retirement plan rfps - warner norcross & judd€¦ · focus on individual not retirement plan...
TRANSCRIPT
Retirement Plan RFPs
©Warner Norcross & Judd LLP 2011
John H. McKendry, Jr. &
Heidi A. Lyon
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OVERVIEW
� Legal Background
� Methods for Selecting Providers
� RFP Process� Steps and Considerations
� Provider Models
� Recent Fee Litigation
� Prudent Provider Selection Criteria
� 408(g) Compliance
� Written Agreement
� Concluding Remarks
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EMPLOYER IS AN ERISA FIDUCIARY
Employer/Plan Sponsor meets 2 ERISA fiduciary definitions:
� Exercises authority or control - disposition of the plan’s assets
� Discretionary authority or responsibility -administration of the plan
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ERISA – FIDUCIARY STANDARDS
�Solely in Interest/Exclusive Purpose
�Prudent Expert – Care, Skill, Prudence and Diligence. Person familiar with such matters
�Per the Documents - Plan, Trust, Agreements
� Investments – Diversification, Liquidity, Funding, Risk Avoidance
�Avoid Prohibited Transactions
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EMPLOYER/FIDUCIARY DUTIES – U.S. DOL VIEWS
DOL/EBSA Publication (May, 2004)
� Understanding and evaluating plan fees and expenses associated with investments, investment options and services is an important part of a fiduciary’s responsibility.
� Establish objective process to evaluate fees, detail specific services requested, consider level of service provider’s responsibility, and give identical disclosures to prospective providers for a meaningful comparison.
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EMPLOYER/FIDUCIARY DUTIES – U.S. DOL VIEWS
� DOL Field Assistance Bulletin (February 2, 2007). Employer retains following fiduciary duties as a prudent expert to select and continue to monitor (as evidenced by procedural due diligence)
� Investment Menu (including, if desired, a qualified default option)
� Investment Advisers
� Qualified Fiduciary Adviser
� Reasonableness of Fees Charged
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INVESTMENT FIDUCIARIES
�TWO TYPES
� 3(38) Investment Manager – complete discretion over selection of assets (Registered Investment Advisers)
� 3(21)(A)(ii) Investment Adviser – offers advice for a fee (Broker)
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THE FAUX FIDUCIARY – INVESTMENT ADVISERS ACT OF 1940 (SEC)
� Brokers/Insurance Agents not regulated due to lack of enforcement resources (suitability standard)
� No established standards of care (“best interests” vagary)
� Focus on individual not retirement plan advice
� Mandatory FINRA Arbitration (no expertise, panels stacked against investors)
� No Plan Remedies (only cease and desist and fines to SEC)
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SERVICE PROVIDER SELECTION
� Considerations - employer (industry, size), plan design, number of participants, amount and description of plan assets are all relevant
� Process – key to fulfilling fiduciary duty and managing risk
� Studies
� Consultant
� Request for Proposal (RFP)
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REQUEST FOR PROPOSAL (RFP) –2010 DOL STATEMENT
�Historically, norm for RFPs was every 3 to 5 years, many went much longer than this
�Preamble to 2010 Service Provider Fee Disclosure Rules - DOL assumes RFPs are conducted every 3 years
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RFP – RECENT LITIGATION EMPHASIZING PROCESS
�George v. Kraft Foods
� Highlights importance of RFP process
� Lawsuit against plan sponsor
� Reliance on consultants with no recent RFP may be breach of fiduciary duty
� Plaintiffs allege RFP should be conducted every three years
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OVERVIEW OF RFP PROCESS - STEPS
� Formulate list of candidates
� Draft proposal and circulate to candidates
� Identify and interview finalists
� Compare and evaluate finalists
� Written agreement with selected providers
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OVERVIEW OF RFP PROCESS -CONSIDERATIONS
� Provider models (Broker, Investment Manager, Financial Services Firm/Bank, Insurer, Mutual Funds)
� Fee litigation emphasizing process
� Selection criteria for advisor, recordkeeper, investment menu/provider, and participant education services
� 408(g) compliance
� Defective agreement can negate an otherwise effective process
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PROVIDER MODELS – BROKERAGE FIRMS
�Advise - Menu, Investment Platform (Insurer, Fund, Managers)
�Compensation – Indirect – Loads, Trailer Fees, Commission/Fees from Platform Provider
�Recordkeeper – Third Party, Proprietary
� Investments – Non-Institutional Share Classes (broker compensation)
�Education
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BROKERAGE FIRM ISSUES
�Fiduciary Status - Steadfast Refusal to acknowledge (minor exceptions)
�Conflicts – Desire to maximize indirect revenue
�Compensation - Opaque compensation Structures (particularly in selling platforms) and
�Buried in difference between fund fees and price of investment management
�Higher Costs diminish Investment Returns
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PROVIDER MODELS – INVESTMENT MANAGERS
�Advise Fund Menu/Manager of Investment Types
�Compensation – Percentage of Assets
�Recordkeeper – Third Party
� Investments – Funds –?Institutional, Managers
�Education – ?
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INVESTMENT MANAGER ISSUES
�Fee Structures – 1% (100 bps) or more
�Platforms – website access for Employer and participant?
�Education Minimal?
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PROVIDER MODELS – FINANCIAL SERVICES FIRM/BANK
�Advice – Platform of Options
�Compensation – Indirect
�Recordkeeper – Internal or Relationship
� Investments – Noninstitutional/ Proprietary
�Education - ? Individual Advice
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FINANCIAL SERVICES FIRM/BANK ISSUES
�Fiduciary Status – Directed trustee, not menu
�Opaque Compensation – Bundled Arrangements
� Investments – Revenue Driven
�Education – General Individualized?
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PROVIDER MODELS – INSURER PLATFORMS
�Advice – Menu from Platform
�Compensation – Indirect from investments on menu plus proprietary clone or advised products and overrides (contract, asset charges)
�Recordkeeping – Internal
� Investments – Funds (non-institutional) -Separate Accounts Proprietary
�Education – General
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INSURER ISSUES
�Fiduciary Responsibility - Refusal to accept for menu, conflicts
�Compensation – Highest among providers, often Opaque
�Proprietary – Provider favorable documents
� Investments – Clone Funds (not the actually traded funds) proprietary options, stable value, target funds
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PROVIDER MODELS – MUTUAL FUND FAMILY PLATFORMS
�Advice – Menu
�Compensation – Internal Fees (non-institutional)
�Recordkeeper – Mix, internal versus third party
� Investments – Funds
�Education - General
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MUTUAL FUND FAMILY - ISSUES
�Advice – Fiduciary Reluctance, Conflicts
�Compensation – Opaque
�Recordkeeper – Third Party
� Investments – Non-institutional proprietary products, or additional charge for non-proprietary options
�Education – Individualized?
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IDEAL PROVIDER MODEL
� Advice – Independent Adviser able to select best funds (including exchange traded funds)
� Fiduciary Status – Acknowledges 3(38) or 3(21)(A)(ii) ERISA responsibility
� Compensation – Transparent, each element separately identified
� Recordkeeping – Third Party, Appropriate Standard of Care
� Investments – Institutional, Low Cost funds, Model Portfolios from menu, 404(c) compliance
� Education – General Individualized, conforms to DOL IB 96-1, Individual per 408(g) principles
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RFP – FEE LITIGATION CONSIDERATIONS
� Cases highlight importance of attention to provider arrangements
� Interested Parties
� Participants
� Plan Sponsor/Employer
� Service Providers
� DOL
�Each group impacted differently
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RFP – FEE LITIGATION FAVORING PLAN SPONSORS
� Hecker v Deere – No requirement to disclose revenue sharing, 404(c) disclosure and compliance offers defense
� Loomis v. Exelon – Offering retail shares not a breach of fiduciary duty
� Taylor v United Technologies – Proper monitoring, objective selection of mutual funds, recordkeeping fees reasonable against market
� Renfro v Unisys – Reasonable mix and range of investment options
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RFP – FEE LITIGATION ADVERSE TO PLAN SPONSORS
�George v. Kraft Foods (discussed earlier) � Fiduciary aspects of decision to maintain status quo
� Emphasis on process and documenting decisions
�Tibble v. Edison� Offering retail funds without good reason, breach of
fiduciary duty of prudence
� Waiver of institutional share requirement available, but never requested
�Braden v Wal-Mart� Retail funds, possible evidence of flawed process
� Settlement for $13.5 million, with plan’s service provider paying $10 million
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RFP – FEE LITIGATION ADVERSE TO PLAN SPONSORS
� Mixed litigation trends create risk
� Sixth Circuit – few cases so far
� Best way to manage risk is prudent process
� Focus on appropriate criteria for evaluating each service provided to plan
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RFP – ADVISOR SELECTION CRITERIA
� Background/Credentials, Registration, Licenses, Reputation
� Conflict Disclosure
� Services - Investment Policy, Menu, Monitoring
� Relevant Expertise
� Clients – Recommendations, Departures
� Fees – RFP, Investment Policy, Menu Selection/Monitoring – all disclosed
� Insurance
� Sample Agreement
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RFP – RECORDKEEPER SELECTION CRITERIA
� Background/Credentials, Registration, Licenses, Reputation
� Conflict Disclosure
� Services – Timing/Warranties
� Fees – Amount – Each element of service complete transparency
� Protection – Bonding, Insurance
� Sample Agreement – Standard of Care/Liability, Dispute – Law, Venue, Forum
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RFP - INVESTMENT MENU/PROVIDER SELECTION CRITERIA
� Investment Policy
�Objective, Systematic Measurement
�Performance/Benchmarks
�Risk
�QDIA Recommendation
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RFP - INVESTMENT MENU/PROVIDER SELECTION CRITERIA
� Internal Diligence Process
�Bonding, Insurance
�Conversion Services
�Custodial, Trustee Services
�Fees – Complete Transparency
� Internal - Offset before performance
� Additional charges
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RFP - PARTICIPANT EDUCATION CRITERIA
� Guidelines� General DOL Interpretive Bulleting 96-1� Individual 408(g)� ERISA 404(c)/404(a) Disclosures
� Plan� General Elements, Sample� Individual Information Gathering � Model Portfolios
� Schedule� Sample Agreement
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RFP - 408(g) COMPLIANCE
� Final Regulations
� Fiduciary Acknowledgment
� Absence of Conflict – Fee Neutral/Computer Model Portfolio
� Notice – Fees, Investment Performance
� Issue – Brokers, Varying Fees (Sales, Trailer Fees, commissions, other incentives) not permitted based on investments selected, conflict disclosure required
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WRITTEN AGREEMENT
� Fiduciary acknowledgement (where appropriate)
� Clear specification of duties and compensation
� Acceptance of Liability for Breaches
� ERISA standard of care
� Dispute Resolution (State Law &Venue)
� Matches RFP responses
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AVOID DEFECTIVE AGREEMENTS
� Not a fiduciary
� Cannot/does not rely on advice
� Advice not tailored to plan
� Indemnify errors unless negligence, gross negligence, willful misconduct
� FINRA arbitration
� Choice of Remote Law and Venue
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RFP – WELFARE/FRINGE BENEFIT PLANS
� ERISA PLANS – medical, health, disability, life, pre-paid legal, unemployment
� IDENTICAL FIDUCIARY STANDARDS & DUTIES –these plans require the same level of due diligence as retirement plans particularly if employee contributions are required IT Corp v General Am Life1997
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RFP – WELFARE/FRINGE BENEFIT PLANS - TASKS
� Selection of Providers
� Broker
� TPA
� Benefits Insurers/Funds
� Documents – Plan, SPD, Benefit Summary
� Cost of Administration/Benefits
� Monitoring Performance of providers
� Claims Procedures – Per ERISA & PPACA
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REWARD – DIMINISHED RISK
�Prudence – Clear Established Processes
�Expertise – Documented in Selection and review
�Documents – Established (IPS, 404(c), Agreements allocating Liability)
� Investment – Objective Process satisfies criteria
�Compliance Review
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CONCLUDING REMARKS
�Plan sponsors/employers have important fiduciary duties
�Recent legal developments emphasize importance of acting in accordance with ERISA fiduciary standards
�Protect yourself through steps discussed today, including RFP process
�Best practices minimize risk and maximize plan benefits
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OUTSIDE, OBJECTIVE, EXPERT ASSISTANCE
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