Transcript No Slide Title

Plan Sponsor Fiduciary Roles
and Responsibilities:
Best Practices for Overseeing 403(b) Plan Investments
Joseph Trainor
Senior VP for Finance & CFO
University of the Sciences
Mark Wetzel
President
Fiduciary Investment Advisors, LLC
Agenda
1) The 403(b) Landscape
2) Fiduciary Roles & Responsibilities
3) Single vs. Multiple Provider Models
4) Sample Lineups & Fee Analysis
5) Case Studies
6) Conclusion
Where We’ve Been
Historically, 403(b) Plans:
• Have had little employer involvement
• Have had little to no formalized oversight
• Have often been simply a payroll function
• Have been the responsibility of the human resources staff
• Have relied upon their investment & recordkeeping vendor to
drive fund menu decisions, fee & revenue discussions, etc.
The Final 403(b) Regulations
403(b) plan sponsors must now operate their plans much more
like 401(k) plans:
• Written Plan Document Requirement
• Form 5500 Filing Requirement
• Plan Audit Requirement (generally for plans over 100 participants)
• Heightened Fiduciary Scrutiny
Plan Sponsor Goals
403(b) Sponsors and their Fiduciaries are looking to:
• Manage their Fiduciary Risk
• Construct a Best-in-Class 403(b) Benefit to attract, retain and
reward valued faculty and staff
• Improve their Participant Outcomes
Sound simple?
Fiduciary Roles & Responsibilities
“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 1EBC 1878, 1886 (E.D.N.Y. 1979)
Who is a Fiduciary?
Under ERISA, a Fiduciary is a person who:
• Exercises any discretionary authority over the management of a
benefit plan or plan investments,
• Has any discretionary authority or discretionary responsibilities in
the administration of a plan, and/or
• Directly or indirectly renders investment advice for compensation.
Overview of ERISA
Fiduciary Duties
Under ERISA, a Fiduciary is required to discharge duties*:
• Solely in the interest of the participants & beneficiaries;
• For the exclusive purpose of:
• Providing benefits to participants & beneficiaries;
• Defraying reasonable expenses of administering the plan.
• With the care, skill, prudence & diligence that a prudent person
would use.
* “Avoiding the Breach,” Diversified Investment Advisors, 2009
Fiduciary Liability
Potential liability for breaches of fiduciary responsibility:
• Personal liability
• Civil action
• Monetary penalties & excise taxes
• Criminal penalties
• Audit exposure
The Process of Managing
Fiduciary Risk
• Establish an oversight committee & committee charter
• Review bonding & fiduciary insurance
• Implement written Investment Policy Statement
• Hire independent third party
• Review quarterly performance
• Communicate with participants/beneficiaries
• Work with an ERISA attorney
Committee Charter
A strong committee charter establishes the following:
• The purpose(s) of the committee
• Guidelines for appointing and removing committee members
• Frequency of committee meetings
• Duties and powers of the committee
• Voting procedures
Bonding and Fiduciary
Insurance
• Fiduciary liability insurance covers claims for alleged failure to
prudently act within the meaning of the Pension Reform Act of
1974.
• Fidelity bonds are required by law & cover claims involving
dishonesty by administrators or trustees.
• Employee liability insurance covers claims for administrative
errors or omissions.
• D&O Insurance typically does not cover ERISA related matters.
Investment Policy Statement
A strong investment policy statement should:
• Contain detail to define, implement & manage investment strategy;
• Define the duties & responsibilities of all parties;
• Define diversification;
• Define due diligence criteria for selecting investment options;
• Define monitoring criteria for investment options.
Third Party Oversight
A strong advisor should provide the following:
• A comprehensive committee charter & investment policy
statement;
• Clear goals, objectives & methodology;
• Guidance in designing a diversified fund menu;
• A method to objectively evaluate performance.
Third Party Oversight ctd.
A strong advisor should provide the following:
• A basis for evaluating fee structures;
• Improved participant outcomes;
• A comprehensive fiduciary governance process;
• Confidence that you are meeting your obligations as a
fiduciary.
Quarterly Performance Review
A quarterly performance review should cover the following:
• Performance against a benchmark and/or peer group.
• Fees relative to other similar investments.
• Organizational changes.
Communication
Communication with participants & beneficiaries can include:
• Targeted campaigns;
• Communications focused on retirement readiness;
• Formal employee education.
Communication can occur:
• In person;
• Via mail;
• Electronically.
Single vs. Multiple Provider Model
Single vs. Multiple
Provider Model
• Multiple provider model is the most prevalent, but it is
changing.
• Sponsors are reexamining retirement plan providers
through a well-documented RFI or RFP process.
• There are significant benefits to utilizing a single
provider.
Benefits of a Single
Provider Model
• One provider = fewer investment choices to monitor;
• Increased purchasing power;
• Less confusion for the average participant;
• Improved administrative efficiencies.
Obstacles in Moving
Toward a Single Provider
• Liquidity
• Politics
• Communications
• Resistance to Change
Sample Lineups and Fee Analysis
TIAA-CREF Annuity Menu
Money Mkt / SV
TIAA Traditional
CREF Money
Market
Bond
CREF Bond
Market
Balanced
Domestic Equity
CREF
Social
Choice
Large
Value
Large
Blend
CREF
Equity
Index,
CREF
Stock
Large
Growth
CREF
Growth
Mid Value
Mid
Blend
Mid
Growth
Small
Value
Small
Blend
Small
Growth
CREF Inflation
Linked Bond
Int’l / Global / Other
CREF Global
Equities
TIAA Real
Estate
Fidelity Unconstrained
Investment Menu
Money Mkt / SV
Bond
Fidelity US Gov’t Res Fidelity High Income
Fidelity Asset Mgr
20%
Fidelity Cash Reserve Fidelity US Bond Idx
Fidelity Ret Gov’t
Money Mkt
Fidelity Rtmt Money
Mkt
Fidelity Cap Income
Fidelity Freedom
Funds
Fidelity Ginnia Mae
Fidelity Balanced
Fidelity Invt Grade
Bond
Fidelity Puritan
Fidelity Money Mkt
Fidelity Interm. Bond
Fidelity US Treas
Money Mkt
Fidelity Gov’t Income
Fidelity US Gov’t
Money Mkt
Fidelity Strategic
Income
Fidelity Sel Money
Mkt
Fidelity New Mkt
Income
Fidelity Mortgage Sec
Fidelity Short Term
Bond
Fidelity Inflation Prot
Bond
Fidelity Inter Gov’t Inc
Domestic Equity
Balanced
Large Blend
Large Growth
Fidelity Equity Income
Fidelity Large Cap Value
Fidelity Blue Chip Value
Spartan US Equity Idx Inv
Fidelity Growth & Income
Fidelity Fidelity Fund
Spartan Total Mkt Idx Inv
Spartan 500 Index Inv
Fidelity Disciplined Equity
Fidelity Value Discovery
Fidelity Dividend Growth
Fidelity Magellan
Fidelity Contrafund
Fidelity Growth Company
Fidelity Blue Chip Grth
Fidelity OTC Portfolio
Fidelity Independence
Fidelity Trend
Fidelity Fifty
Fidelity Asset Mgr 85%
Fidelity Cap Appreciation
Fidelity Large Cap Growth
Fidelity Large Cap Stock
Fidelity Export Multi
Mid Value
Mid Blend
Mid Growth
Fidelity Value
Fidelity Mid Cap Value
Fidelity Leveraged Co Stk
Fidelity Low Priced Stk
Spartan Ext Mkt Idx Inv
Fidelity Value Strategies
Fidelity Mid Cap Stock
Fidelity Mid Cap Growth
Fidelity Growth Strategies
Small Value
Small Blend
Small Growth
Fidelity Sm Cap Value
Fidelity Sm Cap Discovery
Fidelity Small Cap Stock
Fidelity Sm Cap Independence
Fidelity Asset Mgr
50%
Fidelity Asset Mgr
70%
Fidelity Strat Real
Ret
Intl /Global
Large Value
Fidelity Nordic
Fidelity Int’l Cap
Apprec
Fidelity Overseas
Fidelity Pacific Basin
Fidelity Southeast
Asia
Fidelity Diversified
Int’l
Fidelity Japan
Fidelity Canada
Fidelity Europe
Spartan Int’l Idx Inv
Fidelity Emerging
Mkts
Fidelity Int’l Real
Estate
Fidelity China
Region
Fidelity Int’l
Discovery
Fidelity Japan
Smaller Co
Fidelity Int’l Sm Cap
Fidelity Latin
America
Fidelity Global
Balanced
Other
Fidelity Select:
Leisure
Medical Del
Healthcare
Energy
Med Equip Sys
Technology
Comm Equip
Natural Gas
Cons Staples
Energy Svcs
Defense
Gold
Materials
Financial
Natural
Resources
Pharmaceutical
Environment
Fidelity Real
Estate Invs
Fidelity Telecom
Util
Fidelity
Convertible Sec
Fidelity Real
Estate Income
Sample Optimized
Fund Menu
Cap. Preserv.
Primary
Stable Value
Secondary
Money Market
Fixed Income
Active
Intermediate
Term Bond
Passive
Intermediate
Term Bond
International
Intermediate
Term Bond
Hybrid
Suite of
Target
Retirement
Date Funds
Domestic Equity
Large
Value
Active
Manager
Large
Blend
Passive
Manager
Large
Growth
Active
Manager
Small/Mid
Value
Active
Manager
Small/Mid
Blend
Passive
Manager
Small/Mid
Growth
Active
Manager
Int’l / Global / Other
Active
Manager
(ACWI ex US)
Passive
Manager
(ACWI ex US)
Active
Manager
(Small Cap)
Emerging
Markets
Qualified Default
Investment Alternative
• Lifecycle / Target Date Fund
• Balanced Fund
• Professionally-Managed Account
• Capital Preservation Product (for the first 120 days of participation)
“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 investment succeeded or failed.”
- Donovan v. Cunningham 716F. 2d 1455, 1467 (5th Cir. 1983)
Understanding Vendor
Fees & Revenue
• 12b-1 Fees
• Subtransfer Agency Fees
• Revenue Sharing Arrangements
• Recordkeeping Costs / Vendor “Required Revenue”
• Fiduciaries must benchmark plan fees & revenue structures to
determine reasonableness and competitiveness of the services.
Fee Transparency
A fiduciary’s obligations are:
• To know & understand all charges;
• To ensure they are reasonable;
• To evaluate all revenue sharing agreements, disclosure of
12b-1, sub-transfer agency or other commission-based fees
and all contract charges, surrender charges & other fees that
participants or the plan may incur.
Fee Transparency
Fiduciaries should establish a required revenue benchmark:
• This benchmark acts as the basis for determining if any excess
revenue exists in the plan.
• Excess revenue may be used to enhance participant services,
access lower cost share classes for participants or pay for
other plan-related costs.
Sample Full Fee Disclosure
Worksheet – TIAA-CREF
Fund Nam e
CREF Stock
CREF Global Equities
CREF Grow th
CREF Equity Index
CREF Money Market
CREF Social Choice
TIAA-CREF S&P 500 Index Instl
Vanguard Total Bond Market Idx Inv
TIAA-CREF International Eq Idx Instl
Vanguard Extended Mkt Index
CREF Bond Market
CREF Inflation-Linked Bond
Vanguard Inflation Protected Secs
TIAA-Traditional
Vanguard Target Retirement Income
Vanguard Target Retirement 2020
Vanguard Target Retirement 2025
Vanguard Target Retirement 2010
Vanguard Target Retirement 2015
Vanguard Target Retirement 2030
Vanguard Target Retirement 2035
Vanguard Target Retirement 2040
Vanguard Target Retirement 2045
Vanguard Target Retirement 2050
TIAA Real Estate
Plan Fees / Vendor Fees
Plan Adm inistration:
Participant Maintenance
# of participants =
ERISA Budget
Transaction Based
Loans, QDROs, MRDs, ROEs, ISWs, etc.
Plan Fees / Vendor Fees
Assum ed/Actual Assum ed/Actual Vendor Fee
Recordkeeping
Recordkeeping
Per
Offset (%)
Offset ($)
Participant
0.24%
$190,242
0.24%
$34,660
0.24%
$29,953
0.24%
$18,455
0.24%
$18,525
0.24%
$19,840
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.24%
$18,873
0.24%
$27,347
0.00%
$0
0.15%
$164,849
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.00%
$0
0.24%
$14,645
0.20%
$537,389
$209
9/30/2010 Assets
$79,267,304
$14,441,828
$12,480,263
$7,689,695
$7,718,615
$8,266,756
$1,017,184
$0
$1,750,129
$3,239,255
$7,863,655
$11,394,405
$0
$109,899,379
$0
$340,613
$976,766
$92,337
$370,447
$541,190
$467,137
$1,404,285
$50,953
$19,865
$6,102,269
$275,394,330
Fees (%)
0.44%
0.46%
0.43%
0.39%
0.38%
0.41%
0.09%
0.22%
0.16%
0.30%
0.41%
0.41%
0.25%
0.51%
0.18%
0.18%
0.19%
0.17%
0.17%
0.19%
0.20%
0.20%
0.20%
0.20%
1.06%
0.47%
Fees ($)
$348,776
$66,432
$53,665
$29,990
$29,331
$33,894
$915
$0
$2,800
$9,718
$32,241
$46,717
$0
$560,487
$0
$613
$1,856
$157
$630
$1,028
$934
$2,809
$102
$40
$64,684
$1,287,819
2,576
0.00%
$0
0.00%
$0
$0
0.00%
$0
0.05%
$137,697
$0
0.00%
$0
0.00%
$0
$275,394,330
0.47%
$1,287,819
0.15%
$399,691
$155
Sample Full Fee Disclosure
Snapshot – TIAA-CREF
Plan Fees / Vendor Fees
Plan Administration:
Participant Maintenance # of participants =
ERISA Budget
Transaction Based
Loans, QDROs, MRDs, ROEs, ISWs, etc.
Plan Fees / Vendor Fees
$275,394,330
0.47%
$1,287,819
0.20%
$537,389
2,576
0.00%
$0
0.00%
$0
$0
0.00%
$0
0.05%
$137,697
$0
0.00%
$0
0.00%
$0
$275,394,330
0.47%
$1,287,819
0.15%
$399,691
$209
$155
Fiduciary Duty to
Monitor
Other fiduciary duties:
• Hold committee meetings at regular intervals;
• Maintain detailed meeting minutes;
• Monitor investment options;
• Establish investment, fee & revenue benchmarks;
• Evaluate benchmarks periodically;
• Document all decisions.
Case Studies
Case Study #1
• University of the Sciences
• 403(b) ERISA plans
• Two plan vendors – TIAA-CREF (Annuity Menu) & Vanguard
(Limited Fund Menu)
___________________________________________________
Sponsor Goals:
Manage fiduciary risks and work to improve participant outcomes.
Case Study #1
University of the Sciences Process:
• RFP for independent plan consultant
• Established structure
• Evaluated
• Decided
• Documented
• Implemented
/
Case Study #2
• Prominent University
• 403(b) and 401(a) plans – both ERISA plans
• Two plan vendors – Fidelity (Unconstrained Fund Menu) & TIAACREF (Annuity Menu)
___________________________________________________
Sponsor Goals:
Manage fiduciary risks and work to improve participant outcomes.
Case Study #2
Case Study #2 Process:
• Established structure
• RFP for independent plan consultant
• Revised structure
• Evaluated
• Decided
• Documented
• Implemented
Case Study #2
Where They Were:
• Offered entire lineup of Fidelity Funds – approximately 175
investments.
• Offered the full suite of TIAA-CREF annuity accounts.
____________________________________________________
Where They Are:
• Reduced menu of core TIAA-CREF accounts.
• Offer a core lineup of Fidelity Funds, including Target Date
Retirement Funds.
• Offer a self-directed brokerage window.
Results
• A well-managed fiduciary process.
• A well-designed “best-in-class” fund menu – highly
simplified, yet still offering broad diversification
opportunities.
• Improved participant outcomes.
Well-Publicized
Decisions
• Purdue University
• Consolidated vendors down to one (Fidelity)
• Incorporated a 4-Tier Investment Menu
• Stanford University
• Incorporated a 4-Tier Investment Menu with a decidedly
indexed approach (Vanguard)
• Pepperdine University
• Consolidated from four vendors to one (Diversified
Investment Advisors)
An Ongoing Fiduciary Process
Fiduciary Governance:
Annual Checklist
• Investment Review
• Recordkeeper Svcs Update
• Administrative Fee Review
• Plan Demographic Review
• Investment Expense Analysis • Education & Advice Plan
• Benchmarking & Trends
• Plan Design Benchmarking
• Recordkeeper Negotiations
• Investment Menu Review
• IPS Review
• Asset Class Updates
• Regulatory/Legislative Update • Trends & Best Practices
• Committee Best Practices
• Bonding & Fiduciary Insurance
• QDIA Analysis
In Closing
Overall Considerations:
• Establish a fiduciary committee and appoint members;
• Adopt a written committee charter;
• Review bonding & fiduciary insurance;
• Adopt a comprehensive Investment Policy Statement (IPS);
• Evaluate service providers & document your findings;
• Hold regular committee meetings & maintain meeting minutes.
In Closing
When evaluating service providers:
• View investment management fees;
• Understand your vendor’s revenue structure;
• Monitor investments;
• Benchmark for reasonableness and competitiveness;
• Consider employing an RFI or RFP process.
“There is risk in doing nothing.”
- TIAA-CREF, “Investment Menu Construction,” NACUBO, July 2010
Questions?
Contact Information
• Joseph Trainor, University of the Sciences
• [email protected], 215.596.8862
• Mark Wetzel, Fiduciary Investment Advisors, LLC
• [email protected], 860.697.7410
Joseph Trainor
Joe is Senior Vice President of Finance for University of the Sciences.
USciences is a healthcare and science focused institution founded as the first
college of pharmacy in North America. USciences has a current enrollment
of 2,850 students in undergraduate, professional and graduate programs and
is located in the University City section of Philadelphia.
In 1997 he became the founding Treasurer for the University City District.
The UCD is a special service district formed to focus upon commercial
revitalization and quality of life in the areas surrounding the various
universities and healthcare campuses in West Philadelphia.
He is also a CPA who received his Bachelor of Science degree from The
Pennsylvania State University.
He has served various nonprofit
organizations including EACUBO and The Savoy Company. The latter is the
oldest amateur theater company in the world dedicated solely to the
production of the works of Gilbert and Sullivan.
Mark Wetzel
Mark is President of Fiduciary Investment Advisors, LLC (FIA). Prior to
founding FIA, he was a Senior Vice President and PRIME Consultant at UBS
Financial Services Inc. He chaired their PRIME advisory committee and was
a member of the firm’s pension and 401(k) committee. In 2009 and 2010
401kWire named Mark one of the 300 Most Influential Advisors in Defined
Contribution.
Mark received a Bachelor of Science degree from the University of Vermont
and a Masters of Business Administration from the Tuck school at
Dartmouth, where he graduated as a Tuck Scholar with distinction. He is a
trustee of the Ellsworth Foundation, a chairperson of the trustees for McLean
and a director of the Granby Land Trust. He is a member of the investment
committee for the Ellsworth Foundation, McLean, The Northfield Mount
Hermon School and Hartford Hospital, as well as a paid member of the
pension committee for Novartis Corporation.
About Fiduciary
Investment Advisors, LLC
• Fee only independent registered investment advisory firm
• 100% employee owned
• 32-person staff with considerable experience working together
• Over 130 institutional clients with more than $16 billion in
fiduciary assets
• Over 70 defined contribution clients with $7.9 billion in assets
under advisement
Disclosure
Past performance may not be indicative of future results. Different types of
investments involve varying degrees of risk, and there can be no assurance
that the future performance of any specific investment, investment strategy,
or product made reference to directly or indirectly in this presentation will be
profitable, equal any corresponding indicated historical performance level(s),
or be suitable for your portfolio. Due to various factors, including changing
market conditions, the content may no longer be reflective of current opinions
or positions. A copy of our current written disclosure statement discussing
our advisory services and fees is available for your review upon request.
Moreover, you should not assume that any discussion or information
contained in this presentation serves as the receipt of, or as a substitute for,
personalized investment advice from Fiduciary Investment Advisors, LLC.