higher ed webinar with cbiz “limiting your retirement plan … · 2018-07-09 · higher ed...

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Higher Ed Webinar with CBIZ

“Limiting Your Retirement Plan Liability in Light of Recent Litigation”

11/16/2016

Craig Kovarik and Jack Keller

SPEAKER TRANSCRIPTION

Craig Kovarik Hello. Good morning or good afternoon to you all. We’ll get started here. It’s right at noon time, Central time. My name is Craig Kovarik. I’m an attorney here at Husch Blackwell and I’m a member of our Healthcare, Life Science and Education group, and I’m glad to speak to you today with my friend, Jack Keller. Jack is with CBIZ and Jack and I did this presentation about a year ago on It’s Best To Be Sure, Best Practices and so we thought, in light of some recent litigation, we thought it was a good opportunity to kind of get back together and update the group on some new litigation.

Before we begin, we would like to take care and we need to take care of a few housekeeping items. At the bottom of your audience console are multiple application icons that you can use during the program today and I want to call a couple of those to your attention. If you have any questions, you can submit those via the question box and we can see those here and we’ll do our best to answer those questions during the webcast today, but if we run out of time we can respond via email and we really do appreciate questions so don’t hesitate to send those in. There’s also an icon to assist you with your viewing preferences and you can expand your slide area by clicking on the maximal icon on the top right of the slide area or by dragging the bottom right corner of the slide area. If you’re having any technical difficulty, please click on the yellow help icon and it had a question mark and then it can help you through some common technical issues. And then let’s see here – a copy of today slides are available on the resource list icon and that looks like a green folder at the bottom of your screen. This program is approved for Continuing Legal Education credits in the cities of Colorado, Illinois, Iowa, Kansas, Kansas, Nebraska, Tennessee, Texas and Wisconsin. And then finally we’re recording this so if you need to drop off or you have others in your group



that would like to listen to this webcast, that will be available tomorrow for listening and sharing and once available the link to the recording will be emailed to you along with the Certificate of Attendance. And it indicates here that that recording will be available for about two weeks after the webinar.

So before we get started, I want to thank Emily Kenyon and Jordan Bergkamp who are with my office for helping put this this together. And then of course I want to welcome Jack Keller. I know Jack well. Jack is a Vice President and Senior Retirement Plan consultant with CBIZ Retirement Plan Services and he is a real expert in this space – in both the 403(b) plans and 401(k) plans, and works with a lot of folks on this call and, of course, lots of our clients.

So I think that’s it. We’ll have a closing and we’ll have to tell them about filling out some program surveys, but we’ll do that at the end. So don’t let me forget that, Emily. So with that, let’s kick it off.

So this is just a quick Table of Contents of what we’re going to be talking about today and you may want to refer back to this and I’ll kick it off with “why the recent focus on 403(b) plans”). To start, this is really just a primer, you know, what are your fiduciary duties and so some of the folks – most of the folks I think, frankly, on this call today have 403(b) plans that are subject to ERISA, the Employment Retirement Income Security Act. But not everyone on the call is subject to ERISA. We have some folks that are from governmental plans or maybe church plan status and so technically they’re exempt from ERISA. However, there will be state common law fiduciary obligations and so whether we refer to ERISA or not, I think the general point here is that all these rules apply to all of us regardless of whether they’re technically subject to ERISA. In a fiduciary – and this is just a reminder, this sort of fiduciary 101 – a fiduciary is any person or a committee who exercises discretionary authority or control over a plan or its assets; someone who renders investment advice for fee; or has discretionary authority, a responsibility for administering the plan. And if you’re a fiduciary, the key is you need to act in the best interest of your participants and beneficiaries and, of course, treat your participants and beneficiaries in a proven and fair manner.

So, again, some more history – for the longest time it was not



uncommon for 403(b) plans to be sort of viewed as more of a personal account, more of an individual account, similar to an IRA. And so prior to the Pension Protection Act in 2006, it was not uncommon for employers to have 403(b) programs that were not maintained for monitored in a way like when (k)s were monitored. And again the idea was most of those accounts were viewed or typically often viewed as individual accounts and so the employer’s involvement was limited. Back in 2006, there were some changes to the Internal Revenue Code that obligated employers to take some steps with respect to the 403(b) plan that in turn caused many of these plans to be subject to ERISA or these fiduciary obligations. And so that sort of spearheaded all of this and again goes back to around 2008 when this was all happening. Then in 2012, the Department of Labor became very active and very concerned about plan expenses and so they enacted some new regulations that required extensive fee disclosure and that fee disclosure applies both ways. One is vendors and third party administrators for plans are required to have more and full and fair disclosure to plan sponsors and then similarly plan sponsors and plan administrators are likewise required to have more disclosures to participants. So fees beginning around 2012 have really been a hot item and then again, of course, there has been a lot of litigation when we’re going to talk about.

The other point here is in 2016, the Department of Labor has issued some new rules in the way in which they define fiduciary. And so, again, it’s more of the same in that the Department of Labor is really emphasizing all these fiduciary best practices. The increased focus on retirement plan legislation and enforcement really is two-fold. In argue, it’s beneficial for participants and beneficiaries to have compliant plans and then there’s also just a general standardization across the industry for all the fine contribution plans. Really the distinctions between 401(k) and 403(b) plans are becoming rare and more distinct so we’re just going to continue to see this. If under the new Trump administration there is really also a significant possibility that we’ll have some internal revenue code – some new tax reform – so there’s a possibility we’ll continue to see 401(k)s and 403(b)s look for like, I think.

So, this is just sort of the fifth stage here and we’re going to be talking about fiduciary best practices but we’re doing this through the lens of the recent lawsuits that I know that many of you are



aware of. There’s a law firm out of St. Louis, and there’s other law firms that have been very active in litigating a list of lawsuits, particularly with respect to 401(k) plans. And to date, 403(b) plans have not been a large target. And that has changed during 2016. In 2016 there was a whole series of copycat lawsuits filed against really some large and well-known institutions and it’s upwards of 10 to 12 and perhaps more Jack. And just to give you a flavor of the names, I mean they’re big time institutions – Yale, New York University, MIT, Duke, and the list goes on and on. And if you read the lawsuits – again, they literally are copycat lawsuits – but ultimately they’re really focusing on all of these items that we have on the slide here. I won’t spend time reading this all to you, you can see those because Jack is going to as he goes through his discussion we’re going to be really focusing on these issues. And again, when I was reading the complaints – I think the other thing we need to remember is that when you read these pleadings, these are all allegations and so just because the plaintiffs say something or make a statement in the complaint and makes the allegations, that doesn’t mean it’s the law. But, it gives us an inside as to what they’re thinking.

Jack Keller I would also just add – this is Jack here – that that may be some new terminology for some of you, you know, share classes, revenue sharing. So feel free to ask questions throughout this. We want to keep this interactive and really best serve everybody on this call.

Craig Kovarik Yeah. And Jack and I, we were preparing for this. We’re going to try to make this somewhat conversational to the extent we can and so we welcome you. So these are just some of the questions, again, that we’re going to be talking about. Really we want you to walk away with this with some comfort and really improving your fiduciary, um, comfort that you’re doing the right thing or if there’s some steps that you could take away to help improve your fiduciary practice and hopefully not get with a lawsuit here. So I think, Jack, let’s jump right into it.

Jack Keller Alright, well good deal and thanks for having me today, Craig. I’m really, as a result of these lawsuits, you know, we’ve really seen this as a called action for many institutions that recognize that, you know, maybe they’re not experts, they may need some help, there could be a potential conflict of interest with who they’re



working with and so there’s definitely been some more activity working with consultants and advisers. And so as you go through this webinar, the first question I always ask in meetings is, you know, one year from today what does progress look like. So we’ve reviewed the lawsuits, you probably understand where your plan is, so one year from today what would you like to see improve. So our first section, many of the lawsuits deal with evaluating investment options, share classes, investment lineups and educating employees. So the first slide there is share classes. What a share class is is really just a designation of the fund. And really depending on how you pay plan-related fees, what fund options are available with your record keeper, whether they’re proprietary or whether you have an open architecture investment platform, some of you on the phone could be paying a higher fee for the exact same fund. So there’s institutional share classes, retirement classes, advisor share classes, or the same mutual fund that have different expense ratios. And, you know, some of those goes to pay plan-related expenses, some pay adviser fees and we really believe that it’s the best practice to utilize the cheapest share class there is possible because these investment costs can have a real impact on long-term performance of your retirement account. We have a plan sponsor client that tells us that the only guaranty in investing is that the cheaper share class of the same fund will outperform the more expensive share class. And so we definitely think that’s the best option is to utilize the lowest cost share class. That’s a question you ought to be asking your record keeper or adviser.

Then kind of along those same lines is the way that plan-related fees are paid. And so some of the lawsuits, I know Craig, get into asset based versus flat fee record keeping charges. And so let me ask everybody on this phone just a question. So I have a $5,000 403(b) account balance and Craig has a $50,000 account balance. We’re invested in the same fund and we each pay, we’ll say .5 percent, for record keeping and administration for the day-to-day, our website, where we send our money, how we get our disclosures to firms like Fidelity, TIA, whoever. And if we’re paying an asset-based fee at .5 percent, Craig’s paying 10 times more than I am for the exact same service. So it’s nothing but some management costs but the actual record keeping based on his account being ten times larger than mine.



Craig Kovarik Yeah, and I’ll comment there. That is not necessarily a problem, okay, but it’s an issue. And interestingly, one of the a – again, I mentioned your copycat lawsuits and I think the plaintiffs’ firms are becoming more knowledgeable and creative in coming up with more arguments. And so what Jack was just articulating is effectively one of the claims in the pleading is they’re saying “Hey, you breached your fiduciary duty by not negotiating for a fixed per account fee for record keeping.” Now, as a defendant, I can counter that because I would say “Well, I have a fiduciary duty to the plan as a whole, not each individual participant, and so I need to make sure that my plan record keeping fee as a whole are reasonable and benchmarked and all that.” And then how I internally charge that to participant accounts is a separate issue. But, it’s clear in this lawsuit – at least this most recent lawsuit – is that’s not what the plaintiffs are saying. The plaintiffs are saying you need to charge a per account fee which I think is what you’re sort alluding to.

Jack Keller And that’s a real normal way that a lot of 401(k)s go about this. This is just charging a flat dollar fee. And obviously if I have a smaller account balance the percentage fee doesn’t affect me as much as it affects somebody with a much larger account balance. And so as prudent plan sponsors, we just think that that’s something that you ought to consider and ask the record keepers. And again, I didn’t mean to confuse anyone here but the actual investment management cost of the mutual fund, and that pays for the professional management, and with an index fund that’s going to be lower than an actively managed fund. But that’s kind of a separate issue. So you’re going to pay more for an active manager that’s picking securities than just tracking the index. But I’m talking about the separately the record keeping and administration function of – keeping track of the website, taking payroll, getting our disclosures, that’s kind of what I’m getting to in those record keeping fees.

Craig Kovarik Okay. Next slide we’re going to talk about the investment line up. And from a fiduciary perspective as you build investment menus, we think it’s a best practice to kind of focus on what we’ll call the four pillars of investment. And the first one of those is universal. So investment menus should be built for diverse groups and prioritize simplicity while still offering a wide variety of choice. The second pillar is choice and we think a defined contribution



plan should offer actively managed, passively managed, and target date or risk based investment options. Low cost, we already talked about that but investment management cost for a major predictor of long-term performance and should be minimized to the extent possible. And lastly is long-term – investment managers should be evaluated over full market cycles. You know we’re in the 8th year right now with a full market and so everything has been going up for quite some time now. But if you look back to that 10 or 15 year number, you’re going to include 2007, 2008 where the market really declined. And so as you kind of select your investments for your employees, we look at what’s called the upside capture and downside capture ratio. So how much of the upside of the market we want to catch versus how much of the downside do we want to protect against. Because as my account goes down 50% as it may have, you know, eight or nine years ago, I have to go up 100% just to get back to square one. And so we may prefer maybe a more defensive strategy just to protect against that down side.

You know one of the lawsuits kind of hinted at index funds and the use of index funds and should they be used for actively managed funds and let’s talk about that for a minute. And we’re going to talk about it in terms of an investment policy statement versus investment methodology. So when it comes to investment policy statements, we prefer more general language, more processed oriented, more qualitative than quantitative. So maybe not saying that we have to include five index funds but that all passively, actively managed funds will be considered. Now if you do have language in there that says you need to include index funds and obviously by that legal document that’s something that needs to be included. For as investment methodology like I said choice, I think a combination of active and passive is prudent but let’s talk about indexes for just a second because I know there’s people on this call that are probably index fans. And what I would say is if the U.S. stock market is really pretty efficient to benchmark, you know, the international market not as much just dealing with the quality of information and different currencies around the globe, and bonds are kind of similar in between. And so really rather than picking different index funds for what we’ll call each Morning Star style box for each category, we prefer to use really broad indexes. Like the Vanguard Total Stock Market Index or the Total International Market Index or the Total Bond Market Index which



would capture for U.S. – for example, large cap, small cap, mid-cap – kind of include everything in those indexes so people aren’t really, um – the risk isn’t concentrated into one specific segment of the market.

Jack Keller Yeah.

Craig Kovarik So in terms of this litigation, I’ll say I thought this was interesting and I don’t remember this and it may have been raised in the 401(k) lawsuits, but in this recent 403(b) litigation, again, the complaint – I need to make it clear – it’s just at the complaint stage – is it’s clear that the plaintiffs are, they don’t specifically say it, but imply that – and they cite some University of Chicago studies and so forth, but they imply that if you do not have index funds in your core line up, it’s a breach of fiduciary duty. And I think that’s interesting, again, as a defendant I can argue against that. But, at the very least, as a fiduciary or fiduciary committee, you need to have that dialogue with your advisers, you need to look at your investment policy to your point, and it needs to be document, okay.

Jack Keller And that’s a good point, Craig. We actually have a question here that says “If the cheapest share class is always one that is not actively managed, do you fill your portfolio with these?” And that kinds of gets into the question that you asked. Again, index funds are going to be cheaper than actively managed funds. I am of the opinion that a good active manager can actually outperform the markets. But I’m sure there are people on this call that would totally disagree with that and so that’s why we think a combination of both is prudent for these investment menus. But again, regardless of what the investment management costs are, we want to choose the cheapest share class possible.

The last slide in this section deals with education and according to ERISA 404(c) you do have a fiduciary duty to educate your employees. And on the previous slide we talked about building for the masses, a combination of active and passive. Well let’s talk for a minute about specialty funds, a really complex investment offerings. Those really require a higher level of education and may not be appropriate for retirement savings plan. So no commodities funds. We think for, you know, (inaudible) or retirement program, folks may not really understand what they’re investing in and can see some real volatility in those and so a real additional level of education needs to take place. Now secondarily, depending on



your contract structure with your record keeper or service provider, whether it’s an individual contract or group contract, some funds may have restrictions where you can’t move your money or there could be surrender charges as part of maybe annuity products, different contribution sources, employee deferrals versus employer contributions can be treated differently. And so you really need to educate your employees on all the complexities, kind of the moving parts. You know, again, Craig talked about these almost being like individual IRAs in kind of a group plan, so your employees really need to be educated on all these complexities. And the last thing I would add is it can really be a challenge with multiple record keepers. You know it’s more of a sales driven environment than it is an education driven environment. When you have a whole bunch of different record keepers, TIA, Fidelity, Mass Mutual, (inaudible), everybody coming at your employees, they’re trying to really solicit that employee’s money and really do what’s in his or her best interest. And so the education part, we think, (inaudible) to one provider may be in their best interest which Segways nicely into our next section. You can go to the next side, Craig. But these are just some of the problems that can arise when engaging multiple record keepers, operational complexities, transferring money between record keepers, keeping track of everything, it makes even just your payroll more complex, participant confusion. Studies show that too many funds can really have a negative impact on your employees and the analysis paralysis kind of kicks in and they don’t do anything. So if you have all these different fund options with all these different record keepers…

Craig Kovarik Yeah, and so I’m going to comment here again. This ties into the complaints in these lawsuits and they, too, say – and again there’s historical basis for this. But many of these defendants, these universities, had upwards of hundreds and, you know, hundreds of funds made available. And part of the issue is that these are your core funds, are you really monitoring these 100 funds. And so they were alleging that that’s a breach of fiduciary duty by offering too many funds and it’s not in the participant’s best interest.

Jack Keller That’s exactly right. You know, more cost in terms of time and expense. If we have all these multiple record keepers that’s meeting with all these folks, plan reviews, disclosures for each record keeper, and the loss of bargaining power. It would be like



offering your employees a United Healthcare Insurance program, Blue Cross Blue Shield and Aetna. So rather than kind of pooling everybody into one plan, you’re spreading everybody across all these different record keepers and kind of losing the economies of skill, having to pay greater expenses.

At this point, before we get into fees, a couple of decision points here to think about that we have covered. Kind of the old school thought was it’s so great if we offer so much choice to our employees, so many different investment options, they can pick from anything they want to and if you spread all the money across all these different record keepers, you’re going to pay higher fees. Like we said, too many funds can have a real negative impact on your employees. Fund revenues, it’s really time consuming to review all these funds and are you actually reviewing all these funds as a fiduciary as being prudent for your employees. And the contract structure – individual contract versus group contract, what’s in the best interest for our employees, are we able to move the money, and are there options as we move forward.

Craig Kovarik And if you have 100 plus funds, you’re going to have competing funds, almost identical funds in the same space and that just doesn’t make any sense.

Jack Keller It doesn’t. Okay, so we’ve talked a lot about retirement plan fees and expenses but, what are plan fees. And kind of depending on your ERISA status, your public versus private, ERISA, Non-ERISA, if you’re part of a larger maybe estate plan, if you have church affiliation, you pay different fees. But just on a piece of paper in front of you sort of write down all the different fees that you’ve heard about that really kind have been mentioned in these lawsuits or maybe you’ve heard about from consultants or record keepers. But there’s record keeping fees, there’s adviser fees, legal fees, plan audits, investment costs, revenue sharing, and when Craig talked about the fiduciary duties on the first slide, nowhere did it say you have to have the best investment options or the lowest fees out there. But they need to be reviewed and they need to be understood and plan fees and expenses need to be commensurate with products and services available through the plan. And so when I talked about share classes earlier, that’s really how you get into paying plan-related cost. Retirement share class, institutional adviser share classes, whether you want to pay all plan-related expenses through the investments or if you want to pay some of



those out-of-pocket and make it maybe a better deal for your employees. That’s kind of what the share class gets into and really the options when it comes to how you feel about transparency for instance. So what we’ve seen is right now a lot of plans are paying all plan-related costs out of the plan, deducted from participant accounts. And that’s been working that way for a while and plan costs are probably pretty low. But everything is kind of hidden in there and there may be some indirect compensation and maybe not everybody is tracking where all the money is going and so – and their 401(k) roll was taken place because everything has kind of been broken apart and that’s kind of the reason for these fee disclosures is to kind of understand where all the compensation is going and so having a line item expense for the investment management, having a line item expense for the record keeping, having a line item expense for the education and advice service, a line item expense for advisory fees. And so it’s really up to the committee, the plan sponsor of what you think is best for the culture of your employees to maybe break out all of those costs. If you break all those out, it becomes more transparent to your employees, they’re able to see what they’re paying for – but at the same time if I get a statement for the first time that shows all these additional expenses, I’m going to go to my HR director or benefits manager and say why did all my fees go up. I’m paying for all these additional costs now and you really have to explain that to them that it’s still the same fee but now you understand everything is broken out and so…

Craig Kovarik Yeah, I would say transparency for the employees starts with transparency for the employers. And so what the employer knows – the reality is that the employer knows what the fees are, the employer absolutely should share that with the employees, but if they know what the fees are there’s a good chance they can drive them down.

Jack Keller And that kind of gets us into our next section. That’s a really good Segway, Craig, because there has been some challenges in the higher education community with really understanding what the fees are. Number one is the lack of historical data. I mean (inaudible) 2012 these fee disclosures first came into play and so nobody really was tracking these things before a couple of years ago. And the second bullet point is small budgets and there isn’t a lot of free cash to spend on some of these enhanced products and



services available to plan and depending on your contract structure and what record keeper you’re working with, you may not be able to charge some of the fees against the plan and so this is a new cost for a lot of institutions and really right now they’re not able to pay those. You know limited resources and personnel, we talked about that earlier. I’m pretty confident everybody on this call wears a lot of hats and has a lot of different responsibilities and can’t spend a ton of time digging into retirement plan fees all the time, and time constraints. So, what I would ask you right now is has your institution gone through a benchmarking and do you really understand what types of fees that you are paying. And so really there’s three ways to evaluate. And, Craig, I’m actually going to have you go to the third slide in this section. I kind of got these out of order.

Craig Kovarik Tell me when to stop.

Jack Keller Right there.

Craig Kovarik Okay.

Jack Keller Okay, so kind of the first and most simple way to review your plan fees and expenses is to benchmark the plan. And right now you’re probably getting a benchmarking report from your record keeper or service provider each year. And that’s where TIA or Fidelity comes to you annually with a break out of all the costs, if a Fidelity person presenting the Fidelity reports and so there’s a possible, you know, conflict of interest there. They want to make themselves look good, they’re presenting their own data and so just the question is how good is that data. And so if you kind of bring in an independent party to really benchmark the plan – you know for instance, I’m going to two dollar unhorn for a little bit here – you know we have 200 different higher education institutions we work with. We work with 50 different record keepers across our book of business and so we have data from all these different record keepers. They kind of pigeon hole where you are, how big your plan is against your peers, going to break everything apart. And so as you benchmark that data you just want, look do our fees look reasonable, does everything commensurate, can we ask for lower fees, have we ever asked for lower fees, and are we knowledgeable about what we are paying for. So go kind of forward there for me. And we recommend



benchmarking the plan every year and document the process. Every single year benchmark your plan fees.

Secondarily, is what we’ll call an RFI – Request For Information. And this is where you would kind of anonymously solicit proposals from different record keepers or service providers. Not necessarily taking your plan out to market but say “Hey, what would a plan with our demographics, population, plan assets, what would it cost for you all to provide these services to our institution?” You’re under no guidelines to nuke the plan, it’s really just kind of establishing what else is available in the market and are we getting a good deal right now. Oftentimes a new record keeper may come in with cheaper fees and see if you can go back to your existing record keeper and say “Principal gave us a cheaper recordkeeping solution, will you match that price?” And automatically, a lot of times, they’ll reduce their fees. And what did we say before, if you reduce the fees, your investment return is going to go up. And so getting reduced fees is going to be a good thing from a fiduciary perspective. And we recommend doing that maybe every three to five years. Again, documenting the process – this is something you all can do on your own. But again, you may need some help, seek outside advisers.

And really the most formal way of going about this – and this is something we don’t recommending doing all the time, but maybe every five to ten years is doing what’s called a formal RFP process. And that’s where you take your plan to the market, you solicit a number of proposals, you’re able to see what the competitors charge, it gives you that leverage, again, with the incumbent but now your plan is really out to market, there’s more at stake. You’d probably invite some of these recordkeepers in for face-to-face interviews. They could talk about how great maybe their financial wellness solutions are or all these types of solutions they may give you that your incumbent provider may not provide. And so that’s really the most formal way of going through this. What is unique about higher education is the plans have been in place for a long time. They haven’t changed for a long time. There’s a lot of loyalty to maybe the existing recordkeepers or advisors that are in place and so change is difficult for higher education. But again as a fiduciary we have to operate in the best interests of our employees and so we do think it is the best practice to maybe every five to ten years take your plan out to market. Don’t flip it every year because



that makes it more complex and confuses the employees.

The other difficulty in the higher education space is again it’s just historically some of these accounts are not subject to employer change. You can’t make a change without having individual consent. That’s part of the reality and some of the difficulties with some of the types of products that have been historically sold. Now again I think in my experience that’s changing. And again for 403(b)s today look more like 401(k)s than they do 403(b) the old times but that’s a reality too.

Jack Keller I think that’s a great point Craig and also we can do this next year and just talk about contract structure and all the options there for an entire hour. But that needs to be taken into account – is what kind of impact does this have on our employees, on certain investment options that may have restrictions or brand loyalty and again the grass isn’t always greener on the other side. You’re probably getting a pretty good deal where you are but let’s bring in outside investment options. And let’s enhance participant’s education and financial wellness that really impacts the outcomes. Let’s minimize our fiduciary risk and maximize the employee outcomes.

Craig Kovarik One way to do that and I’m going to pose this question – I think one way to possibly do that is you say okay we can’t force someone to move this money. But we can prevent future money from going to this fund and we’re going to consolidate our future money to a single recordkeeper or single vendor. The other way is through education. You say okay – and again I think if you do all that and you document it and it’s part of the process. We’ll talk about that – that’s one way to help defend against a lawsuit.

Jack Keller Absolutely. That’s probably the step that a lot of these institutions were missing.

Craig Kovarik Yeah I think you’re right and if you look again – I’m flipping through this as you’re talking and all the points you’re raising is exactly what the plaintiffs are claiming in their pleading here.

Jack Keller Um-um. We have a question here. How long should it take to have a benchmarking study completed for a plan with about 25 investment options? It shouldn’t take much time and if you’re interested in that service, that’s something we can definitely help



you with. Another question here --

Craig Kovarik Wait – so how much time --

Jack Keller Okay.

Craig Kovarik Is that a six week process? Is it a six month process? What --

Jack Keller Just a benchmarking study – we’d want somebody to share all of their quantitative plan information. We could put that together in three to four weeks.

Craig Kovarik Okay.

Jack Keller Definitely. Another question here – an RFI to an RFP please. The RFP’s going to take a lot more time if we’re talking about the timeline here. So kind of the steps of the RFP are you really aggregate – put together all the data on your existing plan. That includes the investment policy statement, the investment menu, all the recent fee disclosures, and you’re probably going to send that out to maybe seven recordkeepers. At that point they’re going to have some time to respond to you with their ten thousand page proposal that you may or may not read through.

It’s really a kind of a long process as they get back to you. From that point either you’re doing the RFP on your own or you’re getting outside help and maybe take a month or so to review all the proposals and you invite two to three of the favorites back in to present face-to-face to your committee. And really dig into what’s in the RFP, what kind of enhanced services we can receive from a committee perspective and employee perspective and it’s really a face-to-face interview – where cost is also considered. Again, it doesn’t have to be the cheapest or best but you want to make sure fees are commensurate with services. At that point then you would pick who is the correct vendor to choose from and if you chose to stay, doesn’t require a lot of time and if you chose the new that’s at least a three month process to move and the RFP process itself probably took three months. So that’s about a six month process altogether to kind of go through that formal RFP.

Craig Kovarik The way I would sort of view it is I sort of view benchmarking as comparing your fees to the universe. RFI – in little baby steps – it’s an additional benchmarking process but you’re going out and



saying just generally and it’s more specific to your plan and then the RFP really is a full blown review with an expectation that you’re going to change. You’re going to go with the best bidder. That’s the bottom line. You’re going to do a full blown analysis and probably change.

Jack Keller The much better way and more concise way. Absolutely.

As we move to our last slide here in my section is kind of analyzing our fees. We’ve talked about this – about the reasonableness – not best or lowest but reasonable for the product and services available and then how to negotiate. I would recommend to everybody on here if you’ve never asked the question to your recordkeeper, just as if you can get lower fees. A lot of times they may acquiesce that request. If you’re not really sure how to do that, maybe get a consultant in there to kind of figure out the right way to ask that question and then if you’re really not happy, if nothing can be done – really consider what’s in the best interests of your employees as a fiduciary and that’s what would kind of take you to the next step of an RFI or an RFP.

So really before I let Craig wrap this up from a legal perspective, I’m going to talk about just some kind of practical to dos here so when’s the last time you benchmarked your plan. We think that’s something that you ought to do every year and some really kind of things to do along those same lines is let’s review our investment policy statement and our committee chart. And do our processes follow what’s written in those documents. Is everybody attending our quarterly or semi-annual meetings? Is the language in our RPS general enough that we’re not making a bunch of violations, because that is a legal document? How often are we reviewing our contract structure and what’s in the best interest for employees? Kind of this IRA setup or do we want to change going forward to more of kind of a group plan, more like a 401(k) where the money is transferrable? How often are we reviewing our investment options and are we using a fiduciary advisor to really help us do that? And most importantly are we documenting all of this?

So with that – we’ll try and answer some of the questions here. I’m going to let Craig talk for a minute.

Craig Kovarik Yeah I think here – and I’ve got some questions that I’ve been jotting down for you too Jack. These next couple of slides – this is



just from a – this is just a lawyer talking and saying okay – we’re a fiduciary. We’re responsible for these funds. What should we be doing? And again the whole idea of ERISA fiduciary status is – it’s really the process. It’s not the outcome. And Jack’s mentioned this. It’s not picking the best fund. It’s not necessarily having the lowest cost fund. It’s really have you done your analysis and you’re acting in the best interests of participants and are you documenting this. So keeping good minutes. Meeting regularly. Working with consultants to the extent you think you need to work with consultants. Reporting back to your board of trustees or board of directors. Reviewing your charters. Making sure that the folks that are on your committee have fiduciary training is important. That they fully understand why they’re there. That they’re engaged. Often times we have clients who have committees and they’ll have people on their committees who are on there by title but that aren’t truly engaged in the process. And so I don’t they’re the best committee members and would not recommend them be on your team. Of course as we talked about benchmarking.

A couple of things I want to focus on here. We have about ten minutes and we’ve gotten some questions that we’ll try to get to. Jack I want to go back to this because I think this is important in the 403(b) space in particular. This whole notion of recordkeeping or admin charges. When I say recordkeeping, I’m not talking about the fee charge by the mutual fund or the passive investment manager. I’m talking about the fees charged for the recordkeeper for sending out statements, keeping track of the daily balance, doing all that sort of stuff.

In my belief in that the 403(b) space, there is still the majority of the plans pay recordkeeping fees or the recordkeeping fees are set up on an asset based fee. So to give a – this might not be a right number but just to illustrate – it may be that the recordkeeping fee is 15 basis points. Right? Of assets under management. And so in the 401(k) world there is – as this pleading says, is they’re saying wait a minute, that’s not right. Because you may be paying too much in fees because as assets grow the recordkeepers doing the exact same thing and the recordkeepers is being paid more.

Okay. And for my argument, okay we’ll cap your fees. Negotiate a fixed fee for recordkeeping. What are your thoughts from a fiduciary perspective of – if at the plan level – you have your set



fees. Okay? What are your thoughts about how you allocate that fee internally within the plan? On an asset based fee versus an account based fee? Because I know that – I sit through committee meetings with folks like you and a lot of people have concerns for small account balances. And if I charge – let’s say the recordkeeping is reasonable but that ultimately comes out at $100 per head. Well if I have someone with a small account balance, that’s a pretty substantial chunk of change from their small account. What are your thoughts on that?

Jack Keller You know and this is something that we do regularly on 401(k) side. For 403 this is kind of a new question and kind of my first observation is before I kind of dive into the detail is not every recordkeeper is able to break apart a per participant fee.

Craig Kovarik Right.

Jack Keller And you’re right. If I have a $1,000 account balance, and it’s $100 every year – I’m paying a 10% recordkeeping every year. And so it really hurts the person on the small end where the person with the $500,000 account balance is really happy about it. And so I’ve had plan sponsor clients go – one of each way or a hybrid. And I think most people it makes sense because you are getting or receiving the same service of daily tracking of your account, statements everything like that. Everyone’s receiving the same service. And so kind of a combination of a fixed and variable expense. It makes a little more complex but it’s probably the most fair way to do it. The other thing I’ve seen is where anybody under maybe a $5,000 account balance isn’t charged.

Craig Kovarik Subsidized by the employer.

Jack Keller Exactly right. And so you kind of help those people out – if they try to build their account.

Craig Kovarik And I’m not expecting you to have the answer because I know it’s a hard question and I’m saying that this pleading – the complaint as I would argue they’re wrong – they make a statement here and they say it’s a breach of fiduciary duty. But I do think those are the kind of dialogues that committees need to have and there may not be a right or wrong answer but it needs to be documented.



Jack Keller That’s exactly right.

Craig Kovarik Another question and again I’m trying to tie this back to these allegations in this lawsuit is – well you’ve offered way too many funds and you’ve offered competing funds and by doing that you’ve watered down your ability – because really ultimately they’re driving back to -- by doing all this stuff – you pay too much in fees. And that’s the heart of these lawsuits.

And if they offer too many funds and you water down your bargaining capability and so you’ve paid excess fees and hence you’ve breached your duty. How many funds are too many?

Jack Keller Well I guess it would be our recommendation first to work with one recordkeeper or service provider, as best you can. And so immediately there we’re eliminating some of the overlap between all these competing recordkeepers. We talked about our four pillars earlier: Universal, Choice, Low Cost, Long Term – to me the perfect investment menu is maybe 20 investment options. One of those options being the target big fund suite. So we’ve got nineteen core investments and all the target date fund options that I can choose from and so within those you’ve got maybe an actively managed bond fund, a passively managed bond fund. So we get some choice in there. But again there aren’t any competing funds in there. We’re streamlining the menu because if somebody is still honed in on mid-capped growth for instance. One of your employees is so honed in on mid-capped growth. They want to go there. Well if there is ten different mid-cap growth funds, how the heck are they supposed to choose that. And so if we can streamline the menu with just a few options, then we walk people through either our questionnaire or kind of figure out where they would fall on the risk return spectrum so then they can make prudent options on maybe twenty different choices.

So we’ve got a couple other questions here Craig.

Craig Kovarik Do you want to answer that one or do you --

Jack Keller I was going to --

Craig Kovarik I’m going to go to question number 2 here.



Jack Keller Okay.

Craig Kovarik What – let me see if I can paraphrase this – why don’t you go ahead and tackle that one. I’m going to paraphrase this one.

Jack Keller Okay. So this question is RFP is a vendor selection process – RFI is a request for information. Which do you recommend for determining fees are in line?

You have to determine if fees are in line – I would say just an independent benchmarking really just for the fees.

Craig Kovarik Okay.

Jack Keller Because there you’re bringing in independent party just to really do kind of a quantitative assessment of what’s going on. If you find you’re out of whack there and you want to learn more about what’s available or maybe negotiate kind of going out to market, then the RFI would probably be the right one.

Craig Kovarik Okay. So let me ask. Here’s my question – I’m going to paraphrase this. This is what they’re getting at. This is a hard one. So and I think this will be our final question and then I’ll close out here.

So what are your views about using – I think you made the statement that you ought to use the lowest share class, right? But some share classes pay revenue sharing, okay. And that revenue sharing is then used to pay recordkeeping – or pay expenses.

Jack Keller Um-um.

Craig Kovarik So again I would argue that you look at it from an overall perspective and that you ought to be figuring out what’s a reasonable expense for what you’re paying for. But you – what is your preferences – do you think funds that pay revenue sharing versus funds that don’t pay revenue sharing can lower the cost?

Jack Keller And off hand --

Craig Kovarik I realize there’s a --

Jack Keller I did a minute ago – but not every recordkeeper is able to kind of



break those apart like that. The 401(k) industry is about twenty years ahead of the 403(b) industry.

Craig Kovarik Yep.

Jack Keller And there’s complete transparency. You know every line item. A lot of plans are just a flat fee per head.

Craig Kovarik There’s a technology changing and again I think revenue sharing will go away. But there’s also technology where they can actually rebate that revenue sharing back to the person who generates the account.

Jack Keller Right. And so I think just an understanding of the reasonableness – benchmarking no matter which way you do it. Right now I would say most institutions are still using revenue sharing to pay a lot of the expenses and so maybe to have a bunch of different share classes. So that’s – hopefully that’s a takeaway is to review your share classes and maybe at least ask the question – can we get rid of this revenue sharing.

There is one other question here – what additional services can CBIZ provide – asking about compliance report, audit assistance, etc. We haven’t even got into a lot of the things that we can help with that are more kind of qualitative in nature but compliance issue like definition of compensation, that’s a major compliance issue we see that maybe the plan audit doesn’t capture. So are all the difference sources of compensation being treated equally with these plans. We go through an operational compliance assessment where we identify the six key areas. Financial wellness is something we’re doing for a lot of our clients right now. And then really partnering with Craig and experts like Craig to kind of do a fiduciary training session for committees because before you can run these plans as fiduciaries, you kind of need to know – get everybody’s investment education on a baseline – understand what you’re supposed to do as a fiduciary. So really partnering with Craig on a lot of these engagements has been very beneficial.

Craig Kovarik Hopefully partnering with people smarter than me but thank you. So I think that’s all of our time. I want to thank everyone for joining us today. We hope this has been helpful to you and we really appreciate your participation. If you have not already done so,



we’d ask that you please click on the survey icon at the bottom of the screen to complete a short survey. And your feedback helps us for future programs and really it’s meaningful to Jack and I as well. As a reminder, this program has been approved for Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, Tennessee, Texas and Wisconsin continuing legal education credits and you’ll be able to have the webcast recording if you’d like it.

If you have any questions or thoughts or if you disagree or if we can help in any way, think about that – feel free to shoot us an email and we’ll make sure that somebody responds to you.

Thank you and have a great afternoon.

Jack Keller Thanks everybody.

END OF RECORDING

higher ed webinar with cbiz “limiting your retirement plan … · 2018-07-09 · higher ed...

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