Emerging Regulatory & Litigation Trends

Transcription

1 The Next-Generation of 401(k) Fiduciary Management Joshua P. Itzoe, CFP, AIF Partner & Managing Director Institutional Client Group Emerging Regulatory & Litigation Trends 1

2 ERISA Fiduciary Responsibilities Some of those plan fiduciary responsibilities outlined by the ERISA and highlighted by the DOL include acting solely on behalf of participants in respect of: Doing so for the exclusive purpose of providing benefits to them Carrying out their duties prudently Following the plan documents (unless inconsistent with ERISA) Diversifying plan investments Paying only reasonable plan expenses 1 1.Dept. of Labor, Employee Benefits Security Administration, Meeting Your Fiduciary Responsibilities, Recent DOL Fiduciary Guidelines Additional DOL guidelines for Plan Fiduciaries: Target Date Retirement Funds TIPS for ERISA Plan Fiduciaries (Feb. 2013) 2 Selecting And Monitoring Pension Consultants - Tips For Plan Fiduciaries (May 2005) 3 The selection of Qualified Default Investment Alternatives (QDIA) 4 The Fiduciary Education Campaign, a compliance assistance initiative of the Employee Benefits Security Administration (EBSA)

3 Braden v. Wal-Mart Background Plan had ~$10 billion and 1m+ participants Plan included 10 primarily active mutual funds + company stock Suit originally filed in district court in March of 2008 claiming the company cost participants $60m in excess expenses over 6 years by using retail share classes instead of institutional shares 7 of 10 funds had 12b-1 fees Merrill Lynch collected $26m in 6 years Case dismissed in late 2008 but overturned by 8 th Circuit Court in 2009 Amended complaint in 2010 added Merrill Lynch as defendant Key Issues/Findings Court found that issue of fees shouldn t be decided before discovery and it was reasonable the fund selection process was flawed Unlike the 7 th Circuit, the 8 th stated revenue sharing was material and plan fiduciaries had a duty to disclose Amended complaint alleged Merrill Lynch was a plan fiduciary and controlled their compensation by limiting investment options Braden v. Wal-Mart, Continued Outcome Plaintiffs awarded $13.5 million (includes $3.5m from Merrill Lynch) Attorney s received 30% plus costs and expenses Court required Wal-Mart to: To retain an investment consultant as a 3(21) fiduciary and review for conflicts on an annual basis Provide web-based investment education to participants Eliminate retail share classes as well as funds that pay revenue sharing Consider adding more passively managed fund options to the plan Comply with DOL fee disclosure regulations Lessons learned Moving forward, discovery is necessary prior to dismissal Beware of using an affiliated recordkeeper and investment consultant Use an independent consultant who acknowledges fiduciary status Use plan size to negotiate lower cost institutional share classes Consider using a majority of low cost index funds 3

4 Tibble v. Edison Background Plan had more than $3.1 billion as of December 2005 Plan included 10 institutional funds, company stock and 40 mutual funds Suit originally filed in August 2007 with all but 2 claims dismissed in 2009, followed by a 3-day bench trial during the summer of 2010 which was affirmed by the 9 th Circuit in 2013 Hewitt Associates was rk and Hewitt Financial Services (HFS) was the plan consultant Defendants included Plan Sponsor, Benefits Committee, and a VP and Manager of HR Key Issues/Findings Plaintiffs argued plan fiduciaries chose retail shares to maximize revenue sharing rejected by the Court Court rejected breach of loyalty claim by using revenue sharing Court upheld several claims of breaching the duty of prudence regarding level of fees in certain funds while rejecting others Court upheld claim that fiduciaries breached their duties by not asking for a waiver to invest in institutional shares over retail shares 6-year statute of limitations begins when fund included in Plan Tibble v. Edison, Continued Outcome Mixed bag for both plaintiffs and defendants Plaintiffs awarded $370k for excessive fees on 3 mutual funds Lessons learned Inquire about share classes and ask for waiver if minimums are not met Don t automatically exclude retail shares make a reasoned decision Document the reasons for selecting investments, esp. if higher cost Understand revenue sharing arrangements of funds that are reviewed 404(c) protection may not provide protection in certain Circuits (6 th & 9 th ) 4

5 Tussey v. ABB, Inc. Background 2 plans union and non-union Fidelity provided recordkeeping, trust and other corporate services Plaintiffs claimed ABB and Fidelity breached their fiduciary duties 1 of only 2 excessive fee cases to go to trial and result in a ruling Key Issues/Findings ABB used plan assets to subsidize other corporate services Fidelity was not a fiduciary ABB failed to monitor the reasonableness of revenue sharing and never calculated dollar amount of rk or obtained a benchmark ABB did not follow the plan s IPS ABB mapped to investments with higher revenue sharing to reduce costs to the company ABB ignored recommendations of an outside consultant Tussey v. ABB, Inc., Continued Outcome Sweeping win for plaintiffs Plaintiffs awarded $36.9 million (includes $1.7m from Fidelity) Court required ABB to: To complete a competitive RFP process for RK within 18 months Monitoring of rk fees with dollar cost calculations to determine exact fees Fee negotiation by leveraging plan size To use separate recordkeepers for plan and non-plan services To use lowest cost share classes Lessons learned Understand and benchmark fees Seek to use lowest cost share classes when possible Be careful to understand and follow the terms of your IPS Don t use plan assets to subsidize other services for your company to avoid self-dealing Take heed to follow unconflicted advice 5

6 Investment Trends Plan Fiduciaries & Investments For example, if the Plan fiduciary or a broker or investment advisor they hire makes the investment decisions for the plan: An investment does not have to be a winner if it was part of a prudent, overall diversified investment portfolio for the plan A key fiduciary responsibility is to minimize the risk of large investment losses in the Plan; not maximize returns. 6 Necessitates that investments offered as options in the Plan have the appropriate Risk/Reward characteristics with sufficient diversified investment options. 6. DOL, EBSA, Publications, Meeting Your Fiduciary Responsibilities, 6

7 Process and Documentation Regardless of the metrics that will be monitored, it is critical that plans have an Investment Policy Statement (IPS) But if your client is going to have an IPS, they must FOLLOW IT! Ensure that tools and technology are in place to monitor Investment Decisions How are participants using investments Percentage of participants in diversified options Percentage of participants in one option Education vs. advice Professionally managed portfolios Risk vs. time horizon (or a combination) IPS Criteria Review 7

8 IPS Criteria Review Con t. Watch List Commentary 8

9 Target Date Funds State of the Union Assets in Target Date Funds have exploded in recent years to over $621B Nearly 75% of TDF assets are held by 3 companies: Fidelity, Vanguard, T. Rowe Price Assets Source: Target Date Funds One size fits all? Strategies and investment approach can vary: Expenses (Avg. 0.91%, Range 0.15% %) To vs. through Active vs. passive Domestic vs. international Risk profile Equity/Fixed Income & the glide path Source: 9

10 The SEC & Target Date Funds 2010 Investment Company Advertising: Target Date Retirement Fund Names and Marketing 7 Rule requiring target date funds to include a table, chart or graph depicting the fund s asset allocation over time, i.e. an illustration of the fund s glide path. SEC is again seeking public comment on this topic, and whether or not this illustration should also include a standardized measure of fund risk Comments to be submitted by June 9, The DOL & Target Date Funds 2013 DOL s Tips for ERISA Plan Fiduciaries 8 Establish process for comparing & selecting Follow a process for periodic review Understand investments and how they change over time Review fees Explore non-proprietary or custom DOCUMENT

11 Target Date Fund Glide Path Decisions Stable Value 5 reasons why NOW may be a great time to consider replacing stable value with money markets in defined contribution plans 1. Take off the handcuffs 2. Favorable market value / book value 3. Lower fees 4. Increased transparency 5. Rising rates = higher money market yields 11

12 FEES & EXENSES Fee Reasonableness - Process & Documentation For the process of determining fee and expense reasonableness, prudence suggests that the focus should be on the process and subsequent documentation for making fiduciary decisions. When hiring any plan service provider, the Plan fiduciary should survey a number of potential providers (e.g. RFI/RFP benchmarking analysis). By doing so, a fiduciary can document the process and make a meaningful comparison and selection DOL, EBSA, Publications, Meeting Your Fiduciary Responsibilities, 12

13 Trends in Fees & Expenses In the new era of fee disclosure, there are still plan sponsors that believe that their plan is free. 26.6% of respondents to PLANSPONSOR s 2013 DC Survey do not know the average expense for the investments in their plan In 2012, only 55% of those in the survey calculated the total fees paid to their providers Determine how plan fees will be paid Explicit vs. revenue sharing Company vs. participant Document decision and rationale Monitor share classes Consider fee levelization Source: PLANSPONSOR 2013 Defined Contribution Survey Fee Levelization Method for equalizing recordkeeping and administrative expenses for all participants in a given plan Fixed fee pricing Per participant hard dollar fee (ex. $85 per participant) Zero revenue sharing investments or revenue rebates Required revenue Typically a flat basis point fee Excess revenue results in a rebate to participant Revenue shortfall results in a charge to participants 13

14 Fee Levelization Example 0.30% Required Revenue BENEFIT All participants contribute the same amount towards the cost of operating the Plan Fee Summary 14

15 Fee Analysis Plan Fee Benchmark Total Weighted Average Plan Expense (%) 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Q Q Q Q Q % 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 1.42% 1.37% 401(k) Averages Book, 10th Edition Summary of Average Total Investment Costs by Plan Size ($50k Average Balance) 1.27% 1.20% 1.14% 1.10% 1.01% 0.94% 0.56% Your Plan 15

16 Assessing Fiduciary Performance Limitations of Current Plan Benchmarking Approaches Stale data Time intensive Comparison vs. improvement focused One-size fits all Difficult to make actionable 16

17 Focusing On The Areas That Matter Fiduciary Responsibility Plan Design & Performance Fees & Compensation Employee Engagement Fiduciary Advisory Services (Plan-Level) Plan Design Investment Options Fiduciary Advisory Services (Participant-Level) Retirement Committee Benchmarking Share Classes Menu Construction Prudent Investment Process Strategic Measurement Fees Diversification Statistics Documentation & Record Retention 1:1 Employee Meetings 33 Fiduciary Responsibility 1. Hire the right advisor Written contract Fiduciary acknowledgment Fiduciary experience 2. Establish a committee Formal appointments Committee charter Fiduciary training 3. Follow a prudent investment process Investment Policy Statement (IPS) Due Diligence Reporting Watch List 4. Document everything Keep minutes Utilize a fiduciary file 34 17

18 Plan Design & Performance 1. Be thoughtful about plan design Provide an employer contribution Use automatic features Make sure default percentage earns full match Target at least 10%/employee for a combined contribution Target at least 75%-90% participation 2. Benchmark Not everything that counts can be counted, and not everything that can be counted counts Einstein Focus on the right actions to drive the desired outcomes 3. Track progress Set goals Measure progress on an annual basis 35 Fees & Compensation 1. Choose low cost investments Index funds should make up least 50% of total lineup 2. Monitor revenue sharing Utilize appropriate share classes Establish an ERISA Budget Account (EBA) if revenue sharing exists 3. Eliminate conflicts Make sure advisor compensation is level 4. Keep fees low Target total fees of < 1% for participants Pay a portion of admin fees outside the plan When possible, negotiate fixed fees 36 18

19 Employee Engagement 1. Hire the right advisor Written contract Fiduciary acknowledgment No selling other products to rank and file 2. Design the right investment menu When it comes to fund options, less is more Drive participants toward diversified options 3. Give participants the right support Proactive communication 1:1 advice meetings Deferrals Diversification Designated beneficiaries 37 The (k)larity Quotient Next-generation fiduciary assessment tool & performance framework Analyzes nearly 40 key performance indicators (KPIs) across 4 plan dimensions Each KPI is weighted and scored to determine your k(q) between 0 and 100 Breakdown of scores by each dimension for easy intervention and incremental, continuous improvement Comparative/benchmarking capabilities Industry segment Participant and asset size Recordkeeper 19

20 Q&A The Greenspring Difference We Provide Conflict-Free, Objective Advice We have no 3 rd -party affiliations and 100% of our revenues are derived directly from clients (the Firm accepts no commissions for the sale of any products). We Are Retirement Plan Specialists We ve worked with more than 50 corporate clients (publicly-traded and privately-held) across the country with plan s ranging from $3 million to nearly $800 million and employee populations from less than 100 to more than 5,000. We Have Extensive Fiduciary Experience We have served in an acknowledged fiduciary capacity to all ongoing clients, both Private and Institutional, since our inception. We Are Recognized For Industry Leadership Members of our team are recognized as industry thought leaders and have been nominated for numerous prestigious awards for leadership, expertise, client service, mentorship and industry contributions. We were named a 2014 Top 100 Retirement Plan Adviser by PLANADVISER Magazine. We Are Growth Oriented We were recognized in 2008, 2010 and 2011 as one of the fastest growing independent advisory firms in the country by Financial Advisor magazine (7 th in 2008, 18 th in 2010 and 3 rd in 2011). We Are Committed to Client Satisfaction Our commitment to exceeding client expectations is represented by our 95% client-retention rate since inception. 20

21 Greenspring Bios Joshua P. Itzoe, CFP, AIF is a Partner and Managing Director of Greenspring Wealth Management s Institutional Client Group. Itzoe is respected as an industry expert, commentator and thought leader on matters pertaining to retirement security, fiduciary responsibility and defined contribution plans. Itzoe was recently named as one of three finalists in the United States for the prestigious 401(k) Advisor Leadership Award sponsored by Morningstar and The American Society of Pension Professionals & Actuaries (ASPPA). The award recognizes significant accomplishments by a leading financial advisor in the 401(k) marketplace. He was also recently nominated for the second time for the Top 100 Most Influential People in Defined Contribution survey by 401kWire. He is also the author of one of the retirement industry s most well-known books on fiduciary responsibility for defined contribution plans, Fixing the 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully. You may contact Josh at josh.itzoe@greenspringwealth.com or Matthew R. Cellini, AIF is a Retirement Plan Consultant in Greenspring Wealth Management s Institutional Client Group. Matt specializes in developing and managing retirement plan solutions for institutional clients by providing independent advice on fiduciary oversight, investment due diligence, fee-benchmarking, and investment advice and education to plan participants. Prior to joining Greenspring, Matt worked in a variety of finance and project management roles for Lockheed Martin and most recently as a Senior Consultant for Booz Allen Hamilton. He graduated from Stevenson University with a Bachelor of Science degree. He has earned the Accredited Investment Fiduciary professional designation awarded by the Center for Fiduciary Studies and has received formal training in investment fiduciary responsibility. You may contact Matt at matt.cellini@greenspringwealth.com or Disclaimers Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results