6. Issues In Vendor Management - Retirement

Question 1

What was the essence (gravamen) of the plaintiffs’ complaint in Tibble v. Edison?

Answer 1

Defendants (plan sponsors) had breached their duty of prudence by offering 6 more, highly-priced, mutual funds, when virtually identical lower priced funds were available at exactly the same time.

The ERISA statute of limitations provision specifies that a lawsuit claiming a breach of fiduciary duty is timely if it is filed no more than 6 years after the date of the last action that constituted a part of the breach or violation. Based on this provision, lower courts ruled the plaintiffs’ fiduciary breach claims were inapplicable since the funds were added >6y before complaint.

Question 2

What was the result of the Supreme Court Tibble decision?

Answer 2

It removed the impediment that blocked plan participants from filing a lawsuit relating to an improperly monitored plan investment where the initial decision to add that investment occurred past the ERISA 6y statute of limitations.

In other words, although the selection of an inv fund for an ERISA plan would generally be insulated from claims of fiduciary breach after 6y, the Court ruled that the failure to properly monitor an investment fund once selected would still be exposed to claims for 6y from the date of such monitoring failure.

Furthermore, if there is a continuing monitoring failure, participants would never lose their ability to sue.

The Court reaffirmed the duties of retirement plan sponsors to monitor (as noted in Tibble) and to update plan options with their findings in Hughes v. Northwestern University in Jan 2022. Here, the Court noted that a sponsor couldn’t evade responsibility by offering “an adequate array of choices.” Fiduciaries fall short if they “fail to remove an imprudent investment from the plan within a reasonable time.”

Question 3

What are the steps a plan fiduciary should take to ensure that their approach to monitoring plan investments meets the Tibble standard of being “systematic and regular”?

Answer 3

1. Adopting procedures for the periodic monitoring of plan investments
2. Closely adhering to those procedures, and then
3. Documenting the implementation of those procedures.

The approach entails the plan sponsor committee retaining both an ERISA counsel & an investment advisor, and also establishing systematic monitoring procedures.

Question 4

What is the hallmark of a prudent, systematic monitoring process for plan investments?

Answer 4

To have a written to-do list of items that need to be accomplished each time plan fiduciaries meet to evaluate their plan’s investments.

Best practice is for plan fiduciaries to meet quarterly to monitor their plan’s investments.

Each time the fiduciaries meet, it is recommended that they address 6 items:
1. Review performance over time & relative to b’mark
2. Review individual/institutional share classes
3. Evaluate asset classes vs. “style drift”
4. Review compliance changes w/ counsel
5. If applicable, review target-date funds
6. Review fees

These items should be included on the plan’s IPS or in a separate doc such as minutes that is adopted & ratified by committee.

Question 5

List the 6 actions that fiduciaries should take each time they meet for the purpose of monitoring the performance of the plan’s investments.

Answer 5

1. Review the quarterly report prepared by the investment advisor to evaluate performance over quarter, YTD, 3-, 5-, 10y periods. Show perf against b’mark & peer groups; discuss whether any mgmt changes took place within the fund.
2. Review whether institutional share classes are available for the plan’s inv funds. If an institutional share class is available, but the plan is ineligible for it bc it fails to have a minimum level of assets invested, fiduciary duty would require committee to ask fund mgr to make an exception on behalf of the plan. The switch to institutional share class should be evaluated carefully, not automatically pursued. Other factors, e.g. revenue sharing, should be considered..
3. Evaluate investment funds to determine whether they represent all desired asset classes; & if there’s been “style drift” since funds were last evaluated
4. Review recent changes in the law w ERISA counsel, incl. court cases & gov’t pronouncements
5. If applicable: evaluate target-date funds quarterly. Fee structure of TDF family (as well as underlying inv funds) should be confirmed, and the perf of each TDV vs. appropriate indexes noted
6. Review all fees paid in/directly by plan; make sure they’re reasonable. OK to do semi/annually.

Question 6

When a 401k plan utilizes both an investment advisor and a TPA, which party typically controls the client relationship?

Answer 6

The investment advisor

Question 7

Differentiate bt the core services provided by TPA vs. those provided by plan advisor:

Answer 7

TPA:
- plan docs & amendments
- compliance testing
- Forms 5500 prep
- processing loans & distributions

Advisor: a wider spectrum —
- investment selection & monitoring
- Conducting plan reviews
- Engage in provider negotiation, benchmarking
- Providing EE education
- Maybe acts at only plan level & leaves EE comm to others, or perhaps involved in group meetings/even provide 1-1 EE counseling

Question 8

In what areas of plan mgmt are plan advisors likely to possess a different kind, not just degree, of info from TPAs?

Answer 8

Unlike TPAs, plan advisors are particularly knowledgeable about mutual funds, collective investment trusts (CITs), different share classes, advice vs passive investments, “to” vs. “through” TDF glide paths, and net asset value (NAV) vs. accumulation unit value (AUV).

The latter terms refer to measurements of value of mutual funds that are held directly or indirectly through accounts owned by insurance companies.

Other matters which investment advisors are also likely to be more familiar with than TPAs, are social security optimization, non qualified deferred comp arrangements, distribution planning, and estate & trust issues.

Question 9

What common goal do plan advisors and TPAs share?

Answer 9

To design a plan that meets the objectives of the plan sponsor, yet falls within the framework allowed by IRS & DOL rules.

First, the advisor & TPA have to prompt plan sponsors to communicate what’s important to them. While a free-form conversation can be productive, it’s generally more helpful to have a worksheet or outline to guide the conversation & stimulate discussion.

As a prospective plan sponsor begins speaking, it may also be hard to resist the inclination to mentally race ahead, searching for ways in which the plan sponsor’s needs can be molded into a qualified plan design. Occasionally, what the plan sponsor/prospect needs/wants is out of scope of what the TPA can provide. The desired objective might be best met by something other than a qualified retirement plan! Under such circumstances, the advisor is in the best position to offer other options after actively listening to the plan sponsor.

Question 10

In developing an outline to serve as a guide for the various parties establishing a qualified retirement plan, there are 4 key areas of responsibilities/functions:

Answer 10

1. Plan design and implementation
2. Fiduciary responsibilities with plan investments
3. IRS & DOL compliance
4. Operational compliance

Question 11

In developing an outline to serve as a guide for the various parties establishing a qualified retirement plan, there are 4 key areas of responsibilities/functions. Explain the functions of the responsibility “Plan design & implementation”

Answer 11

1. Determine company objectives
2. Decide on plan provisions
3. Prepare plan & trust docs, SPDs, and adopting resolution
4. Obtain proposals/provider search
5. Select service providers
6. Provide EE enrollment & education

Question 12

In developing an outline to serve as a guide for the various parties establishing a qualified retirement plan, there are 4 key areas of responsibilities/functions. Explain the functions of the responsibility “Fiduciary responsibilities with plan investments”

Answer 12

1. Meet with plan committee & fiduciaries at least annually
2. Create & maintain IPS
3. Select investments to be offered
4. Monitor investments; add/delete/replace investments as directed by the IPS
5. B’mark plan fees & services
6. Counsel terminating & retiring EEs

Question 13

In developing an outline to serve as a guide for the various parties establishing a qualified retirement plan, there are 4 key areas of responsibilities/functions. Explain the functions of the responsibility “IRS & DOL compliance”

Answer 13

1. Prepare year-end compliance testing:
   - Coverage, 401k nondiscrimination tests
   - Top-heavy, vesting
2. Prepare 5500 & applicable schedules
3. Prepare req’d participant disclosures
4. File 5500 & applicable schedules
5. Distribute SAR & other req’d participant notices

Question 14

In developing an outline to serve as a guide for the various parties establishing a qualified retirement plan, there are 4 key areas of responsibilities/functions. Explain the functions of the responsibility “Operational compliance”

Answer 14

1. Notify EEs of eligibility
2. Ensure that contribs are deposited timely
3. Ensure plan operates according to its terms

Question 15

The plan sponsor is ultimately responsible for ensuring that all plan transactions are executed in a timely fashion. Identify the entities who typically carry out the responsibilities & functions of administering a qualified retirement plan.

Answer 15

The plan sponsor, with assistance from broker/advisor/consultant, is responsible for developing company objectives and making decisions re: plan provisions.

The plan admin (typically company’s senior HR exec) is tasked with: selecting service providers, filing IRS & DOL forms, distributing SAR and other req’d participant notices. Plan admin also responsible for ensuring operational compliance.

Record keeper/provider takes on task of enrolling participants (& perhaps educating them on options under the plan) and also compiling info to disseminate req’d participant disclosures.

TPA has responsibility to prepare plan docs & conduct EOY compliance testing.

The services of broker/advisor/consultant are sought to assist w soliciting plan proposals, conducting provider search, assisting with EE enrollment, surveying investment industry for plan fees/services, and possibly counseling terminating or retiring EEs re: their options wrt plan accumulations and distributions.

Question 16

DOL considers the plan admin, not the plan service provider, responsible for maintaining req’d plan records.

What kinds of records can DOL commonly request from the plan admin?

Answer 16

-Specific plan information:
- Plan docs, operational compliance logs, comms to EEs, payroll records used to calc contribs

-Specific EE info:
- personal info, employment history, deferral elections, investment selections, beneficiary designations.

Question 17

Provide examples of financial reports that a plan filing Form 5500 is req’d to keep for a minimum of 6y after the filing date:

Answer 17

All of the information used to arrive at the figures in the 5500 and related schedules, such as financial reports including:

1. Statements from the trust, custodian, brokerage accts and/or bank accts that reflect deposits, withdrawals, income, fees, and other transactional activity
2. Documentation that such accts are properly maintained as plan (not company or personal) accts
3. Certified audits and/or appraisals, depending on plan size & type of assets held
4. Distribution records including withholding and Forms 1099-R
5. Reconciliation of deposits to deductions taken on corporate income tax returns

Question 18

In addition to the financial reports that underpin the figures a plan admin puts on the Form 5500 and its schedules, what other records must be preserved under ERISA Ss.107?

Answer 18

1. Proof of the fidelity bond covering the plan
2. Data supporting all req’d NDT, that is:
   - HCE and key EE determinations
   - Controlled group & affiliated service group determinations
   - Payroll & hours info for all EEs used to determine eligibility, exclusions and allocations

Question 19

ERISA Ss.209 requires plan admins to retain records related to the determination of each EE’s benefit for what, in some cases, could turn out to be decades.

List the kinds of records needed to document the benefits due and/or paid to EEs.

Answer 19

1. Basic plan info
   - Properly executed plan docs, amendments and/or restatements, incl. company resolutions adopting each. Clearly label any kept drafts and pertinent notes re: decisions to implement/change plan provisions
   - Timing and details of statutory/regulatory changes operationally implemented prior to being memorialized via amendment/restatement of plan doc
   - Participant comms, including SPD, SMM, edu materials, req’d notices…
   - Determination, advisory, or opinion letter(s) for all plan docs
2. EE/participant info
   - Personal details: name, SSN, DOB, marital/fam status
   - Employment history, DOH, DOT, rehire dates, termination details e.g. in/voluntary, death, disability
   - Comp and hours used to determine eligibility & calc contribs
   - Officer/ownership history; family relations
   - Details of EE exclusion by plan terms or EE opt out elections
   - Election forms for choices such as deferral amnt, investment direction, Ben designation, distribution req
   - Transactional history of contribs/distribs

Question 20

What are the general reqs for the maintenance of electronic records by plan admins?

Answer 20

The physical copies of records can be transferred to electronic versions if the transfer results in legible, accurate copies that are reproducible.

Electronic record keeping system must:
1. Be maintained with controls in place to ensure accuracy & authenticity of records
2. Be able to index, retain, preserve, retrieve, reproduce records in a safe and accessible place
3. Be able to convert the records to legible paper form
4. Not impose access restrictions (e.g., time, location) that would impair an individual’s ability to comply with reporting & disclosure reqs of ERISA
5. Be adequately secured, organized, backed up, and maintained by established procedures.

Not all records may be electronically stored (e.g., notary seals…) While electronic copies may serve as backup records, originals must be maintained if they can’t be converted to spec or if the physical copy has significant value.

Question 21

Describe the critique of research conducted by leading experts on the significance of fees in reducing retirement account balances of DC plan participants.

Answer 21

To demonstrate payoff from a lower fee, many illustrations assumed a fee cut of 100+ basis points and correspondingly assumed a sure boost of annual investment return by the equivalent size, without sacrifice in investment depth or services. However, -100pts may be dramatic in institutional fee negotiations. Many analyses nonetheless extrapolate this as a common size to expect! Much of the research fails to consider where the fee level should settle as reasonable, and how the fee effect evolves when reduced.

In addition, most studies looked at the fee effect by assuming a one-time savings (e.g., $10k) and a constant investment return over a long horizon (e.g., 7% PY), which isn’t a close approx of typical savings/investment patterns over the life cycle. Ret plan are often deposited regularly, dollar amounts vary, and contribs to final balance vary with time duration & investment outcomes.

Factoring periodic savings into the fee assessments makes a difference. A 1% fee, for instance, reduces the acct balance by nearly 45% if only a one-time savings is assumed over 40y - a stark overestimate of fee erosion - in comparison with about 23% when periodic savings are considered in calls. The discrepancy varies with fee levels.

Question 22

What is a basis point?

Answer 22

One basis point is equal to 1/100th of 1%.

One basis point = 0.01%

One basis point = 0.0001

Question 23

Discuss the popular default options of DC plans, before and after the Pension Protection Act 2006

Answer 23

Money market funds were often the default option of DC plans pre-PPA. This is a lower risk approach but not an effective way to grow assets for the purpose of long-term retirement. Interest accrual here was assumed to be commensurate with variable 1Y CD, which can be viewed as the lower bound to gauge the role of savings. A worker assumed to save 6% of their salary /y.

TDFs are the most popular DC investment in the post-PPA world. TDFs seek higher returns by taking greater risk when workers are younger, bc they have earnings as a cushion & a longer investment horizon to weather short-term volatilities. As the worker gets older, the risky proportion in the TDF gradually decreases, so as to mitigate potential loss.

Question 24

Based on an analysis that ran simulations using historical data, how do fees measure up in connection with the contributions of saving and investing?

Answer 24

On average, 68% of worker wealth accumulation upon ret can be attributable to savings; 38% to investing and -6% to fees.

Individual investment experiences vary, but this ordering of attributions held for the majority of cases across various savings patterns, glide paths in TDFs, and levels of fees observable in the market. The results clarify that to get ready financially for retirement, the foremost force is rigorous savings on a persistent basis and that the power of long-term investing (that is, compounding returns) builds on this foundation.

Question 25

What are the major conclusions from the analysis to rank the drivers for retirement outcomes using 3 factors: saving, investing, fees?

Answer 25

Security hinges on savings levels and investment outcomes, plus containment of the effect of management fees.

Fees nonetheless have received what may be outsized fiduciary focus. Recent regulations have fixated much of plan sponsors’ attention to fees, and media frenzy has fueled fear of litigation. Fee negotiations sometimes de facto serve to filibuster a holistic view of success factors for a ret plan.

Lower fees are beneficial to plan participants, all other things being equal. Fiduciaries are obligated to assess & negotiate fees. Yet, racing to the bottom of fees may detract fiduciary oversight of investment selections. A lower cost mandate tends to entail easier-to-implement asset classes with less professional expertise & services necessary, and thus may forgo return opportunities if such route has insufficient exposures and diversification among key areas & markets.