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