Focus On

CEO Tim Phillips speaks out on the risks in trying to choose a plan that suits your company

THIS IS NOT AN EASY TIME TO BE A 401(k) FIDUCIARYAnd fiduciaries can be an array of company employees, from a plan administrator to the highest levels of the company

At Phillips and Company, we understand what 401(k) means to a business owner – and what kind of risks you take when trying to choose the plan that best fits your business.

As CEO, I worry about many of the same things you do – such as finding the balance between what is good for my business and what is fair for my employees, choosing from amongst a dizzying array of fund managers, keeping an eye on the financial markets and making sure I am covering all of my legal bases.

My experience working with CEO’s over the course of two decades has provided me with a unique perspective on the risks associated with choosing the right 401(k) plan. But it also gives me the opportunity to meet your specific needs as a client, and to anticipate certain unforeseeable aspects to investing so that you don’t have to worry about them. Simply put, our 401(k) team and I endeavor to make managing your plan as easy as pos-sible – by making the unpredictable predict-able.

Phillips and Company serves about 8,000 clients nationwide, with a business unit spe-cializing as an independent advisor to 401(k) plans. Our pride stems from our success in helping plan sponsors and administrators meet their fiduciary responsibilities – unin-hibited by ties to fund providers. This leaves us free to advocate solely for our clients, in both financial markets and legislation, and not for fund managers.

As a business owner, you understand what it means to worry about your business. My clients are my business, and I worry about their money constantly. If my clients have taught me anything, it is that business own-ers take on unnecessary risks when it comes to their 401(k) plans, often without even be-ing aware of it.

Part of this stems from the unpredictability that investing carries. While many elements of a retirement plan can be safely predicted, many cannot. For example, you can guar-antee factors such as the number of partici-pants that will be involved, the basic costs associated with running the plan and the fund selection. But no fund can guarantee positive returns on the dollars invested, and it is impossible to predict how ‘hidden costs’ will erode gains.

Such uncertainty has been an accepted part of the business since its inception, but this is changing. In the last few years the industry has been met with an uptick in the number of class action lawsuits filed against employ-ers for passing on excessive costs to plan participants. Although high-profile names such as Wal-Mart and Kraft Foods have been hit hard by lawsuits alleging excessive fees, a group of less than 30 employees at a small company in Kansas recently filed a similar lawsuit against a plan sponsor for its two million dollar 401(k) plan. These smaller re-tirement plans, especially those holding in-surance-based products, are more likely to have greater proportional expenses and may

carry more liability as a result.

As CEO, I see too many people making too many decisions based on the wrong criteria. This happens more often than you’d think, and it also carries more risk than any CEO should be comfortable with. What often happens is that a plan is chosen based solely on the recommendation of a trusted friend or relative, or the ease of signing up for an option from the company managing your payroll, or even an offer made by an advisor from your local bank.

Although seemingly convenient, the ‘easy’ approach will put your business – and the retirement of your employees – at risk. In the past, the only consequence may have been a mediocre plan. But now that choice can make your company liable. Faced with this risk, our 401(k) team makes it their job to help business owners anticipate the un-predictable elements of their 401(k) plan, address this liability head-on and ensure their decisions are made based on the right criteria – specifically, what plan is the best fit for the company and the employees and whether or not the plan is cost effective.

Liabilities under ERISA

An essential part of this process is gaining an understanding of the litigation currently affecting the retirement plan landscape. Under the Employee Retirement Income Security Act (ERISA), any individual who is

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a trustee or administrator is considered a fi-duciary of their 401(k) plan, and they have a legal obligation to ensure that fees charged to the plan are reasonable and solely for the benefit of the participants. If this condition isn’t satisfied, your firm runs the risk of facing a class action lawsuit.

Current 401(k) fee litigation is centered on two issues:

Revenue Sharing

When a financial institution ‘kicks back’ a portion of the expenses paid by investors to an advisor, it is called “revenue sharing.” In this case, fund providers use plan assets to encourage advisors to select their funds, in-hibiting advisors from selecting the best or most cost-effective choices. Many advisors have these relationships with the funds they bring into a plan, which calls into question how independent they really are.

Fee Disclosure

Many contracts are intentionally made com-plicated so that hidden fees will be passed on to plan participants. While fiduciaries are required to disclose these costs to plan par-ticipants, many service providers make these costs difficult to decipher. This lack of disclo-

sure can negate the safe-harbor protection of ERISA Section 404(c), meaning that ulti-mately the plan fiduciary – you – will be held accountable.

Although it is difficult to determine how courts will rule on these issues, some damage estimates range from a hundred thousand to a quarter million dollars per participant, an amount that should make every business owner want to reassess their plan.

But how does a company or fiduciary antici-pate and prevent the unpredictable? This is where we fit in. While I know that there is no way to predict the future, I understand the immeasurable benefit that having a knowl-edgeable adviser on your team will be in pre-paring you for all possible outcomes.

As your advisor, we will leverage our knowledge and expertise to work with you to foresee changes in financial markets and legislation. This lets you establish preven-tative measures to limit your risk. Our pro-cess, beginning with a cost-analysis review, will break down hidden fees, reduce legal liability and ensure that plan sponsors and administrators are meeting their fiduciary re-sponsibilities – all in addition to the superior service we provide.

Conducting a Cost Analysis Review

Among the services we provide as a partner on your plan is a thorough cost analysis. This allows plan sponsors to understand the fee structure of their funds and how they com-pare with other available plans. It also pro-vides you with access to the most current and up-to-date information, along with a clear breakdown of the fees charged.

In providing cost analyses to firms through-out the Northwest, we operate with the understanding that most employers and employees aren’t equipped with the time or training to understand fund provider con-tracts that are engineered to disguise fees. After all, you have a business to run. That’s where we come in.

Our investment consultants:

- Review each plan’s investment options and expense ratios at least once per year,

- Set performance benchmarks for the funds, and make sure that they aren’t underperforming,

- Compare investment fees to industry standards,

Focus On Phillips & Company

Pil Hwang, Phillips & Company Vice Presi-dent - 401(k) Services, works one-on-one with client-company workers to help them understand their retirement plan details. This helps employees be better able to make informed decisions. It is also an immense help to benefits administrators.

“Before we started working with them, the majority of workers had not received any advice about what to do with their retirement plan money.” - Pil Hwang

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- Obtain all information on costs and expenses, and identify any revenue sharing arrangements for each fund, and

- Compile and deliver this information to the plan sponsor in a clear and concise report.

Accurate Disclosure

ERISA requires all plan sponsors to provide accurate and comprehensive disclosure to all plan participants. The more transparent and thorough the report, the less liable a plan sponsor will be. Via our employee-engage-ment system, we are uniquely able to tackle this liability – by engaging each plan partici-pant on a one-on-one basis with a member of our 401(k) team. This opportunity allows a seasoned financial professional to person-ally address the questions and concerns of each of your employees, while also provid-ing full and open disclosure of the costs of their plan.

In addition to this, we recommend taking a few extra steps to provide the most accurate and comprehensive disclosure:

- Confirm that the information on each fund is accurate and up to date,

- Be prepared to disclose any and all expenses related to the plan (revenue sharing costs included) to plan participants upon request, and

- Annually review plan documents to ensure they are full and complete.

Working with Phillips and Company

Phillips and Company clients put us to work so that we can worry about the unpredict-able for them. As CEO, I understand better than most that, as a 401(k) trustee, you have other pressing duties. This is why we make it our job to take some of the responsibility off your shoulders.

Working with Phillips and Company will put an experienced and knowledgeable 401(k)

advisor on your team to provide you with the due diligence to tackle the risk and unpre-dictability of choosing a plan for the wrong reasons. In short, both your business and your employees will be better protected.

Contact Pil Hwang,Vice President – 401(k) Services(800) 572-4765 Toll-Free(503) 224-0858 Local 1300 SW Fifth Avenue, Suite 2100 Portland, OR 97201

Advocates Acting Solely On Your BehalfPhillips and Company is an independent investment advisory firm located in Portland, Oregon that provides investment and consulting services to institu-tions, high-net-worth families and individuals. Our clients receive major benefits from our independent and conflict-free philosophy; we approach every client’s investment situation in a way that is as individual as the client.

As a 401(k) advisor, Phillips and Company will help your company:

- Co-manage fiduciary responsibilities- Uncover buried costs- Educate all employees about your 40(k) plan

Our wealth management division provides long-range investment solutions to our clients in all matters of wealth management and asset growth. We deliver:

- Conflict-free environment - Open Communication- Dynamic Asset Allocation - Best-of-Breed Manager Selection

In addition to corporate 401(k) design and maintenance, Phillips and Company can help create a comprehensive wealth management plan designed to work with specific investment objectives, whether it’s taking care of your family, creating a charitable trust, or sending your children or grandchildren to college.

We provide the following services:

- Retirement Planning - Equity Strategies- Trust/Estate Planning - Educational Planning- Cash Management and Loans - Stock Options Exercises

Phillips & Company is an AOI Endorsed Service Provider