RISK MANAGEMENT SYSTEM™

1. RISK MANAGEMENT SYSTEM™

2. Session Description While ERISA 3(38) discretionary investment management services have been around since the inception of ERISA, an increasing number of advisors are now marketing this service as an answer to all fiduciary problems. Given the low barrier to entry, many advisors are claiming 3(38) expertise to differentiate themselves when they have never before taken discretion of plan assets and have no performance history to meet the IPS standards established by the plan. Advisory competition is creating so much noise that it is becoming difficult for a plan sponsor to identify a qualified 3(38) advisor from an impersonator. This spirited session will take the gloves off and debate whether or not a 3(38) service platform offers any real value and if so, who is qualified to provide the service.  The panel will be populated by two highly skilled advisors in favor of outsourced 3(38) services and two who are opposed to it.

3. About The Panel Jon Chambers, Principal, Schultz Collins Lawson Chambers, Inc. has testified before Congress on 401(k) fee disclosure rules and is responsible on a recurring basis for plans with assets under supervision of over $2 billion and has been retained as a consultant to plans with up to $10 billion in assets. Steven Glasgow, Sr. VP of Avondale Partners has consulted on over $2 billion of institutional plan assets. Mark Griffith,Sr. VP Product Development, Envestnet Retirement Solutions. Envestnet oversees more than $425 billion of assets under administration with over $38 billion of assets under management. Todd Kading, Managing Director,LeafHouseFinancial Advisors is a Texas based RIA that offers both 3(21) and 3(38) services through a nationwide network of independent advisors overseeing approximately $1.5 billion in assets. David J Witz, is Managing Director and founder of Fiduciary Risk Assessment LLC (FRA) and PlanTools, LLC, a consulting and technology firm. He has 32 years of industry experience including serving as an expert witness on such prominent cases as ABB, Bechtel, Deere, Edison, General Dynamics, International Paper, Kraft Foods, Lockheed Martin, United Technology and the Robert Plan. His experiences as an expert witness have fueled the development of PlanTools benchmarking, compliance, fiduciary governance, advisor qualification assessment, revenue sharing modules and target-date analyzer.

4. The Weigh In • What percentage of your business is 3(38)? • Do you charge more for 3(38)? • How much more as a percent do you charge for 3(38) services? • Do you have insurance for 3(38) services? • Is 3(38) E&O more expensive than 3(21)? • Do you accept discretionary engagements for • Individual securities or ETFs? • The core menu? • Custom QDIA portfolios? • Collective funds, Separate accounts, Managing accounts or Private Equity?

5. Are You a Player or Spectator? ERISA’s fiduciary standards of care require stewards to act with loyalty, care and prudence. To do so requires a three step process: • Assess each steward’s ability to meet the prudent expert rule, • Retain outside experts where expertise is lacking, and • Monitoring the expert’s performance periodically.

6. Criteria for Selecting a 3(38) Contender? • ERISA 411 Qualifications • SEEK – Skill, Education, Experience and Knowledge • A record of performance? • Financial and criminal background reviews? • Bench strength – business continuity and succession plan?

7. Who Hires the 3(38) Contender? Dictated by the plan document and also referred to as the “responsible plan fiduciary” 29 CFR 2550.404b-2(c)(1)(viii)(E) Options include: • The company/plan sponsor? See 29 CFR 2509.75-5 FR-3 • If it is the company, the plan instrument should provide for a designation of specified individuals by name, committee or title to carry out the fiduciary obligations in accordance with section 405(c)(1)(B) • The “named fiduciary”? As defined under ERISA 402(a) • a fiduciary either named in the plan instrument or designated according to a procedure set forth in the plan instrument…402(a)(2) • The fiduciary appointed by a “named fiduciary”? 402(c)(2) and (3)

8. Who is Responsible for Monitoring the 3(38)? • Whoever appoints a fiduciary is responsible for monitoring that fiduciary • The appointing/monitoring fiduciary is subject to the prudent man rule • The prudent man rule applies to the performance of oversight duties • Governing documents dictate whether other duties apply beyond oversight • A monitoring fiduciary is not liable for losses arising from the day-to-day management of plan assets IF oversight responsibilities have been conducted prudently • Oversight fiduciaries are not responsible for results

9. Placing your bet on the 3(38) • For a reduction in fiduciary risk? • For an increase in performance? • For an improvement in services? • For compliance support? • For better participant outcomes?

10. Trash Talking 3(38) – Part 1 • No one cares about your money like you do • It is a gimmick, a sales pitch for higher fees • Higher fees with no added value • Increases risk for the plan sponsor and advisor • It does not eliminate all your fiduciary liability • It does not eliminate your obligation to monitor • It was never intended in the law to be used as it is today • It encourages complacency among Trustees • It encourages complacency among oversight fiduciaries

11. Trash Talking 3(38) – Part 2 • Few advisors selling 3(38) services qualify under prudent man rules • It creates conflicts when a Plan Sponsor relies on 3(38) for due diligence • Plan Sponsors can’t demonstrate due diligence that rises to the level of a prudent expert when selecting a 3(38) • Using plan assets to hire a 3(38) • to reduce plan sponsor liability is a breach of loyalty • to pay for services that benefit the PS is a breach of exclusive purpose • to pay for services that benefit the PS is a prohibited transaction • that is not prudently selected and monitored is a Duty of care breach • Most 3(38)s have investment expertise but no ERISA expertise increasing risk

12. Trash Talking 3(38) – Part 3 • Hiring a 3(38) does not eliminate lawsuits • Most 3(38)s don’t have the capital to cover their deductible • Most 3(38)s don’t have the capital to cover a loss that exceeds their limits • Retaining a 3(38) causes a plan to lose 404(c) protection • A 3(21) must be hired to evaluate a 3(38) • Retaining a 3(38) requires a more complicated IPS • Plan sponsor has less control

13. Does a 3(38) Tip the Scale in Your Favor? • Outsourcing advantages • Reduction in liability • Reduction in work load • Reduction in responsibility • Transfers responsibility to the experts • Reasonable for the benefits • 3(21)(A)(ii) provides no protection to the plan sponsor • In a lawsuit, a 3(38) is on the PS’s side of the table

14. The Fight! Round 1: What does it mean to be a 3(38) for a participant directed 401k Plan if your authority is limited to • The core menu? • A participant’s individual account balance? • Management of an asset allocation model? Round 2: Is process the best defense for 3(38) performance or 3(21) recommendations? Round 3: Is there is more work evaluating, selecting and monitoring 3(38) than value that can be justified?

15. The Fight! Round 4: Does the retention of a 3(38) IM impose an obligation to engage in face to face meetings with the 3(38)? Round 5: It there is more cost to retain a 3(38) than can justify any additional value? Round 6: Do 3(38) IMs accept more compliance responsibilities than a 3(21) advisor? Round 7: Does a 3(38) IM offers more fiduciary protection than a 3(21) advisor?

16. The Fight! Round 8: Is a fiduciary is better off using a Mutual fund exempt under 3(21)(B) and 401(b)(1) than a 3(38) IM? Round 9: Does retaining a 3(38) increase the potential for conflicts of interest? Round 10: Can a 3(38) justify the use of investments with revenue sharing to offset administrative expenses when they have the power and knowledge to secure the lowest cost funds with no revenue sharing?

17. AND THE WINNER IS? Open Discussion