Investment Fiduciary Responsibility …Understanding The Role of Plan Fiduciaries

1. Investment Fiduciary Responsibility …Understanding The Role of Plan Fiduciaries

2. Course Objectives This presentation is designed to help you better understand: • Who is an investment fiduciary and when might you be considered one; • If you are considered a fiduciary, what are the minimum standards of care that must be met; • If you advise others in your company, what do you need to know to do job.

3. Definition of a Fiduciary • Two categories of Fiduciaries: • Designated Fiduciaries; • “de facto” Fiduciaries • Who are the Designated Fiduciaries? • Who are “de facto” Fiduciaries?

4. Definition of a Fiduciary • According to ERISA, relating to qualified plans, a Fiduciary is one who . . . • Exercises any discretionary authority or control over management of the plan; • Exercises any authority/control over management, or disposition, of assets; • [continued]

5. Definition of a Fiduciary • According to ERISA, relating to qualified plans, a Fiduciary is one who . . . • Renders investment advice (direct or indirect) with respect to plan assets for compensation; • 4. Has any discretionary authority or responsibility in administering the plan. This includes: Plan Administrators; Committees (such as Investment Committee, Retirement Committee, Boards of Trustees, etc); Plan Trustees (e.g. bank trustees, individuals, committees, etc); and “Named Fiduciaries”.

6. Definition of a Fiduciary • Designated Fiduciaries • ERISA says certain people automatically become a Fiduciary by holding a position: • Plan Administrators; • Committees (such as Investment Committee, Retirement Committee, Boards of Trustees, etc); • Plan Trustees (e.g. bank trustees, individuals, committees, etc); and “Named Fiduciaries”. By the very nature of these positions, the plan administrator or a trustee of the plan must have “discretionary authority or discretionary responsibility in the administration of the plan”.

7. Definition of a Fiduciary • “de facto” Fiduciaries • An “Investment Fiduciary” is one who has authority in the management or disposition of plan assets. • This is true even if person is not designated a fiduciary in plan documents. • Criteria is whether the person undertakes the described functions. • Thus,ERISA employs concept of “functional fiduciary”

8. Definition of a Fiduciary “de facto” Fiduciaries Other company positions should be examined to determine whether they involve the performance of any of the functions described (e.g. discretionary responsibility or control). • The officers of a corporation will be functional fiduciaries if they perform fiduciary activities, for example, if they select the investments for a 401(k) Plan. • Members of the board of directors will be fiduciaries only to extent they have responsibility for specified functions. (e.g. selection of plan fiduciaries)

9. Definition of a Fiduciary According to ERISA, the following are NOT Fiduciaries: • Accountants, Attorneys, Actuaries and “Consultants” [i.e. non-discretionaryadvisors to decision makers]; • Individuals performing ministerial functions. In other words they: • apply rules determining eligibility for participation/benefits • calculate benefits • prepare government agency reporting • allocate contributions according to plan documents • maintain participant records • process claims • make recommendations regarding plan administration. • Participants (if all they do is “participate”)

10. Definition of Non-ERISA Fiduciary According to the Foundation for Fiduciary Studies: • “Persons who have legal responsibility for managing someone else’s money” • See website at http://www.fi360.com

11. Procedural Prudence DOL Interpretive Bulletin 94-1 describes “Procedural Prudence” • If investment fiduciaries follow a “Prudent Process”, they will have satisfied their fiduciary duties. • Procedural Prudence requires the plan fiduciary to follow the proper steps (or process) in making the investment decisions. • Courts have said, “The court’s task is to inquire whether the individual trustees employed the appropriate methods to investigate the merits of the investment.” • ERISA’s prudence standard is not that of a prudent lay person but rather that of a prudent fiduciary with experience dealing with a similar enterprise.

12. “Prudent Investment Practices… A Handbook for Investment Fiduciaries” Written by the Foundation for Fiduciary Standards Published by the Center for Fiduciary Studies Edited by the American Institute of Certified Public Accountants . . . Twenty Seven Practices Leading To Procedural Prudence

13. Uniform Fiduciary Standards of Care • Know standards, laws, and trust provisions. • Diversify assets to specific risk/return profile of client. • Prepare investment policy statement. • Use “prudent experts” (money managers) and document due diligence. • Control and account for investment expenses. • Monitor the activities of “prudent experts.” • Avoid conflicts of interest and prohibited transactions.

14. Investment Fiduciary Process FIVE-STEP INVESTMENT MANAGEMENT PROCESS Analyze Current Position Diversify – AllocatePortfolio Step 1 Rebalance Formalize Investment Policy Step 2 Step 3 Implement Policy Monitor and Supervise Step 4 Step 5

15. The Benefits of Having Practices Practices provide the following benefits: • Reduce fiduciary liability by uncovering omissions; • Provide educational outline; • Should improve long-term performance; • Enable fiduciaries to compare practices and procedures; • Assist in prioritizing projects; • Establish benchmarks to measure progress.

16. Analyze Current Position Practice No 1.1 - Investments are managed in accordance with applicable laws, trust documents, and written investment policy statements. Practice No. 1.2 - Fiduciaries are aware of their duties and responsibilities. Practice No. 1.3 - Fiduciaries and parties in interest are not involved in self-dealing.

17. Analyze Current Position Practice No. 1.4 - Service agreements and contracts are in writing, and do not contain provisions that conflict with fiduciary standards of care. Practice No. 1.5 - There is documentation to show timing and distribution of cash flows, and the payment of liabilities. Practice No. 1.6 - Assets are within the jurisdiction of U.S. courts, and are protected from theft and embezzlement.

18. Diversify: Allocate Portfolio Practice No. 2.1 - A risk level has been identified. Practice No. 2.2 - An expected, modeled return to meet investment objectives has been identified. Practice No. 2.3 - An investment time horizon has been identified.

19. Diversify: Allocate Portfolio Practice No. 2.4 - Selected asset classes are consistent with the identified risk, return, and time horizon. Practice No. 2.5 - The number of asset classes is consistent with portfolio size.

20. Formalize The Investment Policy Practice No. 3.1 - There is detail to implement a specific investment strategy. Practice No 3.2 - The investment policy statement defines the duties and responsibilities of all parties involved. Practice No. 3.3 - The investment policy statement defines diversification and rebalancing guidelines. Practice No. 3.4 - The investment policy statement defines due diligence criteria for selecting investment options.

21. Formalize The Investment Policy Practice No. 3.5 - The investment policy statement defines monitoring criteria for investment options and service vendors. Practice No. 3.6 - The investment policy statement defines procedures for controlling and accounting for investment expenses. Practice No. 3.7 - The investment policy statement defines appropriately structured, socially responsible investment strategies (when applicable).

22. Adoption of 404 Decision on number of investment options. Decision on which asset classes per option. Due diligence on investment options. Monitoring of investment options and expenses. Key Components of the DC IPS

23. Implement Policy Practice No. 4.1 - The investment strategy is implemented in compliance with the required level of prudence. Practice No. 4.2 - The fiduciary is following applicable “Safe Harbor” provisions (when elected). Practice No. 4.3 - Investment vehicles are appropriate for the portfolio size. Practice No. 4.4 -A due diligence process is followed in selecting service providers, including the custodian.

24. Safe Harbors • Practice No. 4.2 - The fiduciary is following applicable “Safe Harbor” provisions, in general. • Use prudent experts to make the investment decisions; • Demonstrate that the prudent expert was selected by following a due diligence process; • Give the prudent expert discretion over the assets; • Have the prudent expert acknowledge their co-fiduciary status; • Monitor the activities of the prudent expert to ensure that the expert is performing the agreed upon tasks.

25. Safe Harbors • Practice No. 4.2 - The 401(k) fiduciary is following applicable “Safe Harbor” provisions for DC Plans (when elected). • Plan participants must be notified that the plan sponsor intends to constitute a 404(c) plan; • Participants must be provided at least three different, prudently selected, investment options; • Participants must receive education on the available investment options; • Participants must be provided the opportunity to change their investment strategy/allocation with a frequency that is appropriate in light of market volatility.

26. Key Components of the DC IPS 20 steps to comply with ERISA Section 404(c)* • The participant has an opportunity to obtain written confirmation of his instructions. • The person to whom the instructions are given is an identified plan fiduciary who is obligated to comply with the instructions. * As identified by Mr. Fred Reish, Esq.

27. Key Components of the DC IPS 20 steps to comply with ERISA Section 404(c) (continued)* The participant is provided, by an identified plan fiduciary, with the following: (1) An explanation that the plan is intended to be a 404(c) plan; (2) An explanation that the fiduciaries of the plan may be relieved of liability for losses; (3) A description of the investment alternatives available under the plan; (4) A general description of the investment objectives and risk and return characteristics of each designated alternative; (5) Identification of any designated investment managers; (6) An explanation about giving investment instructions; (7) A description of any transaction fees and expenses which affect the participant’s account balance; (8) The name, address, and phone number of the plan fiduciary responsible for providing information; (9) Specified information regarding employer securities; (10) A copy of the most recent prospectus provided to the plan for investment alternatives subject to the Securities Act of 1933; (11) Any materials provided to the plan relating to the exercise of voting, tender or similar rights. * As identified by Mr. Fred Reish, Esq.

28. Key Components of the DC IPS 20 steps to comply with ERISA Section 404(c) (continued)* The participant is able to obtain upon request: (1) A description of the annual operating expenses of each designated investment alternative; (2) Copies of any prospectuses, financial statements and reports provided to the plan; (3) A list of the assets comprising the portfolio of each designated investment alternative; (4) Information concerning the value of shares or units in designated investment alternatives; (5) Information concerning the value of shares or units in designated investment alternatives held in the account of the participant. * As identified by Mr. Fred Reish, Esq.

29. Key Components of the DC IPS 20 steps to comply with ERISA Section 404(c) (continued)* • Plan permits participants to give investment instructions with a frequency which is appropriate in light of market volatility. • The core investment alternatives, constituting a broad range, permit instructions at least once within any three-month period. * As identified by Mr. Fred Reish, Esq.

30. Key Components of the DC IPS • Exhibit I • Annual Notification Requirement for • Maintaining a Valid Section 404(c) Election • Notice 98-52, I.R.B. 1998-46, November 16, 1998. • V. ADP TEST SAFE HARBOR • C. Notice Requirement • Content Requirement • The content requirement of this section is satisfied if the notice (1) is sufficiently accurate and comprehensive to inform the employee of the employee's rights and obligations under the plan and (2) is written in a manner calculated to be understood by the average employee eligible to participate in the plan. For purposes of the preceding sentence, a notice is not considered sufficiently accurate and comprehensive unless the notice accurately describes (i) the safe harbor matching or nonelective contribution formula used under the plan (including a description of the levels of matching contributions, if any, available under the plan); (ii) any other contributions under the plan (including the potential for discretionary matching contributions) and the conditions under which such contributions are made; (iii) the plan to which safe harbor contributions will be made (if different than the plan containing the CODA); (iv) the type and amount of compensation that may be deferred under the plan; (v) how to make cash or deferred elections, including any administrative requirements that apply to such elections; (vi) the periods available under the plan for making cash or deferred elections; and (vii) withdrawal and vesting provisions applicable to contributions under the plan.

31. Key Components of the DC IPS • Exhibit I • Annual Notification Requirement for • Maintaining a Valid Section 404(c) Election • Notice 98-52, I.R.B. 1998-46, November 16, 1998. • V. ADP TEST SAFE HARBOR • C. Notice Requirement • Timing Requirement • a. General Rule • The timing requirement of this section V.C.2 is satisfied if the notice is provided within a reasonable period before the beginning of the plan year (or, in the year an employee becomes eligible, within a reasonable period before the employee becomes eligible). The determination of whether a notice satisfies the timing requirement of this section V.C.2 is based on all of the relevant facts and circumstances. • b. Deemed Satisfaction of Timing Requirement • The timing requirement of this section V.C.2 is deemed to be satisfied if at least 30 days (and no more than 90 days) before the beginning of each plan year, the notice is given to each eligible employee for the plan year. In the case of an employee who does not receive the notice within the period described in the previous sentence because the employee becomes eligible after the 90th day before the beginning of the plan year, the timing requirement is deemed to be satisfied if the notice is provided no more than 90 days before the employee becomes eligible (and no later than the date the employee becomes eligible). Thus, for example, the preceding sentence would apply in the case of any employee eligible for the first plan year under a newly established section 401(k) plan, or would apply in the case of the first plan year in which an employee becomes eligible under an existing section 401(k) plan.

32. Monitor and Supervise Practice No. 5.1 - Periodic reports compare investment performance against appropriate index, peer group, and investment policy statement objectives. Practice No. 5.2 - Periodic reviews are made of qualitative and/or organizational changes of investment decision-makers. Practice No. 5.3 - Control procedures are in place to periodically review policies for best execution, soft dollars, and proxy voting.

33. Monitor and Supervise Practice No. 5.4 - Fees for investment management are consistent with agreements and with the law. Practice No. 5.5 - “Finders fees,” 12b-1 fees, or other forms of compensation that have been paid for asset placement are appropriately applied, utilized, and documented.

34. What Next? • Determine if YOU are a fiduciary • Determine which of your Employees are fiduciaries • Understand the responsibilities that go with being a fiduciary

35. What Next? • Understand and communicate to your employees the personal liability that goes with being a fiduciary • Ensure that all aspects of fiduciary responsibility are being met by you and others in your firm • Document the processes in place that are consistent with prudent investment practices

36. Investment Fiduciary Responsibility. . . Understanding the Plan Sponsor’s Role Summary & Questions