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3/15/18 Meeting - 401(k) Plans: What CEOs & CFOs Need to Know…and Why

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Mark Zorko will discuss what CFOs should expect from their service providers and tools to stay on top of their plan’s financial, operational, and legal “vital signs.”

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3/15/18 Meeting - 401(k) Plans: What CEOs & CFOs Need to Know…and Why

  1. 1. 1 401(k) Plans What CEO’s and CFO’s Need to Know …and Why Fiduciary Guidance for Employers & Employees Brentwood401k.com
  2. 2. 2 Questions Board’s May Be Asking How does our 401(k) performance compare to the S&P 500 or other agreed upon benchmarks? How do our 401(k) plan fees compare with similar sized plans offered by other sponsors? Have we reviewed the cost & performance differences between active and passive options? Should we be using Index funds or ETF’s that track investment benchmarks? How often does our Investment Committee meet? Do they have a plan calendar and checklist of responsibilities? Are meeting minutes prepared? Do they know they have personal liability to act in the employees best interest? Is our Investment Committee aware of its ERISA 3(38) Fiduciary obligations? Have we delegated, in writing, the obligation to our plan provider? When was the last time our plan advisor did more than help with fund selection and training? Where’s our quarterly dashboard of the Company’s 401(k) plan performance and vital signs? If our current advisor doesn’t show leadership to help us, do we have the right advisor? Fiduciary Guidance for Employers & Employees Brentwood401k.com
  3. 3. 3 Common 401(k) Plan Observations CFO’s and HR exec’s are busy with business demands 401k plans may be on “autopilot” due to other priorities Plans are a #11 priority on the top 10 list Plan administration is often delegated to untrained staff, with limited coaching Management has ERISA compliance obligations for plan oversight that often gets a low priority Until there is a major problem or DOL audit M&A integration can be complex Record keeping problems between payroll/HR systems and 401(k) systems are very common Source of audit problems and remediation costs to correct Fiduciary Guidance for Employers & Employees Brentwood401k.com
  4. 4. 4 Common 401(k) Plan Observations Employee satisfaction and participation is affected when: Plan performance deteriorates due to Investment Committee’s lack of attention Credibility is questioned when there are errors in record keeping Training is not a priority Employees may stay beyond their most productive years because they can’t afford to retire It’s a lose-lose outcome for both the employer and employee Fiduciary Guidance for Employers & Employees Brentwood401k.com
  5. 5. 5 Treat the 401(k) Plan Like a Business Unit It’s not on the Balance Sheet…it doesn’t get the normal scrutiny Your Plan Advisor should provide a dashboard of vital signs for you and your team The Plan Advisor should provide the leadership and expertise to keep your plan successful Key areas to be reviewed three-four times per year include: Financial Operational Legal If they aren’t what are they doing to earn there fee? Fiduciary Guidance for Employers & Employees Brentwood401k.com
  6. 6. 6 Fiduciary Guidance for Employers & Employees Brentwood401k.com Does Your Plan Advisor Provide a Comprehensive Quarterly Assessment? If not, what are they doing to earn their fees? Prepared by: M Zorko Vital Signs Comments Most Recent Prior Qtr -1 Prior Qtr -2 Financial Plan performance and fund evaluation Reviewed last Qtr Plan fees review Not reviewed in 6 months. Scheduled for April BOD Update of Plan's vital signs Done at June meeting. Provide update for March meeting QDIA - Fund selection review Needs update at next IPC meeting Fiduciary Insurance adequacy Needs review with P&C carrier. Scheduled for April. Legal Investment Committee Charter and Investment Policy Statement Last reviewed at Nov mtg Investment Policy Committee (IPC) quarterly meeting & minutes Last meeting was Nov. Minutes prepared. ERISA updates to review, any DOL correspondence? Reviewed at last IPC mtg. Two employees complained about plan. Summary Plan Description (SPD) review Last updated in 2017, Needs legal review for ERISA changes Operational Plan calendar & checklist of responsibilities review Reviewing at each meeting IPC Fiduciary Training Scheduled for next IPC - meeting with attorney Employee skill set adequacy to sync payroll and 401k recordkeeping P. Jones needs training, Unreconciled difference of $30k Recordkeeping changes implemented Changed in August, no issues Audit & 5500 preparation Scheduled for Apr, 2018 Discrimination testing Done in Nov. 2017 Employee education Not done since June. Scheduling difficulties with reorganization Service Providers: Payroll Service Provider ADP Plan Assets: $10.3 million, an increase of $300k since June 30th. 401k Plan Provider Fidelity Plan Participants: 130, an increase of 3 since June 30th Brightscope Rank: 2nd Quartile performance Recordkeeper & Trustee State Street Plan Performance - Blended: Prior year up 9.3%, last 3 years up 15.2%. Plan Advisor Mark Zorko Auditor ABC, LLP Note: The Plan Advisor will conduct reviews three-four times per year to ERISA Attorney Jim Smith help the IPC determine the green, yellow or red condition of the vital signs IPC Chair Joe Jones, HR Director and work with the IPC to implement corrective actions. IPC Members S. Davis, G. Miller Acme, Inc. 401(k) Plan Dashboard Update for December 2017 Quarterly Update
  7. 7. 7 Recent Litigation Against 401(k) Sponsors A New Reality Does your asset manager take ERISA Section 3(38) fiduciary liability for the 401(k) plan? Is it in writing? Do they have conflicts of interest with the fund options they propose? Has your Investment Committee had fiduciary training? RECENT LEGAL ACTIONS… Edward Jones Hit With Second ERISA Lawsuit Over 401k Fees DOL Sues Company to Restore $166k to 401k Plan Voya Accused of Layering 401(k)’s With Unnecessary Fees Recordkeeping Fees Trigger Latest Excessive Fee Suit Fidelity, Putnam 401(k) Investors Get Class Treatment Wells Fargo Sued Over In-House 401(k) Funds, Again Allianz agrees to settle 401(k) fee lawsuit for $12 million Fiduciary Guidance for Employers & Employees Brentwood401k.com
  8. 8. 8 Why the Litigation? Excessive Fees Conflicts of Interest Poor Fund Performance ARE THE CRUX OF THE PROBLEM Companies, with Their Advisors and Service Providers, Need to Act in the Best Interest of Their Employees and Their 401(k) Assets It’s That Simple Fiduciary Guidance for Employers & Employees Brentwood401k.com
  9. 9. 9 401(k) Plans Involved in Fee Lawsuits Verizon Communications Inc. $30 billion Chevron Corp. $19 billion Intel Corp. $14.9 billion Oracle Corp. $11 billion American Airlines $9.1 billion Anthem Inc. $5 billion Not just the large firms… LaMettry’s Collision $9.2 Million Fiduciary Guidance for Employers & Employees Brentwood401k.com
  10. 10. 10 Case Study: LaMettry’s Collision, Inc. Fiduciary Breach Allegations Similar to Large Plan Litigation 11 retail class share mutual funds, but institutional shares were available Recordkeeping fees charged as a percentage of assets versus per participant Revenue sharing payments, were retained by Voya, not disclosed to participants Never reviewed for reasonableness against services provided No process for considering, selecting or actively monitoring funds Fiduciary Guidance for Employers & Employees Brentwood401k.com
  11. 11. 11 Common Lawsuit Allegations Imprudent Selection and Retention of Investments Retail versus institutional Active versus passive Share classes Receipt of Revenue Sharing Payments Excessive Recordkeeping Fees Self-Dealing Fiduciary Guidance for Employers & Employees Brentwood401k.com
  12. 12. #VALUE! =COUNTIF(R[1 0 0 0 424% 2013 2014 2015 2016 2017 TOTAL PAID OUT $172,785 $1,131,462 $1,025,806 $592,916 ? ? $ 2,922,969 Distributions 2012 -$343,766 -$4,038,269-$287,526 -$840,692 -$891,929 -$978,999 -$695,358 Acme Inc. 401k Savings Plan Federal regulation 2550.408b-2 requires reviewing providers to determine they bring value and are "necessary." Federal regulation 2550.404a-5 requires disclosures to investors so they can evaluate performance versus benchmarks. This document was produced to aid in these efforts. "...emphasizes a duty to diversify, the avoidance of unjustified costs, and the importance of evaluating the portfolio as a whole…" 60% In 2017, what percent of the evaluated trust was invested in lagging funds? Supreme Court May 18, 2015 Ruling No In 2017, were >50% of assets invested in passive institutional shares? The Third Restatement of Trusts Prudent Investor Rule Adherence “The greater the trustee’s departure from one of the valid passive strategies, the greater is likely to be the burden of justification and also of continuous monitoring.” $ Lag 2012 2013 2014 2015 2016 2017 TOTAL $ LAG "Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones." 66% What % of the investment menu met or beat their benchmarks in 2017? Values from www.efast.dol.gov--also review and refer to your plan's annual 29 CFR 2550.404a-5 notice % of Plan Assets Reviewed: -34% -59% -34% -17% -70% -60% -50% -40% -30% -20% -10% 0% 2017 2016 5 YEAR 10 YEAR % of Funds Lagging Benchmarks (888)PlanLag www.FundLag.com -0.63% 0.11% Participants' Investment Cost v. Return Comparison Reviewed using data as of 12/31/17
  13. 13. 8% 5% 7% 15% % of this plan's active managers demonstrating skill1 1 the % of managers' whose performance beat benchmarks (with a <40 year observation period (working life)) Since 2001, S&P Dow Jones stated: % largecap funds beat benchmark % midcap funds beat benchmark % smcap funds beat benchmark Acme Inc. 401k Savings Plan Due Diligence--facts for this plan's fiduciary investment "experts" under ERISA 10 11.00 18 17 17 2012 2,014.00 2015 2016 2017 # Funds in Plan that Lagged Benchmarks by Year
  14. 14. 16 Sage Wisdom Warren E. Buffett Chairman and CEO Berkshire Hathaway, Inc. “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” Fiduciary Guidance for Employers & Employees Brentwood401k.com
  15. 15. 12 Why Companies Change Plan Advisors 34% of companies less than satisfied/not satisfied with current advisor 23% of companies are actively looking for a new sponsor…an increasing trend 69% of companies want their advisor to take a formal fiduciary role 71% of plan advisors don’t demonstrate how they’ve provided good value 88% of companies have employees delaying retirement due to lack of savings Source: Fidelity’s Annual Plan Sponsor Research – Key Findings Fiduciary Guidance for Employers & Employees Brentwood401k.com
  16. 16. 13 401(k) Best Practices Establish a Plan Committee Obtain a commitment from senior management 401(k) plan is a benefit…keep it from becoming a detriment to employee morale Fiduciary liability is expensive and personal Adopt a committee charter (similar to corporate bylaws) Purpose and authority, membership, responsibilities, meetings Rules and procedures, resources of committee Appoint members – sign document accepting appointment 3 to 5 members who are ready and able to participate fully Permanent (CFO and HR) and staggered rotating members
  17. 17. 14 401(k) Best Practices Document Processes Used To Carryout Fiduciary Responsibilities Meeting notes, Memo to file Courts won’t substitute their judgment for yours, if documented Research, Hire and Monitor Service providers Investment manager Retirement plan advisor Record keeper Auditor ERISA Counsel Consider Fiduciary Liability Insurance However, it’s not likely to cover negligence
  18. 18. 15 401(k) Best Practices Plan Committee Responsibilities Develop investment policy statement Review and evaluate administrative fees and expenses, investment selection and managers, investment fees, and plan administration issues Meet two to four times per year Retain outside investment advisors, consultants, etc. Document decisions (meeting agendas, meeting notes) Conduct ongoing training and education Helps to avoid actual or potential conflicts of interest
  19. 19. Core Belief #1 Fiduciary Delegation Follows ProceduralPrudence © Copyright 2017. Efficient Advisors, LLC | www.EfficientAdvisors.com | Core Beliefs & Philosophy | Page 5 of 17
  20. 20. 18 Brentwood’s Services Plan Investment Committee Coaching Brentwood approaches its plan advisor role with an insider’s perspective Planning & Execution Brentwood brings a CFO’s perspective to integrating the 401(k) plan calendar and checklist of responsibilities Employee Education & Coaching Providing employees with a well-crafted plan and quality educational services is a competitive advantage…and the right thing to do. 401(K) Dashboard of Vital Signs Customized dashboard is at the right level of detail for distribution to a company’s Board and CEO for them to discharge their oversight responsibilities. Fiduciary Guidance for Employers & Employees Brentwood401k.com
  21. 21. 21 Brentwood’s Partners Efficient Advisors (EA) Manage over $1 billion in assets Accepts full ERISA Section 3(38) fiduciary responsibility Investment options guided by Nobel research Potential outperformance of active management Focus on lower cost passive or index like investment options Professional Capital Services(PCS) Independent recordkeeping service CEFEX certified – Fiduciary excellence recognition “Best in Class” recognition by PlanAdvisor for serving plan participants SSAE 16 Type 2 Certified – Key attribute for audit firm attestation Fiduciary Guidance for Employers & Employees Brentwood401k.com
  22. 22. 23 Contact Information Mark A. Zorko, CPA Brentwood 401k, LLC 847-477-2784 mzorko@brentwood401k.com Brentwood 401k, LLC is a Registered Investment Advisor (RIA) with offices in North Carolina & Illinois Fiduciary Guidance for Employers & Employees Brentwood401k.com

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