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Navigating The “Perfect Financial Storm”

Navigating The “Perfect Financial Storm”. Identifying & Dealing with Fiduciary Liability in 401(k) Investment Programs. The “Perfect Financial Storm”. Key Forces Coming Together Baby Boomers Looking for financial security as retirement approaches.

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Navigating The “Perfect Financial Storm”

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  1. Navigating The “Perfect Financial Storm” Identifying & Dealing with Fiduciary Liability in 401(k) Investment Programs

  2. The “Perfect Financial Storm” • Key Forces Coming Together • Baby Boomers • Looking for financial security as retirement approaches. • Home equity value no longer a “given” anymore. • Financial Markets • Volatile equity markets and low yields on fixed income assets. • Recession / inflation worries. • Liquidity “crunch” for commercial / mortgage borrowers. • Fiduciary Scrutiny Increasing • ERISA lawsuits on the rise. • Fee transparency on the horizon • What Should Plan Sponsors Do?

  3. The “Perfect Financial Storm” • Fiduciary Risk Increasing • One plaintiff’s firm, Schlichter, Bogard & Denton, brought 11 class action cases against major corporations regarding service provider compensation. • Large Plan Sponsors Are Being Sued •Bechtel •International Paper •Boeing •Kraft •Catepiller •Lockheed Martin •Deere •Northrop Grumman •Excelon •United Technologies •General Dynamics •Unisys • Tobacco, Guns and… 401(k) Plans? • “We are nearly completed with litigation against tobacco companies.  We are just beginning the major litigation against gun companies, and the next big area for litigation - after guns - is going to be suing 401(k) and 403(b) plan sponsors.” • - Anonymous Litigation Attorney Source: Groen Law Group 401(k) Plans?

  4. The “Perfect Financial Storm” • Fiduciary Risk Increasing: • US Supreme Court ruled in “LaRue vs DeWolf “ that individual employees can sue plan administrators for fiduciary breach. • “My sense is this will end up producing a tremendous amount of litigation” • - Mary Ellen Signorille, Esq AARP Foundation • “This opens the door to a variety of worker lawsuits, including challenges to the fees workers are charged to administer their savings plans.” • - Ed Ferrigno, VP Profit Sharing/401(k) Council of America Source: WSJ

  5. Setting the Course • Dealing With Fiduciary Status: • Identifying / Understanding Who is a Responsible Fiduciary in YOUR Plan • Documenting the Selection & Monitoring of Plan Investments

  6. Navigating The “Perfect Financial Storm” • Know Your Fiduciary Responsibilities • DOL has launched a national education campaign: “Getting It Right – Know Your Fiduciary Responsibilities”emphasizing the obligation of plan sponsors and other fiduciaries to: • Understand the terms of their plans; • Select and monitor service providers carefully; • Make timely contributions to fund benefits; • Avoid prohibited transactions; and • Make timely disclosures to workers and their beneficiaries and reports to the government “Strong fiduciary oversight and protecting workers’ benefits is our highest priority. ‘Getting it Right,’ however, can be challenging. This is particularly true for small and medium-sized employers who have limited time, resources and access to professional help with benefit programs.” – Secretary of Labor Elaine L. Chao

  7. Navigating The “Perfect Financial Storm” • “Fiduciary” Defined: • Plan Sponsor/Employer • Trustee • Anyone who… • Exercises any discretionary authority/control over the plan or the management/disposition of its assets • Provides investment advice regarding plan assets for a fee (direct/indirect) • Has any discretionary authority/responsibility in the administration of the plan

  8. Navigating The “Perfect Financial Storm” • Who are the Responsible Fiduciaries? • Am I a fiduciary? • What are my fiduciary responsibilities? • How do I fulfill those duties under the law? Who is a Fiduciary? “401(k) Committee” Members Officers Principals Board of Directors  Remember – the appointment of a fiduciary is, in itself, a fiduciary act

  9. Navigating The “Perfect Financial Storm” • Duties of the “Fiduciary”… • The Fiduciary must: • Manage the Plan with the “Best Interest” of Participants & Beneficiaries • Diversify Investment Portfolio to Minimize Loss of Principal • Monitor Investments Over Time to Ensure a Competitive Investment Menu • Incur Reasonable Costs to Deliver Investment Management and Plan Services “The Fiduciary should act with the ‘care, skill, prudence, and diligence under the circumstances than prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.’” – ERISA, §404(a)(1)(B)

  10. Navigating The “Perfect Financial Storm” • What’s At Stake… • Potential Remedial Actions Include: • Fiduciaries are Personally Liable for Breaches of Duty • Must Disgorge Any Profits • Must Make up Any Plan Losses • Must Make up Any Lost Opportunity Costs • Must Pay Participants’ Attorneys’ Fees • Subject to Stiff DOL Civil Fines • Subject to Criminal Fines and Incarceration

  11. Navigating The “Perfect Financial Storm” How Many Funds are Enough? Number of Funds Offered As Your Plan Adds More Options  Additional Monitoring Requirements Increase  Selection Risk Rises  More Education Necessary For Plan Participation Source: CRA RogersCasey, Spectrem Group

  12. Navigating The “Perfect Financial Storm” Selecting Mutual Funds “The Past Does Not Accurately Project The Future”

  13. Navigating The “Perfect Financial Storm” February 2000 February 2000 Ten for 2000 Focuses on ten of the top performing fund managers in the United States who talk about how they have beat the markets for years and how they plan to continue their streaks into the 2000’s. Ten for 2000

  14. Navigating The “Perfect Financial Storm” February 2001 FEBRUARY 2001 Ten for 2001 Ten for 2001 “Best mutual funds for 2001” None of the top 10 funds from 2000 Top List made this list. You now own 20 Funds.

  15. Navigating The “Perfect Financial Storm” February 2002 FEBRUARY 1993 FEBRUARY 2002 The 12 Funds To Buy Now Best Funds for 2002 “Nine funds that can weather tough times” None of the 20 funds previously listed are mentioned this year You now own 29 Funds

  16. Navigating The “Perfect Financial Storm” February 2003 FEBRUARY 2003 Best Funds for 2003 Best Funds for 2003 “Ten all weather funds who can prosper in good and bad times” One of the 29 previous funds is mentioned this year. You now own 38 Funds.

  17. Navigating The “Perfect Financial Storm” February 2004 FEBRUARY 2004 Eight Great Funds “Eight Great Funds from Companies you can trust” One of the 38 previously mentioned funds is mentioned You now own 45 different mutual funds.

  18. Review of Money Magazine Mutual FundRecommendations Navigating The “Perfect Financial Storm” “Best Fund List” for 2000 – 2004 47 Funds Made the list 45 Funds appear only once 2 Funds made the list twice (one is a bond index fund) 30 Different Fund Families have at least one fund on the list Source: Money Magazine 02/2000 – 02/2004

  19. Navigating The “Perfect Financial Storm” Pension Protection Act

  20. PPA- Most Important Legislation Since ERISA Navigating The “Perfect Financial Storm” Shift focus from teaching participants to doing it for them The new “DC” Plan will look like an old “DB” Plan • Auto Enrollment • Auto Deferred increase • QDIAs • Professional Investment Management • Lifestyle / Lifecycle funds • Managed Accounts

  21. Navigating The “Perfect Financial Storm” • Qualified Default Investment Alternative (QDIA) • Safe Harbor Protection provided to employer if employer defaults to eligible QDIA when participant fails to direct investments • Eligible QDIAs • LifeCycle / LifeStyle Funds • Balanced Fund • Managed Account

  22. LifeCycle / LifeStyle Funds Navigating The “Perfect Financial Storm” • Generally two types of funds • LifeCycle (age-based)-target maturity funds based on expected retirement date and are gradually rebalanced to achieve a more conservative allocation • LifeStyle (risk-based)-funds that offer fixed risk exposure utilizing a static allocation approach

  23. Life Style vs. Life Cycle Navigating The “Perfect Financial Storm”

  24. Take the Helm…Navigate to Safety • TOP TEN THINGS YOU CAN DO TO MITIGATE YOUR • FIDUCIARY RISK EXPOSURE 1. DOCUMENT, DOCUMENT, DOCUMENT 2. Consider Auto-Enrollment/Auto Deferral Increases 3. Consider LifeCycle/LifeStyle Funds 4. Benchmark Plan Services/Fee Every 3-5 Years 5. Identify All Fees Paid to Investment Funds/Service Providers 6. Evaluate Fund Performance Quarterly 7. Diversify the Investment Portfolio 8. Make Investment Portfolio 404(c) Compliant 9. Establish a Written Investment Policy Statement 10. Understand Your Fiduciary Responsibilities

  25. Smooth Sailing • Some Helpful DOL Publications: • Meeting Your Fiduciary Responsibilities • Understanding Retirement Plan Fees & Expenses • DOL Plan Fee Disclosure Form • Reporting & Disclosure Guide for Employee Benefit Plans • Selecting an Auditor for Your Employee Benefit Plan The US Department of Labor’s Employee Benefits Security Administration offers more information on its webstie: www.dol.gov/ebsa

  26. Smooth Sailing • Remember: • Knowing & Understanding YOUR Fiduciary Responsibilities Will Enable You to Take the Appropriate Steps to AVOID Many Problems Often Found in Qualified Retirement Plans • Set & Stay the Course to “Smooth Sailing”

  27. Questions

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