best practices for value & fee benchmarking€¦ · this report from fiduciary benchmarks can...

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Best Practices for Value & Fee Benchmarking

January 2016

Copyright© Fiduciary Benchmarks All Rights Reserved

Agenda

1. Benchmarking Basics

2. Protect Yourself…Protect Your Clients…Improve Outcomes

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What are the duties of a Fiduciary?

• Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;

• Carrying out their duties prudently; • Following the plan documents (unless

inconsistent with ERISA); • Diversifying plan investments; and • Paying only reasonable plan expenses.

Source: www.dol.gov/ebsa/publications/fiduciaryresponsibility.html

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Question: Which of these variables changed by 20% will have the GREATEST IMPACT on Retirement Readiness: 1. Retiring 5 years early at age 62 2. Contributing 8 years earlier at age 34 3. Increasing the 7.11% ROR by 20% 4. Increasing the 6.00% Deferral by 20% 5. Increasing the 50 cent match by 20% 6. Decreasing the 72bp fee by 20%

Why Low Fees is NOT the Fiduciary Requirement – part 1

• Female Age 42 • 3% Inflation Rate • Saving 6% • Company Match 50% on 6% • Rate of Return of 7.11% • Fees of .72% • Retirement age of 67

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• The analysis below shows the impact on the Retirement Readiness Ratio of 87% by changing 6 important retirement assumptions by 20% (except for Early Retirement where the reduction is the earliest age one can begin receiving Social Security):

Why Low Fees is NOT the Fiduciary Requirement – part 2

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Fiduciary Benchmarks’ Evaluation Process

First, we build a customized benchmark group from your plan to allow valid comparisons.

PROPRIETARY DATABASE

The FBI proprietary database has tens of thousands of plans sourced directly from hundreds of service providers.

The DOL has specifically noted that you can consider the quality of your service provider when determining fee reasonableness of your Service Provider.

Therefore, Fiduciary Benchmarks provides a framework to help you examine this important factor that is customized for each type of Service Provider for your plan.

THE QUALITY YOU’RE GETTING

Another important factor to consider is the Scope of Services being delivered by each of your service providers. In that regard, Fiduciary Benchmarks has relied on our extensive industry experience to develop a comprehensive list of services with varying degrees of difficulty that are most pertinent to the services delivered by each provider. We then built proprietary mathematical models that allows you to easily compare the level of services you receive from your Service Provider to a market standard based on the applicable benchmark group.

THE SERVICES YOU’RE GETTING

THE VALUE YOU’RE GETTING

The Employee Retirement Income Security Act (ERISA) REQUIRES fiduciaries to make sure they pay only reasonable expenses to all service providers and investment managers. BUT…per the Department of Labor’s booklet on 401(k) Plan Fees: “don’t consider fees in a vacuum. They are only one part of the bigger picture including investment risk and returns and the extent and quality of services provided.”

This report from Fiduciary Benchmarks can help you determine whether the fees being paid to your various Service Providers are reasonable by following a logical and patented process (U.S. Patent 8,150,198) as shown below.

NORMALIZED DATA

All data is scrubbed for accuracy and normalized before being placed in our database. This helps ensure all comparisons are valid and consistent.

MATHEMATICALLY DRIVEN

We use a four-step method designed to provide you an economically logical, statistically valid and properly diversified benchmark group.

After looking at the services that drive fees for your Service Provider, we then examine the Value being delivered to you as Plan Sponsor and to your Participants.

For you as Plan Sponsor, we provide data that is generally related to the quantity and quality of services you receive as the Plan Fiduciary.

For your Participants, we compare the Participant Success Measures for your plan versus your industry. We also project the difference in total account balances at retirement versus the typical industry, assuming all participants are “average.”

Finally, we take a detailed look at the fees being paid to your various Service Providers.

TRACK

We account for ALL fees being paid to your Service Providers.

COMPARE

Because services can vary greatly, we compare your fees to the benchmark group and to our proprietary FeePoint – a market-based benchmark that reflects the unique services provided by your Service Providers.

UNDERSTAND

We explain how FeePoint works in detail so you can gain better insight regarding the value of the services provided by your Service Providers.

Examine Value Delivered

Assess Scope of Services

Review Provider Quality

Customize Benchmark Group

Evaluate Fees The Employee Retirement Income Security Act (ERISA) REQUIRES

fiduciaries to make sure they pay only reasonable expenses to all service providers and investment managers. BUT…per the Department of Labor’s

booklet on 401(k) Plan Fees: “don’t consider fees in a vacuum. They are only one part of the bigger picture including investment risk and returns

and the extent and quality of services provided.”

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True or False: Reasonable Total Plan Fees is the Fiduciary Issue

Total Plan Fees vs. Benchmark Group (in Percent)

0.66%

0.83%

0.99%

1.06%

1.15%

1.42%

Low Below Average Average Your Plan Above Average High

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INVESTMENT MANAGER ANALYSIS

REPORT BASICS

RECORDKEEPER ANALYSIS

Report Key

The following designations are referred to throughout the report:

Chart Designations

= This Plan

= Benchmark Group/Standard

Blue = Greater than Median

Red = Less than Median

Table of Contents 1

Fiduciary Benchmarks’ Evaluation Process 2

Total Plan Fee Detail 3-4

Total Expense Ratio Breakdown 5

Benchmark Group 14

Provider Quality 15

Scope of Services 16

Value Delivered 17

Fees 18

Summary 19

Table of Contents

Benchmark Group 6

Provider Quality 7

Scope of Services 8

Value Delivered 9

Fees 10-12

Summary 13

DISCLAIMERS 20

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The 3 Major Points Regarding Fee Reasonableness

1. Fees need to be REASONABLE…NOT LOW

2. Fees should NOT be considered in a vacuum

3. This determination needs to be made at the Service Provider Level

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Agenda

1. Benchmarking Basics

2. Protect Yourself…Protect Your Clients…Improve Outcomes

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The impact per one prominent ERISA attorney: 1. Know what your fees are 2. Compare them to benchmarks 3. Monitor on an ongoing basis 4. Make sure you have real documentation 5. Hire Third-Parties for an independent review 6. Make sure you conduct a fiduciary audit 7. Have a Fiduciary Manual

One of the First Lawsuits to Settle…

Marcia Wagner, Plan Sponsor interview, December 2009

$16.5 million

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One of the Latest Lawsuits to Settle…

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Boeing’s 401(k) Lawsuit Settlement Second Largest

NAPA Net Staff

Terms of a trial eve settlement in Boeing’s 401(k) excessive fee lawsuit have finally

come to light. … READ MORE

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And there is no end in sight…

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Retirement Plans Still Being Scrutinized by Plaintiffs’ Attorneys:

“From stable value, to proprietary funds, to company stock, to excessive fees, to a

mix of all of the above, there are also more plaintiffs law firms filing suits than ever,”

warns David Levine, a principal at Groom Law Group specializing in the Employee

Retirement Income Security Act (ERISA). It’s been a busy year for litigators, Levine

says, and there even seems to be a developing measure of competition among

plaintiffs firms to organize and file complaints first, “to come up with new theories,

and to move quickly.” Where does this leave sponsors, advisers and providers? Read

more »


The Resulting Problem…A Race to the Bottom

“my client doesn’t appreciate the work we do” “people are offering to do the same work at absurdly low prices” “Fee Compression is a big concern of mine”

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Advisor RFPs not Just for Mega Plans

Fred Barstein

The median size of plans conducting advisor RFPs recently is $35 million, according to

research by Inhub, an online advisor RFP service. … READ MORE

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The Ideal Solution would… Protect Plan Sponsors with a Prudent Process

“The lesson is to benchmark your plan’s services against appropriate peer-group data. It would be difficult for a plaintiff’s attorney to show that you were imprudent if you take that step and if the results are reasonable.” Fred Reish, Drinker Biddle, Plan Sponsor 7/2011

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Shown on the right is a Drinker Biddle White Paper that analyzes why the FBI report is a procedurally prudent way to test for Fee Reasonableness.


The Ideal Solution would… Help Plan Sponsors Save Money

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The use of a Fiduciary Benchmarks report can qualify a plan sponsor for a reduction in their Fiduciary Liability Insurance Premiums of up to 50%.

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The Ideal Solution would… Protect Yourself by emphasizing Value BEFORE Fees

vs.

Fees

Cost Drivers

Value Factors

Quality of Provider

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• If a service provider can demonstrate that their communication and education programs actually results in deferral rates that are 1.20% higher than average, that will be worth $38,148 to just that one participant

• This is an example of how the proper use of benchmarking can result in a situation that is a Win-Win-Win for all parties

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The Ideal Solution would… Improve Outcomes for Participants

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The FBi Patented Process (U.S. 8,510,198)

1. Use the RIGHT Data

2. Build a Fair and Repeatable Process

3. Customize Benchmark Groups by Service Provider

4. Consider the Quality of the Service Provider

5. Examine Scope of Services which Drives Plan Costs

6. Examine Value Delivered: to the Plan Sponsor and their Participants

7. Track & Compare Fees BUT…Allow for “Extra Credit”

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100% of data should come directly from the source: Service Providers

All data is thus current, accurate and consistent with 408(b)(2) disclosures.

Essential #1: Use the RIGHT Data

RKs and TPAs Investment Mgrs Advisors

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Essential #2: Build a Fair and Repeatable Process

Examine Value

Delivered



Customize Benchmark

Group

Evaluate Fees

Judging: “to form an opinion about through careful weighing of evidence and testing of premises”

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Essential #3: Customize Benchmark Group by Service Provider

• Economically Driven • Plan Assets • Participants • Average Account Balance Customize

Benchmark Group

• Statistically Valid • REMOVE the Outliers • Strive for Predictability

• Diversified by Recordkeeper • At Least 25 plans • At Least 10 Recordkeepers • All 5 Business Models • Representative of Market Segment

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Essential #4: Consider the Quality of the Service Provider

• Recordkeeper • Expertise with Retirement Plans • Non-401(k) Plan Expertise • Cultural Fit

• Services/Processes

• Definition of Plan Success • Process to Mitigate Conflicts of Interest • Protecting/Improving the Plan

• People/Technology/Resources

• Team • Technology • Profitability/Sustainability


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Essential #5: Explain Scope of Services which Drives Plan Costs

Small Cost Impact Large Cost Impact

√ More Services

Fund Additions Fund Deletions Managed Account Self Directed Account Model Portfolios

Extra Contribution Types Extra Funds Extra Payrolls Extra Loan Activity Extra Terminations

Rollovers IN to plan Investment Transfers Age 59 ½ Withdrawals Hardship Withdrawals MRDs and QDROs

Core Services

Company Stock Bad/Inconsistent Data M&A Activity Plan Design Changes Periodic Valuation

Medium Cost Impact


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Essential #6: Examine Value Delivered to Plan Sponsor

Examine Value

Delivered

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Essential #6: Examine Value Delivered to Participants

Examine Value

Delivered

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Essential #7: Track & Compare Fees BUT…Allow for Extra Credit

Evaluate Fees

• Start with a Base Fee and Adjust for: A. Fiduciary Responsibility B. Extra Communications C. Extra Meetings/Work

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Technology Demonstration: The Fiduciary Benchmarks System

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3 Simple Steps: 1. Load Your Data 2. Analyze your Plans 3. Pick the Right Report

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Stopping the Race to the Bottom… And Starting the Race to the Top

• Risk Losing Clients • Does NOT Help Participants • Reduces Revenue • Increases Expense • Decreases Margins • Fees BEFORE Value

• Protect Plan Sponsors • Truly Help Participants • Retain Revenue • Lower Expense • Expand Margins • Value Before Fees

Versus

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This material has been prepared solely for informational and educational purposes. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

www.fiduciarybenchmarks.com 5335 Meadows Road, Suite 210 Lake Oswego, OR 97035 866.516.4909

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