Qualified Retirement PlansUnderstanding Your Fiduciary Duty

“When the refs change the rules of the game, the players will be forced to change the way they play the game”

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Outline

1. Qualified Plan Landscape2. Who is a Fiduciary?3. What Liability Do I Have?4. ERISA Compliance5. How Do I Limit Liability?6. Current Case Law7. Q&A

Qualified Plan Landscape

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• ERISA- Federal law that governs retirement plans

• Recent Regulatory Changes (Fee Transparency)• July 16th, 2010 – Interim Final Regulations expanding on

408(b)(2) & 404(a)(5)• July 1st, 2012 – Effective Date of Changes

• Why the Change?• Social Security• Scarcity of Pension Plans• There is no 3 legged stool anymore

• Implications on Plan Sponsors/Fiduciaries

Who is a Fiduciary?

• You are a Fiduciary under ERISA if you:• Exercise discretion and control over plan management or disposition

of assets• Render investment advice• Have authority over plan administration• Are a named Fiduciary• Are a fiduciary by functions of your responsibilities (not just by name)

• Fiduciary status is based on functions performed for the plan, not a person’s title

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What Liability Do I Have?

• Fiduciaries can be held personally liable to make good any losses or to restore any profits made through their use of plan assets resulting from a breach in fiduciary duties

• Penalties of up to 20% for any amount recovered as a result of an ERISA violation can be assessed

• Penalties can be assessed up to six years after fiduciary violations or three years after the party bringing suit had knowledge of the breach

• Willful violations carry personal criminal penalties of up to $5000 ($100,000 for corporations)and up to one year in prison

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Statistics

• 141 million Americans covered• Approximately 684,000 private retirement plans• 2.4 million health plans• $7.8 trillion in assets• 2012:

- 3,566 Civil Investigations; - 318 Criminal Investigations (117 indictments); - 1,884 VFCP Applications Processed;- 22 CPA Firm Inspections

ERISA Compliance

The Employee Retirement Income Security Act (ERISA) requires plan fiduciaries, when selecting and monitoring service providers and plan investments, to act prudently and solely in the interest of the plan’s participants and beneficiaries. Responsible plan fiduciaries also must ensure that arrangements with their service providers are “reasonable” and that only “reasonable” compensation is paid for services. Fundamental to the ability of fiduciaries to discharge these obligations is obtaining information sufficient to enable them to make informed decisions about an employee benefit plan’s services, the costs of such services, and the service providers.

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How Do I Limit Liability?

• ERISA requires prudent decision making not successful outcomes

• Fiduciaries should implement a process by which it monitors the selection of investments, the selection of service providers(investment advisors, TPA’s, and providers of participant education) and the decision to continue offering investments or using service providers (phase known as monitoring)

• Key elements of a prudent process:– Duty to investigate– Duty to maintain records– Duty to obtain expert assistance where necessary

• The above steps lead to the required outcome: An informed and reasoned decision

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How Fees Are Paid

Shareholder Servicing: Revenue shared by the mutual fund company with the service provider.

Investment Management Fee

12b-1 Fees

Shareholder Servicing Fees

Sub-TA (Agency Transfer Fees)

Asset / Wrap Fee: Additional fees layered on top of total investment fees.

12b-1: Distribution expenses paid by mutual funds from fund assets. Includes commissions to brokers, marketing expenses and other administrative services.

Investment Management: Fees for managing investment assets. Charged as a percentage of the assets invested and deducted from the investment return.

Sub-TA: Brokerage firms and mutual funds often contract recordkeeping and other services related to participant shares to a third party called a sub-transfer agent.

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Components of Plan Costs

Paid for by plan sponsor or participant

Administrative FeesAdministrative Fees

Always paid by plan

participant

Investment FeesInvestment Fees Plan Consulting FeesPlan Consulting FeesAll costs associated with managing the

investments

Advisory fees paid to a registered investment advisor or commission

paid to a broker

Paid for by plan sponsor or participant

Services to operate the plan:

Recordkeeping, Trustee,

Compliance, Communica-

tions

Total Plan Total Plan CostCost

Paid for by plan sponsor or participant

Administrative FeesAdministrative Fees

Always paid by plan

participant

Investment FeesInvestment Fees Plan Consulting FeesPlan Consulting FeesAll costs associated with managing the

investments

Advisory fees paid to a registered investment advisor or commission

paid to a broker

Paid for by plan sponsor or participant

Services to operate the plan:

Recordkeeping, Trustee,

Compliance, Communica-

tions

Total Plan Total Plan CostCost

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Share Classes Defined

• Many mutual funds offer the identical money manager with several different investment management expense options varying the revenue sharing shared with third parties

• Each investment management expense option is a different share class

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Share Class Matters

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Benchmarking

Asset Class Assets Fund Expense Ratio Cost ($) Revenue

SharingRevenue

Sharing ($) Fund Expense Ratio Cost ($) Revenue

SharingRevenue

Sharing ($)Large Blend 6.24% LC S&P 500 Index (PGI) 0.73% $9,612 0.58% $7,637 Fid Spar 500 Idx Adv 0.07% $922 0.00% $0Large Blend 2.69% LargeCap Blend II (TRP) 1.32% $7,494 0.78% $4,428 AF Fundamental Invs 0.96% $5,450 0.65% $3,690Large Growth 4.42% AF Growth Fd of Amer 0.93% $8,667 0.60% $5,592 AF Gr Fd of Amer R3 0.93% $8,667 0.35% $3,262Large Growth 1.61% LargeCap Gr I (TRP) 1.30% $4,427 0.80% $2,724 AF Gr Fd of Amer R3 0.93% $3,167 0.35% $1,192Large Value 3.26% Amer Cent Eq Inc A 1.22% $8,398 0.55% $3,786 BlackRock Eq Div A 1.03% $7,090 0.50% $3,442Mid Blend 1.04% MC S&P 400 Idx (PGI) 0.74% $1,630 0.58% $1,278 Vanguard MC Index 0.21% $463 0.00% $0Mid Growth 4.04% Janus Adviser MCG 1.16% $9,900 0.50% $4,267 Munder MC Core Gr 1.33% $11,351 0.60% $5,121Mid Value 0.78% MCV I (Goldman/LA) 1.57% $2,589 0.86% $1,418 JPMorgan MCV Sel 1.01% $1,665 0.50% $824Small Blend 2.22% SC S&P 600 Idx (PGI) 0.73% $3,426 0.58% $2,722 Vanguard SC Index 0.22% $1,033 0.00% $0Small Growth 0.66% Lord Abbett Dev Grth 1.13% $1,562 0.40% $553 Sentinel Sm Co A 1.13% $1,562 0.35% $484Small Value 1.96% Amer Cent SCV 1.74% $7,209 0.55% $2,279 Allianz NFJ SCV A 1.21% $5,013 0.50% $2,072Int'l Stock 8.21% AF EuroPacific Growth 1.07% $18,542 0.60% $10,397 AF EuroPacific Gr R3 1.11% $19,235 0.65% $11,264Fixed Income 10.19% PIMCO Total Return 1.15% $24,735 0.70% $15,056 PIMCO Total Ret Ad 0.68% $14,626 0.25% $5,377Cash 39.17% Fixed Income Option 0.65% $53,724 0.65% $53,724 Stable Pooled 0.90% $74,387 0.84% $69,428Asset Allocation 0.41% LifeTime Strat Inc 1.25% $1,080 0.73% $631 BGI LP Retire I 0.85% $734 0.40% $346Asset Allocation 2.12% LifeTime 2010 1.34% $5,994 0.76% $3,400 BGI LP 2010 I 0.85% $3,802 0.40% $1,789Asset Allocation 3.33% LifeTime 2020 1.39% $9,767 0.77% $5,410 BGI LP 2020 I 0.85% $5,972 0.40% $2,811Asset Allocation 5.18% LifeTime 2030 1.42% $15,533 0.78% $8,532 BGI LP 2030 I 0.85% $9,298 0.40% $4,375Asset Allocation 1.77% LifeTime 2040 1.44% $5,385 0.79% $2,954 BGI LP 2040 I 0.85% $3,178 0.40% $1,496Asset Allocation 0.67% LifeTime 2050 1.46% $2,067 0.79% $1,118 BGI LP 2050 I 0.85% $1,203 0.40% $566Total Assets 100.00%

Weighted Expense Ratio (EE paid) 0.96% $201,740 0.65% $137,906 0.85% $178,819 0.56% $117,538 Asset Charge (EE or ER paid) 0.10% $21,101 0.02% $4,220 Billed Fees (ER paid) 0.05% $10,000 0.00% $0

TOTALS 1.10% $232,841 0.65% $137,906 0.87% $183,039 0.56% $117,538

Information is for illustrative purposes only and cannot be guaranteed now or in the future.

Vendor 1 Vendor 2

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Participant Education

• Fiduciaries should ensure that plan participants are educated and well informed

• “We don’t need more information, we need advice”

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Fiduciary Outsourcing

• ERISA permits plan sponsors to delegate fiduciary functions of the plan to service providers

• ERISA Section 3(21) Co-Fiduciary• ERISA Section 3(38) Investment Manager• ERISA Section 3(16) Fiduciary• Proper delegation requires service providers must

explicitly acknowledge in writing that it is a fiduciary• Upon delegation, fiduciaries of the plan still have a

responsibility to monitor the providers

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Current Case Law

• Tussey v ABB Inc – Initial Rulings• ABB fiduciaries failed to calculate recordkeeping fees paid to Fidelity

through revenue sharing arrangements it had with ABB investments• Also ruled ABB failed to investigate the market price for similar

recordkeeping services and did not benchmark the cost of recordkeeping fees prior to entering the relationship with fidelity

• Failed to follow the Investment Policy Statement (IPS)- IPS required rebates associated with investments would be used to offset plan cost. In this case, they were retained by fidelity

• Ruled that a breach of the IPS occurred in the selection of funds• Ruled that they were allowing one plan to subsidize another• Float Income- Interest was earned when unallocated balances were

held in overnight accounts and not credited to the plan

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Questions

Clayton SmithRetirement Plan Advisor

220 Trace Colony Park Drive, Suite A Ridgeland, Mississippi 39157

601-414-4455 phone 601-414-4459 fax

www.wealthpartnersnfp.com

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Disclosures

· Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), member FINRA/SIPC. WealthPartners, LLP is a member of PartnersFinancial, an affiliate of NFPSI. WealthPartners, LLP and NFPSI are not affiliated.

· Any decisions whether to implement these ideas should be made by the client in consultation with professional financial, tax and legal counsel.

· Hypothetical investment results are illustrative only and should not be deemed representative of past or future investment experience.

· The information contained herein is based on data you may have provided, our interpretation of the existing Internal Revenue Code, and the application of relevant statures, regulations, court rulings, and familiarity with this material as it currently exists.

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· This may contain information from fixed and variable life insurance and annuity sales illustrations. Refer to the disclosures in the actual illustrations.

· There are issues to consider before replacing life insurance, such as commissions, fees, expenses, surrender charges, premiums and new contestability period. There may also be unfavorable tax consequences caused by surrendering an existing policy, such as a potential tax on outstanding policy loans. Please discuss your situation with your financial advisor.