Retirement Plan RFPs

©Warner Norcross & Judd LLP 2011

John H. McKendry, Jr. &

Heidi A. Lyon

22

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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