Morgan Stanley Smith Barney Fiduciary Audit File

Transcription

1 Morgan Stanley Smith Barney Fiduciary Audit File Helping plan sponsors manage their responsibility smithbarney.com

2 IN THIS GUIDE Introduction Documents Government Reporting Service-Provider Agreements Bonding and Fiduciary Liability Insurance Procedures and Minutes Section 404(c) Investment Policy Investment Management Monitoring Investments Miscellaneous

3 INTRODUCTION The Employee Retirement Income Security Act of 1974, or ERISA, sets the standards for qualified retirement plans.

4 Introduction By making the decision to offer your employees a qualified retirement plan, you have taken a crucial step toward helping them save for a financially secure retirement. With this decision, however, comes certain additional responsibilities. Management of the plan, whether the responsibility of a single individual or a committee, must be performed up to the heightened fiduciary standards established by the Employee Retirement Income Security Act of 1974, or ERISA. FIDUCIARY RESPONSIBILITIES The responsibilities of plan fiduciaries include, but are not limited to: their beneficiaries and with the exclusive purpose of providing benefits to them; with ERISA); EXPERT ASSISTANCE The duty to act prudently is one of a fiduciary s encourages plan fiduciaries to hire professional plan advisors, particularly when making plan decisions in areas where the plan fiduciaries lack experts, plan fiduciaries are not relieved of their obligations to prudently select and monitor the parties to whom such functions have been establish procedures that authorize you to FIDUCIARY LIABILITY Failure to perform any of the fiduciary duties pursuant to the standards established under ERISA may subject a plan sponsor to: the plan; and Additionally, under certain circumstances, a fiduciary can be held liable for the breaches of ENFORCEMENT Each of the following parties has the right to file suit to seek applicable remedies for fiduciary breaches: Given this risk exposure and the many legal requirements under ERISA, employers should be diligent about managing their fiduciary LIMITING LIABILITY Plan fiduciaries must become familiar with ERISA requirements and Department of Labor guidelines with respect to plan operation and investment documenting such adherence) to a structured and prudent set of procedures that govern the plan, as

5 Once a set of procedures has been established, it is critical that plan sponsors create and maintain a set of written records to document these help you: For the fiduciary audit file to be most effective, plan sponsors should ensure that the applicable documents referenced under each tab, as well as any other important plan records, be included in were established; and procedures; issues more effectively; and materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such matters involving the plan or in the event of government or participant action, including the matters set out in the Fiduciary Audit File, which are based upon ERISA, judicial decisions and Department of Labor regulations and rulings in existence on the Further, neither Morgan Stanley Smith Barney nor any Financial Advisor is (by virtue of this Fiduciary Audit File or otherwise) a to constitute investment advice, and there is no agreement or understanding between Morgan Stanley Smith Barney, the Financial Advisor, the plan or any plan fiduciary under which the latter receives information, recommendations or advice

6 Plan sponsors should periodically review, update and maintain plan documents in an easily accessible file. DOCUMENTS

7 Documents ERISA requires that plan sponsors provide copies of certain documents to participants and Department of Labor or another government agency might request a copy of plan provide copies of these documents when requested could result in the imposition of cumulative daily penalties against the plan In order to be well prepared for any disclosure required to the Department of Labor, participants and/or beneficiaries, it is a good practice to INCLUDE UNDER THIS SECTION: (if not within the scope of any other section of this audit file)

8 Plan sponsors have a responsibility to file certain returns, reports and statements with the agencies that administer the federal pension law. GOVERNMENT REPORTING

9 Government Reporting Plan sponsors have the responsibility to file the plan s annual financial report (Form 5500) with the Department of Labor s Employee Benefits 502(c)(2), civil penalties may be assessed against a plan administrator for failure to timely file a may also assess penalties for not filing returns for INCLUDE UNDER THIS SECTION: the 5500 and any applicable notes The most recent report must be made available for participant examination or provided to participants upon request (as described in the

10 ERISA provides plan sponsors and other fiduciaries with the ability to delegate certain duties to other parties. SERVICE-PROVIDER AGREEMENTS

11 Service-Provider Agreements Plan sponsors (and other named fiduciaries) may delegate certain fiduciary and nonfiduciary some cases, the delegating fiduciary will be responsibility to prudently select and monitor all vendors hired to act as service providers to the also be free from the influence of any conflicts of interest the plan sponsor may have (such as a financial interest in the service provider or service- The Department of Labor has emphasized that plan sponsors should engage in an objective and independent process when selecting service providers, taking into account a variety of relevant factors, including the service provider s qualifications, the quality of services and the INCLUDE UNDER THIS SECTION: Services Agreements administration or investment of assets In addition to the agreements listed above, also include here (or in another easily accessible location) any documentation you might have reflecting the selection and ongoing monitoring process, such as: costs and breadth of investment offering

12 ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles plan funds or property be bonded. BONDING AND FIDUCIARY LIABILITY INSURANCE

13 Bonding and Fiduciary Liability Insurance ERISA Section 412 generally requires that every person who handles plan funds or other property be bonded to protect the plan against loss due to fraud to the receipt, safekeeping and disbursement of INCLUDE UNDER THIS SECTION: The amount of the bond must be at least 10% of the amount of funds handled, but no less than $500,000 ($1,000,000 for plans that hold Plan fiduciaries may wish to consider the purchase of fiduciary liability or pension-trust liability losses that the insured is legally obligated to pay most policy definitions, a wrongful act includes any acts, errors or omissions involved in plan administration as well as any violation of the responsibilities, obligations or duties imposed on includes coverage for defense costs in connection

14 PROCEDURES AND MINUTES The existence of written minutes of all important actions helps plan sponsors demonstrate procedural prudence.

15 Procedures and Minutes A plan sponsor may properly execute its fiduciary duties with respect to a plan only by establishing the plan sponsor must establish an appropriate fiduciary structure (consistent with the provisions of the plan document) for the administration of the functions may be delegated to specific personnel of the sponsor or they may be executed by one or more fiduciary committees, typically a plan administrative committee and a plan These procedures may be formalized, such as in the plan document or in the fiduciary committee plan sponsor that delineates the fiduciary sponsors might also keep a less formal compilation of relevant plan procedures and maintain them in a can simply be a collection of any procedures Once procedures are in place, it is also important to demonstrate that the process established is being done is through a written record of fiduciary the form of committee minutes (if applicable), memoranda or copies of notices to participants should document compliance with claims procedures, rollover procedures or selection and plan fiduciary committees ideally should have INCLUDE UNDER THIS SECTION: here or noted in another location) to include at a minimum: Plan enrollment procedures and forms; Claims procedures; Loan procedures and forms; Qualified Domestic Relations Order procedures; and forms; and Other forms used for plan administration (if applicable) (if applicable) plan administration

16 When section 404(c) of ERISA is satisfied, plan sponsors responsibility for any loss that results from a participant s investment decisions may be reduced. SECTION 404(c)

17 Section 404(c) Section 404(c) of ERISA may relieve a plan fiduciary of some of their liability with respect to 404(c) only applies to a situation where the employer allows the participants to exercise control over the investment of assets in their accounts complies with the conditions of 404(c) and states such intention to comply, the fiduciary may be afforded relief from liability for losses that result from the participant s exercise of control over the In order to be in compliance with 404(c), the plan must (among other things): each of which is internally diversified, has materially different risk and return characteristics, allows a structured portfolio with aggregate risk and return characteristics within the range normally appropriate for the participant and tends to reduce through with respect to any investment at a frequency that is appropriate in light of the market volatility to which the investment may be subject, but not less frequently than quarterly for the required three core practice is to permit a participant to change investments more frequently than the minimum make informed investment decisions, including, but not limited to, the following: An explanation that the plan is a 404(c) plan and that fiduciaries may be relieved of responsibility for losses that are a direct result of participant investment instructions; A description of each investment alternative and a general description of the investment objectives and risk and return characteristics of each alternative, including information on the type and diversification of the portfolio assets of each investment alternative available under the plan; The identity of any designated investment separate accounts); An explanation of how participants may give investment instructions and any restrictions on investment transfers and restrictions on voting and tender rights on the participant s investments; A description of all transaction fees and expenses that may affect the account balances on purchases or sales including commissions, sales loads, The name, address and phone number of the plan fiduciary (and, if applicable, the person or persons designated by the fiduciary to act on his or her behalf) responsible for providing information; Certain information regarding investments in employer securities; and In the case of an investment alternative which is sold by prospectus, a copy of the most recent prospectus must be provided to an investing

18 Section 404(c) INCLUDE UNDER THIS SECTION: disclosures (most of which are included in plan documents or the summary plan description): a description of the frequency of the participant s ability to transfer assets among investments; a statement of intent to be a Section 404(c) plan; a statement regarding the preservation of confidentiality regarding investment and proxy voting of employer securities, if applicable; a description of the investment alternatives, including a description of the investment objectives and risk and return analysis of each alternative*; identification of any designated investment managers; explanation of how participants may give investment instructions, including any limitations; a description of any transaction fees and expenses; instructions on how participants can obtain telephone number, address); copies of prospectuses (if applicable); any materials provided to the plan (subsequent to investment) regarding voting rights; and procedures regarding the investment in to participants communication of participant disclosures

19 A carefully designed investment policy statement is an effective way for plan sponsors to defend investment decisions that are consistent with that policy. INVESTMENT POLICY

20 Investment Policy investment policy statement may be the best approach to providing quality investment STEP 1 PRELIMINARY CONSIDERATIONS The fiduciary should ascertain goals for the plan by taking into consideration the following factors: of participants; for the handling of plan duties; and STEP 3 PERIODIC REVIEW The investment policy statement should be reviewed periodically to assure INCLUDE UNDER THIS SECTION: STEP 2 DRAFTING AN INVESTMENT POLICY STATEMENT Once overall goals are established, a flexible policy A well-structured investment policy statement should contain the following: rationale for each class included; fill each asset class; and

21 ERISA provides that plan sponsors, as fiduciaries, select investments with care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use. INVESTMENT MANAGEMENT

22 Investment Management One of the most important duties of the plan sponsor, as a fiduciary of the plan, is the ERISA does not define what is or is not a prudent Labor has adopted a standard that requires a fiduciary to follow a prudent process in making PRUDENT MANAGEMENT Under this standard, a plan fiduciary must give appropriate consideration to the relevant While neither ERISA nor the DOL regulation specifies the steps to be taken in each instance, a fiduciary should follow a process for plan investments that includes: for the plan; diversification needs of all plan participants; and When investments are participant directed, a plan fiduciary may be able to limit liability for investment loss by complying with ERISA Section 404(c) regulations, however, a plan fiduciary is still responsible for prudently selecting PRUDENT EXPERT The prudence requirement of ERISA Section this standard, a fiduciary who lacks the requisite education, experience and skill to make investment decisions has a duty to seek qualified expert where a fiduciary lacks expertise in establishing investment and asset-allocation strategies, making investment decisions or selecting investment managers, styles or funds, the fiduciary should SELECTION PROCESS Fiduciaries should document the process of investigating, evaluating and making investment- documenting adherence to a well-written INCLUDE UNDER THIS SECTION Information regarding the selection of investment funds - Copies of prospectuses (if applicable) - Selection criteria including asset class placement, investment performance, manager tenure, risk characteristics and any other relevant supporting materials - Investment contracts (if any)

23 ERISA requires that plan sponsors conduct ongoing monitoring of investments. MONITORING INVESTMENTS

24 Monitoring Investments As described in the Investment Management section, the plan fiduciary (with the assistance of a professional if the fiduciary lacks the expertise) should formulate an investment policy, identify asset classes and select investments within each a continuing obligation to prudently monitor the ERISA does not describe any specific measures of performance that will satisfy the prudence investments should include: effectively measure fund performance (such as the use of benchmarks, comparison against investment to replace a fund, including: Fund-manager changes and/or changes in fund company ownership, Performance and risk relative to appropriate benchmarks, Performance in varying market conditions, and Portfolio changes and/or style consistency; INCLUDE UNDER THIS SECTION: historic performance versus benchmarks change, including supporting information for that decision oriented presentations changes including procedures and notices

25 MISCELLANEOUS Plan sponsors should retain any documents demonstrating the existence of a sound process and adherence to that process with respect to the management of their plan. (1803JV)

26 Miscellaneous While the tabs in this binder are designed to establish a comprehensive collection of documents that plan sponsors should retain, also include (or maintain separately in a safe file) any document not previously listed that relates to the administration INCLUDE UNDER THIS SECTION: previously listed operation and investment of the plan or any other fiduciary responsibilities Records used to determine employee eligibility and contributions (including information supporting any exclusions from participation) (1803JV)

27 Morgan Stanley Smith Barney LLC, its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor Morgan Stanley Smith Barney LLC. INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE 1803JV 06/09

28 Morgan Stanley Smith Barney Fiduciary Audit File YEAR