Fiduciary Landmines & Solutions

1. Fiduciary Landmines & Solutions

2. 360 Wealth Planners and our approach Recent problems arising for Plan Sponsors Building a 401k team New Guidelines as a result of prosecution and settlements Plan Scorecards and determining continued success. Investment Policy Statements Upcoming Legislation What are we going to discuss today?

3. Who is 360 Wealth Planners/Management? 3.5 Billion Under Management 80+ Advisors 6000+ Clients

4. Independent Multi-Custodian What does that mean? No Proprietary Products

5. “HR Executives Again Named In 401(K) Lawsuit.” – Forbes 2/7/19 • An upsetting trend for HR executives continues as they are more frequently named as defendants in these fiduciary breech lawsuits. • While it appears Pioneer Natural Resources and its executives have gotten off light with a small settlement worth only .1 percent (500K) of their plans assets, employers and their financial and HR executives should be put on notice. There is much at stake for all parties as the can be held “personally liable” in lawsuits such as these.

6. “BTG International Profit Sharing 401(k) plan sponsor sued for alleged ERISA violations.” – Pensions & Investments 4/24/19 The suit alleges that since Jan 1, 2012 the defendants have forced the plan “into investments that charged excessive fees” that benefited its record keeper, John Hancock USA. Sponsors of the 401k profit-sharing plan allowed John Hancock “to receive excessive and unreasonable compensation” through direct and indirect fees paid by the plan… The defendants are being accused of larding the plan “with excessively expensive subadvised accounts- to the exclusions of superior alternatives…

7. “Fidelity hit with third lawsuit over alleged ‘secret’ 401(k) fees.” – Pensions & Investments 4/9/19 The plaintiff also alleged that the payments, which Fidelity characterized as infrastructure payments, were "plainly a replacement for declining amounts of revenue-sharing payments received by Fidelity.“ The court noted that Fidelity makes thousands of non-Fidelity mutual funds available to 401(k) plans for which Fidelity acts as record keeper, as well as to other Fidelity customers. "We receive a fee from some of those mutual fund companies to compensate us for maintaining the infrastructure that is needed to make those funds available.“ The plaintiff in the latest Fidelity lawsuit is seeking declarative and injunctive relief as well as compensatory damages and disgorgement and/or restitution for "all the kickback payments and other compensation improperly received by Fidelity."

8. “Settlement reached in Tussey vs. ABB fiduciary breach case.” – Pensions & Investments 3/28/19 In 2012, the plaintiffs obtained a $36.9 million judgment. Plan participants had accused ABB of a mapping decision that was "based on self-interest rather than what was best for the plans," according previous court documents. Founding partner Jerome Schlichter said that ABB and Fidelity spent 13 years and $50 million fighting the case.

9. “Trustees settle multiemployer DC plan lawsuit for $8.75 million.” – Pensions & Investments 4/18/19   Felipe Ybarra and Cesario Serrato, the two participants in the $1.1 billion Supplemental Income 401(k) Plan, alleged that the board of trustees breached their fiduciary duties by offering retail class mutual fund shares when identical lower-cost institutional shares were available.   They also accused the defendants of paying its record keeper excessive fees through revenue-sharing arrangements with the mutual funds offered as investment options under the plan. The settlement calls for the creation of a "non-reversionary common fund" of about $8.75 million, which is the amount remaining under the defendants' fiduciary liability policy after paying for defense costs. In addition to creating the fund, the defendants also agreed to hire an independent consultant to oversee a request for proposals for plan record-keeping and administrative services, something the plaintiffs claimed hadn't been done in more than 15 years.

10. Broker of Record Record Keeper/ 401k vendor Third Party Administrator Plan Sponsor (Business Owner)

11. Broker of Record Record Keeper/ 401k vendor Third Party Administrator Plan Sponsor (Business Owner) Independent Consultant

12. Summary Judgment to 401(k) Fiduciaries • Oracle Granted Partial Summary Judgment in • 401(K) Fees/Investment Option Case • – The National Law Review 3/1/19 • Plan Fees • There is nothing suspect or improper about revenue sharing per se; indeed, it has been • described as ‘a common and acceptable investment industry practice[] that frequently inure[s] to the • benefit of ERISA plans.’” The committee, with its financial representatives, outside counsel and the • recordkeeper, met at least quarterly, and the financial representatives produced quarterly reports with • expense ratios for each fund and administrative fees, stated in total and on a per-participant basis. • “No reasonable jury could find anything imprudent in this decision-making process. If anything, it seems • exceptionally careful and well-informed.” • The considerable benchmarking material in the market resulting from US Department of Labor fee • disclosure regulations arguably alleviates the need for plans to “shop for services” at regular intervals

13. Summary Judgment to 401(k) Fiduciaries • Oracle Granted Partial Summary Judgment in • 401(K) Fees/Investment Option Case • – The National Law Review 3/1/19 • Imprudent Investment Options • There In assessing the prudence of investment decisions, the court focused on the steps taken in arriving • at the decisions. A fiduciary must, at a minimum, “examine the characteristics of an investment, • including its risks characteristics and its liquidity, to ensure that it is an appropriate plan investment, and that it is in the best interests of plan participants.” The plaintiffs challenged three particular funds • of the plan’s 32 investment options. The court noted that investment decisions were made pursuant to • an Investment Policy Statement that set out detailed standards and procedures. The committee also • relied on advisors, who provided reports, benchmarking data and professional analysis. • Insight • Fiduciaries who have a thorough process in place to monitor fees and investment options, and who retain expert advisors to assist with that process, are well positioned to defend against claims of fiduciary imprudence and disloyalty.

14. Protecting Plan Sponsors from Department of Labor Sanctions and Participant Lawsuits • – The CPA Journal 2/1/19 •  A broker is not a fiduciary and assumes no responsibility for fund selection and ongoing fund performance monitoring.  • Many plan fiduciaries are unaware of the plan governance practices necessary to comply with ERISA, and become aware of an alleged violation as a result of a DOL investigation or participant lawsuit. Two employers can select the same fund and face different liability risks if one follows a prudent decision-making and monitoring process and the other does not. A prudent process would include an analysis of the performance, portfolio statistics, and expense of other funds in the same asset category. Plan fiduciaries who do not replace funds that consistently underperform are at greater risk of an investigation or a lawsuit. • Plan fiduciaries include plan administrators, trustees, and retirement plan committee members. CFOs, Human Resource Managers, and Board Members are also fiduciaries

15. Protecting Plan Sponsors from Department of Labor Sanctions and Participant Lawsuits • – The CPA Journal 2/1/19 •  83% of employers assessed their 401(k) plan fees in 2017, and more than 40% of those employers reduced plan fees. The second most important action taken was to update or review their investment policy statement.  • Many DOL investigations are triggered by complaints or inquiries from employees (EBSA Enforcement Manual, Complaints).  The targets of fiduciary investigations are individuals who are or are considered to be named plan fiduciaries or functional plan fiduciaries.  • Plan fiduciaries need to benchmark their plan’s recordkeeping fee in the marketplace every three years • Many plan sponsors and their advisors benchmark plans against self-serving, published industry averages. Plan sponsors and their advisors should benchmark their plans against service and fee quotes obtained in the marketplace, taking into account their plan’s superior profile, because the DOL contemplates marketplace benchmarks, and because excellent 401(k) plans are valued more by employees than average 401(k) plans.

16. Protecting Plan Sponsors from Department of Labor Sanctions and Participant Lawsuits • – The CPA Journal 2/1/19 • A well-structured plan governance process substantially increases the likelihood that a 401(k) plan will be successful. Employers who value operational excellence understand the need to monitor plan expenses, fund performance, and fiduciary compliance, and consequently sponsor successful and compliant 401(k) plans. • The DOL’s increased enforcement efforts and the likelihood that 401(k) plan litigation will continue make it clear that plan fiduciaries must manage plan governance effectively or retain a capable fiduciary to do so. Outside fiduciaries assist plan fiduciaries with the search, selection, and monitoring of funds and expenses in a manner designed to ensure compliance with ERISA’s stringent fiduciary standards.  • Robotic advisor services are customarily offered by nonfiduciary brokers to supplement their service deliverable, since brokers cannot assume responsibility for fund selection and cannot make fund recommendations.

17. Typical Scorecard: General Overview Outlines Penalties

18. Half Price Books Plan Score:58

19. Marsh & Mclennan Plan Score:38

20. IMA Inc. Plan Score:72

21. Lockton Inc. Plan Score:83

22. Our Plan Diagnostic

23. Our Plan Diagnostic

24. Investment Policy Statement What’s Your Process to Retain Plan Health? Our Defined Pass/Fail Process Monitoring - Watch List Criteria The decision to retain or terminate an investment option cannot be made by a formula. Also, extraordinary events do occur that may interfere with the investment option's ability to prudently manage investment assets. It is the committee's confidence in the investment option's ability to perform in the future that ultimately determines the retention of an investment option. An investment option may be placed on a Watch List and a thorough review and analysis of the investment option may be conducted, when: fi360 fi360 Fiduciary Score Avg (3yr) Threshold: <= 25 | Pass 1 of the last 1 quarters | Treat missing data values as a failure *Please reference the fi360 Fiduciary Score Methodology document in Appendix C for additional details. Expenses Prospectus Net Exp Ratio (Optional) Threshold: Top 50% of peer | Pass 1 of the last 1 quarters | Treat missing data values as a failure Performance 10 Year Return (Optional) Threshold: Top 50% of peer | Pass 1 of the last 1 quarters | Treat missing data values as a failure 3 Year Return (Optional) Threshold: Top 50% of peer | Pass 1 of the last 1 quarters | Treat missing data values as a failure 5 Year Return (Optional) Threshold: Top 50% of peer | Pass 1 of the last 1 quarters | Treat missing data values as a failure Operations Style (Optional) Threshold: No Style Drift | Pass 1 of the last 1 quarters | Treat missing data values as a failure Assets (Optional) Threshold: >= 75 Mil | Pass 1 of the last 1 quarters | Treat missing data values as a failure Inception Date (Optional) Threshold: >= 5 Years | Pass 1 of the last 1 quarters | Treat missing data values as a failure Manager Tenure (Optional) Threshold: > 5 Years | Pass 1 of the last 1 quarters | Treat missing data values as a failure In addition to meeting any required criterions 6 of the 9 optional criterion must be satisfied to meet the overall Due Diligence Criteria • Risk • Alpha (Optional) • Threshold: Top 50% of peer | Pass 1 of the last 1 quarters | Treat missing data values as a failure • BENCHMARK INDEX • MSCI ACWI Ex USA NR USD • Inflation-Protected Bond Barclays US Treasury US TIPS TR USD • Intermediate Government Barclays US Government TR USD • Intermediate-Term Bond Barclays US Govt/Credit 5-10 Yr TR USD • Large Blend S&P 500 TR • Large Growth Russell 1000 Growth TR USD • Large Value Barclays ABS TR USD • Mid-Cap Blend S&P MidCap 400 TR • Money Market Taxable USTREAS T-Bill Auction Ave 3 Mon • Short-Term Bond Barclays Govt/Credit 1-5 Yr TR USD • Small Blend Russell 2000 TR USD • Target Date 2000-2010 Morningstar Lifetime Moderate 2010 • Target Date 2016-2020 Morningstar Lifetime Moderate 2020 • Target Date 2026-2030 Morningstar Lifetime Moderate 2030 • Target Date 2036-2040 Morningstar Lifetime Moderate 2040 • Target Date 2051+ Morningstar Lifetime Moderate 2050 • Monitoring - Measuring Costs • The committee will review at least annually all costs associated with the management of the plan, including: • 1. Expense ratios of each mutual fund against the appropriate peer group. • 2. Administrative Fees; costs to administer the plan, including record keeping, custody and trust services. • 3. The proper identification and accounting of all parties receiving soft dollars and/or 12b-1 fees generated by the plan. • Investment Policy Review • The committee will review this IPS at least annually to determine whether stated investment objectives are still relevant and the continued feasibility of achieving the same. It is not expected that the IPS will change frequently. Short-term changes in the financial markets should not require adjustments to the IPS.

25. On the Hill Open Multiple-employer Plans (Open MEPs): One of the key elements of congressional pension reform efforts, is viewed as a way of encouraging small employers to sponsor plans. An MEP is a plan maintained by unrelated employers. Under current law, these may only be offered if there is some common interest between the participating employers. As a result they are typically offered by trade associations such as the American Bar Association. In addition, under Internal Revenue Service rules if a single participating employer has a disqualifying event, the entire MEP is deemed disqualified (known as the “one bad apple” rule). SECURE would remove the commonality requirements and apply any disqualification only to the employer who had the disqualifying event. Several rules must be met for an open MEP: • The MEP must have a Pooled Plan Provider (PPP). A PPP is a party named as a fiduciary under the plan that assumes responsibility for plan administration and must register with the Department of Labor. • Each participating employer retains fiduciary responsibility for the selection and monitoring of the PPP. Participating employers also have fiduciary responsibility for investment and management of plan assets unless delegated. • In order to get relief from the “one bad apple” rule, assets of the offending employer would need to be spun off from the MEP. Lifetime income provisions: Annuities • Participants in qualified defined contribution, 403(b) and governmental 457(b) plans can be allowed to take a distribution of a lifetime income investment option without regard to any IRS restrictions if that lifetime income investment is no longer authorized to be held in the plan. The distribution would have to be made via a direct rollover to an IRA or to another retirement plan or, in the case of an annuity contract, through direct distribution to the individual. • A fiduciary safe harbor would be created for employers to use in selecting an annuity provider for their defined contribution plans. This would remove a barrier to access to in-plan lifetime income solutions for participants. Expanded tax credits: • An expanded tax credit for small employers (100 or fewer employees) would increase the current annual cap on the tax credit for starting a plan from $500 to the lessor of $5,000 or $250 multiplied by the number of non-highly compensated employees. • A new $500 tax credit would be created for small employers (with 100 or fewer employees) that adopt automatic enrollment.

26. On the Hill Department of Labor’s proposed rule on association retirement plans: In August 2018, President Trump issued an Executive Order, which, among other things, asked the DOL to expand circumstances in which small and mid-size employers can participate in a multiple-employer plan (MEP). The order also asked the DOL to look at increasing retirement security for gig economy workers (Uber drivers, independent contractors, etc.). One of the barriers to using MEPs is a DOL requirement stating that, in order for an MEP to be treated as a single ERISA plan with a single 5500 filing, etc., there must be some commonality among the employers joining the MEP other than their desire to be part of a pooled plan. The DOL promptly responded by publishing a proposed rule in October 2018. While the proposed rule does provide some clarity regarding when a professional employer organization (PEO) can offer an MEP, as well as the conditions for sponsoring an association retirement plan, it unfortunately did not eliminate the commonality requirement. In order for an entity to sponsor an association retirement plan, it must satisfy the following conditions: • It must have at least one substantial business purpose unrelated to the goal of providing an MEP. • Each participating employer must employ at least one employee participant (although owner-employees can act as both the employer and the employee for this purpose). • There must be a formal organizational structure with a governing body and by-laws or similar indications of formality. • The plan and the activities of the entity generally must be • controlled by its members. • • Employers joining the MEP must have a commonality of • interest, which can be either participation in the same trade or • business or geographic commonality (i.e., they operate in the • same state or metropolitan area). • • Participation in the MEP can only be available to • employees, former employees and beneficiaries of the • association members. • • Service providers, including banks, insurance companies, • broker-dealer firms, third-party administrators, and • recordkeepers, cannot offer an association retirement plan. • In spite of the fact that the proposed rule did not eliminate • the commonality requirement and prohibited financial service • providers from offering an association retirement plan, it • did generate some activity among associations interested in • offering this benefit to their members. However, that interest • may be curtailed because of a recent ruling from a DC district • court that invalidated portions of the DOL’s association • health plan rule containing language virtually identical to the • association retirement plan rule. The DOL may challenge this • ruling, but, until this matter is resolved, it is likely the DOL will • not act to finalize its proposed rule, and associations intending • to rely on it may have to wait for more clarity

27. 360 Wealth Planners offers Independent unbiased market shopping and benchmarking. Regulators and employees are naming Plan Sponsors as well as Executive staff in court documents. 401k plans need consistent monitoring and revision considerations throughout the year. There is a public scorecard of each 401k’s health. Having a criteria for revision such as an Investment Policy Statement is crucial to the success of the plan and protection from liability. Multiple Employer 401k Plans for associations could be a reality in the near future. In Conclusion

28. What’s your score? What’s your process for protection?