Fiduciary Duty

Posted by admin on: 2007-06-28 14:46:16

Randy Durig Accredited Fiduciary presenation to CPA's and Attourney's

Fiduciary Duty on New Government Rules About 401k

June 5, 2007

Presented by: Randy Durig

Accredited Investment Fiduciary
Registered Investment Advisor

Table of Contents

1. Introduction
2. ERISA
3. Law Suits
4. Pension Protection Act
5. Company Sponsors
6. Participants
7. Practically Speaking

1. Introduction
Since 2000 some major events happened with 401ks:
Many of the large problems arose with the crash of 2000 with the Enron, WorldCom debacle.

The PBGC, which insures defined benefit programs, basically became insolvent.

As of last the PGGC September, it only had $39 billion in assets to cover the $62.3 billion in guaranteed pension benefits it owes to more than 1 million workers.

Many lawsuits targeting the nation
The largest 401k plans include: Boeing, Dell, General Motors, IBM, AT&T 3m, and Black and Decker

The fee structure was so complex and often expensive. That The Department of Labor has authority under ERISA to oversee retirement plans fees and certain types of business arrangements that could affect fees, but lacks the information it needs to provide effective oversight. In other words the government often could not understand the fee structure.
Facts and Stats:

Only about 66% of 401k eligible employees participate

31% allocate their retirement plan accounts by random guessing or dividing their assets equally among the investment options.

44% do not think they could save an extra $20 per week.

61% of employees have not determined how much money they will need to save for retirement.

97% of plan sponsors that seeking to reduce the risk of liability to lawsuits is a priority.

60% of the plan sponsors did not realize they were fiduciaries.

ERISA lawsuits are among the most common (seventh most frequent) categories of cases clogging our federal court system. Defending ERISA lawsuit can be expensive.

32.5% of Plan Sponsors do not have an investment policy

2. ERISA
Possibly the single largest mistake with plan sponsors is not completing the extras steps to ensure the plan qualifies for safe harbor protection.
The following rules and conclusions came from the Enron case:

The conclusion was that unless participant-directed plans satisfied the Section 404(c) conditions, the investment fiduciaries - usually the members of the plan committee - were legally responsible for participants investment decisions. Since in our experience, few plans satisfy the 20-plus requirements in the regulation, most of the investment fiduciaries for the over 300,000 401(k) plans are probably unknowingly legally responsible for the prudence of participant investment decisions.
The brief describes several 404(c) conditions that Enron had not demonstrated that it satisfied, including the following:

Whether the participants and beneficiaries were provided with an explanation that the plan intended to qualify as a Section 404(c) plan. [DOL Reg. 2550.404c-1(b)(2)(i)(B)(1)(i)]

Whether the participants and beneficiaries were given an explanation that, if the plan qualified as a Section 404(c) plan, the fiduciaries would be relieved of liability for losses under the circumstances described in the 404(c) regulation. [Id.]

Whether the plan satisfies the specific regulatory requirements for employer stock. [DOL Reg. 2550.404c-1(b)(2)(i)(B)(1)(vii), -1(b)(2)(i)(B)(2)(vi)(C)(3), and -1(d)(2)(ii)(E)]
The DOL concluded:
Absent a showing that the plan qualifies as a 404(c) plan, the fiduciaries retained full fiduciary responsibility for all of the plan's investments, including the Enron stock that the participants directed the Trustee to purchase with their employee contributions. In re Unisys, 74 F.3d at 443-47.
If 401(k) investment fiduciaries are legally responsible for participant investments unless the plan satisfies the Section 404(c) conditions, why aren't fiduciaries taking the steps necessary to be protected by the Section 404(c) shield?
The answer is not clear. Why would a fiduciary unnecessarily expose him - or herself to claims from the widow of a 65-year-old participant who invested entirely in employer stock or entirely in a technology fund? What about the 25-year-old who is invested entirely in cash - year after year? Most people would agree that those are imprudent decisions - and, unless the plan complies with Section 404(c) requirements, they are the legal responsibility of the plan's investment fiduciaries (i.e., of the officers or committee members who oversee the plan's investments).
By complying with the 20 to 25 conditions in the Section 404(c) regulation, which are not overly burdensome, fiduciaries can insure - or protect themselves against - the imprudent investment, or asset allocation, decisions of participants.
It is inconceivable that a responsible officer or committee member would accept that potential liability if they understood the risk and if they knew that Section 404(c) protection was available. The likely problem is that the attorneys, consultants and investment providers have not done an adequate job of explaining ERISA Section 404(c), and its value, to plan sponsors.
Source: Reish.com
Fiduciary vs. Suitability Standard
ERISA 404(a)(1) states that a fiduciary must act prudently and solely in the interest of the participants and beneficiaries.
Source: ERISA
The difference is legal Brokers are held to a different standard than Registered Investment Advisers (RIA). The Investment Advisers Act of 1940, which legally obligates RIA's act solely in the best interests of their clients.
Brokers, meanwhile, are regulated by the National Association of Securities Dealers, which imposes a "suitability standard" rather than the stricter fiduciary standard. This simply means an investment sold by a broker must be suitable for the client. Brokers by SEC rules must also put the investment needs of the firm first before the needs of their client.

Source: BankRate.com
Brokers with the suitability standards can and often do hide their fees. Hidden fees by many are a major problem in the 401k structure, plus hidden fees do not comply with ERISA standards.
ERISA defines "fiduciary" not in terms of formal titles or designations, but in functional terms of control and authority over the plan. An ERISA "functional" fiduciary according to the federal courts, includes anyone who exercises discretionary authority over the plan's management, anyone who exercises authority or control over the plan's assets, and anyone having discretionary authority or responsibility in the plan's administration.
Source: Plan Sponsor's Roadmap for Meeting Fiduciary Responsibilities

A breach of fiduciary duties subjects a fiduciary to liability under ERISA. Section 409 of the law provides that any person who is a fiduciary and who breaches any of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA shall be personally liable to make good to such plan any losses to the plan resulting from such breaches and to restore to the plan any profits which the fiduciary may have made through the use of the assets of the plan. In addition to liability for her own acts, a fiduciary may be liable for the breach of duties by a co-fiduciary where the fiduciary participates knowingly in or knowingly undertakes to conceal an act or omission of another fiduciary, or where by action or inaction, the fiduciary has enabled another fiduciary to commit a breach or if a fiduciary has knowledge of a breach by such other fiduciary unless reasonable efforts are made to remedy that breach.
Source: Meyer Unkovic & Scott, LLP
The burden of proof for compliance with all provisions of ERISA lies with the plan sponsor/employer.
Corporate officers who appoint fiduciaries must ensure that the appointed fiduciary clearly understands his obligations.

Source: Martine vs. Harline D. Utah, 1992

Fiduciary Liability and Penalties:

Cannot be avoided by delegating duties
Lost profits plus 20% penalty
Criminal penalties for willful violation
Civil actions by participants
Removal as fiduciary
Can lose personal assets, home and business

The single largest problems with 401k plans are they are often not in compliance with ERSIA laws.
ERISA laws often ignored for years but after the crash the large retirement losses at Enron and WorldCom the ERSIA laws began to have real teeth.

Many who serve in fiduciary roles are unaware of the duties they bear, although ignorance is no protection under the law. Under ERISA, a pure heart and an empty head are not enough to avoid responsibility for fiduciary breaches.

Source: Riesh.com
3. Law Suits
If you want to sue a company that has qualified under the 401k safe harbor shield, then you must find a company lacks in protection, or a breach. A breach is when a company did not follow ERISA rules properly. With the complexity of ERISA laws many small companies could have several breaches.

Liability is not determined by investment performance, but rather on whether prudent investment practices were followed.

Source: The Center for Fiduciary Studies
Forecasts
Below is a forecast of the top three 401k law suits according to Keller Rohrback, LLP.
Forecast #1
Lack of monitoring the investments, specifically investments in company stock This is the most common situation to date that has led to suits over 401(k) investments is when a company invests its employees in company stock. Fiduciary is required to diversify plan investments so as to minimize the risk of large losses.
The new guidelines expect planned sponsors to have a documented prudent approach to their investment selection.

Each plan sponsor should document annually the performance, management changes, cost, long term record, and risk of its investments. This should be done by a professional and who is non-biased. The plan should diversify your participants portfolio by providing (the law is three) the average is 14 to 17, 401(k) investment options. Be sure to cover multiple asset classes, such as stable value, bonds, large, mid and small value, large and mid growth, and international.

Possibly add a natural resource option as a buffer for potential inflation. Most plan sponsors overlook adding low beta, pure value fund choices and balanced funds, when selecting their investment menu.

Source: Expert-Insights.com

Companies that have been or are currently are being sued due to lack of investment monitoring:

Krispy Kreme, Sears, Oneida, General Motors, Bausch & Lomb, Radio Shack, American Express, Lucent, Ikon, CMS, Conseco, Enron, Global Crossing, HealthSouth, Polaroid, Visteon Corp., Williams Companies, WorldCom, KB Homes, Dell, Freddie Mac-Beazer Homes USA, Household Int, Tribune Co., Marsh & McLennan, Home Depot, Archer, Daniels, Midland

Forecast #2

High Fee's and Expense Transparency
A fiduciary) has a specific obligation ensure that fee's and expenses are reasonable in light of the level and quality of services provided.
Source: US Department of Labor, Publications. p. 3

The Advisory Council makes the following recommendations in an effort to further educate plan sponsors and fiduciaries:

1. Plan sponsors should avoid entering transactions with vendors who refuse to disclose the amount and sources of all fees and compensation received in connection with plan.
2. Plan sponsors should require plan providers to provide a detailed written analysis of all fees and compensation (whether directly or indirectly) to be received for its services to the plan prior to retention.
3. Plan sponsors should obtain all information on fees and expenses as well as revenue sharing arrangements with each investment option. Plan sponsors should also determine the availability of other mutual funds or share classes within a mutual fund with lower revenue sharing arrangements prior to selecting an investment option.
4. Plan sponsors should require vendors to provide annual written statements with respect to all compensation, both direct and indirect, received by the provider in connection with its services to the plan.
5. Plan sponsors need to be aware that with asset-based fees, fees can grow just as the size of the asset pool grows, regardless of whether any additional services are provided by the vendor, and as a result, asset-based fees should be monitored periodically.
6. Plan sponsors should calculate the total plan costs annually."

Some experts believe Financial services firms that operate under the suitability standard versus the fiduciary standard would no longer be viable. Correcting the hidden fee problem might require barring non fiduciaries from doing business in a fiduciary governed industry. Only fee-based Professional fiduciaries would then remain.

Source: Matthew D. Hutcheson, Bureau of National Affairs

The U.S. Department of Labor issued a statement in March calling fee disclosure "a top priority," and says it intends to publish a proposed regulation this spring requiring service providers to disclose information concerning direct and indirect compensation, fees and other financial arrangements.

In 2008 the Form 5500 Schedule C, which would be issued in May or June, would require plan administrators to identify all service providers receiving $5,000 in total compensation (whether from the plan or plan sponsor or indirect from any other source) in connection with
1. Services provided to the plan
2. The person position with the plan. In addition, plan administrators would be required to indicate for each service provider whether the service provider received any indirect compensation from a third party.
First of all, plan sponsors should evaluate administrative costs separately from investment costs, and should be able to demonstrate that their plans fees are reasonable. To do that, they should gain a full understanding of their current fee and revenue sharing arrangements. A review of current fee disclosure practices to see if additional disclosure is warranted in light of recent court cases and ERISA requirements would also be prudent. Plan sponsors confirm that their fee monitoring and oversight processes are rigorous and up to date, including documentation of fees paid from plan assets.

Source: CCH Pension Plan Guide
Average Cost
Annuity average cost 2.25%
Mutual fund average cost 1.40%
Index fund average cost 0.18%
Source: 403bwise
Hidden Cost

More than half of all mutual funds have a 12(b)-1 feature. These fees are disclosed in the prospectus, but very few plan sponsors understand their significance to them, the participants, and the trustees.

The average 12(b)-1 or hidden cost to broker is .35%

Source: Matthew D. Hutcheson, Bureau of National Affairs

Some companies that have been involved with high fee law suits:

ABB Inc, Bechtel, Boeing, Caterpillar, Exelon, General Dynamics, International Paper, John Deere, Kraft Foods, Lockheed Martin, Northrop Grumman and United Technologies

System wide high fee lawsuits

Fidelity's involvement with the investment funds offered under the plans was allegedly so pervasive as to make Fidelity an ERISA fiduciary with respect to the plans.

In addition, plan sponsors themselves have sued insurance company providers directly Nationwide, The Hartford, and Principal - in what purport to be national class actions on behalf of all plans and plan sponsors that have engaged those entities.

Source: Fane, Britt, & Brown, LLP
Nationwide [which provides 401(k) services in addition to financial planning and insurance] represented that its management fees ran between 0.75% and 1.00%. But in some cases mutual funds rebated more than 0.50%. Nationwide failed to disclose that fact and kept the undisclosed kickbacks for itself. What's more Nationwide has been systematically replacing funds in its bundled annuity product in favor of ones that pay better revenue sharing rebates. Nationwide has steadily replaced mutual funds managed by its competitors with its own. [This] has resulted in holding funds that provide inferior returns.
Source: Employee Fiduciary
ING Life Insurance Annuity Co. has asserted excessive fee allegations against offering annuity instead of mutual funds
Source: Law.com
The duty of a fiduciary is to make sure the employees are receiving fair value for the costs that come out of their retirement savings account, to make sure they are receiving a fair return on their invested dollars compared to the revenues being generated by the investment provider and the plan's advisors. The task is not difficult - it just requires attention and a willingness to do a little probing.
Fiduciaries are required to know all expenses that are being paid by the plan, directly or indirectly, and to determine if they are reasonable (that is, whether the expense is competitive in the marketplace and whether the plan and its participants receive value commensurate with the cost). Fiduciaries are not required to choose the least expensive services; rather, they should ensure that they are getting adequate value for the plan's money.
Source: Reish.com
Fiduciary applying industry best practices can often reduce overall fees, and significantly compared to the suitability standard. A best practices fiduciary will disclosed all fees and this allows for a much higher degree of accountability, which often leads to better service.
"you need to be prepared to say, 'We've looked at our fees and believe they are reasonable.'
Source: Keller Rohrback L.L.P.'s
Forecast #3
Undisclosed financial relationships
ERISA 403(c)(1) states that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.

Significance: Using soft dollars for purposes other than for the exclusive purpose of providing benefits to participants and beneficiaries and paying operational costs of the plan itself is a fiduciary breach.

ERISA 404(a)(1) states that a fiduciary must act prudently and solely in the interest of the participants and beneficiaries.

Significance: Using soft dollars to buy loyalty of brokerage firms, consultants or other parties-in-interest to the plan is a fiduciary breach.

ERISA 406(a)(1)(D) states that a fiduciary shall not transfer to, or use by or for the benefit of a party-in-interest, any assets of an ERISA governed plan

Significance: Use of soft dollars could effectively be a transfer to a party interest, thereby creating a fiduciary breach.

This argument challenges the safe harbor that Section 404(c) of ERISA provides plan sponsors. That section protects fiduciaries from liability for losses participants incur in making investment choices. However, the protection only applies if sponsors give participants sufficient information to make informed investment decisions. Because they failed to provide adequate information, the plaintiffs argue, the defendants cannot claim Section 404 (c) protection

Plaintiffs in the class action suits argue the fees are not only too confusing for the average employee to understand, but also may be excessive. While the specifics differ, each suit accuses the corporation, its directors and executives who oversee the plan of breaching their fiduciary duties under ERISA by accepting fee arrangements from their 401(k) plan providers that are hidden from employees and jeopardize their retirement savings.

Source: Matthew D. Hutcheson, Bureau of National Affairs

With many high fees using the suitability standard many experts believe Fees are excessive or unreasonable and are tied to Revenue Sharing arrangements among companies involved in the 401k plans.

Source: Law.com

Courts have emphasized the importance of the independence of the expert. While fiduciaries are entitled to rely on the expertise of their qualified advisers, courts appear to permit greater reliance on independent investment advisers who compensation is not affected by the advice given and whose recommendations are not limited (e.g., to investments managed by their employer or an affiliate).

Source: Center of Fiduciary Excellence
4. Pension Protection Act
The Pension Protection Act Strengthens the Federal Pension Insurance System. The legislation: Requires companies that under-fund their pension plans to pay additional premiums:
Extends a requirement that companies that terminate their pensions provide extra funding for the pension insurance system

Requires that companies measure the obligations of their pension plans more accurately
Closes loopholes that allow under-funded plans to skip pension payments

Raises caps on the amount that employers can put into their pension plans, so they can add more money during good times and build a cushion that can keep their pensions solvent in lean times

Prevents companies with under-funded pension plans from digging the hole deeper by promising extra benefits to their workers without paying for those promises up front.

EGTRRA Made Permanent
Since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), American taxpayers have wondered if the 40-odd provisions set to sunset in 2010 would indeed cease and revert contribution, deferral and catch-up limits to pre-2001 levels. Thankfully, the Pension Protect Act made most of those previsions permanent. These include contribution, deferral and catch-up limits for IRA, 401(k), 403(b), SIMPLE IRA and SIMPLE 401(k), defined contribution plans and defined benefit plans.
Traditional to Roth IRA Rollovers
A glitch in the Tax Act of 2001 required that funds from an employer retirement plan had to be rolled to a Traditional IRA before being converted to a Roth IRA. The Pension Protection Act eliminated a step. Starting in 2008, funds from your employer retirement plan can be rolled directly to a Roth IRA with, however, federal income tax due on pre-tax contributions and earnings. Once money has been moved to a Roth IRA, additional earnings accumulate tax-free.
The new legislation also eliminates the Roth rollover ceiling starting in 2010, which prevented a person earning over $100,000 in modified adjusted gross income from converting to a Roth. Starting in 2010, anyone regardless of income can convert funds from a 401(k) plan to a Traditional or Roth IRA.
401(k) No Spouse Beneficiaries
Beneficiaries other than a spouse named on 401(k) plan documents can roll the plan funds they inherit directly to their own IRA. Prior to the change, no spouse beneficiaries had to receive the 401(k) funds in whatever manner the plan documents prescribed, usually a lump sum distribution, creating an immediate state and federal tax burden and potentially pushing the beneficiary into a higher income tax bracket. No spouse beneficiaries also can be included in those for whom hardship withdrawals qualify, giving families more resources in the event of a medical or other emergency.
Automatic Enrollment
As part of the congressional effort to encourage more individual retirement savings and less reliance on government benefits like Social Security, companies may automatically enroll employees in the employer 401(k) plan, starting with a minimum default contribution of 3 percent of your gross income and increasing to a minimum of 6 percent after three years, but not to exceed 10 percent. Employers must make a matching contribution.
Employees get a 90-day window to opt out by withdrawing contributions and earnings. They will owe income tax on the contributions and any earnings but will not be subject to the premature distribution penalty of 10%.
The Employee Benefits Research Institute anticipates automatic enrollment will boost 401(k) plan participation from 66 percent to 92 percent of eligible employees.
Employer Stock in Defined Contribution Plans
If your employer is a publicly-traded company, you now have the freedom to sell off any of your employers stock that you purchased with your deferrals or after-tax contributions. You have the right to sell any stock contributed by your employer, or purchased with employer contributions, after three years of service. If you hold company stock in your 401(k) plan, now may be a good time to visit with a financial professional to determine if you should reallocate to avoid over-exposure.
Pension Provisions
If you participate in a pension plan, also known as a defined benefit plan, you may be concerned about its future funding in light of notable corporate failures like Enron and WorldCom. As its name implies, a large section of the Pension Protection Act focuses on bolstering existing defined benefit plans by establishing required funding levels and protecting employees from the abrupt abandonment of pension

Partial Retirement
Pension plans may now make distributions to employees over age 62 that have not yet ended their employment. This could allow older workers to phase-in their retirement by working part-time while receiving pension benefits to make up the difference in wages.
Military, Reserve and Public Safety Officers
The act provides special consideration for our active and reserve military as well as public safety officers, such as law enforcement, fire fighters and emergency medical professionals. Public safety officers over age 50 avoid the 10% premature-distribution penalty for distributions due to separation from service. They also may defer up to $3,000 a year of retirement income to use pretax dollars for health or long-term care benefits. Reservists called for duty for more than 179 days between Sept. 11, 2001, and Dec. 31, 2007, also avoid the 10% early withdrawal penalty.
Hardship Distribution
Under the Hardship Distribution rules, individuals who list their same-sex partners as beneficiaries under a 401(k) plan can now withdraw monies from their retirement fund in case of the partner's medical or financial emergencies.
Previously, employees could only utilize their 401(k) funds for the emergencies of legally recognized spouses and dependents.
Source: The Money Alert
5. Company Sponsors
1) ERISA compliance.
This is the first and most important step. It is prudent to establish a 20-25 check system to insure that plan sponsors are within ERISA guideline.
2) Investment Policy Statement (IPS)
Then the second most important step the Investment Policy Statement which is produced by the Fiduciary

This is designed to support ERISA conformity
Provides working framework for Trustee's and Advisors
Supports the paper trail
Sets Investments and guidelines for making investment decisions
Keeps investment process intact during market upheaval
Reassures participants of the investment Stewardship

An Investment Policy Statement has five components:
1) Account information and summary of investor circumstances.
2) Investment objectives, time horizon, and risk attitudes.
3) Permissible asset classes, constraints, and restrictions.
4) Asset allocation ranges and targets.
5) Selection, monitoring, reporting, and control procedures.
A properly constructed Investment Policy Statement provides support for the investment manager to follow a well-conceived, long-term investment discipline, rather than one that is based on ad hoc revisions spawned by overconfidence or panic in reaction to short-term market fluctuations. The absence of written policy reduces decision making to an individual event basis and often leads to chasing short-term opportunities that may detract from reaching long-term goals. The presence of policy encourages all parties to maintain their focus on the long-term nature of the investment process, especially during turbulent, or exuberant, times.
Source: Investment Policy Statement Basics
The IPS provides a long-term plan and a basis for making disciplined investment decisions over time. Written investment policy helps to clearly and concisely identify your pertinent objectives and constraints. Once this is done, we can establish investment guidelines that we feel are appropriate, given the universe of strategies and realities of the marketplace.
A review of the IPS should be part of the annual review process.
3) Safe Harbor
The best ways to protect the companies are through safe Harbor laws in which now there are three:

1. Committee-Directed Safe Harbor
2. Participant-Directed Safe Harbor(also known as 404(c))
3. Fiduciary Adviser Safe Harbor
A) Company
B) Participants

General provisions of all safe harbors:

1. They are voluntary.
2. They may insulate the plan sponsor from liability associated with certain investment related decisions and acts.
3. They require the plan sponsor to demonstrate compliance with the defined requirements.

Committee and/or advisor directed investment decisions comply with applicable Safe Harbor provisions. The 2006 Pension Protection Act had no impact on the established provisions for safe harbor.

If the investment decisions are being managed by a committee and/or by an investment advisor, then there are five generally recognized provisions to the safe harbor rules. These were not impacted by the 2006 Pension Protection Act.

To be afforded safe harbor protection, the fiduciary is required to use

Prudent experts to make the investment decisions.
Have been selected following a sound due diligence process
Have been given discretion over the assets
Acknowledge their co-fiduciary status in writing
Are monitored.

Plan participants must be notified in writing that the plan sponsor intends to constitute a 404(c) plan.

Participants must be offered at least three investment options with materially different risk/return profiles.

As an alternative, the plan sponsor can offer a qualified default investment alternative defined as:

a. Age-based life-cycle or targeted retirement date funds or accounts;
b. Risk-based, balanced funds; or
c. An investment management service.

Employer stock is permissible if: (1) the stock is held or acquired by a pool investment vehicle; and (2) the stock is acquired as a matching contribution from the employer and the stock is held at the direction of the participant.

Employer stock is permitted if the stock is held or acquired by a pooled investment vehicle, including registered investment companies, and the stock is acquired through an employer match and held at the direction of the participant.

Source: Center for Fiduciary Excellence

Even if there were no inherent conflict of interest between the needs of the business and the best interests of plan participants, the facts are the complexity of the plans, knowing that the executives are occupied with running their businesses, and simply do not have the time or expertise required to serve as true

If the plan is bundled together, assume it is a high cost plan. You need to justify all aspects of the plan are deserving of a high fee. That is very hard to do.

Thus unbundled service is:

More inline with ERISA guidelines
Could provide a cost saving
Individual services are easier to replace
Provide higher levels of accountability
The higher accountability often leads to better overall service.

6. Participants

Remember the stats:
66% eligible employees sign up
31% need help allocating
44% don't increase the benefits
61% need help in retirement
Participant directed plans comply with applicable Safe Harbor provisions.

Participants must receive information and education on the different investment options. When a qualified default investment alternative is offered, the participant must be provided details of the alternative.

Participants must be provided the opportunity to change their investment strategy/allocation with a frequency that is appropriate in light of market volatility.

When a qualified default investment alternative is offered, the participant must be provided a notification 30 days in advance of the first investment and each subsequent year, of the opportunity to transfer assets to any other investment alternative available without financial penalty.

That the participants receive sufficient education on the different investment options so that each can make an informed investment decision. Participant education should include:

Each investment option's most recent prospectus, or similar document. A general description of the investment objectives and risk/return characteristics of each investment option
Information on the fees and expenses associated with each investment option
A listing of the securities held by each option
The performance of each investment option
And, to be safe, MPT stats, such as the Alpha, Sharpe ratio, and standard deviation of each investment option.

In the case of the qualified default investment alternative, the participant must be provided details regarding the alternative. And, the ninth provision of the 404(c) Safe Harbor rules is that the plan permits participants to change their investment Strategy/allocation with a frequency that is appropriate in light of Market volatility. The current industry best practice is to permit changes daily.

For the qualified default investment alternative,the participant must be notified 30 days in advance of the initial investment and each year thereafter of the opportunity to transfer the assets to another investment alternative.

Source: Center of Fiduciary Excellence

In the current environment, participants want and need access to expert advice to assist them in managing the investment of their accounts. Many employers, hoping to empower their employees to make smart investment decisions and thereby maximize the retirement benefits provided by the employers contributions, want to facilitate providing such advice to plan participants. Unfortunately, in Interpretive Bulletin 96-1, the Department of Labor (DOL) ruled that, in order for employers and others to avoid risking becoming fiduciaries of their participants self-directed account assets, they must not stray beyond providing information regarding the plan, general financial and investment information, broad-based asset allocation models, and interactive investment questionnaires. In the recently enacted Pension Protection Act of 2006 (the Act), Congress has now established rules for how more detailed and individualized investment advice may be provided to plan participants without employers and others risking reassuming a fiduciary role in their self-directed plans. Under a new safe harbor, the plan sponsor and other fiduciaries who select and oversee the fiduciary adviser will not be treated as failing to meet their fiduciary duties solely due to the provision of investment advice by the fiduciary adviser under an eligible investment advice arrangement that complies with the Act. The safe harbor does not remove the requirement of prudent selection and periodic review of the fiduciary adviser, but the plan fiduciaries have no duty to monitor the specific investment advice given by the fiduciary adviser.
Source: Boult, Cummings, Conners, and Berry
In the recently enacted Pension Protection Act of 2006 (the Act), Congress has now established rules for how more detailed and individualized investment advice may be provided to plan participants without employers and others risking reassuming a fiduciary role in their self-directed plans. Under a new safe harbor, the plan sponsor and other fiduciaries who select and oversee the fiduciary adviser will not be treated as failing to meet their fiduciary duties solely due to the provision of investment advice by the fiduciary adviser under an eligible investment advice arrangement that complies with the Act.
Source: Reish.com
Participant directed plans should comply with applicable Fiduciary Adviser Safe Harbor provisions.
The following Safe Harbor provisions apply to participant directed plans that engage a fiduciary adviser to provide advice to participants:

1. The plan sponsor must prudently select a qualified fiduciary adviser.
2. The Fiduciary Adviser must acknowledge fiduciary status in writing, disclose all conflicts of interest, and all forms of compensation.
3. The plan sponsor must determine that the fiduciary adviser eligible investment advice arrangement,including associated fees and expenses, is appropriate for the plan's participants.
4. The plan sponsor must prudently monitor the fiduciary adviser and ensure that both the arrangement between the plan sponsor and the fiduciary adviser and the eligible investment advice arrangement are audited on an annual basis.

In the case of participant directed plans that engage a fiduciary adviser to provide specific advice to the participants, this is new as per the 2006 Pension Protection Act and described as an eligible investment advice arrangement. The liability associated with the advice given to participants rests with the fiduciary adviser, however the plan sponsor is responsible for meeting the following Safe Harbor provisions.

A computer model working within the proper guidelines is acceptable from a non-fiduciary investment professional. The computer program and person will have to go threw a similar review to the Fiduciary advisor.

Source: Center of Fiduciary Excellence

ERISA does not require that investment advice be offered to participants, who have the right to direct the investments of their accounts. However, some experts believe that under ERISA's general prudence rule, a plan fiduciary cannot fulfill his or her duty to act prudently if they do not make investment advice available to participants.

Source: Guide to Understanding Fiducially Responsibilities.

7. Practically Speaking

Most companies want to attain:
Compliance with regulations
Liability shield form lawsuits
Lower costs
Higher level of service
Advise from a co-fiduciary (sharing the liability risk)
A better plans for the employees.

To achieve these goals you should:

Step 1.
You prudently review Fiduciary Advisors who qualify for the 401k market, and hire a Fiduciary Advisor

Step 2.
The Fiduciary Advisor reviews the current plan with an initial focus to ensure the plan qualifies as a safe harbor, shielding the fiduciaries and the company.

Step 3.
Have an Investment Policy Statement that is in ERISA conformity. This function performed by the Fiduciary provides working framework for the Trustee's and the Advisors plus Supports the paper trail. The IPS sets investments and guidelines for making investment decisions, keeps investment process intact during market upheaval, and reassures participants of the investment stewardship.

Step 4.
Establish a committee, that meets formally two to four times a year, monitors the investment options, notices and discusses the relevance of any factor in that affect their overall plan, performance, continued suitability and cost of the program. The members must understand and acknowledge their Fiduciary status.

Step 5
The following should be done annually.

The Fiduciary Adviser would report at least twice yearly to the formal committee.

1. The Fiduciary Advisor provides a formal report on the investment performance, including all securities, a listing of the securities held by each option, risk, suitability, and fee's of each investment, a performance of each fund, plus Alpha, Sharpe and Standard Deviation ratios of each investment option should be included. Any change or just keeping the same investment options should be prudent, discussed and noted. Any change in the portfolio should be documented for its prudent reasoning. The fiduciary duty is to be able to diversify the plan risks.

2. The Fiduciary Advisor provides a formal report on the 401k program cost, including Investment product fees, plan administration expenses, one time expenses, possible termination expenses, and any revenue sharing. Any recommendation for change should be documented for its fundamental reasoning.

3. The Fiduciary Advisor reviews the plan document and provides an overall analysis including:

ERISA compliance review
Investment policy review
Additional document review and including any possible changes
New laws or guidelines review

Any recommendation for change to the documents should be accompanied by documented fundamental reasoning.

4. The committee reviews the Fiduciary Advisor and based on the Fiduciary Advisors ability to complete the above requirements. Any recommendation for change should be accomplished by documented fundamental reasoning.

The single most important thing a company can do to avoid being sued to hire an expert investment advisor to advice about plan investments.

Source: Keller Rohrback L.L.P.'s

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