Barbara Appleby, JD, MA, AIF Kristin Guibord, MBA, AIF 100 Middle Street, Portland, ME 04101 207.541.2200 HOT TOPICS FOR RETIREMENT PLAN FIDUCIARIES SECURITIES OFFERED THROUGH COMMONWEALTH FINANCIAL NETWORK MEMBER FINRA / SIPC. Investment advisory services may be offered through Commonwealth Financial Network, a registered investment adviser, and/or BerryDunn Wealth Management, LLC, a state-licensed investment adviser. Advisory services and fixed insurance products and services offered by BerryDunn Wealth Management, LLC are separate and unrelated to Commonwealth. berrydunnwm.com GAIN CONTROL
AGENDA Fiduciary Refresher Hot Topic 1 Fees and Due Diligence Hot Topic 2 Target Date Funds Hot Topic 3 Mitigating Fiduciary Liability and Hiring Advisors Hot Topic 4 Retirement Readiness 2
FIDUCIARY REFRESHER
DUTIES OF A FIDUCIARY Loyalty--Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; Carry out duties prudently; Following the plan documents (unless inconsistent with ERISA); Diversify plan investments; and Pay only reasonable plan expenses. 4
CONSEQUENCES FOR BREACH OF FIDUCIARY DUTY Personal liability for restoring any losses to the plan from personal assets including residence, real estate, investments etc. Required to reimburse any profits as a result of their actions Subject to financial or civil penalties equal to 20% of the amount recovered from the fiduciary 5
FEE CONSIDERATIONS AND DUE DILIGENCE 6
FOCUS ON FEES Department of Labor and Congress focus on plan expenses and services: Form 5500 Schedule C reporting requirements Disclosures to plan sponsors Participant-level fee disclosure Lawsuits Media Academia Now more than ever, it is critical for plan sponsors to understand plan fees. 7
Industry Eyes Lawsuits Over Pension Investment Financial Times 401(k) Fees Gain a Bit of Clarity New York Times What Your 401(k) Really Costs You U.S. News & World Report Labor Department Requires 401(k) Fee Disclosure Bloomberg Cracking Down on 401(k) Fees CNBC Shining a Light on Murky 401(k) Plan Fees Wall Street Journal
6,000? 9
THE AYRES ANALYSIS/LETTERS 46,875 Plans Claims to Study Financial Impact of Fees, Menu Limitations, Excess Fees, and Investor Mistakes Letters to 6,000 High Cost Plans Threat of Publication to NY Times and WSJ and Twitter Concerned calls of Plan Sponsors Potential Litigation if plans identified 10
CAUSE FOR CONCERN Using data from the form 5500 your company filed, I have identified your plan as a potential high cost plan. We recommend that you improve your plan menu offerings, including adding lower fee options both at the plan and fund level, and consider eliminating high-fee funds that do not meaningfully contribute to investment diversification. 11
LIMITATIONS OF THE AYRES ANALYSIS Focus on cost only No consideration of out of pocket costs No consideration of level or types of services Refusal to communicate with plan industry Questions regarding Integrity of Data 12
ARE FEES REASONABLE IN LIGHT OF SERVICES PROVIDED? To determine how reasonable your fees are, compare your fees with other plans on the market. Consider: Plan- and participant-level services provided How well the plan performs participant success measures Plan size and participant demographics Share class and percentage fees
BENCHMARKING: THE KEY TO A PRUDENT PROCESS Benchmarking (or evaluating and comparing plan fees and services with similar plans): Helps you understand the fees paid by your plan Helps you determine whether fees are reasonable in light of services provided Provides documentation for your records
WAYS TO BENCHMARK YOUR PLAN Traditional approaches: RFP from different vendors Using databases from 5500 filings Benchmarking produced by the plan provider Third-party benchmark report: An apples-to-apples comparison of your plan against similar plans: Factors considered include plan size, number of participants, industry, and employer match. Provides the information you need to understand and assess relative plan fees, support, services, and success measures
TARGET DATE FUNDS 16
TARGET DATE FUNDS Facing heightened scrutiny by the Department of Labor. Considerable differences in strategy and fees between TDF providers. Fiduciaries required to understand differences between TFDs. Additional process for review and selection of TFD. 17
MITIGATING FIDUCIARY LIABILITY AND HIRING ADVISORS 18
MITIGATING FIDUCIARY LIABILITY Fiduciary Bonds DOL requires plan sponsor to obtain fiduciary bond equal to at least 10 % of plan assets, with a minimum bond of $1,000 and a maximum bond of $500,000 ($1M for plans with employer securities) May insure against fraud and dishonesty, including malfeasance of fiduciaries No protection for breach of fiduciary duty 19
MITIGATING FIDUCIARY LIABILITY Fiduciary Insurance Director and Officers Liability Insurance generally excludes liability for fiduciary issues Not required by ERISA but advisable Does not eliminate liability 20
MITIGATING FIDUCIARY LIABILITY Fiduciary Warranties A marketing device for platform providers Read the fine print Warranty only protects for 404(c) requirement to offer broad range of investment alternatives Indemnifies plan sponsor only for failure to have a broad range of investment options Plan sponsor still required to monitor investment options 21
HIRING PROFESSIONAL ADVISORS Corporate Trustee TPA, Attorneys, Accountants Investment Professionals such as a broker, investment advisor or investment manager 22
HIRING PROFESSIONAL ADVISORS Investment Professionals Title (broker, financial advisor, investment manager, RIA, etc ) does not define fiduciary status. Function and the formal contract define the fiduciary role. Two types of investment fiduciaries being heavily marketed. 23
HIRING PROFESSIONAL ADVISORS What kind of fiduciary is your investment service provider? ERISA 3(21) ERISA 3(38) Fiduciary status may be functional not formal Assisting in writing IPS Helps design initial fund menu Provides Monitoring Recommends Changes Recommends Mapping Strategies Provides Documentation States in writing fiduciary status Drafts IPS Builds initial fund menu Monitoring investment menu Makes Changes Determines Mapping Strategies Provides Documentation 24
HIRING PROFESSIONAL ADVISORS ERISA 3(21) Advisor: Provides investment advice to other plan fiduciaries. No discretion or control over investment decisions. Co-fiduciary status mitigates but not removes liability. ERISA 3(38) Investment Manager: Discretionary control for investment decisions. Other plan fiduciaries removed from decision making process. Procedural prudence remains for selecting 3(38) advisor. 25
HIRING PROFESSIONAL ADVISORS Selecting a Retirement Plan Financial Advisor Experience Credentials, Licensing, and Registrations Fiduciary Role Platform/investment menu selection process Fiduciary Process Fees how and how much Ongoing Monitoring 26
HIRING PROFESSIONAL ADVISORS I know you are, but what am I? - Jonah, age 8, when he has no witty comeback. 27
HIRING PROFESSIONAL ADVISORS Can a plan sponsor absolve herself from all fiduciary liability? NO! 28
RETIREMENT READINESS 29
RETIREMENT READINESS How close an individual or group of plan participants are to being able to retire. OR Will participants have enough money to support themselves in retirement? 30
THE INDUSTRY S FOCUS ON BALANCES HAS SHORT- CHANGED PARTICIPANTS, BUT A SHIFT IS UNDERWAY TYPICAL PROVIDER MEASURES OF SUCCESS 45% U.S. population at risk for inadequate income in retirement EBRI Retirement Readiness Rating PARADIGM SHIFT: FOCUS ON INCOME Participation Balance Contribution Asset allocation Where you are, in terms of assets 51% 63% U.S. households at risk of not being able to maintain their pre-retirement standard of living CRR National Retirement Risk Index Essential required retirement income that the average U.S. household is on track to achieve McKinsey Retirement Readiness Index Projected retirement income generation potential vs. goal Value of a savings plan, not a point-intime snapshot Where you are heading, in terms of income EBRI 2013: Retirement Confidence Survey 31
RETIREMENT READINESS 66% of workers report savings of less than $50,000 in retirement savings. 54% of respondents have not done a retirement needs calculation. 77% of respondents have basic, limited, or no level of investment understanding. 36% of workers plan to work after age 65. 49% of workers are not at all or not too confident about having enough money for a comfortable retirement* EBRI 2013: Retirement Confidence Survey 32
WHAT ABOUT SOCIAL (IN)SECURITY? The Social Security Trust is expected to be exhausted by 2037. Social security tax revenues will support only 76% of benefits due in 2037 and beyond. The maximum social security retirement benefit for a worker retiring at full retirement age in 2009 is $2,323 monthly. The average social security benefit for all retired workers in 2009 is $1,153. Source: Fast Facts & Figures About Social Security, 2009, Social Security Administration 33
RETIREMENT READINESS Industry Trends DOL Focus Senate Hearings 34
TRANSAMERICA SURVEY Prescience 2017: Expert Opinions on the Future of Retirement Plans 55 Retirement Plan Experts from 45 National Organizations Surveyed Regarding trends for the Larger Plan Market 39% believe Plan Sponsors will change Plan Design to Enhance Retirement Readiness 55% will Adopt Automatic Enrollment 45% will Adopt Automatic Enrollment at 6% or higher 25% will investigate using Annuities 10% will Implement Annuities 35
DEPARTMENT OF LABOR PROPOSED RULE FOCUSES ON RETIREMENT INCOME Requires current account balance to be shown as income stream Projects account balance to retirement AND converts it to an income stream 36
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SENATE HEARINGS FOCUS ON RETIREMENT CRISIS Optimize plan design to address retirement security and simulate DB advantages in 401 (k) environment. 38
PLAN DESIGN ENHANCEMENTS Shorten or eliminate waiting periods for deferrals Give free money provide a match Structure the match to maximize employee participation Design Plan to include automatic enrollment and automatic increase features Enhance Auto Enrollment Features Annuitize all or part of 401 (k) balance 39
WE ARE ALWAYS AVAILABLE FOR YOUR QUESTIONS. Barbara Appleby bappleby@berrydunnwm.com Phone: 207.541.2306 Kristin Guibord, MBA, AIF kguibord@berrydunnwm.com Phone: 207.541.2232 SECURITIES OFFERED THROUGH COMMONWEALTH FINANCIAL NETWORK MEMBER FINRA / SIPC. Investment advisory services may be offered through Commonwealth Financial Network, a registered investment adviser, and/or BerryDunn Wealth Management, LLC, a state-licensed investment adviser. Advisory services and fixed insurance products and services offered by BerryDunn Wealth Management, LLC are separate and unrelated to Commonwealth. 40