Fiduciary Pitfalls in Declining Market

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					Retirement Plan Fiduciary Symposium
Fiduciary Pitfalls in a Declining Market




                                      October 15, 2008
 THE PERFECT STORM

How a Plan Sponsor Should Respond
PRESENTED BY:



David A. Thornton, Member
100 Peabody Place, Suite 900
Memphis, TN 38103
901-543-5922
dthornton@bassberry.com



                               2
  Today‘s Focus



• Plan Sponsors who serve as ERISA fiduciaries

• Internally, identify all individuals that serve in a fiduciary
  capacity

• Identify your fiduciary role and duties

• Plan design considerations

• New DOL initiatives on fee disclosure

                                                                   3
Who is a Fiduciary?




• You may be if you have any discretion or
  authority to interpret or direct the administration
  of the plan

• Examples:
     –   Board of Directors
     –   Committee
     –   Officers
     –   Employee

                                                        4
What are your Fiduciary Duties



                                 ERISA‘s Exclusive Purpose Rule




ERISA §404(a)(1)(A) provides:

“A fiduciary shall discharge his duties . . . for the exclusive purpose of:
         (i) providing benefits to participants and their beneficiaries; and
         (ii) defraying reasonable expenses of administering the plan….‖




                                                                               5
What are your Fiduciary Duties?




The Prudent Man Rule requires that a
fiduciary act:

―. . . with the care, skill, prudence, and     diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims; . . . ―




                                                                         6
What are your Fiduciary Duties?




The Prudent Expert Rule:



    ―ERISA‘s prudent standard ‗is not that of a prudent lay person but
    rather that of a prudent fiduciary with experience dealing with a similar
    enterprise.‘ ‖ Marshall v. Snyder, 1 EBC 1878, 1886 (E.D.N.Y. 1979).




                                                                            7
What are your Fiduciary Duties?




The Procedural Prudence Rule:



If the fiduciary goes through a deliberate set of steps taken in line with the
fundamental duties, a bad result (i.e., loss in plan investments) will not
expose the fiduciary to a successful liability claim.




                                                                            8
What are your Fiduciary Duties?



                                  A Prudent Process




As explained in the leading case:

        ―[ERISA‘s] test of prudence . . . Is one of conduct, and not a test of the
        result of performance of the investment. The focus of the inquiry is
        how the fiduciary acted in his selection of the investment, and not
        whether his investments succeeded or failed.‖

Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983).




                                                                                 9
How to Protect Your Plan and Yourself




                      Procedure, Procedure, Procedure




                                                        10
Plan Design Safe Harbor



                          Section 404(c) Protection




ERISA Section 404(c) provides a layer of protection for the fiduciary. In
order to make this safeguard work, the fiduciary must:
• Give participants the freedom to direct their retirement fund in a broad
range of investments;
• Allow participants the opportunity to change their investment
allocations as frequently as appropriate; and
• Provide sufficient information on investments to participants.




                                                                         11
Plan Design Safe Harbor



                          404(c) Protection




The DOL’s Enron brief points out that:

       “The only circumstances in which ERISA relieves the fiduciary
       responsibility for a participant-directed investment is when the plan
       qualifies as a 404(c) plan.‖




                                                                               12
Plan Design Safe Harbor



                          ERISA 404(c) Requirements


To comply
    The reality
       - The participant has an opportunity to obtain written confirmation of his instructions.
       - The person to whom the instructions are given is an identified plan fiduciary who is obligated to comply with the instructions.
       - The participant is provided by an identified plan fiduciary with the following:
       (1) An explanation that the plan is intended to be a 404(c) plan;
       (2) An explanation that the fiduciaries of the plan may be relieved of liability for losses;
       (3) A description of the investment alternatives available under the plan;
       (4) A general description of the investment objectives and risk and return characteristics of each designated alternative;
       (5) Identification of any designated investment managers;
       (6) An explanation about giving investment instructions;
       (7) A description of any transaction fees and expenses which affect the participant‘s account balance;
       (8) The name, address and phone number of the plan fiduciary responsible for providing information;
       (9) Specified information regarding employer securities;
       (10) A copy of the most recent prospectus provided to the plan for investment alternatives subject to the Securities Act of 1933;
       (11) Any materials provided to the plan relating to the exercise of voting, tender or similar rights.
•      The participant is able to obtain upon request:
       (1) A description of the annual operating expenses of each designated investment alternative;
       (2) Copies of any prospectuses, financial statements and reports provided to the plan;
       (3) A list of the assets comprising the portfolio of each designated investment alternative;
       (4) Information concerning the value of shares or units in designated investment alternatives;
       (5) Information concerning the value of shares or units in designated investment alternatives held in the account of the participant.
•      Plan permits participants to give investment instructions with a frequency which is appropriate in light of market volatility.
•      The core investment alternatives, constituting a broad range, permit instructions at least once within any three-month period.




                                                                                                                                               13
Plan Design Safe Harbor


                          Qualified Default Investment
                               Alternatives




Establishing a QDIA under the Plan will limit fiduciary exposures for the
results of default investment
           - Four types of alternatives to choose from:
                    - Lifestyle (age/risk)
                    - Balanced
                    - Use Investment Management Services
                    - Stable (first 120 days)

                    - Advance and Annual Notice to Employees

See DOL Field Bulletin 2008-3 (FAQs)


                                                                        14
Participant Communications


                      Investment Education




• Investment education is not investment advice

• Follow DOL Interpretive Bulletin 96-1 (provides safe harbor)
  - Plan Information
  - General Financial and Investment Information
  - Asset Allocation Models
  - Interactive Investment Materials




                                                                 15
The Responsibility of Proper Fee Evaluation




Regarding Plan Fees – Fiduciaries Have:

―. . . a specific obligation to . . . Ensure that fees [and] expenses are
reasonable in light of the level and quality of services provided. . .‖

              A Look At 401(k) Plan Fees
              U.S. Department of Labor Publication, p. 3




                                                                            16
DOL‘s New Fee Disclosure Initiatives




• Part I—Fiduciary Disclosures to Participants

• Part II—Service Provider Disclosures to Fiduciaries

• Part III—Plan Disclosures to Government




                                                        17
DOL Disclosure Initiatives


                             PART I–Fiduciary Disclosures to
                                  Participants




• Applies to all participant-directed plans
• Required upon participation and annually thereafter
• Disclosure Types
     – Plan-Related Information
     – Investment Related Information

Proposed Regulations for 404(a) and 404(c)




                                                               18
DOL Disclosure Initiatives


                             PART II—Service Provider Disclosures to
Fiduciaries




• Service Agreement must be in writing
• All direct and indirect fees must be disclosed
• Requires service provider to state if it is acting in a fiduciary capacity

Proposed Regulations for Section 408(b)(2)




                                                                           19
DOL Disclosure Initiatives


                             PART III—Plan Disclosures to Government




• New Schedule C to 5500
• Requires disclosure of ―indirect‖ compensation
• Effective Now-2009 Plan Year

DOL issued FAQ (40 in number) to assist employers




                                                                       20
How Do I Determine That My Fees Are Reasonable?




• Understand the services you are buying
• Benchmark—Understand what others are paying for services
• Industry Publications – 401(k) Averages Book –
  www.401ksource.com
• Expert Assistance




                                                             21
DOL Resource Material



DOL website – www.dol.gov/ebsa
  For Employers:
    - Understanding Retirement Plan Fees and Expenses
    - Meeting your Fiduciary Responsibilities
    - Selecting an Auditor for your Employee Benefit Plan
    - Reporting and Disclosure Guides for Employee Benefit Plans
  For Employees:
    - A look at 401(k) Plan Fees
    - What You Should Know About Your Retirement Plan
    - Savings Fitness . . . A Guide to Your Money and Your
      Financial Future
    - Taking the Mystery Out of Retirement Planning
    - Top 10 Ways to Prepare for Retirement
    - Women and Retirement Savings

                                                                   22
    -Retirement Plan Fee Methodologies-
Plan Sponsor & Financial Advisory perspectives




                              Presented by:

                              Thomas Kelly
                              Vice-President of Sales
                              770-788-3839
           A Fee History: Where have we been?

In the 70’s/ 80’s at the outset of 401k/DC plan growth, most plan sponsors
  did the following:

    Hired a TPA or Bundled Provider (when bundling became prominent)

       * Fees were generally derived from a combination of both billed (explicit) and
       investment management (implicit) for the various services provided

               Recordkeeping Fees (Trust, custodial, administration)
               Investment Fees (Separate accounts, trust products, mutual funds)
       +___________________________________________________________________

       =        Total Plan Expenses


       * Fee disclosure/transparency in many of these examples was ‘known’ due to the
       fact that many sponsors chose to have their recordkeeping expenses ‘billed’
       (explicit) and were thereby ‘separated’ from investment management fees…

       * Most of the retirement plan market was controlled by banks, and insurance
       companies. Then came the mutual fund companies who figured out…
2
         A Fee History: Where have we been?
*We can make a heckuva lot of $$$$ if we simply    ‘couple or combine’ the
 recordkeeping expenses of the fund (transfer agency fee), with the investment
      g
 management fees.

* That way, sponsors won’t have to pay for the billed expenses of their retirement
  plans:
       We ll
    • “We’ll just package them a different way and build it into the expense ratios
    of the funds. Sponsors will love this because they won’t have to write a check
    and participants won’t mind because the market keeps going up and up…”

* We can then make it even more interesting if then decide we can institute or add
  12b-1 fees and pay outside investment advisors who can help us distribute
  these funds.

* We’ll then either build our recordkeeping systems to accommodate our internal
  fund families, or we’ll simply sell them to other record keepers and ‘port’ them
  onto their recordkeeping systems…


And the retirement savings marketplace was changed
3
  forever…(from a fee perspective…)
           So, the more things change, the more they stay
           the same…

What does today look like, and how are sponsors adapting their plans
 from a fee perspective?

           * Many of today’s sponsors are still embracing the fee methodologies
    that came as a result of the ‘bundling’ of fees available through fund revenue
           g;           g     y,                    ,
    sharing; Transfer agency, fund revenue offsets, and 12b-1 remuneration.

          * However, we are experiencing some sponsors who are
    structuring alternative fee arrangements, such as:

                  - Per head only pricing (this covers the required revenue % of
    the record keeper or servicing entity).

                  - Such pricing can be either billed or deducted from participants
    accounts. This essentially eliminates the practice of revenue sharing. In this
    example, we are reverting back to the manner in which plans were priced from
    the t
    th get-go.

4
           So, the more things change, the more they stay
           the same…

                     - In this example (prior page), all revenue that is collected
     from the funds themselves is then accumulated within a separate
     account named, an ERISA budget; this fee revenue is then re-distributed
     to the plan at year-end or on an as accumulated basis (typically
     quarterly)

    * We are also experiencing ‘hybrid’ solutions wherein the client can
      receive the benefits of both billed/per head pricing. A stated per head
      fee is provided, as long as the per head expense = the required revenue
      to operate the plan.

           •For example: $25,000,000 plan with 1000 participants:

                    •Required revenue to operate plan: 0.25% or $62,500

                    •Per head expense would then = $62.50 per participant

                    •So instead of requiring the fund menu to collect 0.25%,
5                   you simply deduct the expense from the account itself
           So, the more things change, the more they stay
           the same…
What else are we experiencing from a fee delivery standpoint?

  No billed fees, or revenue collected f
• N bill d f                                 the funds themselves. Pl
                                 ll t d from th f d th       l     Plans
 that are typically larger are simply ‘wrapping’ the expense of the plan
 and are either deducting those expenses from participant accounts, or
                thereof
 combinations thereof…

For Example: $75mm plan; 2000 participants

                 - Required revenue to manage plan: 0.20%

                  - 10bps of revenue captured from revenue sharing offsets
    the 0.20% expense…which can either be accumulated in an ERISA budge
    or can directly offset the total expense resulting in a 0.10% plan fee.
                  - This fee is then applied to the total plan balance resulting
                                        f $75,000,         f
    in an approximate plan expense of $ 000 which of course can be billed
    or deducted, or any combination thereof…
6
                               An example of what you should come to expect from your
                               plan providers…

                                                                                                                                                                                                            Performance as of 06/30/09

                                                                                                                                   Net                     Estimated Revenue Estimated Revenue
                                                                                                                                               Expense                                             3 mth.      1 yr.   3 yr.    5 yr.    10 yr.
     Current Fund(s)                Assets         Investment Category                  Proposed Fund                 Ticker     Expense                   Available to Offset Available to Offset
                                                                                                                                                 ($)                                                 (%)        (%)     (%)      (%)      (%)
                                                                                                                                  Ratio                         Expenses         Expenses ($)
Money Market                   $    4,663,303    Stable                       Stable Pooled                             N/A       0.60%       $ 27,980            0.55%           $        25,648    0.57      3.12     3.69     3.63     4.24
Intermediate Term Bond         $    2,367,026    Interm. Term Bond            PIMCO Total Return Admin                PTRAX       0.71%       $ 16,806            0.25%           $         5,918    4.67       8.99    8.14     6.10     6.74
Balanced                       $    1,591,637    Moderate Alloc. (Balanced)   Oakmark Equity & Income I               OAKBX       0.81%       $ 12,892            0.40%           $         6,367   10.37     -15.10    1.35     4.02     8.03
Large Value                    $    2,463,277    Large Cap Value              BlackRock Equity Dividend A             MDDVX       1.03%       $ 25,372            0.50%           $        12,316   13.37     -27.24    -5.40    2.90     3.01
Large Blend                    $    3,926,110    Large Cap Blend              American Funds Fundamental Invs R4      RFNEX       0.67%       $ 26,305            0.35%           $        13,741   17.09     -28.96    -6.48    1.93     2.16
Additional Fund Option         $            -    Index                        Fidelity Spartan 500 Index Advantage    FSMAX       0.07%       $      -            0.00%           $           -     15.96     -26.19    -8.24   -2.27    -2.30
Large Growth                   $    4,198,502    Large Cap Growth             American Funds Grth Fund of Amer R4     RGAEX       0.67%       $ 28,130            0.35%           $        14,695   16.81     -26.74    -6.47    0.55     2.53
Mid Cap Value                  $    1,526,399    Mid Cap Value                Transamerica Partners Mid Value         DVMVX       1.25%       $ 19,080            0.80%           $        12,211   17.66     -26.04    -9.37   -0.39      NA
Additional Fund Option         $            -    Mid Cap Blend                AIM Mid Cap Core Equity I               GTAVX       0.88%       $      -            0.35%           $           -     17.03     -16.75    -1.55    2.03     7.04
Additional F d O ti
Additi    l Fund Option        $             -   Mid C G
                                                      Cap Growth
                                                               th             Bl kR k U S O          t iti Instl
                                                                              BlackRock U.S. Opportunities I tl        BMCIX       1 03%
                                                                                                                                   1.03%      $      -            0 25%
                                                                                                                                                                  0.25%           $           -     19.16
                                                                                                                                                                                                    19 16     -25.63
                                                                                                                                                                                                               25 63     2 60
                                                                                                                                                                                                                        -2.60    5 72
                                                                                                                                                                                                                                 5.72     7.19
                                                                                                                                                                                                                                          7 19
Additional Fund Option         $            -    Small Cap Value              Target Small Capitalization Value       TASVX       0.80%       $      -            0.05%           $           -     18.25     -22.71    -6.98    1.83     8.29
Additional Fund Option         $            -    Small Cap Blend              JPMorgan Small Cap Equity Sel            VSEIX       1.01%      $      -            0.25%           $           -     17.77     -13.71    -2.17    5.56     7.32
Small Cap Growth               $       280,360   Small Cap Growth             Sentinel Small Company A                SAGWX       1.22%       $    3,420          0.45%           $         1,262   15.01     -22.24    -5.50    0.47     7.46
International Core             $    7,715,420    Foreign Large Blend          Thornburg International Value R4        THVRX       1.25%       $ 96,443            0.60%           $        46,293   22.80     -26.62    -2.31    6.58     8.02
Additional Fund Option         $            -    Diversified Emerging Mkts.   Oppenheimer Developing Markets Y        ODVYX       0.95%       $      -            0.10%           $           -     38.40     -19.04    6.54    17.96    16.10
Additional Fund Option         $            -    Specialty-Real Estate        AIM Real Estate Inst                     IARIX      0.83%       $      -            0.35%           $           -     25.68     -40.16   -16.20   -0.23     7.42
Additional Investment Option   $            -    End Date Funds               Barclays Global Investors LP 2010 I     STLBX       0.85%       $      -            0.40%           $           -     10.00     -10.22    -0.69    2.27     2.36
Additional Investment Option   $            -    End Date Funds               Barclays Global Investors LP 2020 I     STLCX       0.85%       $      -            0.40%           $           -     13.89     -17.14    -3.84    0.95     0.86
Additional Investment Option   $            -    End Date Funds               Barclays Global Investors LP 2030 I     STLDX        0 85%
                                                                                                                                   0.85%      $      -            0 40%
                                                                                                                                                                  0.40%           $           -     16 61
                                                                                                                                                                                                    16.61      21.97
                                                                                                                                                                                                              -21 97    -6 15
                                                                                                                                                                                                                         6.15    0.02
                                                                                                                                                                                                                                -0 02     0.11
                                                                                                                                                                                                                                         -0 11
Additional Investment Option   $            -    End Date Funds               Barclays Global Investors LP 2040 I     STLEX       0.85%       $      -            0.40%           $           -     19.00     -25.83    -8.09   -0.95    -1.27
Additional Investment Option   $            -    End Date Funds               Barclays Global Investors LP 2050 I     STLFX       0.85%       $      -            0.40%           $           -     21.06     -28.38     NA       NA       NA
Additional Investment Option   $            -    End Date Funds               Barclays Global Investors LP Retire I   STLAX       0.85%       $      -            0.40%           $           -      9.51      -8.69    -0.02    2.26     3.23
Multisector Bond               $       920,834   Multisector Bond             Columbia Strategic Income A              COSIX      0.96%       $    8,840          0.50%           $         4,604    6.92       0.42    4.26     4.92     5.44
International Bond             $       318,965   World Bond                   Templeton Global Bond A                  TPINX      0.92%       $    2,934          0.40%           $         1,276    7.91      13.25   10.87    10.27     9.67
Additional Fund Option         $            -    Foreign Small/Mid Cap        First Eagle Overseas A                  SGOVX       1.15%       $      -            0.40%           $           -     16.58     -14.26    -0.37    8.11    12.22
Total Liquid Assets            $   29,971,832                                                                                 Total Expense   $ 268,202       Total Revenue       $       144,330
Loans                          $            -                                                                         Avg. Weighted Expense     0.89%         Avg. Revenue            0.48%
Total Liquid Assets
        q                      $     ,    ,
                                   29,971,832

Illiquid Assets                                                                                                       Revenue Required to Administer Plan with Third Party Comp       0.48%
Company Stock                  $ 4,969,042                                                                                             Estimated Revenue Produced by Line-up          0.48%
Life Insurance                 $        -                                                                                                  Plan Service Credit/Plan Service Fee       0.00%
Self-Directed Accounts         $        -
Other                          $        -
Total Illiquid Assets          $ 4,969,042

Total Plan Assets                  ,   ,
                               $ 34,940,874




   7
            Pricing & Assumptions (more disclosure is
            better…)

       $34,940,874 in transferable assets
       $6,100,000 gross annual cash flow
       808 total participant accounts
    Service Summary:
    • Transition services
    • Plan administration
    • Open architecture investment platform
    • Initial and ongoing employee education: 20 days of meetings in year one, 20 days of meetings ongoing
    • Trustee services: Including Company stock administration
                                  content,
    • All education materials and content including campaign customization
    Fee Summary:
    • Net required revenue to administer the plan               0.48%
    Optional Services for ABC and Plan Participants:
    • Loan initiation fee                                       $75
    • Charles Schwab Personal Choice Retirement Account         $50
    • Managed Account Advice Service through Ibbotson           0.35% per participant
    • QDRO Administration and Qualification                     Included



8
         So, what does this all mean?


* Revenue created as a result of managing retirement plans doesn’t belong to the
  plan providers, or the advisors who advise them….they belong to the
  participants! Providers/Advisors are simply stewards acting in a fiduciary
  capacity.

  You h ld ’t      tf t                     h ld d     d it
• Y shouldn’t expect fee transparency, you should demand it…

• All fees, revenue streams, and sources of fund revenue can generally be
     g            y,
  negotiated fairly, now more than ever…

• There are many ‘new/old’ fee methodologies that are being investigated and
  utilized with success, that steer away from current fee recapture practices,
                                                   expenses
  while simultaneously bringing down participant expenses….

• The more things change, the more they stay the same…Good Practices live on
  ad infinitum.


9
           Advisory Fee Practice Overview

Fee Benchmarker by Ann Schleck & Company – Database Composition
               TM



120 Practices, 727 Retirement Specialist, 5000+ DC plans



     Business Models Represented                             DC Assets Under Advisement



                                                          0 to 100M                 27%
       31%
       Affiliated       42%
                        RIA’s                             101M to 500M              36%
       FA’s


                 y
          Fee Only                                        501M to 1B                15%
          27%
                                                          Over 1B                   22%




10
               Advisor Fee Methods

Advisor Fee Methods by Plan Size

                                                                Trends:
                  Asset-Based    Flat-Fee   Flat Fee + Asset-
                      Fee                         Based           Most advisors use a standard fee schedule
     Under $10M                                                   Custom pricing for complex plans
                     82%           13%             5%
                                                                  Asset based for current clients
       $10M                                                       Flat fee for new clients
                     75%           19%             6%
                                                                  Who charges the most?
       $25M                                                     Plans under 5M – Fee Based Consultants
                     68%           23%             9%
                                                                Plans 25-50M – FA’s
       $50M
                     66%           23%            10%
                                                                                  RIAs
                                                                Plans over 200M – RIA’s
       $100M
                     46%           37%            17%

       $500M
                     17%           50%            33%



11         • Fee BenchmarkerTM by Ann Schleck & Company – Database Composition
          Scope of Services

Services Commonly Included In the Annual Retainer
       Investment policy development
       Investment fiduciary to the plan
       Fund menu design
       Investment monitoring & committee meetings
       Fund replacements & fund manager searches
       Plan design consulting
       Provider f d     i      i
       P id fee and service reviews
       Provider management and oversight
       Education program strategy


 Services Not Commonly Included In the Annual Retainer
     • Acting as fiduciary to participants

     • Asset-allocation modeling

12   • Compliance and Process reviews                    18
                  Ongoing Investment Reviews

Frequency of Investment Reviews by Plan Size
          Plan Size                     y
                                 Annually                   y
                                                Semi-Annually                y
                                                                     Quarterly

          $5M                      18%               26%               55%

          $25M                     10%               10%               80%

          $50M                      8%               8%                84%

          $200M                     0%               0%                100%

          $500M                     0%               0%                100%

           Vast majority conduct investment reviews Quarterly

     Investment Fiduciary
     • 75% willing to be an investment fiduciary to the plan

     • Of this 75%, 60% include plan level fiduciary support as part of retainer

     • When fiduciary support is charged for separately, common fees are:
           - 5 bps
           - $3,500/year to $15,000/year
13     Fee BenchmarkerTM by Ann Schleck & Company – Database Composition
                                                                                   19
                     Use of Fee Caps


Percent of Advisors that Cap Fees
 FEE CAPS BY PLAN SIZE

                            Percent that                              Factors Driving Advisor’s Fees
                                             Low          High
                                Cap                                     Plan complexity
                                                                        Sophistication of the Sponsor
     Overall Database           31%          $3M          $250M
                                                                        Plan committee structure
     FA s
     FA’s                         %
                                26%         $
                                            $100M         $ 50
                                                          $250M         Plan Size
     RIA’s                      55%          $3M          $100M         Multiple sites/locations

     Fee-Based                                                          Frequency of investment reviews
                                19%          $20M         $250M
     Consultants                                                        Number of meeting days
                                                                                        g y
                                                                        Seniority of advisor team




14                 • Fee BenchmarkerTM by Ann Schleck & Company – Database Composition                    17
         A REAL, LIVE EXAMPLE: $25 Million DC Plan




     FEE METHOD




15     • Fee BenchmarkerTM by Ann Schleck & Company – Database Composition
         What to remember in all of this?

* It is important to understand the relationship between the fees being charged
   y your advisor, and for what services…everyone has different needs and
 by y             ,                            y
 objectives

* It is important to understand the financial relationship between your advisor and
                                                                returns   not…
 the manner in which those fees affect participant investment returns, or not

* Consider working with advisors who can sign on as Fiduciaries to your plan…

* Consider those competent advisors who can provide fiduciary oversight and
 or training to you and your HR/Financial staff

  Remember,                                                          plan
• Remember the $$$ in your plan and fees being charged belong to the plan, and
 thus the participants who maintain ownership in those assets…they should be
 treated with the utmost care, and prudent practicing.




16
Understanding & Controlling Growth of Plan Fees




                                               g             g
                                   Understanding & Controlling Growth of Plan Fees




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees



          Why Worry?

          Plan Fid i i are required t k
          Pl   Fiduciaries           i d to know and understand th service costs associated
                                                     d    d t d the        i      t       i t d
          with operation of their plan and to affirm that these costs are “fair and reasonable”
          (ERISA 401(a)(1)(B))and, as such, have three basic duties regarding the
          determination of fees:

                        Control and account for all investment-related fees and expenses;

                        Identify every party that has been compensated from portfolio assets; and

                        Demonstrate that a determination was made that the fees and expenses paid
                        to each party were appropriate and reasonable, given the level of services
                        rendered.
                        rendered

          The responsible Plan fiduciaries therefore must obtain sufficient information regarding any fees or
          other compensation that [the provider] receives with respect to the Plan's investments to make an
                                                                                  “reasonable”.
          informed decision whether [the provider's] compensation for services is “reasonable”




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees



        Plan fees and expenses generally fall into four categories:

                                             y       y p
        Plan Administration Fees. The day-to-day operation of a p                     p                                                   p
                                                                      plan involves expenses for basic administrative services -- such as plan
        recordkeeping, accounting, legal and trustee services -- that are necessary for administering the plan as a whole. In addition, a
        profit-sharing or 401(k) plan also may offer a host of additional services, such as telephone voice response systems, access to a
        customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan
        information, daily valuation, and on-line transactions.


        Investment Management Fees. By far the largest component of plan fees and expenses is associated with managing plan
        investments. Fees for investment management and other related services generally are assessed as a percentage of assets
        invested. Employers should pay attention to these fees. They are paid in the form of an indirect charge against the participant’s
        account or the plan because they are deducted directly from investment returns. Net total return is the return after these fees have
              deducted          reason,       fees,                                                       investments,
        been deducted. For this reason these fees which are not specifically identified on statements of investments may not be
        immediately apparent to employers. (More information on investment-related fees)


        Advisory Fees/12(b)1 fees. Typically in small and medium size plans these fees are buried in the investment management fees
        and a e used to co pe sa e the ad so to the p a
        a d are       o compensate e advisor o e plan.


        Individual Service Fees. In addition to overall administrative expenses, there may be individual service fees associated with
        optional features offered under an individual account plan. Individual service fees may be charged separately to the accounts of
        those who choose to take advantage of a particular plan feature. For example, fees may be charged to a participant for taking a
        loan from the plan or for executing participant investment directions.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




                                                               Plan Cost Creep




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




The Fiduciary Conundrum

The way service providers have historically charged for their services are often
at odds with the Fiduciary’s duties to monitor and control expense.



                                                               Plan Cost Creep




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




   Example of Fee Cost Creep:

                   Date                                                3/1/2009                             6/1/2009                        9/1/2009
                   S&P 500                                                696.33                              944.74                         1020.62
                   Plan Assets                                  $ 100,000,000.00  $           135,674,177.47  $       146,571,309.58 
                   Participant Contributions                                                    0 $                      50,000.00  $                  50,000.00 
                   Total Plan Assets                            $ 100,000,000.00  $           135,724,177.47  $       146,621,309.58 
                   Fees (45 bps)                                $          112,500.00  $                   152,689.70  $                164,948.97 
                   Fee Growth                                   $          112,500.00  $                   112,500.00  $                112,500.00 
                   Creep                                        $                           ‐     $                      40,189.70  $                  52,448.97 
                     Assumes plan assets track the S&P 500




                                                         47% Increase in Plan Expense
                           The only thing that happened was the market went up and participants
                                               added more money to the plan.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




                                                   Record Keeping and Admin Costs




                         Key Take Away: Administration and Recordkeeping Costs have little correlation to plan asset values.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




   Tips for Controlling Plan Expenses:

      #1 Get an advisor – and get him/her on the same side of the
         table with you.

             The DOL recognizes that plan fiduciaries are not expert in all phases of employee benefit
             plan investments and administration, nor can they have knowledge in the entire range of
             activities integral to the operation of a plan. (ERISA §402(c) (2) and (3)). Therefore, a
             fiduciary has an affirmative duty to seek the advice and counsel of independent experts
             when his/her own ability is insufficient under the circumstances. Katsaros v. Cody, 744 E2d
             270, 279 (2d Cir.), cert. denied sub nom. Cody v. Donovan, 469 U.S. 1072 (1984).
             Fiduciaries are responsible for determining whether the consultants they retain have
             qualifications in the subject area of the transaction.


                      If your advisor is not part of the solution .. he/she may be part of the problem.


             Fix the cost of your advisory services in dollars by written contract and review very 3 years.

             If possible have the advisor sign on as a fiduciary to the plan.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




   Tips for Controlling Plan Expenses:

      #2 Decouple Plan investment Performance from Record Keeping and Admin


             Record Keeping and Admin should be fixed expenses and should not be tied to
             performance of plan investment assets. Explore converting from fixed BASIS POINT
             charges for plan services to fixed DOLLAR when and where possible.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




   Tips for Controlling Plan Expenses:

      #3 Benchmark your plan periodically


             The DOL suggests that plan trustees periodically perform a fee benchmarking or request
             proposals from competing service providers in an effort to determine that the fees being
             paid by the plan and its participants are fair and reasonable.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Understanding & Controlling Growth of Plan Fees




   Tips for Controlling Plan Expenses:

      #4 Document Document Document


             Compliance with ERISA is as much about documentation as anything. Maintain a written
             record of the information you reviewed and document when you reviewed it.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency
Disclosure Statement




                                                                  IMPORTANT INFORMATION PLEASE READ

                                         The information contained herein is not intended to be used by any other party other than
                                         the individual/entity referenced on the front page. It is provided for informational purposes
                                         only and was obtained from sources believed to be reliable, but is not guaranteed by Morgan
                                         Keegan Morgan Keegan shall not be liable for any inaccuracies errors or omissions In no
                                         Keegan.                                               inaccuracies,          omissions.
                                         way should this be considered a complete representation of all material facts. It is not
                                         intended to provide legal or tax advice. Investors should consult with their legal and or tax
                                         consultant prior to embarking on any specific investment strategy. Opinions which may be
                                         expressed herein are our current opinions at the time of publication and are subject to
                                         change without notice.

                                         In no way should this information be construed as a solicitation to buy or sell any specific
                                         security or to employ any specific strategy. From time to time Morgan Keegan may have
                                         short positions in, buy or sell (on a principal basis or otherwise), and act as market makers
                                         in, the securities, or serve as a director of any of the companies herein referenced. In
                                         addition, we may have served as managers or co-managers of a public offering of securities
                                         by any such company within the past three years. Additional information on any security
                                         mentioned is available on request and by prospectus. Investors should read an understand
                                         the prospectus prior to making an investment in any security.




Morgan Keegan & Company, Inc. | Member FINRA, SIPC
Not FDIC Insured | May Lose Value | No Bank Guarantee | Not a Deposit | Not Insured by Any Government Agency

				
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