Retirement Plan Asset Management – A Comprehensive Look 1 Hr. CE

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Retirement Plan Asset Management – A Comprehensive Look1 Hr. CE

NFM-11672AO.2 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

2NFM-11672AO.2 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

Some Things You Need To Know• This presentation is for educational purposes only and is not

intended to be a solicitation or sale of a specific product or service. The presentation is designed to provide accurate and authoritative information in regard to the subject matter covered. The general information in this presentation is not intended to be nor should it be treated as tax, legal, accounting or other professional advice.

• Nationwide Investment Services Corporation, member FINRA. In Michigan only -Nationwide Investment Svcs. Corporation

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AGENDA

• ERISA overview of investment activities – nonfiduciary vs. fiduciary

• ERISA background – retirement plan investments

• Sales of investment products to the retirement plan

• Investment education services to plan participants

• Investment advice to the trustee and/or participants

• Investment management services for the trustee

• Compare and contrast advisory vs. management activities

• Practice management tips for the retirement plan advisor


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ERISA Overview of Investment Activities

• Nonfiduciary• Sales of investment products to the retirement plan

• Investment education services to plan participants

• Fiduciary• Investment advice to the plan’s trustee, named fiduciary, and/or

participants – ERISA section 3(21)(A)(ii)

• Investment management – ERISA section 3(38)


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ERISA Section 404(a) Affirmative Fiduciary Duties

• Exclusive purpose rule

• “Prudent Man” standard of care

• Diversification of investments

• Must follow the plan documents

• Upshot – if one is deemed to be a fiduciary by virtue of his or her position or actions, then these affirmative duties apply


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Investment-Related ERISA Section 406(a)(1) Party in Interest Prohibited Transactions

• ERISA section 3(14) defines “party in interest” and includes (among others) both a fiduciary and a person providing services to the plan

• Retirement plan advisors are parties in interest• ERISA section 406(a)(1) prohibits the following [relevant]

transactions between a plan and a party in interest -• (A) Sale or exchange, or leasing, of property• (B) Lending of money or other extension of credit• (D) Transfer to or use by or for the benefit of, a party in interest of

any assets of the plan• Effectively, this makes the sale of insurance, annuity, and

investment products to the plan’s trustee a prohibited transaction, absent an exemption


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ERISA Background – Section 406(b) Fiduciary Prohibited Transactions

• ERISA section 406(b): A fiduciary with respect to a plan shall not—(1) deal with the assets of the plan in his own interest or for his own

account(2) in his individual or in any other capacity act in any transaction

involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or

(3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan

• NOTE – there are no statutory exemptions for these fiduciary prohibited transactions


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Investment-Related Statutory Exemptions to Party in Interest Prohibited Transactions

• ERISA section 408(b) contains a statutory exemption for the following investment-related prohibited transactions described in ERISA section 406(a)(1) -• (2) services necessary for establishment or operation of the plan,

provided that no more than reasonable compensation is paid (and includes investment advice delivered to the plan’s trustee or named fiduciary)

• (14) provision of investment advice to a participant or beneficiary, provided the conditions of 408(g) [Eligible Investment Advice Arrangement] are met

• (17) transactions described in 406(a)(1)(A), (B), and (D) between a plan and a service provider (who is not a fiduciary), as long as plan receives no less, nor pays no more than “adequate consideration”


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Selective Fiduciary Penalties for Prohibited Transactions

ERISA section 409(a) - personal liability of a fiduciary who breaches any of his or her fiduciary responsibilities, obligations, or duties• personally liable to make good to the plan any losses resulting

from such breach

• restore to the plan any profits of the fiduciary which have been made through use of plan assets by the fiduciary

• other equitable or remedial relief as a court may deem appropriate


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Selective Fiduciary Penalties (cont’d)

• ERISA section 501 - criminal penalties for willful violation of Title I of ERISA include a fine of up to $100,000 and/or imprisonment of up to 10 years

• ERISA section 502(a)(3) - civil suit by participants and beneficiaries to enjoin proscribed conduct and for equitable relief

• ERISA section 502(a)(5) - civil suit by DOL to enjoin proscribed conduct and for equitable relief


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Selective Fiduciary Penalties (cont’d)

• ERISA section 502(g) - a judge may award attorney's fees to the prevailing party in any litigation proceeding

• IRC section 4975 – potential excise tax equal to 15% of the prohibited transaction amount, increasing to 100% if not corrected within the “taxable period”

• ERISA section 502(l) - DOL may assess a civil penalty against a fiduciary for any breach of fiduciary responsibility equal to 20% of the "applicable recovery amount"• this 20% penalty is in addition to whatever DOL recovers


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Sale of Insurance and Investment Products to a Retirement Plan

• Considered to be a prohibited transaction in the absence of an exemption

• Nonfiduciary activity if the FINRA registered representative and/or an insurance-licensed producer is not otherwise a fiduciary

• See prohibited transaction exemption (“PTE”) 84-24 for a list of disclosure requirements in connection with sale of insurance, annuity, and mutual fund products

• DOL Regs. Sec. 2550.408b-2(c) applies: disclosure requirements for determining a “reasonable contract or service”

• ERISA section 408(b)(17) “adequate compensation” rule applies; statutory prohibited transaction exemption


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Investment Education Services to Participants

• Nonfiduciary activity according to Interpretive Bulletin 96-1 [29 CFR sec. 2509.96-1] on Participant Investment Education

• Furnishing the following categories of investment-related information/materials constitutes investment education• plan information

• general financial and investment information

• asset allocation models

• interactive investment materials


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Investment Advice Fiduciary

• ERISA sec. 3(21)(A): a person is a fiduciary to the extent that he/she ... • (ii) renders investment advice for a fee or other compensation,

direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so ...

• DOL Regs. sec. 29 CFR 2510.3-21(c) – current rule • Five-part test for fiduciary advisor status: (1) advisor makes

recommendations on investing in, purchasing or selling securities or other property, or give advice as to their value; (2) on a regular basis; (3) pursuant to a mutual understanding that the advice; (4) will serve as a primary basis for investment decisions; and (5) will be individualized to the particular needs of the plan

• An investment advisor is not treated as a fiduciary unless each of the five elements of this test is satisfied for each instance of advice

• Proposed change to current regulations – elimination of the five-part test; status update


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Implications of Status as an Investment Advice Fiduciary

• Client Relationship• Plan’s trustee or named fiduciary

• Plan participant(s)

• Perhaps both

• Compensation Arrangements – Trustee as the Client• Advisor cannot set own compensation; must be approved by

independent fiduciary

• Compensation Arrangements – Participant as the Client• Compensation may not vary based on a participant’s selection of a

particular investment; ERISA sections 408(b)(14) & 408(g)

• Adv. Op. 2005-10A; fees may reflect size of account

• Rollover Opportunities – Advisory Opinion 2005-23• If advisor is a fiduciary to the plan or participants, then rollover

solicitation has fiduciary and compensation implicationsNFM-11672AO.2 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

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Investment Management Fiduciary

• ERISA section 3(21)(A): a person is a fiduciary to the extent that he/she ... • (i) exercises any discretionary authority or discretionary control

respecting management of such plan or exercises any authority or control respecting management or disposition of its assets

• ERISA section 3(38): "investment manager" means any fiduciary (other than a trustee or named fiduciary, as defined in section 402(a)(2))—• (A) who has the power to manage, acquire, or dispose of any asset

of a plan;

• (B) who is either a registered investment advisor under the Investment Advisers Act of 1940 or is a bank or an insurance company qualified to perform asset management services

• (C) has acknowledged in writing its fiduciary status to the plan


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Investment Advisor vs. Investment Manager Services Provided

• Investment Advisor [3(21)(A)(ii)] Services• investment advice concerning plan assets to the plan’s trustee,

named fiduciary, and/or plan participants

• Investment Manager [3(38)] Services• investment selection for the plan

• sales and purchases of plan assets

• asset management


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Investment Advisor vs. Investment Manager Qualifications Required

• Investment Advisor [3(21)(A)(ii)] Qualifications• no specific requirements under ERISA

• FINRA and state law requirements apply

• can become an "accidental fiduciary" by advisor's actions

• Investment Manager [3(38)] Qualifications• RIA under the Investment Advisers Act of 1940• RIA under applicable state law• bank or insurance company


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Investment Advisor vs. Investment Manager Effect On Other Fiduciaries

• Fiduciary Advisor [3(21)(A)(ii)]• serves as co-fiduciary with plan trustee(s) on investment decisions

• does not implement investment advice; other plan fiduciaries must do so

• does not relieve other plan fiduciaries of liability for investment decisions

• Investment Manager [3(38)]• relieves other plan fiduciaries from liability for investment decisions

• other plan fiduciaries liable for selection and monitoring of manager


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Investment Advisor vs. Investment Manager Effect On Plan Participants in a Participant-Directed Plan

• Investment Advisor [3(21)(A)(ii)]• can provide investment advice directly to participants• participants who elect to work with an investment advisor are still

ultimately responsible for selecting and managing their investment choices

• trustee, named fiduciary, and/or investment manager sets the core fund lineup

• Investment Manager [3(38)]• sets the core fund lineup in a participant-directed investment plan • retains complete control over the selection and retention of plan assets

under an assignment of authority from the plan’s trustee or named fiduciary

• can separately contract with participants for investment management services

NFM-11672AO.2 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC NFM-9354AO.2 (10/12) FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

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Practice Management Tips for the Retirement Plan Advisor

• Decide what role to play – fiduciary vs. nonfiduciary

• Consult with your broker-dealer to determine any limitations on your practice activities

• Review fiduciary duties and prohibited transactions rules

• Comply with PTE 84-24 and ERISA sections 408(b)(17) and 408(b)(2) on the sale of products to the plan

• Study Interpretive Bulletin 96-1 to determine what activities are nonfiduciary education activities

• If providing investment advice, consider using levelized compensation arrangements

• Consider using a 3(38) investment manager on the plan to remain a nonfiduciary and free to do rollover business


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Retirement Plan Asset Management – A Comprehensive Look 1 Hr. CE