Best Practices for 401(k) Fiduciaries Presented by: Lisa Arko May 6, 2008 k:mktg2008presentationsFMC_draft 3_26.ppt
Focus is on Managing Risk  <ul><li>Focus is on managing and reducing risks associated with 401(k) plans </li></ul><ul><ul>...
Framework for Managing Risk Emerging best practice - strengthen/enhance governance system and use as an integrated framewo...
Governance
What is Governance? “ Governance is how plan fiduciaries organize themselves to manage the legal and financial risks assoc...
How Do I Get There? <ul><li>Create a structure </li></ul><ul><ul><li>Identify what needs to be done </li></ul></ul><ul><ul...
Create a Structure –  Identify What Needs to Be Done   <ul><li>Focus on all plan management areas </li></ul><ul><ul><li>Fi...
Create a Structure –   Identify Who Should Do It Governing Managing Operating Board of Directors or Board Committee Benefi...
Appropriate Organizational Level  Example:  Allocations between the Board (Governing) and the Employee Benefits Committee ...
Make Sure it is Done and Done Right <ul><li>Policies </li></ul><ul><ul><li>Provide the decision framework </li></ul></ul><...
Make Sure it is Done and Done Right – Policies to Support Governance Structure  <ul><li>Sample policies </li></ul><ul><ul>...
Make Sure it is Done and Done Right – Performance Management  <ul><li>Areas for performance measurement </li></ul><ul><ul>...
Sample Governance Framework  Agents & Advisors <ul><li>Tasks </li></ul><ul><li>5500s </li></ul><ul><li>Tax withholding </l...
<ul><li>Understanding of fiduciary responsibilities </li></ul><ul><li>Clear mission in  all  plan management areas  </li><...
Governance Best Practices <ul><li>Written policy framework  </li></ul><ul><li>Detailed committee charters  </li></ul><ul><...
Vendor Management
Vendor Management
Service Contract   <ul><li>Ensure you have a copy of most recent service agreement or statement of work </li></ul><ul><ul>...
Compliance   <ul><li>Trust, don’t entrust </li></ul><ul><li>Thorough administration manuals and processing calendars shoul...
Service Level Agreements   <ul><li>Ensure that promised service levels are relevant and meaningful to your objectives  </l...
Ongoing Vendor Communication   <ul><li>Develop a regular meeting schedule to stay current  </li></ul><ul><li>Weekly/monthl...
Vendor Fees   <ul><li>2008 401(k) fee survey of plan sponsors performed by Chatham Partners reports </li></ul><ul><ul><li>...
Vendor Fees -  Mutual Fund Expenses and Revenue Sharing 1.20% = Total Expense Ratio 0.20% + Other Expenses 0.30% + 12b(1) ...
Vendor Fees –  Revenue Sharing Considerations   <ul><li>The absence of explicit fees has allowed many to view administrati...
Vendor Fees –  Revenue Sharing Considerations <ul><li>An example of the potential impact of revenue sharing on administrat...
Vendor Fees – Fee Categories <ul><li>Service fees </li></ul><ul><ul><li>Fees received by the record-keeper for ongoing adm...
Vendor Fees –  Sample Benchmarking of Administrative Service Fees  <ul><li>Administration, employee education and communic...
Vendor Fees –  What should you do? <ul><li>Understand </li></ul><ul><ul><li>What you are currently paying </li></ul></ul><...
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Lisa Arko - Watson Wyatt Worldwide

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Lisa Arko - Watson Wyatt Worldwide

  1. 1. Best Practices for 401(k) Fiduciaries Presented by: Lisa Arko May 6, 2008 k:mktg2008presentationsFMC_draft 3_26.ppt
  2. 2. Focus is on Managing Risk <ul><li>Focus is on managing and reducing risks associated with 401(k) plans </li></ul><ul><ul><li>Fees </li></ul></ul><ul><ul><li>Employer stock </li></ul></ul><ul><ul><li>Litigation </li></ul></ul><ul><ul><li>Compliance requirements </li></ul></ul><ul><ul><li>Retirement adequacy </li></ul></ul><ul><li>A recent survey found a significant percentage of sponsors are focusing on fiduciary issues </li></ul><ul><ul><li>35% are likely to review their governance structure or hire a third party to review investment options </li></ul></ul><ul><ul><li>55% plan to review fund operations, including expenses and revenue sharing </li></ul></ul><ul><ul><li>29% are planning investment fund changes in an effort to reduce fees </li></ul></ul><ul><li>Hewitt survey of 2008 planned activities of 190 mid- to large-sized employers </li></ul>
  3. 3. Framework for Managing Risk Emerging best practice - strengthen/enhance governance system and use as an integrated framework to manage all risks Retirement Plan Management/Governance Human Resources Finance Financial Management Asset Management) Plan Design Administration/ Communications Compliance
  4. 4. Governance
  5. 5. What is Governance? “ Governance is how plan fiduciaries organize themselves to manage the legal and financial risks associated with plans while providing plan participants with promised benefits” <ul><li>Governance is: </li></ul><ul><ul><li>The way in which people are organized within a company to manage their responsibilities </li></ul></ul><ul><ul><li>Managing the legal and financial risks associated with a retirement plan </li></ul></ul><ul><li>The end product is a: </li></ul><ul><ul><li>Clear mission </li></ul></ul><ul><ul><li>Developed skill and resource </li></ul></ul><ul><ul><li>Delegation of responsibilities </li></ul></ul><ul><ul><li>Accountability and monitoring </li></ul></ul><ul><li>Good governance is about: </li></ul><ul><ul><li>Having an appropriate structure </li></ul></ul><ul><ul><li>Following the right processes </li></ul></ul><ul><ul><li>Using the processes efficiently </li></ul></ul>
  6. 6. How Do I Get There? <ul><li>Create a structure </li></ul><ul><ul><li>Identify what needs to be done </li></ul></ul><ul><ul><li>Identify who should do it </li></ul></ul><ul><ul><ul><li>Appropriate organizational level </li></ul></ul></ul><ul><ul><ul><li>Appropriate people within each level </li></ul></ul></ul><ul><li>Make sure it is done and done right </li></ul><ul><ul><li>Delegation </li></ul></ul><ul><ul><li>Policies </li></ul></ul><ul><ul><li>Oversight </li></ul></ul><ul><ul><ul><li>Performance reviews and measures </li></ul></ul></ul>
  7. 7. Create a Structure – Identify What Needs to Be Done <ul><li>Focus on all plan management areas </li></ul><ul><ul><li>Financial Management </li></ul></ul><ul><ul><li>Asset Management </li></ul></ul><ul><ul><li>Plan Design </li></ul></ul><ul><ul><li>Compliance </li></ul></ul><ul><ul><li>Administration </li></ul></ul><ul><ul><li>Communications </li></ul></ul>
  8. 8. Create a Structure – Identify Who Should Do It Governing Managing Operating Board of Directors or Board Committee Benefit Finance Committee Employee Benefits Committee Trustee Record Keeper Tax & Accounting Finance HR Legal
  9. 9. Appropriate Organizational Level Example: Allocations between the Board (Governing) and the Employee Benefits Committee (Managing) Is the decision both settlor and strategic (e.g., of significant economic, cultural, or behavioral impact)? If “yes”, allocate to the Board If “no”, allocate to the Employee Benefits Committee Examples: Create a Structure – Identify Who Should Do It
  10. 10. Make Sure it is Done and Done Right <ul><li>Policies </li></ul><ul><ul><li>Provide the decision framework </li></ul></ul><ul><ul><ul><li>Set objectives </li></ul></ul></ul><ul><ul><ul><li>Provide constraints </li></ul></ul></ul><ul><ul><li>Require periodic reporting by delegates </li></ul></ul><ul><li>Performance measurement </li></ul><ul><ul><li>Often overlooked aspect of governance </li></ul></ul><ul><ul><li>Separates supervision from execution </li></ul></ul><ul><ul><li>Forces establishment of objectives and measurable results </li></ul></ul>
  11. 11. Make Sure it is Done and Done Right – Policies to Support Governance Structure <ul><li>Sample policies </li></ul><ul><ul><li>Selection policy for appointees to committees </li></ul></ul><ul><ul><li>Orientation and ongoing fiduciary education policies </li></ul></ul><ul><ul><li>Investment policy </li></ul></ul><ul><ul><li>Plan expense policy (guidelines for paying fees from plan assets) </li></ul></ul><ul><ul><li>Compliance policy </li></ul></ul><ul><li>Establish at organizational level with ultimate responsibility (governing or managing) and enter into appropriate committee’s minutes </li></ul><ul><li>Committee members should fully understand policy rules and follow them </li></ul>
  12. 12. Make Sure it is Done and Done Right – Performance Management <ul><li>Areas for performance measurement </li></ul><ul><ul><li>Financial Management </li></ul></ul><ul><ul><li>Asset Management </li></ul></ul><ul><ul><li>Plan Design </li></ul></ul><ul><ul><li>Compliance </li></ul></ul><ul><ul><li>Administration </li></ul></ul><ul><ul><li>Communications </li></ul></ul><ul><li>Tailor performance objectives and measures to plan’s specific requirements </li></ul><ul><li>Report results to appropriate stakeholders to facilitate monitoring responsibilities </li></ul>
  13. 13. Sample Governance Framework Agents & Advisors <ul><li>Tasks </li></ul><ul><li>5500s </li></ul><ul><li>Tax withholding </li></ul><ul><li>Corporate deductions </li></ul><ul><li>Tasks </li></ul><ul><li>Implements investment policy </li></ul><ul><li>Monitors investments and managers </li></ul><ul><li>Risk management </li></ul><ul><li>Directs payment plan expenses </li></ul><ul><li>Tasks </li></ul><ul><li>ERISA & Code compliance </li></ul><ul><li>Approves QDROs </li></ul><ul><li>Advises on claims appeals </li></ul><ul><li>Committee secretary </li></ul><ul><li>Tasks </li></ul><ul><li>Day-to-day administration </li></ul><ul><li>Communications </li></ul><ul><li>Supervises delegates </li></ul>Tax - Operating Finance - Operating Legal - Operating Human Resources - Operating <ul><li>Tasks </li></ul><ul><li>Financial Management </li></ul><ul><li>Asset Management </li></ul><ul><li>Policies </li></ul><ul><li>Plan expense policy </li></ul><ul><li>Investment policy </li></ul><ul><li>Performance Measures </li></ul><ul><li>Administrative and investment fees </li></ul><ul><li>Absolute and relative investment performance </li></ul><ul><li>Actual risk experienced </li></ul><ul><li>Periodic review of expenses paid by plan </li></ul><ul><li>Tasks </li></ul><ul><li>Plan design </li></ul><ul><li>Compliance </li></ul><ul><li>Administration </li></ul><ul><li>Communication </li></ul><ul><li>Policies </li></ul><ul><li>Mission statement </li></ul><ul><li>Human capital strategy </li></ul><ul><li>Compliance Policies </li></ul><ul><li>Benefits Administration Policy </li></ul><ul><li>Communications Policy </li></ul><ul><li>Performance Measures </li></ul><ul><li>Benefit adequacy </li></ul><ul><li>Impact on human capital </li></ul><ul><li>Operational review </li></ul><ul><li>Participant investments </li></ul>Employee Benefits Committee - Managing Benefit Finance Committee - Managing <ul><li>Policies </li></ul><ul><li>Plan mission statement </li></ul><ul><li>Code of conduct </li></ul><ul><li>Independence policy </li></ul><ul><li>Selection/education policy </li></ul><ul><li>Tasks </li></ul><ul><li>Appoints Committee Members </li></ul><ul><li>Approves strategic plan amendments </li></ul><ul><li>May appoint and remove trustee </li></ul><ul><li>May approve investment and funding policies </li></ul><ul><li>Monitors Committees </li></ul>Board Committee - Governing
  14. 14. <ul><li>Understanding of fiduciary responsibilities </li></ul><ul><li>Clear mission in all plan management areas </li></ul><ul><li>Appropriate and clear delegation of responsibilities </li></ul><ul><li>Accountability </li></ul><ul><li>Performance management through ongoing monitoring using appropriate measures </li></ul><ul><li>Agility to quickly identify concerns and modify accordingly </li></ul>A Strong Framework Leads to Risk Reduction
  15. 15. Governance Best Practices <ul><li>Written policy framework </li></ul><ul><li>Detailed committee charters </li></ul><ul><li>Documentation of all decisions and oversight activities </li></ul><ul><li>Ongoing fiduciary education and training </li></ul><ul><li>Periodic comparison with best practices </li></ul><ul><li>Performance measured in all plan management areas </li></ul>
  16. 16. Vendor Management
  17. 17. Vendor Management
  18. 18. Service Contract <ul><li>Ensure you have a copy of most recent service agreement or statement of work </li></ul><ul><ul><li>How is responsibility delegated? </li></ul></ul><ul><ul><li>Revise, update if necessary </li></ul></ul><ul><li>Fees and services should be fully articulated </li></ul><ul><li>Understand service model and administration team structure </li></ul><ul><ul><li>Where are hand-offs? </li></ul></ul><ul><li>Proactively address renewals a year in advance of expiration or as plan make-up changes substantially </li></ul><ul><ul><li>Monitor total asset growth </li></ul></ul><ul><ul><li>Assess changes in participant counts </li></ul></ul>
  19. 19. Compliance <ul><li>Trust, don’t entrust </li></ul><ul><li>Thorough administration manuals and processing calendars should be part of standard agreement </li></ul><ul><li>Never assume that everything is being done in full compliance </li></ul><ul><ul><li>Ask the question, have it be proven </li></ul></ul><ul><li>Random vendor-initiated reviews should be expected and included in the contract </li></ul><ul><li>Operational reviews should be undertaken periodically to ensure overall compliance </li></ul>
  20. 20. Service Level Agreements <ul><li>Ensure that promised service levels are relevant and meaningful to your objectives </li></ul><ul><li>Expect granular data in addition to summaries </li></ul><ul><ul><li>There should be standard reporting </li></ul></ul><ul><li>Treat service level goals as incentives, not penalties </li></ul><ul><ul><li>Both parties should have vested interest in meeting service levels </li></ul></ul><ul><ul><li>Incentives for goals exceeded? </li></ul></ul><ul><li>Gain understanding of circumstances that create missed levels </li></ul><ul><ul><li>What is the root cause of service issue? </li></ul></ul><ul><ul><li>Ultimate goal is to avoid service issues going forward, not to continue to collect penalties </li></ul></ul>
  21. 21. Ongoing Vendor Communication <ul><li>Develop a regular meeting schedule to stay current </li></ul><ul><li>Weekly/monthly </li></ul><ul><ul><li>Standing check-in with project team </li></ul></ul><ul><ul><li>Updated issues list/project plan </li></ul></ul><ul><li>Quarterly </li></ul><ul><ul><li>Face-to-face meeting </li></ul></ul><ul><ul><li>Review of Service Level Agreements </li></ul></ul><ul><ul><li>Work plan for upcoming quarter </li></ul></ul><ul><li>Annually </li></ul><ul><ul><li>Review business plan against performance </li></ul></ul><ul><ul><li>Develop business plan for upcoming year </li></ul></ul><ul><ul><li>Identify opportunities for improvement </li></ul></ul><ul><ul><li>Adjust Service Level Agreements, if appropriate </li></ul></ul><ul><ul><li>Staffing review and feedback </li></ul></ul>
  22. 22. Vendor Fees <ul><li>2008 401(k) fee survey of plan sponsors performed by Chatham Partners reports </li></ul><ul><ul><li>79% of plan sponsors participating in survey report that understanding their plan costs is important </li></ul></ul><ul><ul><li>77% of sponsors say that current disclosure levels are sufficient BUT </li></ul></ul><ul><ul><ul><li>58% feel confident they understand their plan costs </li></ul></ul></ul><ul><ul><ul><li>34% say their plan fees are easy to compare to those other providers would charge </li></ul></ul></ul><ul><ul><ul><li>38% of respondent’s vendors disclose revenue sharing to them </li></ul></ul></ul><ul><ul><ul><li>42% report that their plan fees are transparent </li></ul></ul></ul><ul><li>Under Diversified Investment Advisors’ “Report on Retirement Plans - 2007, ” 42% of sponsors report they are unaware of their plan fees </li></ul>
  23. 23. Vendor Fees - Mutual Fund Expenses and Revenue Sharing 1.20% = Total Expense Ratio 0.20% + Other Expenses 0.30% + 12b(1) Fee Management Fee: Sample Equity Fund: 0.70% Investment decisions SUBADVISORS Flow of fees from participant accounts to retirement plan service providers Plan services, recordkeeping, proprietary revenue, commissions, etc. PLAN RECORDKEEPERS Management Fee 12b(1) Fee Other Fund Fees EXPENSE RATIO Sub-Advisory Fee 12b(1) Fees Other Revenue Sharing FUND COMPANY Administrative: trading, accounting, fund board expenses, etc. Investment management Marketing: 12b(1) fees - advertising, shareholder services, etc., which are rebated back to recordkeepers because no broker is involved Additional revenue sharing: Negotiated fee which can vary among plan recordkeepers based on contract with fund management company Investment Admin Fee
  24. 24. Vendor Fees – Revenue Sharing Considerations <ul><li>The absence of explicit fees has allowed many to view administrative services as “free” </li></ul><ul><li>“ Proprietary” options typically pay more revenue sharing </li></ul><ul><li>Revenue sharing may create a windfall for vendors when assets rise absent renegotiation of services and/or changes in investments </li></ul><ul><li>Can create inherent potential for inequitable allocation of fees </li></ul>
  25. 25. Vendor Fees – Revenue Sharing Considerations <ul><li>An example of the potential impact of revenue sharing on administrative service fees </li></ul><ul><li>Plan assets Year 1 with Vendor: $120 million </li></ul><ul><li>Plan assets Year 8 with Vendor: $175 million </li></ul><ul><li>Participants – 2,000 </li></ul><ul><ul><ul><ul><ul><li>YEAR 1 YEAR 8 </li></ul></ul></ul></ul></ul><ul><li>Explicit administration fee ($0/ppt) -- $ 0 $ 0 </li></ul><ul><li>Revenue sharing (average .20%) -- 240,000 350,000 </li></ul><ul><li>Transaction-based fees -- 2,000 2,000 </li></ul><ul><li>Administrative service fees $242,000 $352,000 </li></ul><ul><li>Adm. service fees per participant $121 $176 </li></ul>
  26. 26. Vendor Fees – Fee Categories <ul><li>Service fees </li></ul><ul><ul><li>Fees received by the record-keeper for ongoing administration and employee education/communication services </li></ul></ul><ul><li>Investment management fees </li></ul><ul><li>Transaction-based fees </li></ul><ul><ul><li>Fees associated with a specific type of activity (e.g., loans, withdrawals, distributions) </li></ul></ul>
  27. 27. Vendor Fees – Sample Benchmarking of Administrative Service Fees <ul><li>Administration, employee education and communication costs plus transaction-based fees </li></ul><ul><li>Costs generally paid via </li></ul><ul><ul><li>Hard dollar fees </li></ul></ul><ul><ul><li>Revenue sharing </li></ul></ul><ul><li>Service fees benchmarked with plans that have similar </li></ul><ul><ul><li>Number of participants </li></ul></ul><ul><ul><li>Average account balances </li></ul></ul><ul><ul><li>Complexity </li></ul></ul><ul><ul><li>Employee education and communications </li></ul></ul>Representative sample from WW benchmarking study
  28. 28. Vendor Fees – What should you do? <ul><li>Understand </li></ul><ul><ul><li>What you are currently paying </li></ul></ul><ul><ul><li>How your fees compare to current market practices for similarly situated plans </li></ul></ul><ul><ul><ul><li>Service fees </li></ul></ul></ul><ul><ul><ul><li>Transaction-based fees </li></ul></ul></ul><ul><ul><ul><li>Total plan fees </li></ul></ul></ul><ul><li>Consider </li></ul><ul><ul><li>Benchmarking plan fees every 3 years </li></ul></ul><ul><ul><li>Going through RFP or RFI process every 5 – 6 years </li></ul></ul>

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