joseph trainormark wetzel senior vp for finance & cfopresident
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Plan Sponsor Fiduciary Roles and Responsibilities: Best Practices for Overseeing 403(b) Plan Investments. Joseph TrainorMark Wetzel Senior VP for Finance & CFOPresident University of the SciencesFiduciary Investment Advisors, LLC. Agenda. The 403(b) Landscape - PowerPoint PPT PresentationTRANSCRIPT
Plan Sponsor Fiduciary Roles and Responsibilities:
Best Practices for Overseeing 403(b) Plan Investments
Joseph Trainor Mark WetzelSenior VP for Finance & CFO PresidentUniversity of the Sciences Fiduciary Investment Advisors, LLC
1) The 403(b) Landscape
2) Fiduciary Roles & Responsibilities
3) Single vs. Multiple Provider Models
4) Sample Lineups & Fee Analysis
5) Case Studies
6) Conclusion
Agenda
Historically, 403(b) Plans:
• Have had little employer involvement
• Have had little to no formalized oversight
• Have often been simply a payroll function
• Have been the responsibility of the human resources staff
• Have relied upon their investment & recordkeeping vendor to drive fund menu decisions, fee & revenue discussions, etc.
Where We’ve Been
403(b) plan sponsors must now operate their plans much more like 401(k) plans:
• Written Plan Document Requirement
• Form 5500 Filing Requirement
• Plan Audit Requirement (generally for plans over 100 participants)
• Heightened Fiduciary Scrutiny
The Final 403(b) Regulations
403(b) Sponsors and their Fiduciaries are looking to:
• Manage their Fiduciary Risk
• Construct a Best-in-Class 403(b) Benefit to attract, retain and reward valued faculty and staff
• Improve their Participant Outcomes
Sound simple?
Plan Sponsor Goals
Fiduciary Roles & Responsibilities
“ERISA’s prudent standard is not that of a prudent lay person but rather that of a prudent fiduciary with experience dealing with a similar enterprise.”
- Marshall v. Snyder 1EBC 1878, 1886 (E.D.N.Y. 1979)
Under ERISA, a Fiduciary is a person who:
• Exercises any discretionary authority over the management of a benefit plan or plan investments,
• Has any discretionary authority or discretionary responsibilities in the administration of a plan, and/or
• Directly or indirectly renders investment advice for compensation.
Who is a Fiduciary?
Under ERISA, a Fiduciary is required to discharge duties*:
• Solely in the interest of the participants & beneficiaries;
• For the exclusive purpose of:• Providing benefits to participants & beneficiaries;• Defraying reasonable expenses of administering the plan.
• With the care, skill, prudence & diligence that a prudent person would use.
* “Avoiding the Breach,” Diversified Investment Advisors, 2009
Overview of ERISA Fiduciary Duties
Potential liability for breaches of fiduciary responsibility:
• Personal liability
• Civil action
• Monetary penalties & excise taxes
• Criminal penalties
• Audit exposure
Fiduciary Liability
• Establish an oversight committee & committee charter
• Review bonding & fiduciary insurance
• Implement written Investment Policy Statement
• Hire independent third party
• Review quarterly performance
• Communicate with participants/beneficiaries
• Work with an ERISA attorney
The Process of Managing Fiduciary Risk
A strong committee charter establishes the following:
• The purpose(s) of the committee
• Guidelines for appointing and removing committee members
• Frequency of committee meetings
• Duties and powers of the committee
• Voting procedures
Committee Charter
• Fiduciary liability insurance covers claims for alleged failure to prudently act within the meaning of the Pension Reform Act of 1974.
• Fidelity bonds are required by law & cover claims involving dishonesty by administrators or trustees.
• Employee liability insurance covers claims for administrative errors or omissions.
• D&O Insurance typically does not cover ERISA related matters.
Bonding and Fiduciary Insurance
A strong investment policy statement should:
• Contain detail to define, implement & manage investment strategy;
• Define the duties & responsibilities of all parties;
• Define diversification;
• Define due diligence criteria for selecting investment options;
• Define monitoring criteria for investment options.
Investment Policy Statement
A strong advisor should provide the following:
• A comprehensive committee charter & investment policy statement;
• Clear goals, objectives & methodology;
• Guidance in designing a diversified fund menu;
• A method to objectively evaluate performance.
Third Party Oversight
A strong advisor should provide the following:
• A basis for evaluating fee structures;
• Improved participant outcomes;
• A comprehensive fiduciary governance process;
• Confidence that you are meeting your obligations as a fiduciary.
Third Party Oversight ctd.
A quarterly performance review should cover the following:
• Performance against a benchmark and/or peer group.
• Fees relative to other similar investments.
• Organizational changes.
Quarterly Performance Review
Communication with participants & beneficiaries can include:
• Targeted campaigns;• Communications focused on retirement readiness;• Formal employee education.
Communication can occur:
• In person;• Via mail;• Electronically.
Communication
Single vs. Multiple Provider Model
• Multiple provider model is the most prevalent, but it is changing.
• Sponsors are reexamining retirement plan providers through a well-documented RFI or RFP process.
• There are significant benefits to utilizing a single provider.
Single vs. Multiple Provider Model
• One provider = fewer investment choices to monitor;
• Increased purchasing power;
• Less confusion for the average participant;
• Improved administrative efficiencies.
Benefits of a SingleProvider Model
• Liquidity
• Politics
• Communications
• Resistance to Change
Obstacles in Moving Toward a Single Provider
Sample Lineups and Fee Analysis
TIAA-CREF Annuity Menu
Money Mkt / SV Bond Balanced Domestic Equity Int’l / Global / Other
TIAA Traditional CREF Bond Market
CREF Social Choice
Large Value
Large BlendCREF Equity Index,CREF Stock
Large GrowthCREF Growth
CREF Global Equities
TIAA Real Estate
CREF Money Market
CREF Inflation Linked Bond
Mid Value Mid Blend
Mid Growth
Small Value
Small Blend
Small Growth
Fidelity Unconstrained Investment Menu
Money Mkt / SV Bond Balanced Domestic Equity
Large Value
Fidelity Equity IncomeFidelity Large Cap ValueFidelity Blue Chip Value
Large Blend
Spartan US Equity Idx InvFidelity Growth & Income
Fidelity Fidelity FundSpartan Total Mkt Idx Inv
Spartan 500 Index InvFidelity Disciplined EquityFidelity Value DiscoveryFidelity Dividend Growth
Large Growth
Fidelity MagellanFidelity Contrafund
Fidelity Growth CompanyFidelity Blue Chip GrthFidelity OTC PortfolioFidelity Independence
Fidelity TrendFidelity Fifty
Fidelity Asset Mgr 85%Fidelity Cap AppreciationFidelity Large Cap GrowthFidelity Large Cap Stock
Fidelity Export Multi
Mid Value
Fidelity ValueFidelity Mid Cap Value
Mid Blend
Fidelity Leveraged Co StkFidelity Low Priced StkSpartan Ext Mkt Idx InvFidelity Value Strategies
Mid Growth
Fidelity Mid Cap StockFidelity Mid Cap GrowthFidelity Growth Strategies
Small Value
Fidelity Sm Cap Value
Small Blend
Fidelity Sm Cap DiscoveryFidelity Small Cap Stock
Small Growth
Fidelity Sm Cap Independence
Intl /Global Other
Fidelity US Gov’t Res
Fidelity Cash Reserve
Fidelity Ret Gov’t Money Mkt
Fidelity Rtmt Money Mkt
Fidelity Money Mkt
Fidelity US Treas Money Mkt
Fidelity US Gov’t Money Mkt
Fidelity Sel Money Mkt
Fidelity High Income
Fidelity US Bond Idx
Fidelity Cap Income
Fidelity Ginnia Mae
Fidelity Invt Grade Bond
Fidelity Interm. Bond
Fidelity Gov’t Income
Fidelity Strategic Income
Fidelity New Mkt Income
Fidelity Mortgage Sec
Fidelity Short Term Bond
Fidelity Inflation Prot Bond
Fidelity Inter Gov’t Inc
Fidelity Asset Mgr 20%
Fidelity Freedom Funds
Fidelity Balanced
Fidelity Puritan
Fidelity Asset Mgr 50%
Fidelity Asset Mgr 70%
Fidelity Strat Real Ret
Fidelity NordicFidelity Int’l Cap ApprecFidelity OverseasFidelity Pacific BasinFidelity Southeast AsiaFidelity Diversified Int’lFidelity JapanFidelity CanadaFidelity EuropeSpartan Int’l Idx InvFidelity Emerging MktsFidelity Int’l Real EstateFidelity China RegionFidelity Int’l DiscoveryFidelity Japan Smaller CoFidelity Int’l Sm CapFidelity Latin AmericaFidelity Global Balanced
Fidelity Select:LeisureMedical DelHealthcareEnergyMed Equip SysTechnologyComm EquipNatural GasCons StaplesEnergy SvcsDefenseGoldMaterialsFinancialNatural ResourcesPharmaceuticalEnvironmentFidelity Real Estate InvsFidelity Telecom UtilFidelity Convertible SecFidelity Real Estate Income
Sample Optimized Fund Menu
Cap. Preserv. Fixed Income Hybrid Domestic Equity Int’l / Global / Other
Primary Stable Value
Active Intermediate Term Bond
Suite of Target
Retirement Date Funds
Large ValueActive
Manager
Large Blend
Passive Manager
Large GrowthActive
Manager
Active Manager
(ACWI ex US)
Secondary Money Market
Passive Intermediate Term Bond
Small/Mid ValueActive
Manager
Small/Mid Blend
Passive Manager
Small/Mid GrowthActive
Manager
Passive Manager
(ACWI ex US)
International Intermediate Term Bond
Active Manager
(Small Cap)
Emerging Markets
Qualified Default Investment Alternative
• Lifecycle / Target Date Fund
• Balanced Fund
• Professionally-Managed Account
• Capital Preservation Product (for the first 120 days of participation)
“ERISA’s test of prudence…is one of conduct and not a test of the result of performance of the investment. The focus of the inquiry is how the fiduciary acted in his selection of the investment, and not whether his investment succeeded or failed.”
- Donovan v. Cunningham 716F. 2d 1455, 1467 (5th Cir. 1983)
• 12b-1 Fees
• Subtransfer Agency Fees
• Revenue Sharing Arrangements
• Recordkeeping Costs / Vendor “Required Revenue”
• Fiduciaries must benchmark plan fees & revenue structures to determine reasonableness and competitiveness of the services.
Understanding Vendor Fees & Revenue
A fiduciary’s obligations are:
• To know & understand all charges;
• To ensure they are reasonable;
• To evaluate all revenue sharing agreements, disclosure of 12b-1, sub-transfer agency or other commission-based fees and all contract charges, surrender charges & other fees that participants or the plan may incur.
Fee Transparency
Fiduciaries should establish a required revenue benchmark:
• This benchmark acts as the basis for determining if any excess revenue exists in the plan.
• Excess revenue may be used to enhance participant services, access lower cost share classes for participants or pay for other plan-related costs.
Fee Transparency
Sample Full Fee Disclosure Worksheet – TIAA-CREF
Fund Name 9/30/2010 Assets Fees (%) Fees ($)
Assumed/Actual Recordkeeping
Offset (%)
Assumed/Actual Recordkeeping
Offset ($)
Vendor Fee Per
ParticipantCREF Stock $79,267,304 0.44% $348,776 0.24% $190,242CREF Global Equities $14,441,828 0.46% $66,432 0.24% $34,660CREF Grow th $12,480,263 0.43% $53,665 0.24% $29,953CREF Equity Index $7,689,695 0.39% $29,990 0.24% $18,455CREF Money Market $7,718,615 0.38% $29,331 0.24% $18,525CREF Social Choice $8,266,756 0.41% $33,894 0.24% $19,840TIAA-CREF S&P 500 Index Instl $1,017,184 0.09% $915 0.00% $0Vanguard Total Bond Market Idx Inv $0 0.22% $0 0.00% $0TIAA-CREF International Eq Idx Instl $1,750,129 0.16% $2,800 0.00% $0Vanguard Extended Mkt Index $3,239,255 0.30% $9,718 0.00% $0CREF Bond Market $7,863,655 0.41% $32,241 0.24% $18,873CREF Inflation-Linked Bond $11,394,405 0.41% $46,717 0.24% $27,347Vanguard Inf lation Protected Secs $0 0.25% $0 0.00% $0TIAA-Traditional $109,899,379 0.51% $560,487 0.15% $164,849Vanguard Target Retirement Income $0 0.18% $0 0.00% $0Vanguard Target Retirement 2020 $340,613 0.18% $613 0.00% $0Vanguard Target Retirement 2025 $976,766 0.19% $1,856 0.00% $0Vanguard Target Retirement 2010 $92,337 0.17% $157 0.00% $0Vanguard Target Retirement 2015 $370,447 0.17% $630 0.00% $0Vanguard Target Retirement 2030 $541,190 0.19% $1,028 0.00% $0Vanguard Target Retirement 2035 $467,137 0.20% $934 0.00% $0Vanguard Target Retirement 2040 $1,404,285 0.20% $2,809 0.00% $0Vanguard Target Retirement 2045 $50,953 0.20% $102 0.00% $0Vanguard Target Retirement 2050 $19,865 0.20% $40 0.00% $0TIAA Real Estate $6,102,269 1.06% $64,684 0.24% $14,645Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.20% $537,389 $209
Plan Administration:Participant Maintenance # of participants = 2,576 0.00% $0 0.00% $0
ERISA Budget $0 0.00% $0 0.05% $137,697Transaction BasedLoans, QDROs, MRDs, ROEs, ISWs, etc. $0 0.00% $0 0.00% $0
Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.15% $399,691 $155
Sample Full Fee Disclosure Snapshot – TIAA-CREF
Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.20% $537,389 $209Plan Administration:Participant Maintenance # of participants = 2,576 0.00% $0 0.00% $0
ERISA Budget $0 0.00% $0 0.05% $137,697Transaction BasedLoans, QDROs, MRDs, ROEs, ISWs, etc. $0 0.00% $0 0.00% $0
Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.15% $399,691 $155
Other fiduciary duties:
• Hold committee meetings at regular intervals;
• Maintain detailed meeting minutes;
• Monitor investment options;
• Establish investment, fee & revenue benchmarks;
• Evaluate benchmarks periodically;
• Document all decisions.
Fiduciary Duty to Monitor
Case Studies
• University of the Sciences• 403(b) ERISA plans• Two plan vendors – TIAA-CREF (Annuity Menu) & Vanguard
(Limited Fund Menu)___________________________________________________
Sponsor Goals:Manage fiduciary risks and work to improve participant outcomes.
Case Study #1
University of the Sciences Process:
• RFP for independent plan consultant /
• Established structure
• Evaluated
• Decided
• Documented
• Implemented
Case Study #1
• Prominent University• 403(b) and 401(a) plans – both ERISA plans• Two plan vendors – Fidelity (Unconstrained Fund Menu) & TIAA-
CREF (Annuity Menu)___________________________________________________
Sponsor Goals:Manage fiduciary risks and work to improve participant outcomes.
Case Study #2
Case Study #2 Process:• Established structure
• RFP for independent plan consultant
• Revised structure
• Evaluated
• Decided
• Documented
• Implemented
Case Study #2
Where They Were:• Offered entire lineup of Fidelity Funds – approximately 175
investments.• Offered the full suite of TIAA-CREF annuity accounts.____________________________________________________
Where They Are:• Reduced menu of core TIAA-CREF accounts.• Offer a core lineup of Fidelity Funds, including Target Date
Retirement Funds.• Offer a self-directed brokerage window.
Case Study #2
• A well-managed fiduciary process.
• A well-designed “best-in-class” fund menu – highly simplified, yet still offering broad diversification opportunities.
• Improved participant outcomes.
Results
• Purdue University• Consolidated vendors down to one (Fidelity)• Incorporated a 4-Tier Investment Menu
• Stanford University• Incorporated a 4-Tier Investment Menu with a decidedly
indexed approach (Vanguard)
• Pepperdine University• Consolidated from four vendors to one (Diversified
Investment Advisors)
Well-Publicized Decisions
An Ongoing Fiduciary Process
• Investment Review
• Administrative Fee Review
• Investment Expense Analysis
• Benchmarking & Trends
• Recordkeeper Negotiations
• IPS Review
• Regulatory/Legislative Update
• Committee Best Practices
• Bonding & Fiduciary Insurance
Fiduciary Governance: Annual Checklist
• Recordkeeper Svcs Update
• Plan Demographic Review
• Education & Advice Plan
• Plan Design Benchmarking
• Investment Menu Review
• Asset Class Updates
• Trends & Best Practices
• QDIA Analysis
Overall Considerations:
• Establish a fiduciary committee and appoint members;
• Adopt a written committee charter;
• Review bonding & fiduciary insurance;
• Adopt a comprehensive Investment Policy Statement (IPS);
• Evaluate service providers & document your findings;
• Hold regular committee meetings & maintain meeting minutes.
In Closing
When evaluating service providers:
• View investment management fees;
• Understand your vendor’s revenue structure;
• Monitor investments;
• Benchmark for reasonableness and competitiveness;
• Consider employing an RFI or RFP process.
In Closing
“There is risk in doing nothing.”- TIAA-CREF, “Investment Menu Construction,” NACUBO, July
2010
Questions?
• Joseph Trainor, University of the Sciences• [email protected], 215.596.8862
• Mark Wetzel, Fiduciary Investment Advisors, LLC• [email protected], 860.697.7410
Contact Information
Joe is Senior Vice President of Finance for University of the Sciences. USciences is a healthcare and science focused institution founded as the first college of pharmacy in North America. USciences has a current enrollment of 2,850 students in undergraduate, professional and graduate programs and is located in the University City section of Philadelphia.
In 1997 he became the founding Treasurer for the University City District. The UCD is a special service district formed to focus upon commercial revitalization and quality of life in the areas surrounding the various universities and healthcare campuses in West Philadelphia.
He is also a CPA who received his Bachelor of Science degree from The Pennsylvania State University. He has served various nonprofit organizations including EACUBO and The Savoy Company. The latter is the oldest amateur theater company in the world dedicated solely to the production of the works of Gilbert and Sullivan.
Joseph Trainor
Mark is President of Fiduciary Investment Advisors, LLC (FIA). Prior to founding FIA, he was a Senior Vice President and PRIME Consultant at UBS Financial Services Inc. He chaired their PRIME advisory committee and was a member of the firm’s pension and 401(k) committee. In 2009 and 2010 401kWire named Mark one of the 300 Most Influential Advisors in Defined Contribution.
Mark received a Bachelor of Science degree from the University of Vermont and a Masters of Business Administration from the Tuck school at Dartmouth, where he graduated as a Tuck Scholar with distinction. He is a trustee of the Ellsworth Foundation, a chairperson of the trustees for McLean and a director of the Granby Land Trust. He is a member of the investment committee for the Ellsworth Foundation, McLean, The Northfield Mount Hermon School and Hartford Hospital, as well as a paid member of the pension committee for Novartis Corporation.
Mark Wetzel
• Fee only independent registered investment advisory firm
• 100% employee owned
• 32-person staff with considerable experience working together
• Over 130 institutional clients with more than $16 billion in fiduciary assets
• Over 70 defined contribution clients with $7.9 billion in assets under advisement
About Fiduciary Investment Advisors, LLC
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