Fiduciary Education. Jared Martin, CFP Vice President, Consultant. October 19, 2016

Transcription

1 Fiduciary Education Jared Martin, CFP Vice President, Consultant October 19, 2016

2 FIDUCIARY EXPERTISE Professional certifications which include fiduciary standards: AICPA, AIFA, AIF, ASPPA, CFA, & CIMA Demonstrated expertise through 55 expert witness engagements Fiduciaries with respect to all clients-investment Advisers Act of 1940 Compliance with Center for Fiduciary Studies standards and practices Currently consult to more than 120 fiduciary clients Investment Management Consultants Association 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 2

3 SESSION OVERVIEW Understanding Fiduciary Responsibilities The Due Diligence Process Regulatory References 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 3

4 UNDERSTANDING FIDUCIARY RESPONSIBILITIES 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 4

5 WHO IS A RETIREMENT PLAN FIDUCIARY? Anyone who has responsibility for other people s money Many actions involved in operating a plan make the person or entity a fiduciary Using discretion in administering and managing a plan or controlling the plan s assets makes that person a fiduciary (to the extent of that discretion or control) Hire, fire or retain service providers Appoints Trustees Serves as a member of the Trustee Committee Provides investment advice to the plan or its participants for a fee Fiduciary status based upon functions performed, not just a person s title Source: ERISA 3(21); Black s Law Dictionary 17 th Edition INNOVEST PORTFOLIO SOLUTIONS, LLC 5

6 RETIREMENT PLAN FIDUCIARIES Plans must have at least one fiduciary (person or entity) named in the written Plan, or through a process described in the Plan as having control over the Plan s operation Named fiduciary can be identified by office or name May be an administrative Committee or Board Fiduciaries Trustee(s) Investment advisers All individuals exercising discretion in administration of the plan NOT Fiduciaries Attorneys, accountants, and actuaries when acting solely in their professional capacities The key to determining whether an individual or entity is a fiduciary is to determine if they are exercising discretion or control over the Plan assets 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 6

7 FIDUCIARY DUTY Trustees and plan administrators have a fiduciary duty to the plan participants Requires the Highest Standard of Care Fiduciary duties under ERISA are the highest known to law In recent years it has become higher and broader as plans utilize new and different investment options, and advice 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 7

8 FIDUCIARY DUTY Fiduciary duty encompasses two important legal concepts: The duty of loyalty The duty of prudence 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 8

9 DUTY OF LOYALTY Act solely in the interest of plan participants and beneficiaries (duty of loyalty). The duty of loyalty forbids a fiduciary not only from using plan assets for his or her personal interest but also from favoring the best interests of a third party over the interests of a plan participant, even if the fiduciary s own interests are not impacted INNOVEST PORTFOLIO SOLUTIONS, LLC 9

10 DUTY OF PRUDENCE To be careful, diligent, thorough, and scrupulous in all decision-making, including the way you delegate duties to others INNOVEST PORTFOLIO SOLUTIONS, LLC 10

11 DELEGATION Delegation is permitted and even encouraged by the law 1 It is well recognized that trustees cannot personally perform every necessary function Nor can they be expected to possess all of the required expertise Trustees do, however, have the ultimate fiduciary responsibility They can delegate, but they cannot abdicate 1. Katsaros v. Cody, 744 F. 2 nd 279 (2 nd Cir.) (1984) 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 11

12 CAREFUL DELEGATION Selecting the persons or agents to perform the functions Monitoring the work being performed by the agents Evaluating the quality and timeliness of the work Making appropriate changes if warranted 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 12

13 PROCESS, NOT HINDSIGHT, IS THE RELEVANT STANDARD Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of the trustee s decision or action and not by hindsight. Uniform Prudent Investor Act (UPIA) 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 13

14 REAL LIFE EXAMPLES The Problem Fiduciary Concern Penalty Paid by Employer CPA firm hired by Plan failed to complete 5500 Audit 2 years in a row. Trustee Responsibility and Liability Plan Management $100,000 fine negotiated down to $10,000 Broker recommended replacing an investment option with one that turned out to be less profitable. Trustee Responsibility and Liability Investment Decisions $500,000 in damages plus $358,000 in defense costs Two employees approaching retirement discovered they never enrolled in the company s 401(k) Plan. Trustee Responsibility and Liability Employee Communications $378,000 settlement plus over $200,000 in defense costs Recordkeeper and third party administrator improperly delayed executing participant buy-sell orders and transferring fund balances. Trustee Responsibility and Liability Service Provider Selection, Oversight, and Due Diligence $1,000,000 in damages for lost investment earnings plus $250,000 in defense costs Small 401(k) Plan lost $775,000 in an investment fraud perpetrated by their financial representative. Trustee Responsibility and Liability Service Provider Selection, Oversight, and Due Diligence $775,000 plus lost interest and opportunity costs. (DOL lawsuit underway) 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 14

15 TIBBLE VS. EDISON Initial case was about prudence of the initial selection on investments Retail vs. Institutional share classes Circuit Court ruled claims were time barred, because selection more than six years before suit filed Supreme Court disagreed and ruled fiduciaries have an ongoing duty to monitor investments and remove imprudent funds (without time limits) Sent the case back to the Circuit Court for further review: Define who is responsible for investment decisions Ensure IPS defines selection and monitoring process Document how decision makers select and review investments Review effectiveness of independent investment counsel Conduct fiduciary training 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 15

16 WHAT HAVE PROVIDERS SAID IN COURT? Most often when Plans are sued, the mutual fund company or insurance company has claimed not to be a fiduciary They immediately placed all blame solely on the Plan Sponsor and their retirement committee Hecker v. Deere, Fidelity Research, Fidelity Trust (1990) Fidelity Trust advised Deere on investments included in the Plan Included 23 Fidelity mutual funds, 2 other investments managed by Fidelity Trust and Deere stock Hecker alleged Fidelity Research shared fees with Fidelity Trust and that fees charged for investment management were allocated to Plan administration Hecker alleged fees were unreasonable and excessive, and undisclosed Hecker alleged fund selection was not objective Fidelity Trust and Fidelity Research not held liable; Deere had the sole responsibility for investment selection 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 16

17 PROVIDERS SUE PLAN SPONSORS? Large life insurance and financial services company filed a countersuit alleging the Trustees are reckless and also at fault to the extent the Plans suffered any harm, because the Trustees had the ultimate responsibility for managing the Plan, and investing Plan assets 1 Another large insurance company countersued their client Charters (the Plan trustee) for breach of fiduciary duty, monetary contribution and indemnity for being negligent in hiring them in the first place Haddock v. Nationwide Life and Financial Services (2007) 2. Charters v. John Hancock Life Insurance Company (2008) 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 17

18 THE DUE DILIGENCE PROCESS 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 18

19 SEVEN FIDUCIARY PRECEPTS 1. Know standards, laws and trust provisions. 2. Diversify assets to specific risk/return profile of plan. 3. Prepare Investment Policy Statement (IPS). 4. Use prudent experts and document due diligence. 5. Control and account for investment and plan expenses. 6. Monitor the activities of prudent experts. 7. Avoid conflicts of interest and prohibited transactions INNOVEST PORTFOLIO SOLUTIONS, LLC 19

20 FOLLOW A PRUDENT PROCESS Analyze Strategize Formalize Implement Monitor Providers Products Offered Related Expenses MONITOR ANALYZE STRATEGIZE IMPLEMENT FORMALIZE 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 20

21 STEP 1: ANALYZE The fiduciary process begins with a thorough understanding of your current situation and future needs. ANALYZE Vendor/Recordkeeper/Provider Consultant Attorney Recordkeeping/ Administration Trust and Custody Participant Education Investment Services Legal and Compliance Daily Operations Plan Management Customer Service Contributions Transactions Statements Custodian Trustee Trading Platform Collateral Material Web-based Info Newsletters Ed Workshops Individual Counseling Investment Selection and Monitoring Managers - Mutual Funds - Separate Accts. Plan Document QDROs Legal Defense Regulatory Compliance Reporting Web Transactions Overall Plan Consulting VRU Fiduciary Compliance 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 21

22 STEP 1: ANALYZE Collect, review, and analyze investment files: ANALYZE Investment policy statements (IPS); Applicable trust documents (including amendments); Custodial and brokerage statements so that current fees and expenses for investment management can be analyzed; Service agreements with investment management vendors (custodians, money managers, investment consultant, actuary, accountant, or attorney); Information on retained money managers, such as a prospectus or similar documents; and Any other files pertaining to the management of your investment options INNOVEST PORTFOLIO SOLUTIONS, LLC 22

23 STEP 2: STRATEGIZE The next dimension is: Identify Assets and Build the Investment Menu. STRATEGIZE 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 23

24 STEP 3: FORMALIZE Maintain an Investment Policy Statement In the case of you serving in a fiduciary capacity, the IPS is the essential document that auditors, regulators, and the courts will review to help determine whether the plan is being prudently managed. FORMALIZE The IPS provides a paper trail of practices, and procedures for decisions. The document can serve as critical evidence used in the defenses against litigation or accusations of imprudence. Perhaps the most important functions performed by retirement plan fiduciaries: Establishes investment options and guidelines for making investment decisions Provides replacement criteria Provides working framework for trustees and advisors for evaluating investment performance Eliminates emotion-based decision making Maintains consistency when Committee Members are replaced 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 24

25 RECORDKEEPER/CUSTODIAN SELECTION The key entity that needs to be prudently selected is the recordkeeper/custodian for your plan; IMPLEMENT Quality of service provider to employees Quality of service provided to committee and employer as the plan sponsor Is participant education of high quality and sufficient to meet participants needs? Is the investment universe broad and flexible? Are there proprietary product requirements? A cost analysis based on total cost to participants as well as the total revenue received by the custodian/recordkeeper INNOVEST PORTFOLIO SOLUTIONS, LLC 25

26 STEP 4: IMPLEMENT Define the Process for Selecting Service Providers to Implement the Strategy IMPLEMENT Uniform criteria that can be applied to every decision; Process that can be easily communicated; and Can be used in both the search and monitoring phases of the decisionmaking process INNOVEST PORTFOLIO SOLUTIONS, LLC 26

27 Manager Due Diligence Process IMPLEMENT 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 27

28 PERIODIC INVESTMENT MANAGER REVIEW AND PERFORMANCE EVALUATION MONITOR 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 28

29 PERIODIC INVESTMENT MANAGER REVIEW AND PERFORMANCE EVALUATION (CONT.) MONITOR 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 29

30 PERFORM PERIODIC QUALITATIVE OR PERFORMANCE REVIEW OF DECISION-MAKERS MONITOR 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 30

31 PREPARE PERIODIC REPORTS THAT ANALYZE COSTS MONITOR Persons responsible for managing retirement plans (a.k.a. fiduciaries) must ensure: Plan services are necessary Costs for services are reasonable If a plan sponsor does not understand plan components, their associated costs and how they work, fiduciary responsibilities may not be fulfilled INNOVEST PORTFOLIO SOLUTIONS, LLC 31

32 COST COMPONENTS: WHERE ARE THE FEES IN YOUR PLAN? MONITOR Defined Contribution/457 Plan Costs Investment Management Fees Plan Administration and Recordkeeping Expenses Investment Consulting/Plan Advice Expenses Mutual Funds Collective Trust Funds Annuities Separately Managed Accounts Processing Recordkeeping Participant Education Trustee/Custodial Services Compliance Testing Plan Documents and Amendments Distribution/Contribution Administration Performance Monitoring Due Diligence, Hiring, Retaining and Monitoring of Funds and Investment Managers Investment Policy Statement Preparation 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 32

33 PERFORM PERIODIC EXAMINATIONS OF COSTS MONITOR 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 33

34 DUE DILIGENCE Know and understand your Fiduciary duties and responsibilities Delegate to prudent experts Monitor experts and costs Create a plan then follow the plan Document, document, document Maintain a Permanent Fiduciary File that documents due diligence for all decision making and fiduciary process 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 34

35 REGULATORY REFERENCES - Internal Revenue Code - State Statute - ERISA 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 35

36 REGULATORY REFERENCES Internal Revenue Code IRC 401(a) Colorado State Statute Uniform Prudent Investors Act (UPIA) 15-1 Department of Labor (DOL) ERISA Employee Retirement Income Security Act ( 74) 404(c) 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 36

37 PRUDENT INVESTOR RULE UPIA Section 2(a) A trustee shall invest and manage trust assets as a prudent investor would 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 37

38 UPIA REFERENCED IN COLORADO STATUTES Uniform Prudent Investor Act UPIA (CRS Title 15, Article 1.1, Sections ) UPIA applies to all fiduciaries (CRS ) 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 38

39 PRUDENCE IS DEMONSTRATED BY PROCESS The test of prudence is one of conduct and not performance. Restatement of Trusts (Third): Prudent Investor Rule When enforcing these fiduciary duties the court focuses not only on the merits of the transaction, but also on the thoroughness of the investigation into the merits of the transaction. Donavan v. Cunningham, 716 F.2d 1455, 1467 (5 th Cir.) (1983) 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 39

40 FIDUCIARY RESOURCES Fiduciary360 Center for Fiduciary Studies U.S. Department of Labor Employee Benefit Security Administration Strategic Ethos INNOVEST PORTFOLIO SOLUTIONS, LLC 40

41 QUESTIONS? 2016 INNOVEST PORTFOLIO SOLUTIONS, LLC 41