457 Plan Oversight Best Practices for Plan Sponsors TACA 2010

Transcription

1 1 457 Plan Oversight Best Practices for Plan Sponsors TACA 2010

2 Today s Agenda Importance of Plan Sponsor role Evolution of plan oversight in the governmental sector Fiduciary oversight and compliance Best Practices for Plan Sponsors Evaluating your plan 2

3 Importance of Plan Sponsor Role Monitor plan investments to ensure viable fund line-up Monitor plan fees to ensure competitiveness Work with provider(s) to ensure adequate communication of benefit to all employees Stay up-to-date on market trends and legislative actions relating to 457 and other pension plans 3

4 Evolution of Plan Oversight in the Governmental Sector 1970s Private Letter Rulings began mid 1970s 457(b) Established January 1, 1979 Employers indifferent as to oversight as plans were new Employers indifferent as to participation rates 4

5 Evolution of Plan Oversight in the Governmental Sector 1980s Plans enhanced to include broader fund line-up Advisory Committees established in larger plans Consultants retained to issue RFPs in larger entities HR or Finance Director typically oversaw plans in small and mid-size entities Still not much interest in active oversight by plan sponsors 5

6 Evolution of Plan Oversight in the Governmental Sector 1990s Price compression in larger plans Advisory Committees taking interest in products and features in RFP situations Plan sponsors begin to see 457 plans as a value-add for employees Participation rates start to get attention of plan sponsors 6

7 Evolution of Plan Oversight in the Governmental Sector 2000s Price compression in mid-size and small plans Advisory Committees in larger plans begin to demand retirement planning education for employees Advisory committees begin to be interested in Best Practices fiduciary training for themselves Most plan sponsors interested in increasing participation rates 7

8 Evolution of Plan Oversight in the Governmental Sector Today Typical large plan hires consultant to monitor funds and recommend changes as funds underperform Small to mid-size plans utilize multiple providers Increased participation rates continue to be important to most plan sponsors Fiduciary Best Practices important to all plan sponsors due to volatile markets 8

9 What is Fiduciary Responsibility? Plan fiduciaries have a responsibility to act in the best interests of plan participants. Investment selection Investment monitoring Participant education Participant investing 9

10 Governmental Employers, Fiduciary Responsibility and ERISA Governmental employers are not subject to ERISA, therefore are not technically fiduciaries in the legal sense of the word. Plan sponsors make decisions regarding provider selection. Plan sponsors in any size entity could be said to have a responsibility to oversee the plan from a fiduciary perspective 10

11 Who is a Fiduciary? ERISA Definition Anyone who: 1. Exercises discretionary control over the management of the plan (executives, board members, committee members, etc.) 2. Has discretionary authority or responsibility regarding plan administration 3. Offers investment advice regarding plan assets 11

12 Who is a Fiduciary? State of Texas Definition Texas Courts have found fiduciary relationships to exist in two ways. 1) As a matter of law. 2) Because of prior personal relationships and dealings, together with surrounding circumstances sufficient to create a fiduciary relationship as a question of fact. Fiduciary relationship as a Matter of Law. Fiduciary relationships the courts have found, and statutes declared as a matter of law, include 1) Trustees 2) Executors, administrators, guardians and receivers 12

13 Small Business Protection Act of 1996 Created 457(g) Result of Orange County, CA bankruptcy Requires that eligible plans must have their assets held in: A trust An annuity policy Custodial account Assets must be reserved for the benefit of the participants and their beneficiaries. 13

14 Fiduciary Best Practices for Governmental Employers 1. Analyze: Plan sponsor objectives 2. Diversify: Asset classes 3. Formalize: Investment policy statement 4. Implement: Investment policy statement 5. Monitor: Investments, vendors, expenses Process Flowchart 2005 PlanTools, LLC All rights reserved. 14

15 Fiduciary Best Practices for Governmental Employers Plan sponsor s decisions should be consistent with the key elements of a sound investment-compliance program: 1. Policies: An Investment Policy Statement (IPS) 2. Processes: A system for analyzing and selecting investments 3. Procedures: Quarterly review and reporting 4. Practices: A method to replace funds not performing to the objectives of the plan s IPS Process Flowchart 2005 PlanTools, LLC All rights reserved. 15

16 The Rule ERISA s test of prudence.is one of conduct, and not a test of the result of performance of the investment. The focus of the inquiry is how the fiduciary acted in his selection of the investment, and not whether his investments succeeded or failed. Fred Reish, Esq. Reish Luftman Reicher & Cohen citing Donovan v. Cunningham, 716 F 2d (5 th Cir. 1983) 16

17 The Role of a Fiduciary Prudent Expert Rule A fiduciary must exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of a like enterprise with like aims Plan Sponsors cannot give their fiduciary responsibility away 17

18 An example of how to mitigate risk The SFR SM 457 Program 1. Investment Policy Statement (IPS) developed by Plan Tools LLC. 2. Investment screening adhering to the criteria set forth in the IPS. 3. Investment monitoring and quarterly reporting in accordance to the criteria in the IPS. 4. Investment removal and replacement upon failing to meet the IPS criteria over a period of time. 18

19 Evaluating Your Plan Products Variable Annuities Fixed Annuities Mutual Funds 19

20 Evaluating Your Plan Fees Mortality and Expense Asset-based CDSC MVA 20

21 Evaluating Your Plan: Service Annual plan review? On-site seminar offered? One-on-one consultations available? Annual account review for participants? 21

22 Questions! 22