FIDUCIARY RESPONSIBILITIES

R. SCOTT GARDNER, CIMASENIOR INVESTMENT ADVISOR

PACIFIC PORTFOLIO CONSULTING, LLC

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 2

Agenda

Overview of Plan Governance

Elements of a plan

Who are the plan fiduciaries?

Significance of being a fiduciary

Fiduciary duties

Limiting Liability

Selecting a service provider

Monitoring service providers

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 3

Overview of Plan Governance

Custodian

Custodies Assets

Executes Investment Trades

Manages Cash Flow

Advisor Co-Fiduciary to

Plan

Evaluate Capital Markets

Provides Investment

Options

RK\TPA Administers Plan

Documents

Maintain Participant Records

Host Participant Website

Trustee Committee

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 4

Elements of a Plan

Written plan that describes the benefit structure and guides day-to-day operations.

A trust fund to hold the plan’s assets.

A recordkeeping system to track the flow of monies going to and from the retirement plan.

Documents to provide plan information to employees participating in the plan.

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 5

Who is a Plan Fiduciary

Fiduciary status is based on the functions performed for the plan, not just a person’s title.

A plan must have at least one fiduciary (person or entity) named in the written plan.

Anyone who takes discretionary action to manage and administer the plan or exercise control over plan assets.

A plan’s fiduciaries ordinarily include the: Trustee

Investment consultants/advisors

Individuals exercising discretion in the administration of the plan

Members of the plan’s administrative committee

Members of the plan’s investment committee

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 6

Significance of Being a Fiduciary

Fiduciaries act on behalf of participants in a retirement plan Have important responsibilities

Subject to standards of conduct

Important responsibilities Acting solely in the interest of plan participants and their beneficiaries

Carrying out duties prudently

Following plan documents

Diversifying plan investments

Keeping plan expenses reasonable

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 7

Duties of a Fiduciary

Fiduciaries are held to the highest standard of conduct imposed by law.

Fiduciary standards applicable to non-ERISA plans are in need of clarification.

Non-ERISA plans are governed by state law whose fiduciary standards are very similar to ERISA.

Most legal counsel typically advise public sector plan sponsors to manage their non-ERISA plans as if they were covered by ERISA

There is more guidance around ERISA

ERISA is the highest standard

Source: Center for Due Diligence

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 8

Duties of a Fiduciary

There are five duties of a fiduciary that must be carried out in accordance with the plan documents

Loyalty

Documentation

Prudence

Diversification

Reasonable plan expenses

Source: IMCA

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 9

Loyalty

Also called the “exclusive benefit rule”

Plan fiduciaries must act: Solely in the best interests of the plan participants.

For the exclusive purpose of providing plan benefits.

Fiduciaries cannot put employer interests before those of plan participants.

Avoid conflicts of interest.

Ensure that expenses for administering the plan are reasonable.

Source: IMCA

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 10

Documentation

Maintain up to date, signed documents including: Plan documents and summary plan materials.

Trust agreement.

Plan forms, rules, and procedures.

Service agreements.

Third party contracts.

Investment contracts.

Investment Policy Statement.

Amendments to the above documents.

Committee meeting minutes.

Source: IMCA

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 11

Prudence

Requires fiduciaries to act with the care, prudence, skill and diligence a knowledgeable person would use in administrating the plan.

Prudence requires good judgment and sound processes in every plan activity undertaken by the fiduciaries.

More than just an obligation to be competent and careful in your conduct, prudence is careful, diligent, thorough decision-making process:

Gather, examine and give appropriate consideration to relevant information.

Implement the decision.

Periodically monitor performance to ensure your decisions continue to be in the best interest of the plan and the participants.

Retain third parties to assist you if necessary.Source: IMCA

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 12

Diversification

Investments must be diversified to minimize the risk of large losses

There must be at least three different investment options that offer different risk/return characteristics

Evaluate Liquidity, Diversification, Return & Safety of investment offerings

Election choices must allow diversification with materially different risk and return characteristics

Source: IMCA, U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 13

Diversification

Most plans offer Equity Funds

Bond Funds

Money Market Funds

Other plans offer Target date funds

Model allocations

Brokerage windows

Source: IMCA

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 14

Reasonable Plan Expenses

Fees are just one of several factors fiduciaries need to consider when selecting investments and service providers

Law does not specify permissible level of fees, but fees must be “reasonable”

Plan’s fees should be monitored on an ongoing basis to ensure they remain reasonable

Take into account level and quality of service, not just bottom line cost

When comparing services and fees between vendors, make sure you compare apples-to-apples

Information provided by service providers should include all forms of compensation

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 15

Limiting Liability

With these responsibilities there is potential for liability

Fiduciaries can limit liability by Properly documenting processes

Providing diversified investments

Providing participants with sufficient information to make choices

Hiring third party vendors when fiduciary doesn’t have expertise

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 16

Hiring a Service Provider

Hiring a service provider is a fiduciary function

Provide each prospective provider with the same information

Document the selection process

Service providers must provide information to you about the services they will provide and the compensation they will receive

When hiring a provider, consider the provider’s Financial condition

Experience with retirement plans of similar size and complexity

Quality of service

Recent litigation against the firm

Description of business practices

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 17

Monitoring Service Providers

Establish and follow a formal review process

Evaluate any notices from service provider regarding upcoming changes to service or compensation

Review the service provider’s performance

Review actual fees charges

Confirm provider’s policies and procedures

Follow up on participant complaints

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 18

Tips for Employers with Retirement Plans

Identify your plan fiduciaries and ensure they are clear about their responsibilities.

If participants make their own decisions, provide them with enough information to make informed decisions.

Know the schedule to deposit participants’ contributions in the plan. Make sure it complies with the law.

If hiring a third party service provider, look at a number of providers, give each potential provider the same information, and consider the reasonableness of their fees.

Document the third party service provider hiring process.

Identify parties in interest to the plan and monitor transaction with them.

Review your plan document and make necessary updates. Provide participants with an updated Summary Plan Description.

Confirm that individuals handling plan funds have a fidelity bond.

Source: U.S. Department of Labor, Employee Benefits Security Administration

Not for reproduction and/or distribution.

All data obtained from sources believed to be reliable. 19

Questions?