services Consider having an independent advisor periodically review plan operations and administrative processes Keep written minutes of committee meetings Establish clear policies and procedures Document everything and keep in file

8 Plan Providers know little, plan sponsors know even less Due to prudence requirements, the complexity it takes to operate the plan, and difficulty in selecting and monitoring plan investments, fiduciaries may want to seek experts with the knowledge to provide the necessary support. Experienced Advisor 3(38) Fiduciary 3(21) Fiduciary 3(16) Fiduciary Takes responsibility for all of the daily administration of the plan or only some of the functions Consultant/Advocate Consult the Experts ERISA Attorney provide periodic fiduciary education to the Pension and Investment Committee Biggest Takeaway It is critical to have an effective and well documented process in place to identify and manage the risk of operating the plan

9 Education - The Next Big Thing Believe education will be one of the main areas of focus in 401k plans over the next couple of years Provide clear, precise communication to and educate plan participants Upcoming participant fee disclosure 404(a)(5) Plans aren t free participants will soon see fees on their statements Stay ahead of disclosure and communicate with participants now about fees Provide adequate investment information to participants for them to make proper decisions Need to adapt to change in market conditions Increase communication materials as market warrants Customize education sessions to plan demographics, needs, and the market Further enhanced education services needed may be needed?

10 Take Education to the Next Level Define education approach and document it. Update it as needed Develop, implement and monitor an Education Policy Statement (EPS) The EPS establishes and governs the education needs of the plan Customized education sessions that meets the plan s demographics and needs More then 1 or even 2 group sessions per year may be needed Focus more towards Financial Planning Concepts and ideas Delivered by highly trained Professionals (CFP Practitioners) Additional one-on-one sessions/education in financial planning and goal achievement by CFP Professionals Allow participants to discuss any area of financial planning to help them achieve their goals Bring spouse/significant other along to help see entire retirement picture Sessions can be broken out by different employee demographics to satisfy Participant Call Support with Advisor (Advisor on Demand TM ) Participant Advice Services RJ20 Smart401k.com Customized Services Financial Engines Morningstar

11 Needs of the Vendor are Diametrically Opposed to the Needs of the Plan Sponsor Investments Well-Diversified Selection? Expense Ratios? Investment Policy Statement? Governance Protection from potential liabilities? Investment Committee Process? - Charter - Agenda - Minutes Expertise on Best Practices Low Fees? Costs Appropriate Fund Share Classes? Operations Employee Education? Minimize Operational Burden? Messaging to Employees? Become an ACCOUNTABLE ADVOCATE TM

12 Enhanced Performance Monitoring Research and Analysis Selection Monitoring Process Independent, fee only Registered Investment Advisor Performed by internal investment team inclusive of CFA Charter Holders Gather and document 30+ pages of data for each fund Interview members of the fund management Comprehensive Fund/Manager Screening Process Fund/Manager Ranking Process Three Track Investment Lineup 1. Single Asset Class Funds Active vs. Passive 2. LifeStyle (Risk Based) Funds 3. LifeCycle (Target Date) Funds Additional Options Available Self Directed Brokerage Accounts Collective Trusts Managed Accounts Track fund performance daily Attend monthly and quarterly fund conference calls Speak with fund management team members when needed Internal semi-annual fund review meetings Provide performance comparison reports Provide detailed analysis writeups of underperforming funds Provide recommendations for fund changes Quadruple Benchmarking (fi360, Morningstar, Bloomberg, Zephyr)

13 Understanding Stable Value Funds One of the Most Widely Used Investments What to consider when selecting and monitoring a Stable Value Product 1. The underlying investment portfolio of the Stable Value fund Understanding the risk profile and how it can potentially affect the marketto-book value ratio of the fund 2. The trade-off between the level of principal guarantee and the risk of that guarantee failing 2 main Stable Value fund structures 3. The termination provisions of the fund Understanding any restrictions related to the ability to terminate the investment on a plan level 4. The level of commitment and experience that a provider has in the Stable Value business Understanding the level of expertise a provider has in managing Stable Value fixed income portfolios Understanding a provider s Stable Value fund business

14 Consulting Support Assisting with More of the Comprehensive Administrative Services Monitor and help manage Plan pricing and services, including communications, reporting to the Committee, dealings with the auditor, the government, counsel, HR, payroll and finance Help communicate and coordinate administrative functions and plan changes with vendor Assist in answering participant inquiries regarding plan functions or transactions Analyze plan data to ensure the plan is best utilizing a plan features and options Assist with IRS or DOL audit Assess impact from Corporate Events (corporate restructuring, department changes, acquisitions, divestitures and new US startup companies) Provide comprehensive individual wealth management services to Key Employees

15 Deep and Broad Best Practices Investment Policy Statement: How tight is your process? Committee establishment & charter Comprehensive agenda and minutes Detailed fund review process Mission Statement (3-5 Year Plan) Education policy statement (EPS): Type, nature, frequency and topics Trustee education On-site CFP s with free advice PCRA Auto-enroll, Auto-increase Fiduciary warranty Plan design: safe harbor match, triple decker plan

16 A Good Plan Advisor/Advocate Will Acts as a plan s investment fiduciary Creates the plan Investment Policy Statement (IPS) and execute on it Investments Creates an Education Policy Statement (EPS) for participants Negotiates fees on behalf of the client Governance Best Practices of a Fiduciary Costs Maximizes the investment potential Operations Minimizes the client s liability, cost and risk

17 The Changing Landscape is Suggesting Advisors Should Step up operations and best practices to take advantage of these great opportunities Partner to enable you to have the type of offering you would like Consider exiting the business Select Business Plan Light Moderate Deep

18 Thank You for Your Time QUESTIONS?