Upload
stella-charity-wilkinson
View
215
Download
0
Embed Size (px)
Citation preview
2nd Annual Clients & Friends Breakfast
Sponsored by: This presentation is available for download:
www.alphabenefits.com/seminar
Agenda
Overview of fiduciary responsibility
Minimizing fiduciary liability
Investment policy statement
Due Diligence
Department of labor audits – the real world
Recent Trends
Increased scrutiny of retirement plans due to recent news makers in the economic and business world has
plan sponsors asking: How are we going to protect ourselves and our participants? How can we monitor our investment choices? Where do we invest going forward?
Focus on the actions of fiduciaries, particularly in the area of investment
Who is a Fiduciary?
Under ERISA, a person is a fiduciary to a plan to the extent they:
Exercise any discretionary authority of discretionary control respecting management of such a plan or exercise any authority or control respecting management or disposition of plan assets… Render investment advice for a fee or other compensation with respect to plan assets… Have any discretionary authority or responsibility in the administration of such plan.
Who is a Fiduciary?
Persons who are commonly fiduciaries include: Plan Sponsors
Plan Administrators as defined in ERISA
Trustees
Investment Managers
What Defines a Fiduciary?
Individuals who have, at any time, exercised authority over what investments should be offered under a plan
Sports analogy: You have to know what game is being played.
You have to know the rules and how to keep score.
You have to know what the score is at all times.
Employee Retirement Income Security Act (ERISA)
402(c) Fiduciary may delegate to others
409(a) Fiduciaries can be personally liable to make good losses resulting from breach of fiduciary duty (e.g. consider pending judgements regarding the Enron scandal)
Fiduciary Duties and Obligations:Common Steps to Follow
Execute responsibilities with care, skill, prudence, and
diligence of a prudent expert
Make decisions solely in the interest of plan participants and beneficiaries
Prudently diversify investments
Avoid engaging in prohibited transactions
Follow the plan documents
Fiduciaries and Plan Assets
Fiduciary must be covered by a fidelity bond to help protect plan’s assets from fraudulent activity (ERISA requirement)
Coverage must be at least 10% of plan assets Minimum $1,000
Generally up to a maximum of $500,000
Bond helps protect the plan’s assets, NOT the fiduciary
Individual fiduciaries have the choice to purchase fiduciary liability insurance.
Ways to Help Minimize Fiduciary Liability for Plan Investments
Adopt and adhere to an Investment Policy Statement
Control total costs and fees of the plan
Promote appropriate diversification of the funds
Exercise due diligence when executing duties
Document, in writing, your actions and decisions
Implement ERISA 404(c) procedures
Monitor investment funds for performance and adhere to investment objectives and policies
Steps to Help Minimize Financial Liability
Offer plan participants option of daily account changes
Offer appropriate fund menu for employee demographics
Fully document reasons for change in investment advisiors
Craft a strategic investment strategy (i.e., Investment Policy Statement (IPS)) explaining the plan’s objectives and distribute it to participants
Steps to Help Minimize Financial Liability (continued)
Avoid “doubletalk” or technical jargon in IPS
Get a second look from an independent broker to review current plan investments/fees to see if competitive in marketplace and document these findings along with annual review processes
Consider asking a select group of employees/plan participants to be involved with the plan’s fund selection processes
“Check” It Out…
The following slides attempt to summarize some of the
features of ERISA Section 404(c). You should consult
other references for additional information.
Employers seeking to offer a plan complying with ERISA Section 404(c) should be able to answer “yes” to all of the following questions…
Choosing Investments
Are at least three investment choices provided, each with materially different risk/return characteristics?
Can participants choose their own investments?
Can each investment option be classified as a “prudent” investment?
Can participants change their investment allocations and transfer among investment accounts at least once every calendar quarter?
Have Participants Been Provided With…
A statement that the plan intends to comply with ERISA Section 404(c) regulations?
Descriptions of each investment option, including:
Directions on how to select investments and change investment selections along with access to:
Prospectuses?
Periodic account statements?
Objective Asset diversification Performance Sales charges
Risk/return characteristics Plan fiduciary identification Identity of the portfolio manager
What About Fees?
ERISA does not set a specific level of fees, but requires fees charged to a plan be “reasonable”
“Reasonable” must be determined in each case
Ongoing due diligence is critical
401(k) Plan Fee Disclosure Form
(www.dol.gov/ebsa/publications)
Website URL may change. URL referenced above is valid as of 12/04.
Watch Out for Hidden Fees
A 1% increase in fees on a $100,000 investment can reduce a portfolio’s gain
by $66,254 over 20 years, assuming a 7% return.
When Evaluating Fees…
Make informed decisions
Remember fees are just one of several factors
Assess the plan’s performance over time for each investment option
Look at the full value of services
Consider all plan fees because it is not only about fund expenses
Choosing lower fees doesn’t necessarily mean a better performing fund
When Evaluating Fees… (continued)
Compare all services received with total cost
Remember that some investments, due to their nature, may have higher fees
Ask which services the fees cover
Find out which fees are charged directly to the plan or to the employer, and which ones are deducted from investment returns
What is an Investment Policy Statement (IPS)?
Defines how investments and managers are selected, monitored, and evaluated
Describes how investment decisions are related to a plan’s objectives, as well as the strategic vision for the
investments
What Should an IPS Do?
Reflect the employer’s attitudes and philosophy
Recognize the participants’ needs, circumstances and
goals
Document the plan’s goals and demonstrate the foundation for investment decisions
Address the quantity and quality of funds provided and determine the benchmarks and selection criteria
How much discretion will the sponsor have in the final fund selection
What Should an IPS Do?(continued)
Provide a policy method to objectively evaluate fund managers
Help prudently manage plan assets and conduct due diligence
Provide continuity in decision-making as fiduciaries change
Key IPS Components for 401(k) Plans
Describe the purpose of the plan
State the document’s purpose
Identify the duties of each party involved
Explain plan’s investment philosophy
Identify asset classes being offered
Establish criterion for manager selection
Describe monitoring methodology and frequency
Describe methods for replacing or adding funds
Procedural Due Diligence
Analyze investment documents
Review investment compatibility with the IPS
Review historical performance
Evaluate reasonableness of fees
Obtain competitive bids
Establish review schedule and procedures
Document each step along the way
Time consuming
Department of Labor (DOL)Audit Cases (The Real World)
“A pure heart and an empty head are not enough to defend against a fiduciary breach.”
- ERISA Cliché
Source: Tess J. Ferrera, Esq., Kilpatrick Stockton, LLP. “What Third Party Administrators Should KnowAbout ERISA Liability and Department of Labor Investigations”, Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983), cert denied, 467 U.S. 1251 (1984).
High Deductible Options
Health Savings Accounts (HSA’s)
Health Reimbursment Arrangements (HRA’s)
Medical Expense Reimbursement Accounts (MERP’s)
HSA/HRA Comparison
HSA HRAAvailability Individuals and any size
groupAny size group
with limitations
Maximum Contributions
Lesser of deductible or $2,650 or $5,250
Maximum reimbursement determined by employer
Additional Contributions Allowance
Allowed for age 55 and older
Not applicable
Eligible Contributors Individuals, Employers and or Employees
Employers Only
HSA HRATax Deductibility – Employer
Contributions are tax deductible
Reimbursements are tax deductible
Tax Deductibility – Employee
Contributions are pre-tax if offered through a
cafeteria planNot Applicable
Fund or Account Ownership
Employee Employer
Portable Yes No
Rollover of Funds Yes Employer determines if allowed and can set caps
Funding Required Yes No
HSA HRAPlan Types High deductible plan with
no copaysNo plan restrictions
Deductibles Singles –2004
$1,000 Minimum No limits
Deductibles Families – 2004
$2,000 Minimum No limits
Out-of-pocket Maximum
Singles – up to $5,100
Families – up to $10,200
No limits
High Deductible PlansOn paper, they make sense.
Larger employee out of pocket reduces employer cost
Turns employee into consumer
Employees that utilize medical plan pay more
Isn’t insurance designed to pay for catastrophic?
Why Haven’t HRA’s/HSA’s Taken Off?
Major insurance carriers slow to adopt plan design
Not enough of a discount in rates
Employee communication issues
Confusion over regulations
Employers view this as just a “cost shifting” method as opposed to a way to reduce overall costs
Some Areas of Confusion
Not enough money in account early on
Make sure to receive carrier discount at time of service
Paying for non-medical expenses through HSA accounts
High Deductibles Plans
Carriers now offering a full complementof HSA/HRA’s. Most are available effective
January 1, 2005.
Medical Expense Reimbursement Plans (MERP)
Governed by IRC Section 105
Utilized with an insurance carrier’s high deductible plan
Permits employers to self-insure certain medical expense costs
Strategy Employer secures high deductible plan (i.e. $2,000) for major
expenses (In/Out patient surgery, etc.) from carrier
Generally less than 20% of employees utilize these type of expenses
Communicate lower deductible (i.e. $250) to employees
Employer self insures from $250 to $2,000, only if actually incurred
Employer utilizes premium discount savings to fund the self insured portion
Typically part of PPO plan with office visit co-pay and drug card
Insured Claims Experience
80% of insureds have claims < $3,000
70% of insureds have claims < $2,000
55% of insureds have claims < $1,000
Milliman USA (2002)
Type of Plan% of
Savings
1.$10/Office
Visit10/20 Rx Base
2.$20/Office
Visit$250 In-Network Deductible
3-tier Rx 7%
3. $500 Deductible
80/20 to out-of-pocket maximum of $3,000
3-tier Rx 17%
4. $1,000 Deductible
80/20 to out-of-pocket maximum of $5,000
3-tier Rx 26%
Additional Points
Alpha Benefit Administrators administers the self funded portion for the employer
Advantage over HSA in that employee can retain the doctor visit copays and Rx copay card while still having PPO arrangement for service
All expenses over the $2,000 are the responsibility of the insurance carrier
Additional Points
Serves as a starting point for getting into high deductible plans without having to communicate a complicated process to employees
Alpha Benefits Administrators can provide proposal on
savings and costs
Carrier Update Aetna
Reading Hospital
Oxford/United Healthcare/Mamsi
HealthAmerica and HealthAssurance Dr’s St. Lukes
Gnadden Hutten/Palmerton Hospital 1/1/2005
Capital BlueCross/Keystone Demographic under 45 employees 1/1/2005
Integration Keystone/Cross
New PPO Plan Designs
Calendar Year Deductibles
Company Plan Year Calendar Year
HighmarkNew Business – 1/1/05
Renewals – Upon Renewal
HealthAmerica 10/1/2004
Capital BlueCross