erisa retirement plan fiduciary responsibility practicing fiduciary prudence workshop 2006 benefits...

ERISA Retirement Plan Fiduciary Responsibility

Practicing Fiduciary PrudenceWorkshop

2006 Benefits New York Conference New York, NY

March 13, 200611:00 AM – 11:50 AM

ERISA Retirement Plan Fiduciary Responsibility | Practicing Fiduciary Prudence | 2

About Your Presenters

Greg Limoges is Vice President, Compensation, Benefits & HRIS at Monster Worldwide, Maynard, MA. 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, and appeared on WCVB, MSNBC, and AOL.

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.


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?


What Are Your Fiduciary Duties?

Board of Directors

Retirement or Administrative Committee

ERISA Duties1 Act solely in interest of

participants2 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

Guiding Influencesa) ERISA & IRCb) Plan Documentc) Committee Charterd) Investment Policy

Functional Responsibilities in order to comply w/ERISA(Duties may be delegated)

PlanFunding

DesignCost Analysis

ActuarialAssumptions

Funding ScheduleExpense Reporting

Trustee

CustodyTrading

ReconciliationReportingPayments

Distributions

Investment Management

Asset AllocationDiversification

(Style, Market Cap, Geography

Security Selection, Buy & Sell Decisions,

etc.)

Administration

Participant Accounting Transaction Processing

ConfirmationsTechnology

Benefit Calculations

Compliance

ERISA & IRCDiscrimination

FilingsNotices

Restatements

Employee Understanding

AudienceContentMedia

Frequency

“Prudence is About Process … Not Performance!”


WHO IS A PLAN FIDUCIARY?

Bonds 40.1%Pension

30% to 35%

Social Security 30% to 35%

PLAN SPONSOR

INVESTMENT ADVISOR

ERISA COUNSEL

Personal Savings

30% to 40%

RETIREMENT CONSULTANT

Players On The Same Team


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?


How Objective is Your Advisor?

“Under the Investment Advisers Act of 1940 (Advisers Act), an investment adviser providing consulting services has a fiduciary duty to provide disinterested advice and disclose any material conflicts of interest to their clients.

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

http://www.sec.gov/answers/invadv.htm


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”


Fiduciary “To Do’s”

Fiduciary Committee – Structure and Function

Plan Oversight – Retained and Delegated


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”?


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


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


About Monster Worldwide

• Founded 1967• Online Recruitment• Public Company• 5,000 Employees• 26 Countries• 77% 401(k) Participation• Company Stock Match• Formal Plan Oversight


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


“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?


Vendor Assessment

Vendor ServiceCurrent Vendor

(5 Excellent – 1 Poor)Industry Norms

(5 Excellent – 1 Poor)

Recordkeeping 5 4

Compliance 3 4

Print Communications 3 4

VRS & Web Participant 5 4

VRS & Web Plan Sponsor 4 4

Investment Flexibility 4 3

Investment Performance 4 3

Fairness of Fees 4 3

Overall Participant Service 4 4

Overall Sponsor Service 4 3


Plan Fees

Fee Benchmarking– Competitive investment expense

– High-side administration expense

Investment Performance – Top-quartile rankings for most plan funds

– Employees were happy


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


Excerpt From A Fiduciary Meeting Agenda

Adoption of Feb. 10, 2005 (4th 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


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


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 (Administration, Investment, and Revenue Recapture)

– By Fund (proprietary vs. revenue sharing)

– By Plan

– By Vendor


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


Do Plan Funds Add Value?Three-Year Benchmark And Portfolio Performance For Various Risk LevelsThe return information below was determined using the following funds (indexes), as reported by Morningstar (Ibbotson):

CONSERVATIVE (C)

25% Cash 40% Fixed Income25% Balanced 3% Large Value 4% Large Blend 3% Large Growth

MODERATE (M)

15% Cash35% Fixed Income25% Balanced 9% Large Value 7% Large Blend 9% Large Growth

MODERATELY AGGRESSIVE (MA)

5% Cash10% Fixed Income15% Balanced10% Large Value15% Large Blend10% Large Growth

AGGRESSIVE (A)

5% Mid-Cap Value 5% Mid-Cap Growth 5% Small-Cap Value 5% Small-Cap Growth10% International 5% Real Estate

5% Cash 5% Fixed Income10% Balanced10% Large Value10% Large Blend10% Large Growth

8% Mid-Cap Value 7% Mid-Cap Growth 8% Small-Cap Value 7% Small-Cap Growth10% International10% Real Estate

(C) Index (C) Funds (M) Index (M) Funds(MA) Index

(MA) Funds

(A) Index (A) Funds

3 Yr Annualized 5.66% 7.03% 6.62% 7.82% 10.25% 10.77% 11.65% 12.01%

Alpha 0.00 1.51% 0.00 1.37% 0.00 0.96% 0.00 1.06%

Beta 1.00 0.96 1.00 0.96 1.00 0.95 1.00 0.93

R-Squared 1.00 0.88 1.00 0.92 1.00 0.98 1.00 0.98

Standard Deviation 3.56% 3.64% 5.37% 5.39% 10.95% 10.49% 12.00% 11.29%

Sharpe Ratio 1.15 1.50 0.94 1.16 0.79 0.88 0.84 0.92

Tracking Error 0.00 1.27% 0.00 1.53% 0.00 1.53% 0.00 1.85%

Information Ratio 0.00 1.19 0.00 0.89 0.00 0.63 0.00 0.58

COMPOSITION

Asset Class/Style Class FundModerate Allocation Aggressive Allocation

Naïve* Index Fund Naïve* Index Fund

Cash & Equivalent Stable Value Fund 10% 10% 10% ------ ------ ------

Investment Grade Bonds PIMCO Total Return Admin 50% 30% 30% 20% 12% 12%

Inflation-Adjusted Bonds PIMCO Real Return Instl ------ 20% 20% ------ 8% 8%

Large Cap Value Dodge & Cox Stock ------ 11% 11% ------ 17% 17%

Large Cap Blend S&P 500 Index 40% ------ ------ 80% ------ ------

Large Cap Growth Growth Fund of America R4 ------ 9% 9% ------ 13% 13%

Midcap Value JP Morgan Midcap Value A ------ 5% 5% ------ 8% 8%

Midcap Growth Artisan Midcap Inv ------ 4% 4% ------ 5% 5%

Small Cap Value AmCent Small Cap Value Inv ------ 3% 3% ------ 6% 6%

Small Cap Growth Baron Growth ------ 2% 2% ------ 4% 4%

Real Estate Third Avenue Real Estate Val ------ 3% 3% ------ 8% 8%

International Equity Amer Funds EuroPac Gr R4 ------ 3% 3% ------ 14% 14%

Emerging Markets Equity Oppenheimer Dev Markets A ------ ------ ------ ------ 5% 5%

FIVE YEAR PERFORMANCE** (ending December 31, 2005)

Annualized Return 3.73% 5.69% 7.89% 1.84% 7.02% 10.39%

Alpha vs. Naïve 0.00% 2.01% 4.44% 0.00% 5.12% 8.39%

Beta vs. Naïve 1.00 0.97 0.87 1.00 0.93 0.83

R-Squared vs. Naïve 1.00 0.93 0.87 1.00 0.91 0.86

Standard Deviation 5.61% 5.60% 5.20% 11.70% 11.46% 10.46%

Sharpe Ratio 0.27 0.62 1.09 -0.03 0.42 0.78

Tracking Error vs. Naïve 0.00% 1.45% 2.00% 0.00% 3.55% 4.38%

Information Ratio N/A 1.39 2.22 N/A 1.44 1.92* The Naïve Allocation uses only the S&P 500 Index for equities, Lehman Brothers Aggregate Bond Index for fixed income, and 90-day Treasury Bills for cash and equivalents.** Performance numbers reflect the target allocation weight of each underlying fund or index, rebalanced monthly.

Asset Allocation Assistance(Lifecycle (Risk & Age-based), Managed Accounts, Custom Strategies)



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?


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?


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.


Thanks for coming!

Greg LimogesVice President, Compensation,

Benefits, HRIS

Monster WorldwideFive Clock Tower PlaceMaynard, MA 01754(978) [email protected]

Wayne G. BogosianPresident, CEOThe PFE Group144 Turnpike Road, Suite 360Southborough, MA 01772(508) 683-1400, ext. [email protected]

erisa retirement plan fiduciary responsibility practicing fiduciary prudence workshop 2006 benefits...

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