HOW SAFE IS YOUR 401(k)?

1. HOW SAFE IS YOUR 401(k)? What Employers Should Be Doing in Response to Financial Industry Crisis

2. Reacting to the Market Meltdown • Bear Stearns • Fannie and Freddie • Lehman Bros. • AIG • ???

3. Where is the Risk? • Banks • Mutual Funds • Insurance Companies

4. Banks • Banks often serve as Plan trustee • Plan assets are held in trust, separate from the assets of the bank • Individual retirement accounts at banks (IRAs, SEPs, Simples) are FDIC insured up to $250K per depositor

5. Mutual Funds • Plan assets are often invested in mutual funds • Mutual funds are not FDIC insured, not guaranteed, and may lose value • Mutual fund values based upon the underlying investments of the fund • Assets up to $500K held in brokerage account are protected by SIPC in case of broker failure

6. Insurance Companies • Insurance companies often issue contracts to plans, or funds held by plans (e.g., GICs, and stable value wrappers) • State guaranty associations back up the policy obligations of insurance companies • Some separate accounts are subject to creditors of insurer

7. What is at Risk? • Plan Assets • Market values • Liquidity • Individual Account Balances • Availability of distributions • Retirement income • Fiduciary Personal Liability

8. Who is at Risk? • Plan Participants • Plan Fiduciaries

9. Plan Participants • Retirement benefits of 401(k) Participants are based on their account balances • Participants must invest their accounts in fund options selected by Fiduciaries

10. Plan Fiduciaries • Plan Fiduciaries are responsible for the selection and monitoring of investment funds • Plan Fiduciaries are personally liable to Participants for losses resulting from breach of duty

11. Am I a Fiduciary? • A Fiduciary is anyone who has discretionary authority or control over the management of Plan assets or the administration of the Plan • Examples: • Trustee • Investment Manager • Plan Administrator • Retirement Committee

12. What is the duty of a Fiduciary? • Act solely in the interest of Participants and Beneficiaries • Use “care, skill, prudence and diligence under the circumstances then prevailing” • Like a “prudent man” familiar with such matters • Diversify investments to minimize the risk of large losses • In accordance with Plan documents

13. What Should a Fiduciary Do in Response to Financial Crisis? • Be Prudent – Review Funds for Exposure to Financial Sector Risk • Money Market v. Stable Principal • Fixed Income Funds – Issuers in default • Equity Funds – Overweight on Financials • Diversification is Key

14. What Should a Fiduciary Do in Response to Financial Crisis? • Use Skill – Make sure you have the financial skill to evaluate the risks or find an expert advisor • Be Diligent – Act now; don’t wait until the end of the quarter or year

15. What Should a Fiduciary Do in Response to Financial Crisis? • Ask Questions – Contact your fund providers for information about fund assets and investments • Communicate with Participants – Tell Participants what you are doing to monitor the situation and what you have learned; make sure prospectus delivery is current

16. What Should a Fiduciary Do in Response to Financial Crisis? • Read the Plan – Confirm that investment decisions are made according to the Plan document • Keep Records – Document your Due Diligence efforts and communications to Participants

17. Questions?

18. Presenters • James E. Daniel Womble Carlyle Sandridge & Rice, PLLC 704-331-4931 jdaniel@wcsr.com • B. Kelly Graves Carroll Financial Associates, Inc. 704-553-8006 kgraves@carrollfinancial.com