Qualified Retirement Plans
Understanding Your Fiduciary Duty
“When the refs change the rules of the game, the
players will be forced to change the way they play
the game”
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Outline
1.
2.
3.
4.
5.
6.
7.
Qualified Plan Landscape
Who is a Fiduciary?
What Liability Do I Have?
ERISA Compliance
How Do I Limit Liability?
Current Case Law
Q&A
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Qualified Plan Landscape
• ERISA- Federal law that governs retirement plans
• Recent Regulatory Changes (Fee Transparency)
• July 16th, 2010 – Interim Final Regulations expanding on
408(b)(2) & 404(a)(5)
• July 1st, 2012 – Effective Date of Changes
• Why the Change?
• Social Security
• Scarcity of Pension Plans
• There is no 3 legged stool anymore
• Implications on Plan Sponsors/Fiduciaries
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Who is a Fiduciary?
• You are a Fiduciary under ERISA if you:
• Exercise discretion and control over plan management or disposition of
assets
• Render investment advice
• Have authority over plan administration
• Are a named Fiduciary
• Are a fiduciary by functions of your responsibilities (not just by name)
• Fiduciary status is based on functions performed for the plan,
not a person’s title
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What Liability Do I Have?
• Fiduciaries can be held personally liable to make good any
losses or to restore any profits made through their use of plan
assets resulting from a breach in fiduciary duties
• Penalties of up to 20% for any amount recovered as a result of
an ERISA violation can be assessed
• Penalties can be assessed up to six years after fiduciary
violations or three years after the party bringing suit had
knowledge of the breach
• Willful violations carry personal criminal penalties of up to
$5000 ($100,000 for corporations)and up to one year in prison
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Statistics
•
•
•
•
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141 million Americans covered
Approximately 684,000 private retirement plans
2.4 million health plans
$7.8 trillion in assets
2012:
 3,566 Civil Investigations;
 318 Criminal Investigations (117 indictments);
 1,884 VFCP Applications Processed;
 22 CPA Firm Inspections
ERISA Compliance
The Employee Retirement Income Security Act (ERISA)
requires plan fiduciaries, when selecting and monitoring
service providers and plan investments, to act prudently and
solely in the interest of the plan’s participants and
beneficiaries. Responsible plan fiduciaries also must ensure
that arrangements with their service providers are
“reasonable” and that only “reasonable” compensation is
paid for services. Fundamental to the ability of fiduciaries
to discharge these obligations is obtaining information
sufficient to enable them to make informed decisions about
an employee benefit plan’s services, the costs of such
services, and the service providers.
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How Do I Limit Liability?
• ERISA requires prudent decision making not successful outcomes
• Fiduciaries should implement a process by which it monitors the selection
of investments, the selection of service providers(investment advisors,
TPA’s, and providers of participant education) and the decision to continue
offering investments or using service providers (phase known as
monitoring)
• Key elements of a prudent process:
– Duty to investigate
– Duty to maintain records
– Duty to obtain expert assistance where necessary
• The above steps lead to the required outcome: An informed and reasoned
decision
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How Fees Are Paid
12b-1: Distribution expenses paid by mutual
funds from fund assets. Includes commissions
to brokers, marketing expenses and other
administrative services.
Investment Management: Fees for
managing investment assets. Charged
as a percentage of the assets invested
and deducted from the investment
return.
12b-1 Fees
Shareholder Servicing: Revenue
shared by the mutual fund company
with the service provider.
Shareholder
Servicing Fees
Investment
Management Fee
Sub-TA
(Agency Transfer
Fees)
Asset / Wrap Fee:
Additional fees layered on top of
total investment fees.
Sub-TA: Brokerage firms and mutual
funds often contract recordkeeping and
other services related to participant
shares to a third party called a subtransfer agent.
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Components of Plan Costs
Administrative Fees
Investment Fees
Plan Consulting Fees
Services to operate
the plan:
Recordkeeping,
Trustee,
Compliance,
Communications
All costs associated
with managing the
investments
Advisory fees paid to a
registered investment
advisor or commission
paid to a broker
Paid for by
plan sponsor
or participant
Always paid
by plan
participant
Total Plan
Cost
Paid for by
plan sponsor
or participant
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Share Classes Defined
• Many mutual funds offer the identical money
manager with several different investment
management expense options varying the revenue
sharing shared with third parties
• Each investment management expense option is a
different share class
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Share Class Matters
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Benchmarking
Vendor 1
Asset Class
Large Blend
Large Blend
Large Growth
Large Growth
Large Value
Mid Blend
Mid Growth
Mid Value
Small Blend
Small Growth
Small Value
Int'l Stock
Fixed Income
Cash
Asset Allocation
Asset Allocation
Asset Allocation
Asset Allocation
Asset Allocation
Asset Allocation
Total Assets
Expense
Ratio
6.24% LC S&P 500 Index (PGI) 0.73%
2.69% LargeCap Blend II (TRP) 1.32%
4.42% AF Growth Fd of Amer
0.93%
1.61% LargeCap Gr I (TRP)
1.30%
3.26% Amer Cent Eq Inc A
1.22%
1.04% MC S&P 400 Idx (PGI)
0.74%
4.04% Janus Adviser MCG
1.16%
0.78% MCV I (Goldman/LA)
1.57%
2.22% SC S&P 600 Idx (PGI)
0.73%
0.66% Lord Abbett Dev Grth
1.13%
1.96% Amer Cent SCV
1.74%
8.21% AF EuroPacific Growth
1.07%
10.19% PIMCO Total Return
1.15%
39.17% Fixed Income Option
0.65%
0.41% LifeTime Strat Inc
1.25%
2.12% LifeTime 2010
1.34%
3.33% LifeTime 2020
1.39%
5.18% LifeTime 2030
1.42%
1.77% LifeTime 2040
1.44%
0.67% LifeTime 2050
1.46%
100.00%
Assets
Fund
Cost ($)
$9,612
$7,494
$8,667
$4,427
$8,398
$1,630
$9,900
$2,589
$3,426
$1,562
$7,209
$18,542
$24,735
$53,724
$1,080
$5,994
$9,767
$15,533
$5,385
$2,067
Vendor 2
Revenue
Sharing
0.58%
0.78%
0.60%
0.80%
0.55%
0.58%
0.50%
0.86%
0.58%
0.40%
0.55%
0.60%
0.70%
0.65%
0.73%
0.76%
0.77%
0.78%
0.79%
0.79%
Revenue
Sharing ($)
$7,637
$4,428
$5,592
$2,724
$3,786
$1,278
$4,267
$1,418
$2,722
$553
$2,279
$10,397
$15,056
$53,724
$631
$3,400
$5,410
$8,532
$2,954
$1,118
Fund
Fid Spar 500 Idx Adv
AF Fundamental Invs
AF Gr Fd of Amer R3
AF Gr Fd of Amer R3
BlackRock Eq Div A
Vanguard MC Index
Munder MC Core Gr
JPMorgan MCV Sel
Vanguard SC Index
Sentinel Sm Co A
Allianz NFJ SCV A
AF EuroPacific Gr R3
PIMCO Total Ret Ad
Stable Pooled
BGI LP Retire I
BGI LP 2010 I
BGI LP 2020 I
BGI LP 2030 I
BGI LP 2040 I
BGI LP 2050 I
Expense
Ratio
0.07%
0.96%
0.93%
0.93%
1.03%
0.21%
1.33%
1.01%
0.22%
1.13%
1.21%
1.11%
0.68%
0.90%
0.85%
0.85%
0.85%
0.85%
0.85%
0.85%
$922
$5,450
$8,667
$3,167
$7,090
$463
$11,351
$1,665
$1,033
$1,562
$5,013
$19,235
$14,626
$74,387
$734
$3,802
$5,972
$9,298
$3,178
$1,203
Cost ($)
Revenue
Sharing
0.00%
0.65%
0.35%
0.35%
0.50%
0.00%
0.60%
0.50%
0.00%
0.35%
0.50%
0.65%
0.25%
0.84%
0.40%
0.40%
0.40%
0.40%
0.40%
0.40%
Revenue
Sharing ($)
$0
$3,690
$3,262
$1,192
$3,442
$0
$5,121
$824
$0
$484
$2,072
$11,264
$5,377
$69,428
$346
$1,789
$2,811
$4,375
$1,496
$566
Weighted Expense Ratio (EE paid)
Asset Charge (EE or ER paid)
Billed Fees (ER paid)
0.96%
0.10%
0.05%
$201,740
$21,101
$10,000
0.65%
$137,906
0.85%
0.02%
0.00%
$178,819
$4,220
$0
0.56%
$117,538
TOTALS
1.10%
$232,841
0.65%
$137,906
0.87%
$183,039
0.56%
$117,538
Information is for illustrative purposes only and cannot be guaranteed now or in the future.
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Participant Education
• Fiduciaries should ensure that plan participants are
educated and well informed
• “We don’t need more information, we need advice”
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Fiduciary Outsourcing
• ERISA permits plan sponsors to delegate fiduciary
functions of the plan to service providers
• ERISA Section 3(21) Co-Fiduciary
• ERISA Section 3(38) Investment Manager
• ERISA Section 3(16) Fiduciary
• Proper delegation requires service providers must
explicitly acknowledge in writing that it is a fiduciary
• Upon delegation, fiduciaries of the plan still have a
responsibility to monitor the providers
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Current Case Law
• Tussey v ABB Inc – Initial Rulings
• ABB fiduciaries failed to calculate recordkeeping fees paid to Fidelity
through revenue sharing arrangements it had with ABB investments
• Also ruled ABB failed to investigate the market price for similar
recordkeeping services and did not benchmark the cost of
recordkeeping fees prior to entering the relationship with fidelity
• Failed to follow the Investment Policy Statement (IPS)- IPS required
rebates associated with investments would be used to offset plan cost.
In this case, they were retained by fidelity
• Ruled that a breach of the IPS occurred in the selection of funds
• Ruled that they were allowing one plan to subsidize another
• Float Income- Interest was earned when unallocated balances were held
in overnight accounts and not credited to the plan
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Questions
Clayton Smith
Retirement Plan Advisor
220 Trace Colony Park Drive, Suite A
Ridgeland, Mississippi 39157
601-414-4455 phone
601-414-4459 fax
www.wealthpartnersnfp.com
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Disclosures

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), member FINRA/SIPC. WealthPartners, LLP is a member of
PartnersFinancial, an affiliate of NFPSI. WealthPartners, LLP and NFPSI are not affiliated.

Any decisions whether to implement these ideas should be made by the client in consultation with professional financial, tax and legal counsel.

Hypothetical investment results are illustrative only and should not be deemed representative of past or future investment experience.

The information contained herein is based on data you may have provided, our interpretation of the existing Internal Revenue Code, and the application of relevant
statures, regulations, court rulings, and familiarity with this material as it currently exists.

This proposal contains proprietary information of WealthPartners and possession of this information is not deemed a waiver of our rights. In addition, this proposal
has been created for your exclusive use, and distribution of this information to a non-affiliated party is strictly prohibited.

This may contain information from fixed and variable life insurance and annuity sales illustrations. Refer to the disclosures in the actual illustrations.

There are issues to consider before replacing life insurance, such as commissions, fees, expenses, surrender charges, premiums and new contestability period.
There may also be unfavorable tax consequences caused by surrendering an existing policy, such as a potential tax on outstanding policy loans. Please discuss your
situation with your financial advisor.
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