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MANAGING FIDUCIARY RESPONSIBILITY IN DEFINED CONTRIBUTION PLANS

Beryl W. BallSenior Vice President | Financial Advisor

May 2018

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TODAY’S AGENDA

I. Plan Fiduciaries’ Duties

II. Components of an Effective Fiduciary Process

III. Forming a Defined Contribution Plan Committee Structure

IV. Best Practices

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• Informal

• Few rules

• Simple reporting

• Few fiduciary obligations

• Limited duty to oversee program

• Limited vendor involvement

• No plan document

• Little employer involvement

• No employer vetting of investments

• Outdated regulations

• “Not my problem.”

FIDUCIARY RESPONSIBILITY

THE OLD RULES

• Formal

• Employer makes key decisions

• Audits

• Employer selects and monitors provider/investments

• Clear fiduciary obligations for plan sponsor, committees, trustees, and individuals

• Employer accountable for understanding costs as well as educating participants

• “Now it is my problem!”

THE NEW APPROACH

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Where are you today?

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WHAT MAKES A FIDUCIARY?

• Discretion

• Influence

• Compensation

CHALLENGES: FIDUCIARY OVERSIGHT

PRIMARY FIDUCIARY REQUIREMENTS

• Make decisions in the participant’s interest

• Follow the plan document

• Document your actions

• Know who, what, and why

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CHALLENGES: FIDUCIARY OVERSIGHT

FIDUCIARY OBLIGATIONS

IDENTIFY ALL PLAN

FIDUCIARIES

PLAN COMPLIANCE

AND OPERATION

INVESTMENT SELECTION

AND MONITORING

PARTICIPANT EDUCATION AND ADVICE

SERVICE PROVIDER SELECTION

AND MONITORING INVOLVEMENT

FEE AND EXPENSE

MONITORING

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WHAT DOES THE NEW YEAR HOLD?

Each year, our retirement plan practice leaders sit down to discuss their expectations for the upcoming year. This year, we identified three major themes—each of which has a number of implications for retirement plan sponsors.

RETIREMENT PLAN MARKETPLACE

INCREASING COMPLEXITY FOR RETIREMENT PLAN SPONSORS

To read the full article, “What Does the New Year Hold?,” visit www.captrustadvisors.com/resources.

BENEFITS MATTER MORE THE RETURN OF MARKET VOLATILITY

• Defined contribution plan litigation continues, and it comes down market

• The focus on fees continues, including:• Choice of investment vehicles• Active vs. passive management• Asset-based vs. per-head fees• Zero revenue sharing vs. fee leveling with technology

• Continued proliferation of new products, including: • Managed accounts and hybrid QDIAs• ESG solutions

• The fiduciary rule’s delay complicates plan sponsors’ approach to monitoring service providers and their evolving roles

• Despite the tight labor market and competition for talent, wages haven’t increased much

• Employers’ focus on perks, including financial wellness programs, may be taking pressure off wages

• All three generations in the workforce today have complex financial issues to deal with:• Millennials are stressed about borrowing and haven’t started saving for retirement• Baby Boomers are retiring in record numbers—about 10,000 each day• Gen Xers are facing the competing demands of college planning, retirement saving, and aging parents

• All major asset classes were in positive territory for 2017

• After nearly two years since a 10% correction, U.S. stocks are due for a pullback

• We are entering a new market environment as central banks move to more restrictive monetary policy; we will experience rising interest rates and higher inflation

• This new market environment may call into question the effectiveness of capital preservation options and target date funds

• Defined benefit plan sponsors will continue to explore options for pension risk transfer in light of rising interest rates and increasing plan costs

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• Clearly understand their fiduciary obligations

• Have the appropriate tools and resources necessary to perform their duties with integrity and competence

• Take measure to ensure they have met their responsibilities to participants, in a prudent and objective manner

FIDUCIARY RESPONSIBILITY

Every fiduciary has certain obligations, and it is important to make certain that officers, and their investment committee members:

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ALWAYS, ESPECIALLY WHEN:

WHEN FIDUCIARY DUTIES ARE IMPORTANT

• Complying with legal requirements

• Making investment decisions

• Selecting and monitoring a service provider

• Allocating fiduciary responsibility

• Communicating with participants

• Handling day-to-day administration of the plan

• Making benefit claims decisions

UNDERSTAND:

• WHO is a fiduciary

• WHY it matters

• The RISKS

• The six DUTIES

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Duty to be Loyal and Impartial

FIDUCIARY DUTIES: IN NON-ERISA PLANS, VIEWED AS BEST PRACTICES AND GUIDELINES

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Duty to be Prudent

Duty to Ensure Reasonable Costs

Duty to Monitor and Supervise

Duty to Avoid Prohibited Transactions

Duty to Diversify

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• Ensure that all decisions are made based solely and exclusively on the interests of plan participants and beneficiaries

• Committee members must make every effort to avoid conflicts of interest

DUTY TO BE LOYAL AND IMPARTIAL

FIDUCIARY DUTY #1

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A FIDUCIARY IS ANY PERSON(S) WHO:

• Has discretionary authority over the management or administration of the plan or its assets

• Exercises any control, authority, or influence over the management, or administration of the plan or its assets

• Renders investment advice for compensation

AUTOMATIC FIDUCIARIES:• Plan administrator, named fiduciary, trustee

NOT A FIDUCIARY:• A person who performs purely ministerial tasks (e.g., calculates benefits, prepares

government forms)

WHO IS THE PLAN FIDUCIARY?

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• Follow a prudent process and document decisions

• Retain qualified service providers to ensure that the “knowledgeable prudent expert” standard is met

• Remember that pleading ignorance, bad communication, or inexperience will not be an adequate defense

DUTY TO BE PRUDENT

FIDUCIARY DUTY #2

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• Analyze and document total plan costs

• Compare plan costs to the market for similar plans

• Understand the use of revenue-sharing arrangements on your plan costs

• Not required to have the least expensive plan

DUTY TO ENSURE REASONABLE PLAN COSTS

FIDUCIARY DUTY #3

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• Evaluate managers regularly

• Compare performance against appropriate benchmark and peer group

• Be aware of changes to manager’s style or organization

DUTY TO MONITOR AND SUPERVISE

FIDUCIARY DUTY #4

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• To act in the sole interest of plan participants and should avoid any decision or transaction that directly or indirectly benefits the plan sponsor or party in interest

• Selects plan products or services on a preferential basis with a related party in interest

DUTY TO AVOID PROHIBITED TRANSACTIONS SPECIFIC TO ERISA, BUT CONCEPT IS IMPORTANT

FIDUCIARY DUTY #5

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BIASED ADVICEService provider provides model portfolios and includes proprietary funds that increase the service provider’s compensation.

REVENUE SHARING

Service provider recommends certain mutual funds to be included in a plan’s fund menu which pay higher revenue sharing payments.

FEE SHARING Adviser shares fees with an outside entity for referral (i.e. insurance broker) without disclosing.

HIDDEN COMPENSATION

Insurance broker serving as a plan adviser recommends certain insurance company record-keepers who pay annual “new business” payments for placing business with the insurance company.

CONFLICTED RELATIONSHIPS

Adviser provides free seminars to plan sponsors paid for by mutual fund companies. Advisor receives a financial benefit which leads to a perceived bias in fund recommendations.

EXAMPLES OF CONFLICTS OF INTEREST

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• It is required to diversify plan investments so as to minimize risk of large losses

• Plaintiff must demonstrate portfolio is not diversified “on its face” to establish a fiduciary violation

• When fiduciary failure to diversify is established, burden of proof falls on fiduciary to show it was “clearly prudent” not to diversity

• Prudence must be evaluated at the time of the investment without benefit of hindsight

DUTY TO DIVERSIFY

FIDUCIARY DUTY #6

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• Fiduciary committee

• Shared purpose

• Guiding document

• Ongoing oversight

• Decision documentation

COMPONENTS OF AN EFFECTIVE FIDUCIARY PROCESS

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KEY CONSIDERATIONS BEFORE FORMING YOUR COMMITTEE:

• Who does the plan name as a fiduciary?

• What powers does the named fiduciary have to delegate authority to other parties?

• How is that documented and achieved?

FORMING A COMMITTEE

These are matters of organizational liability. It is important to grant authority and responsibility for fiduciary oversight and decisions. Granting authority may require executed resolutions.

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• No prescribed answer

• Typically an odd number (5 is fairly common)

• 1–2 Finance/treasury

• 1–2 Human resources

• 1–2 Operations (business people)

WHO TO INCLUDE?

FORMING A COMMITTEE

• CEOs

• Domineering CFOs

• Rank and file employee

WHO NOT TO INCLUDE?

• Internal counsel

• Plan managers

POPULAR EX-OFFICIO OPTIONS

We are ultimately looking for a group of people who collectively have the skills and experience to meet the guidelines set in ERISA’s prudent expert standard of care.

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• Be empowered

• Not dominate

• Regularly attend meetings

• Prepare for meetings

• Be present and focused during meetings

• Be protected (liability issues are great concern of our committees)

IRRESPECTIVE OF WHO YOU PICK, COMMITTEE MEMBERS MUST:

FORMING A COMMITTEE

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• Fiduciary decisions are viewed in hindsight

• Poor investment results don’t create liability, if the process was prudent at the time

• Fiduciaries don’t have to be investment experts, but if they are not, they must seek advice of knowledgeable experts

• Fiduciaries may not rubber stamp advice of advisors

• Fiduciaries must monitor their experts

WHAT ABOUT INVESTMENT RESULTS?

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• Create a fiduciary structure

• Appoint plan fiduciaries

• Document authority

• Don’t forget liability insurance and bonding

• Document fiduciary responsibilities

• Establish regular meetings and maintain records

• Evaluate and document service provider selection and monitoring (fee structure transparency, quality of service, value received)

• Create prudent process for investment selection

• Monitor plan investments

• Maintain plan documents

• Monitor plan administration

FIDUCIARY BEST PRACTICES

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PROCESS, PROCESS, PROCESS

WAYS TO SATISFY FIDUCIARY DUTIES

• Train fiduciaries in responsibilities and potential liability

• Follow the plan document

• Implement clear, consistent procedures for decision making and compliance

• Seek out alternatives and options when making decisions

• Document everything: meetings, decisions, alternative, information, analysis, the basis for decisions, compliance with procedures

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• Fiduciary training for all committee members

• Schedule meetings on a regular interval

• Schedule meetings well in advance

• Create an agenda

• Respect committee members’ time and attention

• Determine how decisions will be made

• Document, document, document!

• Have a thorough understanding of your plan and how it operates (you may want to move this up in your list)

COMMITTEE BEST PRACTICES

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• Why do we have a committee?

• Why am I on the committee?

• Who am I representing on the committee?

• Why do we meet as frequently as we do?

• Why is our plan design as it is?

• Why do we use the recordkeeper we use?

• Why do we offer the asset classes we offer?

• Why do we offer the funds we offer?

• Why do we pay the fees we pay?

• Why do we allocate those fees the way we allocate them?

• And on, and on, and on….

BEST-IN-CLASS FIDUCIARY PROCESSES ARE BUILT BY COMMITTEES THAT KNOW “WHY”:

THE “WHYS” HAVE IT

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• Meeting minutes or reports (not all groups use minutes)

• What is captured in meeting minutes is effectively the ONLY thing that happened in a meeting

• Investment reviews

• Investment comparisons/searches

• Fee benchmarking reports

• Periodic reviews of the investment policy statement

DOCUMENTATION BEST PRACTICES

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Follow an investment policy statement

Investments should be diverse

Document activities and decisions

Use level of expertise to make decisions

Costs should be evaluated and compared

Interest of plan participants should be top priority

Avoid conflicts of interest and prohibited transactions

Retain qualified service providers to ensure prudent standard is met

You are the fiduciary

IN SUMMARY: PRACTICAL STRATEGIES OF A FIDUCIARY

QUESTIONS?

THANK YOU

FOR MORE INFORMATION

Beryl BallSenior Vice President | Financial Advisor

beryl.ball@captrustadvisors.com

804.672.4502

www.captrustadvisors.com

The information provided in this presentation is for educational purposes and should not be construed as individualized investment advice. This is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. CAPTRUST Financial Advisors does not render legal, accounting, or

tax advice. Clients should consult their tax professional or legal counsel for such advice.