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The National Association of Government Defined Contribution Administrators, Inc. (NAGDCA)
presents
2009 NAGDCAST #4:
Plan Sponsor Investment Oversight/ Investment Performance
2
Program Introduction
David Turla
Plan Administrator
County of Los Angeles
3
Many thanks to the following 2009 NAGDCAST series
sponsors: Prudential
TIAA-CREF
Wells Fargo
Great-West
ICMA-RC
ING
Nationwide Retirement Solutions
4
Continuing Education CreditCredits: This NAGDCAST is worth 1.5 continuing
education credits to InFRE CRA and CRC designees!
To Receive Credit:
• InFRE designees must report attendance at a NAGDCAST when they submit continuing education with their annual certification renewal.
• NAGDCA will provide InFRE with a final participant list (not registrant list) so that those seeking certification credits can be verified. Individuals must be signed in separately to receive continuing education credits.
5
Don’t forget the on-line NAGDCAST evaluation – NAGDCA needs your
continued input about the
NAGDCAST series!
The evaluation takes
2 minutes to complete!
THANK YOU!
6
Today’s Speakers
Barbara Healy, SST Benefits
Marie Swartzwelder, Prudential Retirement
David Turla, County of Los Angeles
7
Investment Fundamentals: Governance
Fiduciaries
1. Who are they?
2. What are their responsibilities?
3. What liability do they carry?
4. What some common fiduciary best practices?
8
Navigating the Defined Contribution World
Keeping your Defined Contribution plans on track in an increasingly complex retirement and
regulatory world
Barbara Healy
9
? ? ?Who are the fiduciaries of your plan?
How much is your
organization paying for your
Defined Contribution
plan?
What process do you follow to
select or change the investment
choices in your plan?
Three Questions
10
Agenda
The Defined Contribution Landscape Is ChangingThe Defined Contribution Landscape Is Changing
What You Need to Know NowWhat You Need to Know Now
11
The Defined Contribution Landscape Is Changing
Increasing Responsibility Increasing Responsibility
Expanding Litigation Expanding Litigation
Anxious Plan Participants Anxious Plan Participants
The Perfect Storm Is Brewing
12
Increasing Responsibility
Fiduciary Liability
Investment Monitoring and Selection
Participant Education
If you don’t take responsibility, the lawyers (and the Supreme Court) will help you refocus
MoreResponsibili
tyAhead
13
Expanding Litigation
Sources: 1 One Minute Memo, Seyfarth Shaw Attorneys LLP & 401khelpcenter.com, April 2008.2 Defined Contributions In The Crosshairs, Ashlea Ebeling, Forbes, Oct. 4, 2006. 3 Jenna Gottlieb, Pensions & Investments, Nov. 12, 2007.4 Kiplinger Magazine, Thursday, April 10, 2008.5 One Minute Memo, Seyfarth Shaw Attorneys LLP & 401khelpcenter.com, April 2008.
Lawsuits& Lawyers
Danger Ahead
“The lawsuits name the employer as the defendant, and in some cases, plan fiduciary committees and their various individual members.” 4
14
Anxious Plan Participants
People are retiring in record numbers
Markets feel very volatile
Many people didn’t plan to fail, they failed to plan
Sources: 1 MSNBC.com, Associated Press, Oct. 30, 2007.2 Ben Rooney, CNNMoney.com, April 9, 2008.3 Becky Barrow, Daily Mail, March 26, 2008.
Why?
15
Anxious Plan ParticipantsInvestment Returns vs. Investor Returns
Average Annual Returns of S&P 500 vs. Equity Investors
(1987 – 2006)
11.8%
4.3%
S&P 500 Average EquityInvestor Return
Source: 2007 DALBAR, Inc. QAIB
16
Anxious Plan Participants
The Retirement Crisis
Frontline Documentary
17
What are your peers saying*?
I think our Defined Contribution is a good thing for our employees, but I don’t want to spend any time worrying about it.
All I want is not to have to think about it.
The Defined Contribution rules are taking too much time away from my business.
*Assorted quotes from interviews of plan sponsors, Spring 2008
18
Now what?
We understand that the Defined Contribution plan isn’t your primary focus, but you need to monitor your plan
We understand that the Defined Contribution plan isn’t your primary focus, but you need to monitor your plan
Why?The penalties for not knowing and not caring are too high to ignore…especially now.
Why?The penalties for not knowing and not caring are too high to ignore…especially now.
Let me make it easier“Defined Contributions: What You Need to Know Now” Executive Summary
Let me make it easier“Defined Contributions: What You Need to Know Now” Executive Summary
19
Fiduciary Liability Fiduciary Liability
Expense DisclosureExpense Disclosure
Investment Selection & Monitoring Investment Selection & Monitoring
Participant EducationParticipant Education
Need To Know. Not Nice To Know. Need To Know. Not Nice To Know.
What You Need to Know NowSection Two:
Four Key Concepts
Go to
Page 5
20
Fiduciary Liability Are you a retirement plan fiduciary?Are you a retirement plan fiduciary?
Have any discretionary authority or discretionary responsibility in the administration of the plan
Exercise any authority and/or control over the management or disposition of plan assets
Render investment advice to the plan and/or its participants for a fee or other compensation whether direct or indirect
Expense Disclosure
Participant Education
Investment Selection and
Monitoring Process
21
What’s expected of you as a fiduciary?
Demonstrate loyalty to the plan
Proceed with prudence
Diversify investment options
Act in accordance with plan terms
Expense Disclosure
Participant Education
Investment Selection and
Monitoring Process
22
You can be heldpersonally liable
Expense Disclosure
Participant Education
Investment Selection and
Monitoring Process
Reimburse LossesReimburse Losses
Reimburse losses incurred by the plan or plan participants
Criminal PenaltiesCriminal Penalties
Civil ActionsCivil Actions
Penalties of up to $100,000 for individual fiduciaries ($500,000 for corporations) and up to 10 years in prison
In addition to suits filed by individual participants, the DOL itself imposes an automatic 20% civil penalty for certain fiduciary breaches
23
Strategies to ReduceYour Personal Liability
Take advantage of ERISA section 404(c)Take advantage of ERISA section 404(c)
Create an investment policy statementCreate an investment policy statement
Review plan operations Review plan operations
Monitor investments and plan expensesMonitor investments and plan expenses
24
ERISA section 404(c) Reduce liability by giving participants control of their
investments decisions
Offer a diverse range of investment options
Allow frequent exchanges between investment alternatives
Provide information to help participants make informed investment decisions
Select a qualified default investment alternative
25
Create an InvestmentPolicy Statement
Serves as a map for choosing the plan’s investment options
Sets a course of action for monitoring investments
Although not required, an Investment Policy Statement…
26
Review Plan Operations
Conduct a review of plan operations at least once a year
Examine the plan’s routine operations
Ensure that fees and expenses paid by the plan are reasonable
Document your review of plan operations
27
Monitor Investmentsand Plan Expenses
Asset allocation is one of the keys to monitoring investments
You need to make sure you give your employees the right selection of the right assets so they can make the right asset allocation choices for themselves
28
Fiduciary LiabilityExpense
DisclosureParticipant Education
Investment Selection and
Monitoring Process
You can limit your liability by knowing and following the rules
You can delegate some of your responsibility
You can’t delegate all of your responsibility
SummarySummary
29
Expense Disclosure Investment Selection and
Monitoring Process
Sources: 1 Mark Bruno, Worker Defined Contribution fee suits find friend in Labor Department, Financial Week, March 31, 2008.2 Matt Brady House Panel Oks More Defined Contribution Fee Disclosure, National Underwrite Life & Health, May 12, 2008.
30
DOL Proposed RegulationsInvestment
Selection and Monitoring
Process
Expense Disclosure
“If the Department of Labor’s proposed 408(b)(2) Regulation is enacted, Defined Contribution service providers and plan administrators would be required to disclose:• Administrative fees• Investment management fees• Transaction fees• Other fees
Other provisions in the regulations would require serviceproviders to disclose anyfinancial relationships to avoid conflicts of interest.”
31
Hard Dollar Fees (typically paid by employer)
Annual Recordkeeping and Admin. Fee
$_______
Per Participant Annual Fee $_______
Other Fees (e.g. custodian, trustee) $_______
Asset Based Fees (typically paid by employees)
Asset / Wrap Fee charged by provider
______%
Average Mutual Fund Expense ______%
How much are you really paying? Expense Disclosure
32
*Potential Expense Difference – This chart is presented for illustrative propose only. Source: 403bwiseValue after 35 years, assuming $250 contributed monthly with an 8% average annual return (source: Meridian Wealth Management)The “average variable annuity” costs cited above are just that, an average. Frequently, in K-12 plans the “all-in” costs on an annuity can be 300-400 bps (or 3-4%). If that were the case in the example cited above then the value would likely be less than $300,000.
Fees and Charges on Contracts offered
Changing Times and New Opportunities
33
Expense Disclosure
Seemingly insignificant fees make a big difference over time
Uncovering hidden fees is your greatest challenge
Everyone is paying attention: Legislators, Lawyers and Employees
You should, too
SummarySummary
34
Participant EducationWhat it isWhat it is
What it isn’tWhat it isn’t
Best PracticesBest Practices
• Ongoing process• Directed at employees• Increase their ability to make better decisions about their Defined Contribution
• Website + Workbook• Annual Lunch• Something to ignore
• Written plan to educate employees• Multi-faceted: Workshops, Tutorials, Tools, Website, Workbooks• Coordinated effort lead by you
Participant Education
35
Investment Selection and Monitoring Process
Investment Selection and
Monitoring Process
Sources: 1 Donald Stone, Investment Selection and Monitoring: A Practical Approach to Best Practices, 401khelpcenter.com, May 11, 2008. 2 Matt Brady House Panel Oks More Defined Contribution Fee Disclosure, National Underwrite Life & Health, May 12, 2008.
Note: This is another strategy to reduce your personal fiduciary liability exposureNote: This is another strategy to reduce your personal fiduciary liability exposure
36
Investment Selection and Monitoring Process
Investment Selection and
Monitoring Process
Key QuestionsKey Questions
Key Deliverables Key Deliverables
• What is your selection and monitoring process? Is it in writing? • What criteria determine your investment decisions?• What is your procedure for replacing underperforming funds?
• Written Investment Policy Statement• Regular Meetings with Written Minutes • Utilize Third Party Investment Expertise • Regularly Monitor Fund Choices
37
Investment Selection & Monitoring Meets
Fiduciary Liability
Investment Selection and
Monitoring Process
Discretionary Trustee
Delegate decisions and minimize liability
Directed Trustee
Keep control of investment decisions and liability
2 Kinds of Trustees
38
Two Choices
Paper Map Approach
Directed Trustee
GPS Approach
Discretionary Trustee
39
Paper Map Approach
The Roles You Need to Fill
The Rules You Need to Follow
40
The GPS ApproachAssume Fiduciary LiabilityAssume Fiduciary Liability
Complete Expense Disclosure Complete Expense Disclosure
Complete the Investment Selection and Monitoring ProcessComplete the Investment Selection
and Monitoring Process
Perform Ongoing Participant EducationPerform Ongoing Participant Education
Provide Outstanding Service Provide Outstanding Service
41
We’ve Arrived!
The GPS Approach
42
? ? ?Who are the fiduciaries of your plan?
How much is your company paying for your
Defined Contribution
plan?
What process do you follow to
select or change the investment
choices in your plan?
Three Questions
43
David Turla
Best Practices
1. Conflict of Interest Code
2. Investment Policy
44
Conflict of Interest Code
• Adopt a Conflict of Interest Code applicable to all fiduciaries
• Disclose personal and immediate family sources of income, including investments in securities, business interests, gifts, etc.
• Require filing upon assuming and leaving office• Require annual updates• Assign a governance officer to review
disclosures• Make available upon public request• California model code: www.fppc.ca.gov
45
Investment Policy Checklist
46
Investment Policy Objective
1. Identify the Plan’s objective – is it designed to be the primary retirement plan or supplement a DB plan?
47
Investment Policy Objective
2. Identify the investment model objective – 404(c) compliance– Complement participant behavior– Qualified Default Investment Alternatives (QDIA)
» Safe harbor versus fiduciary philosophy
48
Investment Policy Objective
3. Describe the investment structure– Identify the types of investments on the participant
menu (name brands, target date funds, asset class funds, brokerage window)
– Role of passive and/or active management– Asset class allocations– Plan-level diversification strategies
49
Investment Policy Objective4. Identify Fund Manager Requirements
– Resources: personnel depth in portfolio management and research, systems and reporting capabilities
– Investment philosophy: index, core, growth, value, compliance history
– Assets under management: total AUM, % in the target strategy, maximum % Plan assets will comprise target fund
– Governance: management structure (top-down/bottom-up/team/superstar), corporate stability, regulatory investigations/lawsuits, transparency
50
Investment Policy Objective
5. Fund Manager Search (aka beauty contest)– Establish an objective and timeframe– Screening process: Comparing apples to apples, or is
that a lemon?– Making sense of YTD, Annual Returns, Rolling
numbers, and all those tables and charts– Understanding the organization, philosophy, and
product (what’s really in there)? – Does it fit your Plan?– Transition issues: participant notices, logistics– Consultant recommendation (detailed later)
51
Investment Policy Objective
6. Performance Review– How often is enough?– Identifying an appropriate benchmark– Develop a compliance checklist: governance,
performance, fees, strategy, etc– In-person fund manager due diligence updates– “Watch” policy: what does this term really mean?
52
Investment Policy Objective7. Policy reassessment
– Annual review– Addition/deletion of a fund– Major structural changes– Regulatory changes
53
A Fiduciary’s Best Friend?
ConsultantsTheir role in helping your meet your
fiduciary responsibility and
mitigating liability
54
Consultant Selection
• Criteria: resources, investment philosophy, assets under management, governance
• Willingness to accept fiduciary responsibility Firm's Conflict of Interest Code
– Sources of revenue: hard/soft dollars, subsidiary/affiliate/parent firm
– Fee structure (retainer vs. per project) – Performance review and search - is there an
incentive to initiate searches?• Investment Policy review, compliance, and
development
55
Consultant Selection (cont’d)
• Understand the screening process, universe, Plan specific criteria (Investment Policy)
• Firm experience with due diligence visits and calls• Experience of other clients• Third party information (word on the street)
56
Investment Policies
Marie Swartzwelder
0166305-00001-00
57
You’re Not Alone
Investment Consultants come in all shape and sizes
• National or Regional Firms
• Specialists and Generalists– Tax Exempt vs. Corporate Focus– Retirement Focus vs. Broad Investment Market
• Conflicts of Interest
• Fiduciary Responsibility
For Financial Professional use only. Not for plan participants or the general public.
58
Getting to Where You Need to GoCompass or a Global Positioning System
• Compass– Guidance – Provides you with communication, direction and
support – No recommendations
• Global Positioning System– Advice– Provides you with a recommended road map– Accepts Fiduciary Responsibility
For Financial Professional use only. Not for plan participants or the general public.
59
Consultant Solutions
• Knowledge: Understanding the evolving landscape of investment opportunities
• Advice: Developing and preparing the IPS, recommendation of asset allocation/fund lineup, and manager selection.
• Responsibility: Sharing the fiduciary burden, avoiding conflicts of interest
• Research: Reviewing individual fund management firms, understanding their business, people and investment processes, and formulating skill ratings
A consultant is your resource – your window of information – in an increasingly complex field
For Financial Professional use only. Not for plan participants or the general public.
60
Investment Policy Statement
• Provides a road map for asset allocation and investment decisions
• Sets forth the process and the benchmarks used to monitor the managers and al major decisions
• Provides a clear communication tool for response to inquiries by employees, regulators, management, and boards
• Provides continuity as personnel changes
ERISA standards dictate that investment policies should be documented. A written policy statement provides a blueprint for the management of your investments.
For Financial Professional use only. Not for plan participants or the general public.
61
Why are you documenting policy?To whom are you communicating?
Why do you offer this particular plan?What are you trying to accomplish with this benefit?
What are your investment goals?What are you trying to accomplish through your investment choices?
What criteria are critical for plan assets?What are your chief considerations in asset class selection?
For each investment decision, why are you making it?How can you spell out the underpinnings of your decisions so that you will know to
make changes when circumstances change?
Which asset classes have you chosen? Why?Are there any asset classes you reject? Why?
How will you evaluate standards?Which indices and universes will you use as your measure?
What time period(s) will you reference?What are your goals relative to the indices/universes?
What factors will you evaluate other than return?
Which managers/funds do you choose within asset class categories?On what basis are you choosing these?
How often will you evaluate performance?Who will evaluate?
What documentation will you need? From whom?How often will you evaluate your policy?
What quantitative basis do you have for your decisions?What is your current array of managers/funds?
When was this document last reviewed? By whom?
Purpose of Policy Statement
Objectives
Specific Considerations
Underlying Rationale
Asset Classes
Performance Standards
Account Selection
Monitoring Process
Exhibits
Questions to be Addressed in Investment Policy Statement
For Financial Professional use only. Not for plan participants or the general public.
62
Compliance : Policies and Procedures
• Establish Investment/Benefit Committees• Establish regular meetings to monitor investments
and assess any necessary action to be taken– Performance Evaluation/Investment Review– Decisions Made , add/drop watch list– Competitive Analysis
• Benchmarking• Fees• Market Coverage – Fund Options
• Retain detailed minutes of each meeting for review by appropriate parties to the plan
Documentation, Documentation, Documentation
For Financial Professional use only. Not for plan participants or the general public.
63
• Quantitative Evaluations– Absolute performance against benchmark– Relative performance against peer
universe– Volatility relative to indices and peers
• Qualitative Evaluations– Adherence to investment mandates– Key changes to portfolio/fund management – Ethics violations
Performance Review Process
For Financial Professional use only. Not for plan participants or the general public.
64
• Need to understand what you’re being charged– Fee transparency and disclosure– Revenue sharing to record keeper
• Are you being charged a competitive fee?– Plan size– Assets within strategy
• Direct access
• Commingled option
Performance Review Process
Pay attention to Fees
For Financial Professional use only. Not for plan participants or the general public.
65
Benchmark Fees based upon Strategy
0.00
0.30
0.50
0.70
0.90
1.10
1.30
1.50P
ote
nti
al R
an
ge
of
Exp
en
se
R
ati
os
Peer Group Target MedianTarget Manager Expense Reference
For Financial Professional use only. Not for plan participants or the general public.
66
Watch List Considerations
• Sub-standard investment results– Failure to meet established criteria
• Concerns regarding future performance– Portfolio team/process instability– Unexplained style changes– Key personnel departures– Financial instability– Organizational change
• Legal or regulatory issues
For Financial Professional use only. Not for plan participants or the general public.
67
Process for action or follow-up
• Closer Scrutiny• Alternatives to consider
• Freeze investment – for how long?• Identify replacements• Terminate and replace
Watch List Action
Duty to Remove Underperforming Investment Options
For Financial Professional use only. Not for plan participants or the general public.
68
Investments & Manager Search
Manager Search includes:• Search and selection process• Investment Transition• Documentation
Responsible for guiding a disciplined and rigorous investment process to enable the Committee to meet its fiduciary responsibilities
For Financial Professional use only. Not for plan participants or the general public.
69
Search Process
• Satisfy client demands– Proactively identify gaps within the investment line up– Proactively identify replacement based upon Watch List results
• Robust and independent – Universe to include full market of available investment managers– Employs multiple databases (both institutional and retail) to
ensure both broad coverage and redundancy to ensure accuracy of data
• Encompasses qualitative and quantitative criteria• Consistent with IPS selection criteria• Leverage internal analytic resources for both screening, and
independent on site due diligence
For Financial Professional use only. Not for plan participants or the general public.
70
Further Considerations
In addition to standard investment evaluation criteria , additional considerations should include:
• Direct or commingled investments• Competitiveness of management fees• Potential redemption cost and holding period• Firm level
• Investment philosophy• Compliance and oversight • Infrastructure and resource commitment
• Management team consistency
For Financial Professional use only. Not for plan participants or the general public.
71
Transition Management
• Retail - Commingled funds– Remove and replace (map assets) with an alternative
investment option of similar characteristics identified through selection process
– Communicate
• Direct investments– Mitigate costs of transaction– Evaluate and Hire transition manager– Evaluate results
Investment option to be terminated addressed using procedural and substantive prudence
For Financial Professional use only. Not for plan participants or the general public.
72
• Satisfies your needs for an investment resource• Communicates updates on market trends• Includes annual meeting• Assures at least quarterly contact• Emphasizes clear documentation of
– Meetings– Decisions– Actions– Underlying rationale
This investment resource provides you access to the expertise you require to manage your fiduciary responsibility.
Creating and documenting a process for your investments requires that you continue to evaluate and update your work. A consultant is your resource – your window of information – in an increasingly complex field.
Value of a Consultant
For Financial Professional use only. Not for plan participants or the general public.
73
Disclosures• Keep in mind that application of asset allocation and diversification concepts does not ensure a profit or protect against loss
in a declining market. It is possible to lose money by investing in securities.
• Prudential Retirement is a registered service mark of The Prudential Insurance Company of America, Newark, NJ and its affiliates.
For Financial Professional use only. Not for plan participants or the general public.
74
Speaker Contact Information
Barbara Healy, SST Benefits(480) 314-0307 Barbara.Healy@cunamutual.com
Marie Swartzwelder, Prudential Retirement (860) 534-7588 Marie.Swartzwelder@Prudential.com
David Turla, County of Los Angeles(213) 893-2377 dturla@ceo.lacounty.gov
75
Questions
From
Audience
76
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