Transcript No Slide Title
ERISA Retirement Plan Fiduciary Responsibility Practicing Fiduciary Prudence
Workshop
2006 Benefits New York Conference New York, NY March 13, 2006 11:00 AM – 11:50 AM
About Your Presenters
Greg Limoges
Maynard, MA.
is Vice President, Compensation, Benefits & HRIS at Monster Worldwide, His responsibilities include strategy, design, and implementation of global compensation and benefits programs, executive compensation, and long-term incentives. Prior to joining Monster Worldwide, Greg held similar positions at The MathWorks Corporation in Natick, MA and Waters Corporation, Milford, MA, was a Principal at Clark Consulting (formerly Executive Alliance), and held senior human resources positions at State Street Corporation, Main Street America, Fidelity, and Lockheed.
Greg holds a B.S. in Psychology, Plymouth State University, and an M.B.A. from Rivier College. He is a Certified Compensation Professional, Certified Benefits Professional and a member of
WorldatWork.
Wayne G. Bogosian
is founder and President of The PFE Group, Southborough, MA, a leading retirement plan vendor search, investment advisory and financial education consulting firm. Wayne is a frequent public speaker, having conducted more than 1,000 workshops and seminars on topics ranging from retirement planning and investments to corporate downsizing and mergers and acquisitions. He is co-author of
The Complete Idiot’s Guide to 401(k) Plans
and has been quoted in a variety of publications including
Business Week, CNNMoney, Employee Benefit News, Reader’s Digest, USA Today, Wall Street Journal, Washington Post,
AOL.
and appeared on WCVB, MSNBC, and Wayne has a B.S. from Northeastern University, an M.B.A. from Suffolk University, is an Accredited Investment Fiduciary (AIF), and holds various securities licenses.
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Workshop Objectives
What Are Your Fiduciary Duties?
Is Trouble On The Way?
(i.e., What Should Fiduciaries Be Doing?)
What About Investment Selection & Monitoring?
What Actions Should You Take?
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What Are Your Fiduciary Duties?
ERISA Duties
1 Act solely in interest of participants 2 Act for exclusive purpose of
providing benefits and paying reasonable expenses
3 Conduct duties w/care, skill,
prudence and diligence
4 Diversify plan investments, unless
imprudent
5 Comply with provisions of plan and
applicable law Board of Directors Retirement or Administrative Committee Functional Responsibilities in order to comply w/ERISA (Duties may be delegated) Guiding Influences a) ERISA & IRC b) Plan Document c) Committee Charter d) Investment Policy Plan Funding
Design Cost Analysis Actuarial Assumptions Funding Schedule Expense Reporting
Trustee
Custody Trading Reconciliation Reporting Payments Distributions
Investment Management
Asset Allocation Diversification (Style, Market Cap, Geography Security Selection, Buy & Sell Decisions, etc.)
Administration
Participant Accounting Transaction Processing Confirmations Technology Benefit Calculations
Compliance
ERISA & IRC Discrimination Filings Notices Restatements
“Prudence is About Process … Not Performance!” ERISA Retirement Plan Fiduciary Responsibility | Practicing Fiduciary Prudence | 3 Employee Understanding
Audience Content Media Frequency
Players On The Same Team
WHO IS A PLAN FIDUCIARY?
Social Security 30% to 35% Pension 30% to 35% INVESTMENT ADVISOR RETIREMENT CONSULTANT ERISA COUNSEL PLAN SPONSOR Personal Bonds 40.1% ERISA Retirement Plan Fiduciary Responsibility | Practicing Fiduciary Prudence | 4
Fiduciary Responsibility is About Process
Who are the Plan’s fiduciaries?
Do fiduciaries know their duties (settlor vs. fiduciary; investment vs. administration)?
Do fiduciaries intend to comply with ERISA §404(c)?
What selection criteria was used (documented) to select service providers?
How are fiduciaries monitoring directed-trustees, administrators, investment managers, consultants, etc.? Using what benchmarks?
How are fiduciaries monitoring “parties-in-interest”?
How have fiduciaries communicated important Plan actions to participants?
Are the Plan’s fiduciaries properly bonded and insured?
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How Objective is Your Advisor?
“Under the Investment Advisers Act of 1940 (Advisers Act), an disclose any material conflicts of interest to their clients. investment adviser providing consulting services has a fiduciary duty to provide disinterested advice and In this context, SEC staff examined the practices of advisers that provide pension consulting services to plan sponsors and trustees. These consulting services included assisting in determining the plan's investment objectives and restrictions, allocating plan assets, selecting money managers, choosing mutual fund options, tracking investment performance, and selecting other service providers. Many of the consultants also offered, directly or through an affiliate or subsidiary, products and services to money managers. Additionally, many of the consultants also offered, directly or through an affiliate or subsidiary, brokerage and money management services, often marketed to plans as a package of “bundled” services. The SEC examination staff concluded in its report that the business alliances among pension consultants and money managers can give rise to serious potential conflicts of interest under the Advisers Act that need to be monitored and disclosed to plan fiduciaries.” - Excerpt from “Selecting and Monitoring Pension Consultants: Tips for Plan Fiduciaries” Written by the Securities and Exchange Commission, May 2005 ERISA Retirement Plan Fiduciary Responsibility | Practicing Fiduciary Prudence | 6
Likely Places for Fiduciary “Exposure”
Plan Administration
(Who, What, When, Where, Why, & How)
– Misapplying Plan Rules • Eligibility • Compensation – – Timely remittance (contributions & loan repayments) Correcting discrimination test failures
Monitoring Service Providers
– – Ability of internal staff to monitor (training & education) Administrative manual documenting processes & procedures – SAS 70 annual review
Plan Oversight
– – Meetings and Confirmation of Intent/Actions (Minutes) Confirmation of “reasonable fees and expenses”
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Fiduciary “To Do’s”
Fiduciary Committee
– Structure and Function
Plan Oversight
– Retained and Delegated
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Fiduciary Committee – Structure and Function
Committee Structure
– Review Plan Document for Guidance – Draft “Committee Charter”
Charter Should Define Committee Function
– Purpose – Structure – – – – – – – – – Scope of Duties Resources & Authority Action Duties/Prohibitions General Guidelines Maintenance of Plan Investment Policy Selection and Oversight of Service Providers Compliance Indemnification
Action: Does Your Plan have a “Committee Charter”?
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Fiduciary Committee – Plan Oversight Options
Option 1: Retain and Delegate
Option 2: Engage Independent Fiduciary
– Generally follow best practices approach – Advantages • Expertise • No conflicts of interest • Full-time professional – Disadvantages • Cost: Expensive • Relinquish direct authority and control • Obligation to select and monitor fiduciaries
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Fiduciary Committee – Plan Oversight
Committee Responsibilities
– Which will be delegated? Which retained?
Delegated Responsibilities
– – – Trust (directed-trustee) Plan Administration (day-to-day recordkeeping) Communications
Retained Responsibilities (Non-Delegated)
– Functioning as a Prudent Fiduciary – – – – – Compliance Investment Policy (Construction & Monitoring) Fund Manager Performance Fee Analysis (Total and Vendor-specific) Vendor Oversight
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About Monster Worldwide
• Founded 1967 • Online Recruitment • Public Company • 5,000 Employees • 26 Countries • 77% 401(k) Participation • Company Stock Match • Formal Plan Oversight
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Our Fiduciary “To Do List”
Fiduciary Oversight – Getting Back to Basics
– – – Committee Structure Committee Charter Investment Policy
Fiduciary Awareness and Understanding
– – Expectation Investment Only!
Reality Funding, Investment, Administration, Compliance, Communications
Initial and Ongoing Commitment
Objective and Unbiased Advice
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“Work-in-Progress”
401(k) Plan Vendor Search What were our fees? Were they competitive?
How is the plan being “merchandised” to employees?
What role has/should company stock play in the plan?
Should we continue to use Plan Recordkeeper for investment reviews?
What actions were needed?
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Vendor Assessment
Vendor Service Recordkeeping Compliance Print Communications VRS & Web Participant VRS & Web Plan Sponsor Investment Flexibility Investment Performance Fairness of Fees Overall Participant Service Overall Sponsor Service Current Vendor (5 Excellent – 1 Poor) 5 3 3 5 4 4 4 4 4 4 Industry Norms (5 Excellent – 1 Poor) 4 4 4 4 4 3 3 3 4 3 ERISA Retirement Plan Fiduciary Responsibility | Practicing Fiduciary Prudence | 15
Plan Fees
Fee Benchmarking
– – Competitive investment expense High-side administration expense
Investment Performance
– – Top-quartile rankings for most plan funds Employees were happy
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Taking Stock of Company Stock
Know What You Are Getting Into
– – – Oversight IS Required Due diligence for Stock is no different than other Plan funds Trouble travels with access (restricting diversification)
Fiduciary “Catch-22”
– – SEC vs. ERISA Fiduciary duty to disclose material information that could prove harmful to participants Vs. SEC restrictions upon public disclosure by insiders – Who is an insider?
Actions
– – Discuss and document the issues Develop and document proper procedures
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Excerpt From A Fiduciary Meeting Agenda
Adoption of Feb. 10, 2005 (4 th Quarter 2004) Meeting Minutes
Current Events (Affecting Qualified Retirement Savings Plans)
– Mutual Fund Investigations Update – – – – – Implementation of Contingent Redemption Fees Roth 401(k) Feature – Strategic/Tactical Discussion New Fund Introductions Company Stock Administration: Allocating Administration Expense Share Class Adjustments: Passing Savings to Participants
Review of Q1 2005 401(k) Plan Results
– Financial Markets Overview – Plan and Investment Performance • Participant Behaviors (participation/deferrals/loans, etc.) • Trust Financials • Investment Performance • Observations and Recommendations
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Fiduciary Reporting Should Include …
Trust Reconciliation Trust Allocation (Cash, Bonds, Stocks) Participation & Average Deferral Rate Trends Automatic Enrollment Results – Defaults and Investment Use Loan Use (#s and average balances) Self-Directed Brokerage Use Advice Use
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Fiduciary Reporting Should Include …
(continued)
Plan Diversification
(Balances and Contributions)
Fund Usage
– – # of Funds Used (by participant) Lifestyle and Managed Accounts
Revenue Recapture Account Results and Usage
Comprehensive Cost Analysis
Investment, and Revenue Recapture) – – – By Fund (proprietary vs. revenue sharing) By Plan By Vendor (Administration,
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Fiduciary Reporting Should Include …
(continued)
Investment Manager Performance
– –
Vs.
Investment Policy Requirement “bar” for active Managers should be higher than passive Managers – –
Vs.
Indices (2) & Peer Group & Comparables
Vs.
Risk taken (Alpha, Sharpe Ratio) … and many others
Plan Fund Performance
– – – Correlation matrix Style and Market Cap Plot/Trend Model Portfolio Comparisons vs. Composite Indices
Observations and Recommendations
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Do Plan Funds Add Value?
Three-Year Benchmark And Portfolio Performance For Various Risk Levels The return information below was determined using the following funds (indexes), as reported by Morningstar (Ibbotson): CONSERVATIVE (C)
25% Cash 40% Fixed Income 25% Balanced 3% Large Value 4% Large Blend 3% Large Growth
3 Yr Annualized Alpha Beta R-Squared Standard Deviation Sharpe Ratio Tracking Error Information Ratio (C) Index
5.66% 0.00
1.00
1.00
3.56% 1.15
0.00
0.00
MODERATE (M)
15% Cash 35% Fixed Income 25% Balanced 9% Large Value 7% Large Blend 9% Large Growth
(C) Funds 7.03% 1.51% 0.96
0.88
3.64% 1.50
1.27% 1.19
(M) Index
6.62% 0.00
1.00
1.00
5.37% 0.94
0.00
0.00
MODERATELY AGGRESSIVE (MA)
5% Cash 10% Fixed Income 15% Balanced 10% Large Value 15% Large Blend 10% Large Growth 5% Mid-Cap Value 5% Mid-Cap Growth 5% Small-Cap Value 5% Small-Cap Growth 10% International 5% Real Estate
(M) Funds 7.82% 1.37% 0.96
0.92
5.39% 1.16
1.53% 0.89
(MA) Index
10.25% 0.00
1.00
1.00
10.95% 0.79
0.00
0.00
(MA) Funds 10.77% 0.96% 0.95
0.98
10.49% 0.88
1.53% 0.63
AGGRESSIVE (A)
5% Cash 5% Fixed Income 10% Balanced 10% Large Value 10% Large Blend 10% Large Growth 8% Mid-Cap Value 7% Mid-Cap Growth 8% Small-Cap Value 7% Small-Cap Growth 10% International 10% Real Estate
(A) Index
11.65% 0.00
1.00
1.00
12.00% 0.84
0.00
0.00
(A) Funds 12.01% 1.06% 0.93
0.98
11.29% 0.92
1.85% 0.58
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Asset Allocation Assistance
(Lifecycle (Risk & Age-based), Managed Accounts, Custom Strategies) Asset Class/Style Class
Cash & Equivalent Investment Grade Bonds Inflation-Adjusted Bonds Large Cap Value
Fund
Stable Value Fund PIMCO Total Return Admin PIMCO Real Return Instl Dodge & Cox Stock Large Cap Blend Large Cap Growth Midcap Value Midcap Growth Small Cap Value
COMPOSITION Moderate Allocation Naïve* Index
10% 50% ----- ----- 10% 30% 20% 11% 40% ----- ----- ----- ----- ----- 9% 5% 4% 3%
Naïve*
----- 20% ----- ----- 80% ------
Aggressive Allocation Index
----- 12% 8% 17% ----- 13%
Fund
----- 12% 8% 17% ----- 13%
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Trouble Spots for Fiduciaries …
Pension Plan vs. 401(k) Due Diligence?
Share Class selection and monitoring?
Vendor agreement proprietary-asset commitment?
Investment advice? (Investment Policy update) Vendor gross revenue projections?
Cost vs. benefit (does a low cost plan require more plan sponsor support)? Default fund selection?
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Trouble Spots for Fiduciaries ...
(continued)
Comparing plan investments and plan costs to incorrect benchmarks?
“Watch List” – Is it being used?
Company stock? Are insiders on Committee?
Reporting fiduciary actions to Board of Directors?
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Fiduciary “To Do’s”
Confirm Your Committee (Structure and Governance) Review/Draft Your Investment Policy Identify How Vendor Oversight Is Accomplished Interview Your Investment Advisor for Conflicts of Interest
If you don’t know what you are doing … ERISA requires you to find someone who does.
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Thanks for coming!
Wayne G. Bogosian
President, CEO
The PFE Group
144 Turnpike Road, Suite 360 Southborough, MA 01772 (508) 683-1400, ext. 205 [email protected]
Greg Limoges
Vice President, Compensation, Benefits, HRIS
Monster Worldwide
Five Clock Tower Place Maynard, MA 01754 (978) 461-8701 [email protected]
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