FIDUCIARY INSIGHTS & UPDATES

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Brian Stanley
5 years ago
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1 FIDUCIARY INSIGHTS & UPDATES Did You Know? The Employee Retirement Income Security Act of 1974 (ERISA) was enacted on September 2, 1974 and signed into law by President Gerald Ford on Labor Day. It has been amended many times since then. ERISA is a federal law that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by: / Requiring the disclosure of financial and other information concerning the plan to beneficiaries; / Establishing standards of conduct for plan fiduciaries; and / Providing for appropriate remedies and access to the federal courts. In This Issue Fiduciary Spotlight: Committee Charter and Retirement Income Funds...2 Evaluating Stable Value Investments in a Retirement Plan...3 Target Date Fund Fiduciary Decisions..4 Industry Updates & Deadlines....6 Increased Scrutiny of Retirement Plans Most Chief Financial Officers and Vice Presidents of Human Resources have full agendas with managing their organizations and don t come to work every morning thinking about their company s compliance with ERISA (Employee Retirement Income Security Act), the Department of Labor (DoL) guidelines or Internal Revenue Service (IRS) regulations. However, they may want to put this higher on their list of priorities because the DoL is making compliance with ERISA a priority. The DoL plans to substantially increase the number of ERISA compliance audits it conducts each year, which may cause concern for many employers. While we don t believe that most employers or their management teams are deliberately doing things incorrectly, we do believe it is very difficult for employers that don t employ full-time retirement plan experts to stay in compliance of all the rules and regulations from the DoL, IRS, and ERISA. The DoL has estimated that 75% of the retirement plans it audits have had an ERISA violation this usually results in unexpected cash flow, which is not a good surprise for a CFO or VP of HR. Furthermore, unintended problems with the company s retirement plan may create negative employee relations issues, potentially incurring additional costs for the employer. Many ERISA attorneys that we have worked with believe there is no such thing as a qualified plan because it s virtually impossible for an employer to operate their 401(k) Plan or 403(b) Plan in accordance with their plan s document and all of the regulations that dictate how a plan must administered. These regulations go far beyond just monitoring fees and investments. This is why RMB Retirement Plan Solutions provides a holistic approach to helping employers with all aspects of their retirement plans. Please contact Walt Melcher at for more information on any of the topics in this newsletter.

2 FIDUCIARY SPOTLIGHT Establish a Retirement Plan Committee Charter Retirement Income Investments in 401(k) and 403(b) Plans As retirement plan consultants, we support our clients by formally establishing a 401(k) Committee. The establishment of a Committee may be formalized by adopting a 401(k) Committee Charter. This Committee Charter helps to protect the named fiduciaries serving on the Committee by delegating certain identified fiduciary responsibilities to the Committee. It protects the Committee members by defining the specific duties for which they are responsible. Furthermore, it protects the participants, as it provides for orderly and prudent governance of the plan designed for the exclusive best interests of the participants and their beneficiaries, as required by ERISA Section 404(a). When adopting a Committee Charter, it is important to consider the following discussion points: / What is the purpose of the Committee (investmentrelated, administrative issues, or both)? / How are Committee members are selected? / Is there an ideal number of Committee members? / What topics should the Committee cover (e.g., review investments, review IPS, identify ongoing participant needs/education, review plan design provisions, review plan/participant demographics vs. objectives, consider trends and legislation which may impact the plan, review and benchmark fees)? The recent stock market turmoil combined with our litigious society is generating concern on the part of many fiduciaries regarding their potential exposure. Taking a casual approach to plan governance, without a formalized Committee Charter, will not help insulate the company or the plan fiduciaries from participants' complaints or lawsuits. One of the more significant developments in the retirement industry in recent years has been the advent of retirement income investments within a 401(k) Plan or 403(b) Plan. Insurance companies offer these solutions in order to provide a steady stream of income to participants throughout retirement. These products are generally directed at participants who are concerned about outliving their assets and who seek peace of mind throughout retirement, knowing that guaranteed income will be coming in (particularly in light of market downturns). The most common types of retirement income products include: / Deferred fixed annuities: provide a fixed, monthly payment until death. These annuities are usually purchased before retirement. / Guaranteed minimum income products: guarantee a minimum level of future annual income based on underlying investment performance, similar to a variable annuity. / Guarantee minimum withdrawal products: guarantee a participant can withdraw a set percentage annually from their investments and never run out of funds. / Immediate annuity: provide a fixed, monthly payment until death. Generally purchased at retirement. Many retirement plan service providers already recommend a variety of retirement income products. And along with more choice comes more fiduciary considerations, such as portability issues and fee transparency. 2 Please contact Walt Melcher at for more information on any of the topics in this newsletter.

3 SELECTING YOUR PLAN S STABLE VALUE INVESTMENTS Evaluating Stable Value Investments in a Retirement Plan Stable value funds are generally a low-risk investment option within tax-qualified retirement plans. Similar to money market funds, stable value funds typically invest in high-quality, short-term, fixed income assets. The book value of stable value funds is insured via wrap providers (insure a certain minimum return), which preserves the principal and offers the potential to earn a higher interest rate than money market funds. As a fiduciary, it is important to analyze the different aspects of a stable value fund rather than just mere returns. RMB s Approach: 1. Assess client needs. 2. Determine stable value fund lineup available via the plan recordkeeper s platform. 3. Evaluate available funds using, but not limited to, the following criteria: Crediting Rate Market Value-to-Book Value Ratio Average Credit Quality Rating of Portfolio Insurance/Wrap Provisions Asset Allocation Size of Fund Manager Tenure Indicates whether a consistent and competitive crediting rate is paid to investors, relative to other issuers. Measures whether the portfolio has a gain or loss" by comparing the current value of securities to the price at which the securities were purchased (book value) and is a representation of potential risk. A higher ratio indicates greater financial health of the underlying assets. Minimizes credit risk by investing in higher-rated securities. Allows participants to make withdrawals at a stable $1 NAV. Diversification in providers is generally preferred, but not required, versus a single provider. Aims to diversify across various asset classes to mitigate underperformance in one sector. Determines ability to handle sizeable inflows/outflows without materially affecting the credit rate. Promotes confidence based on length of track record. 3 Please contact Walt Melcher at for more information on any of the topics in this newsletter.

4 COMPARING AND SELECTING TARGET DATE FUNDS Target Date Fund Considerations Target date funds are in the spotlight, again. They re expected to account for approximately 40% of all 401(k) and 403(b) Plan assets by 2020! How can 401(k) or 403 (b) Plan fiduciaries prudently select and monitor targetdate funds? A big part of the answer can be found by determining proactively whether a target-date fund's asset allocation and glide-path are consistent with a plan's particular needs. Target-date fund style benchmarks (a to index and a through index) can help throughout the process from screening candidates to monitoring performance and asset allocation. Plan fiduciaries should begin the selection process by developing an understanding of the behavioral tendencies and demographics of their employee population. They should articulate the investment implications of this analysis in their investment policy statement. For example, firms in high-paying industries might wish to select a target-date fund that is more sensitive to longevity risk than it is to market risk. The life expectancy of highly compensated employees might tend to be greater than average, so that aspect of the plan's demographics could support such an investment policy. Plan fiduciaries should also integrate implications of retirement plan design into their investment policy statement. For example, whether a defined benefit plan is offered will affect which targetdate fund best fits a plan's needs. indicated by consistency with a to benchmark index. Conversely, if demographic and plan design factors point to more concern about longevity risk, they could start the selection process by screening for funds that pursue a through style as indicated by consistency with a through benchmark index. If neither style is strongly indicated, they could look at a set of target-date funds that are a blend of to and through those that do not fall strictly into one or the other style. In the monitoring phase, to and through targetdate fund style indexes can be appropriate benchmarks for performance analysis and a source for comparing glide-paths (between the benchmark and any particular fund). They are superior to peer group analysis because genuine target-date fund style benchmarks are representative, investible, style-specific, known before each evaluation period, and permit performance attribution. Of course, these recommendations presume that appropriate target-date fund style benchmarks exist. For example, S&P Indices is responding to that need by building its target-date index family. S&P Indices is developing consensus-driven to and through style indexes for every five-year target date from retirement income through With this perspective, fiduciaries can align the overall needs of their plan with a set of target-date fund candidates. If the results of their analysis call for heightened sensitivity to market risk, they could start the selection process by screening for funds that pursue a to style as 4 Please contact Walt Melcher at for more information on any of the topics in this newsletter.

5 COMPARING AND SELECTING TARGET DATE FUNDS (cont.) Target Date Fund Considerations (cont.) What are the elements of target-date fund style? The de-risking policy of a target-date fund manager is certainly one. Whether the manager stops de-risking at retirement or continues beyond seems to capture the idea of to and through. However, does de-risking policy account for the entire picture? Implicit in the to style is heightened sensitivity to market risk, whereas the through style has more sensitivity to longevity risk. This difference makes equity exposure around the retirement date and in the retirement income allocation another meaningful factor in determining target-date fund style. As with all statistical exercises, the degree of uncertainty inherent in measuring participant demographics should be acknowledged. Target-date funds, including custom target-date strategies, are ideally aligned with the needs of a particular plan. However, individual participants retain all investment risk in defined contribution plans, so even a prudently selected target-date fund will have outliers in terms of its optimality for given individuals. Selecting a target-date fund for a particular plan is similar to fitting a line or curve to a set of data points. Because plan sponsors cannot fit a glide-path to each plan participant, they ought to think about the opportunity cost of choosing a custom target-date strategy. If plan demographics and behavioral tendencies justify paying for the creation of a custom strategy, it's appropriate to measure the custom strategy's opportunity cost relative to a representative benchmark. A consensus target-date style index is the most representative benchmark for such an opportunity cost analysis. Consensus target-date fund benchmarks measure the combined opinion of active target-date fund managers regarding the appropriate asset class exposure for each target date. They are representative, market-driven proxies for each target date that stakeholders can use to measure the success of any given target date strategy. With respect to helping participants understand targetdate funds, plan executives can provide appropriate benchmarks, financial education, and clear communications to support proper usage of target-date funds even for outlier employees. They can also illustrate how their plan's glide-path compares with that of a consensus target-date style benchmark. Lastly, they can communicate demographic assumptions in an engaging way so each employee can make an informed decision about which target-date year within their plan's target-date fund glide-path best fits their individual retirement accumulation needs. RMB Capital Management s team of more than 10 investment research professionals provides its clients with the bread and depth of knowledge necessary to select and monitor the appropriate investments for its clients. Contact Walt Melcher to learn more about how your organization may benefit from our unique knowledge and experience: wmelcher@rmbcap.com. 5 Please contact Walt Melcher at for more information on any of the topics in this newsletter.

6 INDUSTRY UPDATES Small Businesses Get Help With Financial Management BodeTree, a tech startup with an office in Denver, pushes small businesses to reach financial nirvana. Their financial advice and bookkeeping software helps business owners monitor and improve the health of their companies, or as Bode Tree's founders like to put it, to achieve financial enlightenment. BodeTree offers "financial insight for people who hate finance," said Denver resident Matt Ankrum, who founded the company with Chris Myers of Phoenix. The two met while working in the strategy department of the Apollo Group Inc., owner of the University of Phoenix. "There is this huge opportunity to take what we know and to get it done at a Fortune 500 level for the small business customer," Ankrum said. BodeTree works primarily through a partnership with Intuit Inc., developer of QuickBooks, a bookkeeping program for small businesses. Users can automatically sync their numbers from QuickBooks into BodeTree to get started. After asking some questions, the software will give the business an encompassing valuation, a BodeTree score, and a comparison in each area with other businesses in the industry. A high level of debt or low cash reserves can raise red flags. Age-Based Savings Guidelines Employees should aim to save at least eight-times their ending salary to meet retirement income needs, Fidelity Investments suggests. The new set of savings guidelines, designed to help workers evaluate whether they are on track to meet retirement income needs, shows that an average worker may replace 85% of his pre-retirement income by saving eight-times his ending salary. To reach this figure by age 67, Fidelity advises workers have about one-times their salary saved at age 35, three-times at 45, and five-times at 55. The eight-times savings guideline is based on a hypothetical worker saving in a workplace retirement plan, such as a 401(k), beginning at age 25, working and saving continuously until 67, and living until 92. The ending goal would include savings in all qualified retirement accounts. Source: Important Dates and Deadlines September 30--Distribute Summary Annual Report (if a request for a 2.5-month extension for Form 5500 was not filed with the IRS) October 15--File Form 5500 with the DoL (for plans filing under a Form 5558 extension) November 1--Meet all data and other requirements to allow for timely distribution of any annual participant notices (e.g., 401(k) safe harbor, QDIA, automatic enrollment, participant disclosure) November 15--Meet all data and other requirements to ensure timely distribution of any minimum required distributions November 30--Meet all data and other requirements to ensure timely year-end processing of distributions, loan defaults, and forfeitures December 1--Deliver annual participant notices (e.g., 401(k) safe harbor, QDIA, automatic enrollment, participant disclosure) December 15--Distribute Summary Annual Report (if a request for a 2.5-month extension for Form 5500 was filed with the IRS) December 31--Issue corrective distributions for prior year's ADP and/or ACP testing failures 6 Please contact Walt Melcher at for more information on any of the topics in this newsletter.

7 ABOUT RMB RETIREMENT PLAN SOLUTIONS Contact us to schedule a consultation. In an initial meeting, we strive to provide valuable industry updates and insights, as well as a unique perspective on how you may improve your retirement plan without moving to a new service provider. 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. This newsletter should not be considered legal or tax advice. 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. Walt Melcher, QPFC, AIFA V.P., Director of Retirement Plan Solutions P E wmelcher@rmbcap.com Retirement Plan Solutions is a unit of RMB Capital Management 115 S. LaSalle St., 34th FL, Chicago, IL University Blvd., Suite 750, Denver, CO 80206

FIDUCIARY INSIGHTS & UPDATES

FIDUCIARY INSIGHTS & UPDATES Did You Know? The section of the Internal Revenue Code that made 401(k) plans possible was enacted into law in 1978. It was intended to allow taxpayers a break on taxes on