Navigating The “Perfect Financial Storm”

Navigating The Navigating The “Perfect Financial Storm”“Perfect Financial Storm”Navigating The Navigating The “Perfect Financial Storm”“Perfect Financial Storm”Identifying & Dealing with Fiduciary Liability in 401(k) Investment ProgramsIdentifying & Dealing with Fiduciary Liability in 401(k) Investment Programs

2

The “Perfect Financial Storm”The “Perfect Financial Storm”

Key Forces Coming Together• Baby Boomers

» Looking for financial security as retirement approaches.

» Home equity value no longer a “given” anymore.

• Financial Markets» Volatile equity markets and low yields on fixed income assets.

» Recession / inflation worries.

» Liquidity “crunch” for commercial / mortgage borrowers.

• Fiduciary Scrutiny Increasing» ERISA lawsuits on the rise.

» Fee transparency on the horizon

• What Should Plan Sponsors Do?

3


Fiduciary Risk Increasing• One plaintiff’s firm, Schlichter, Bogard & Denton, brought 11 class action cases against major

corporations regarding service provider compensation. • Large Plan Sponsors Are Being Sued

• Bechtel • International Paper• Boeing • Kraft• Catepiller • Lockheed Martin• Deere • Northrop Grumman• Excelon • United Technologies• General Dynamics • Unisys

• Tobacco, Guns and… 401(k) Plans?

“We are nearly completed with litigation against tobacco companies. We are just beginning the major litigation against gun companies, and the next big area for litigation - after guns - is going to be suing 401(k) and 403(b) plan sponsors.”

- Anonymous Litigation Attorney

Source: Groen Law Group

4


Fiduciary Risk Increasing:

» US Supreme Court ruled in “LaRue vs DeWolf “ that individual employees can sue plan administrators for fiduciary breach.

“This opens the door to a variety of worker lawsuits, including challenges to the fees workers are charged to administer their savings plans.”

- Ed Ferrigno, VP Profit Sharing/401(k) Council of America

Source: WSJ

“My sense is this will end up producing a tremendous amount of litigation”

- Mary Ellen Signorille, Esq AARP Foundation

5

Setting the CourseSetting the Course

Dealing With Fiduciary Status:

• Identifying / Understanding Who is a Responsible Fiduciary in YOUR Plan

• Documenting the Selection & Monitoring of Plan Investments

6

Navigating The “Perfect Financial Storm”Navigating The “Perfect Financial Storm”

Know Your Fiduciary Responsibilities• DOL has launched a national education campaign: “Getting It Right – Know Your

Fiduciary Responsibilities” emphasizing the obligation of plan sponsors and other fiduciaries to:

» Understand the terms of their plans;

» Select and monitor service providers carefully;

» Make timely contributions to fund benefits;

» Avoid prohibited transactions; and

» Make timely disclosures to workers and their beneficiaries and reports to the government

“Strong fiduciary oversight and protecting workers’ benefits is our highest priority. ‘Getting it Right,’ however, can be challenging. This is particularly true for small and medium-sized employers who have limited time, resources and access to professional help with benefit programs.”

– Secretary of Labor Elaine L. Chao

7


“Fiduciary” Defined:• Plan Sponsor/Employer

• Trustee

• Anyone who…» Exercises any discretionary authority/control over the plan or the management/disposition of its assets

» Provides investment advice regarding plan assets for a fee (direct/indirect)

» Has any discretionary authority/responsibility in the administration of the plan

8


Who are the Responsible Fiduciaries?• Am I a fiduciary?

• What are my fiduciary responsibilities?

• How do I fulfill those duties under the law?

Who is a Fiduciary?

“401(k) Committee” Members

Officers

Principals

Board of Directors

Remember – the appointment of a fiduciary is, in itself, a fiduciary act

9


Duties of the “Fiduciary”…

The Fiduciary must:• Manage the Plan with the “Best Interest” of Participants & Beneficiaries

• Diversify Investment Portfolio to Minimize Loss of Principal

• Monitor Investments Over Time to Ensure a Competitive Investment Menu

• Incur Reasonable Costs to Deliver Investment Management and Plan Services

“The Fiduciary should act with the ‘care, skill, prudence, and diligence under the circumstances than prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.’”

– ERISA, §404(a)(1)(B)

10


What’s At Stake…

Potential Remedial Actions Include:• Fiduciaries are Personally Liable for Breaches of Duty

• Must Disgorge Any Profits

• Must Make up Any Plan Losses

• Must Make up Any Lost Opportunity Costs

• Must Pay Participants’ Attorneys’ Fees

• Subject to Stiff DOL Civil Fines

• Subject to Criminal Fines and Incarceration

11

How Many Funds are Enough?

0

2

4

6

8

10

12

14

16

18

1995 1999 2003 2005Source: CRA RogersCasey, Spectrem Group

As Your Plan Adds More Options

Additional Monitoring Requirements Increase

Selection Risk Rises

More Education Necessary For Plan Participation

Number of Funds Offered


12

Navigating The Navigating The “Perfect Financial Storm”“Perfect Financial Storm”Navigating The Navigating The “Perfect Financial Storm”“Perfect Financial Storm”

Selecting Mutual Funds

“The Past Does Not Accurately

Project The Future”

February 2000February 2000Ten for 2000

Focuses on ten of the top performing fund managers in

the United States who talk about how they have beat the

markets for years and how they plan to continue their

streaks into the 2000’s.

Ten for 2000Ten for 2000

February 2000


February 2001February 2001Ten for 2001

“Best mutual funds for 2001” None of the top 10 funds from 2000 Top List made this list.

You now own 20 Funds.

Ten for

2001Ten for

2001

FEBRUARY 2001


February 2002February 2002

“Nine funds that can weather tough times”

None of the 20 funds previously listed are mentioned this year

You now own 29 Funds

The 12

Funds To

Buy Now

The 12

Funds To

Buy Now

FEBRUARY 1993

Best Funds

for 2002Best Funds

for 2002

FEBRUARY 2002


February 2003February 2003Best Funds for 2003

“Ten all weather funds who can prosper in good and bad times” One of the 29 previous funds is mentioned this year.

You now own 38 Funds.

Best Funds

for 2003Best Funds

for 2003

FEBRUARY 2003


February 2004February 2004“Eight Great Funds from

Companies you can trust”

One of the 38 previously mentioned funds is

mentioned

You now own 45 different mutual funds.

Eight Great

FundsEight Great

Funds

FEBRUARY 2004


18

Review of Review of Money MagazineMoney Magazine Mutual Fund Mutual FundRecommendationsRecommendations

Source: Money Magazine 02/2000 – 02/2004

“Best Fund List” for 2000 – 2004

47 Funds Made the list

45 Funds appear only once

2 Funds made the list twice (one is a bond index fund)

30 Different Fund Families have at least one fund on the list


19

Pension Protection Act

Navigating The “Perfect Financial Storm”

20

PPA- Most Important Legislation Since ERISA

Shift focus from teaching participants to doing it for them

The new “DC” Plan will look like an old “DB” Plan Auto Enrollment

Auto Deferred increase

QDIAs

Professional Investment Management Lifestyle / Lifecycle funds

Managed Accounts


21


Qualified Default Investment Alternative (QDIA)

» Safe Harbor Protection provided to employer if employer defaults to eligible QDIA when participant fails to direct investments

» Eligible QDIAs

– LifeCycle / LifeStyle Funds

– Balanced Fund

– Managed Account

22

LifeCycle / LifeStyle Funds

» Generally two types of funds

» LifeCycle (age-based)-target maturity funds based on expected retirement date and are gradually rebalanced to achieve a more conservative allocation

» LifeStyle (risk-based)-funds that offer fixed risk exposure utilizing a static allocation approach


23

Life Style Funds (Risk Based)

Life Cycle(Age Based Target Funds)

Risk Based vs. Age Based • Allows for an investor to choose a fund based on their risk profile/tolerance

• Target date fund geared towards an investors retirement date

Fund Labels • Typically use the words Conservative, Moderate or Aggressive in their name

• Typically labeled with target year in title (2010, 2020,2030)

Investor Input • Investors determine risk tolerance by completing a questionnaire

• No investor input required - Age & retirement date are driving factor

Risk Based vs. Age Based • Funds maintain a predetermined risk level• Risk/return metrics remain constant• Lifestyle funds rebalance to keep a static mix of stock, bonds and cash• Participant may need to switch funds as time horizon changes

• Assets are allocated based on a preset schedule for that date• Rebalance to reduce the level of risk in the portfolio over time• Funds change allocation to become progressively more conservative as target date approaches • No need for a participant to switch funds unless time horizon changes

Life Style vs. Life Cycle


24

Take the Helm…Navigate to SafetyTake the Helm…Navigate to Safety

TOP TEN THINGS YOU CAN DO TO MITIGATE YOUR FIDUCIARY RISK EXPOSURE

9. Establish a Written Investment Policy Statement

10. Understand Your Fiduciary Responsibilities

8. Make Investment Portfolio 404(c) Compliant

7. Diversify the Investment Portfolio

6. Evaluate Fund Performance Quarterly

5. Identify All Fees Paid to Investment Funds/Service Providers

4. Benchmark Plan Services/Fee Every 3-5 Years

3. Consider LifeCycle/LifeStyle Funds

2. Consider Auto-Enrollment/Auto Deferral Increases

1. DOCUMENT, DOCUMENT, DOCUMENT

25

Smooth SailingSmooth Sailing

Some Helpful DOL Publications:• Meeting Your Fiduciary Responsibilities

• Understanding Retirement Plan Fees & Expenses

• DOL Plan Fee Disclosure Form

• Reporting & Disclosure Guide for Employee Benefit Plans

• Selecting an Auditor for Your Employee Benefit Plan

The US Department of Labor’s Employee Benefits Security Administration offers more information on its webstie:

www.dol.gov/ebsa

26

Smooth SailingSmooth Sailing

Remember:• Knowing & Understanding YOUR Fiduciary Responsibilities Will Enable

You to Take the Appropriate Steps to AVOID Many Problems Often Found in Qualified Retirement Plans

• Set & Stay the Course to “Smooth Sailing”

27

QuestionsQuestions

Documents

Navigating The “Perfect Financial Storm”