H E A L T H W E A L T H C A R E E R

F I D U C I A R Y I N V E S T M E N T A D V I C EN E W D O L R U L E

I M P L I C AT I O N S F O R R E T I R E M E N TP L A N S P O N S O R S

M A Y 1 9 , 2 0 1 6

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T O D AY ’ S S P E A K E R S

Amy ReynoldsPartner

Karen WillskyPrincipal

Linda DelivoriasPartner

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N E W F I D U C I ARY A D V I C E R U L E

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D O L F I D U C I A R Y R U L E

L O N G - AW A I T E D “ I N V E S T M E N TA D V I C E F I D U C I A R Y ” R U L E

• Significantly expands the fiduciary umbrella• Replaces five-part test dating back to 1975• Key provisions effective April 10, 2017• Certain other provisions phased-in through

January 1, 2018

O B J E C T I V E S :• Address the many changes in benefit structures,

industry practices, and technology• Protect plans, participants, IRA owners, and HSA

owners from conflicts of interest

Over $14 trillion in DC plans and IRAs (est.)

F I D U C I A R Y F I D U C I A R YF I D U C I A R Y

Investment Company Institute: Quarterly Retirement Market Data, Fourth Quarter 2015; March 24, 2016

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P L A N S P O N S O R S A R E A L R E A D Y F I D U C I A R I E S- - - S O W H A T ’ S T H E B I G D E A L ?

E R I S A F I D U C I AR I E S AR E R E Q U I R E D T O :• Prudently discharge their duties solely in participants’ best interests

• Communicate plan information accurately and objectively

• Prudently select and monitor plan vendors

• Oversee plan administration

Enhanced scrutiny and scope under new rulesmay increase co-fiduciary exposure

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W H A T I S F I D U C I A R Y I N V E S T M E N T A D V I C E ?

Aspect Current rule New rule

Plans andaccountsimpacted

• ERISA retirement plans• ERISA retirement plans

• IRAs, HSAs, Coverdell education savingsaccounts (collectively “IRAs”)

Topics • Investments

• Investments

• Investment management

• Distributions

Frequency • On a regular basis • Any frequency, including one-time

Relationship

• Mutual agreementadvice will be both– Primary basis

for decisions– Individualized

• Fiduciary status acknowledged, or

• Agreement that advice will be individualized,or

• Directed to specific recipient abouta particular investment or decision

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W H A T I S F I D U C I A R Y I N V E S T M E N T A D V I C E ?

• Advice provided for direct or indirect fee or other compensation• Advice recipient is plan, fiduciary, participant/IRA owner• Advice includes a “recommendation”

If a communication is tailored to a specific recipient,it may be viewed as a “recommendation”

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N E X T S T E PS F O RP L A N S P ON SOR S

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P A R T I C I P A N T C O M M U N I C A T I O N S

• Potential fiduciary exposure− Broader range of communications = fiduciary investment advice

− Enhanced scrutiny may increase risk of participant claims/litigation

• Sponsors have a duty to monitor communications provided by

recordkeeper, managed account provider and all third parties

– Call center scripts

– Websites and mobile apps

– Enrollment kits

– Distribution kits

– Investment information

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E D U C A T I O N E X C E P T I O N

General communications for abroad audience and some forms ofinvestment education are notconsidered investment advice, ifconditions are met

Examples Exempt?

Broadcasts, newsletters,conference speeches

Yes

Information on retirementspend-down or annuitization

Yes

References to recordkeeper’sproprietary IRA as distributionoption

No

Examples of conservative,moderate and aggressiveallocations using plan’s coreinvestment options

Yes

FOR INSTITUTIONAL CLIENT USE ONLY

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S T R A T E G Y F O R T E R M I N AT E D P A R T I C I P A N T S

• Impartial distribution counseling that avoids conflicts of interest• Facilitate asset retention

– Special web site/communication materials for terminated participants– Plan features that accommodate post-employment flexibility– Education and assistance with spend down strategies

• Implications of retaining terminated accounts– Reduced investment and recordkeeping expenses– Additional administration– Tracking participants

FOR INSTITUTIONAL CLIENT USE ONLY

Formulate strategic and tactical approaches for engagingwith terminated participants

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E V A L U A T I N G D I S T R I B U T I O N M A T E R I A L S

• Address advice related to distributions, rollovers, and annuity products• Identify distribution programs and related touch points – oral or written –

that could be considered advice under the new rule• Examples:

– Counseling an employee whether to start benefit payments now versusdeferring to retirement age

– Terminated vested lump sum materials for defined benefit plans– Recordkeeper interactions

• Review/revise all materials to confirm consistent messaging andcompliance at each touch point

FOR INSTITUTIONAL CLIENT USE ONLY

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I R A R O L L O V E R S

• New rules target distributioncounselling, especially as it relatesto IRAs

• Recordkeepers often facilitate rolloversto proprietary IRAs– Over $6.7 TN in US DC plans

(as of December 31, 2015)

FOR INSTITUTIONAL CLIENT USE ONLY

• DC plans may offer advantages over IRAs:– Institutional investment pricing– Diversified fund options appropriate for retirement accounts– Professional oversight and ongoing monitoring of fund options

Advice onplan

distributions

Investment Company Institute: Quarterly Retirement Market Data, Fourth Quarter 2015; March 24, 2016

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F O C U S O N M A N A G E D A C C O U N T S

• New rule targets counselling that namesspecific investment options or products

• Recordkeepers often involved inmarketing and communicating managedaccount option– Fee credits to recordkeeper typically

tied to number of participants enrolled– Marketing aimed at

- Plan sponsors- Participants

FOR INSTITUTIONAL CLIENT USE ONLY

• Not yet clear how new rule will impact– Compensation related to managed accounts– Marketing and communication practices

Advice onplan features

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I M P A C T O N R E C O R D K E E P E R S

• Potential for significant conflict of interest related to:– Distribution counseling– Counseling and marketing related to managed accounts

• Many recordkeepers offset low margins with downstream income from:– Non-retirement financial services and banking relationships– Managed accounts– Rollovers to proprietary IRAs

• New rule could change recordkeeping economics– Decrease income from alternate sources– Add initial and ongoing compliance costs

FOR INSTITUTIONAL CLIENT USE ONLY

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I M P A C T O N O T H E R P R O V I D E R S

• Investment consultants (traditional consulting and delegated advisors)– Generally, already under the fiduciary umbrella– Review and negotiate favorable contract terms

– Independence representation–Compensation/revenue representation–Unlimited fiduciary liability

• Consultants, legal counsel, accountants, directed trustees– No impact since these parties do not provide investment advice

• Rollover and annuity placement services– Subject to increased scrutiny and liability– Variable annuity products may need to change pricing structures

- Could curtail use of variable products

FOR INSTITUTIONAL CLIENT USE ONLY

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W H Y A R E B R O K E R S C O N C E R N E D ?

Current rule: not a fiduciary New rule: a fiduciary

“Suitability” standard (low bar) “Best interests” standard (high bar)

Charge whatever you can get away with Charges must be reasonable

Minimal fee disclosure Clear fee disclosure

Conflicted advice OK• Bonuses, commissions, trips, prizes, etc.

for selling certain products• No disclosure to buyer required• No contract required

Any conflicted advice must be in “bestinterest” of participant or IRA owner• Variable compensation must be disclosed

in detail• Enforceable contract required

Enforcement very difficult Best-interest contract terms enforceable

Rollover counseling not “investment advice” Rollover counseling is “investment advice”

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N E X T S T E P S F O R P L A N S P O N S O R S

Participant Communications

Distribution Counseling

Vendor Management

Fiduciary Training

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Q U E S T I O N S ?

Amy ReynoldsPartner

Karen WillskyPrincipal

Linda DelivoriasPartner

QUESTIONSPlease type your questions in the Q&A section of the toolbarand we will do our best to answer as many questions as wehave time for.

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FEEDBACKPlease take the time to fill out thefeedback form at the end of this webcastso we can continue to improve. Thefeedback form will pop-up in a newwindow when the session ends.

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I M P O R T A N T N O T I C E S

References to Mercer shall be construed to include Mercer LLC and/or its associated companies.

© 2016 Mercer LLC. All rights reserved.

Information contained herein has been obtained from a range of third party sources. While the information is believed tobe reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties asto the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequentialor incidental damages) for any error, omission or inaccuracy in the data supplied by any third party.

No investment decision should be made based on this information without first obtaining appropriate professional legal,tax and accounting advice and considering your circumstances.

Investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Mercer Investment Management, Inc. and Mercer Investment Consulting LLC are federally registered investmentadvisers under the Investment Advisers Act of 1940, as amended. Registration as an investment adviser does not implya certain level of skill or training. Mercer’s Form ADV Part 2A & 2B can be obtained by written request directed to:Compliance Department, Mercer Investments, 701 Market Street, Suite 1100, St. Louis, MO 63011.

MMC Securities LLC is a registered broker dealer and an SEC registered investment adviser. Securities offered throughMMC Securities; member FINRA/SIPC, main office: 1166 Avenue of the Americas, New York, New York 10036. Variableinsurance products distributed through Marsh Insurance & Investments LLC; Marsh Insurance & Investments LLC inCalifornia, and Marsh Insurance Agency & Investments in New York. Mercer, Mercer Investment Consulting, LLC,Mercer Investment Management, Inc., Guy Carpenter, Oliver Wyman, Marsh and Marsh & McLennan Companies areaffiliates of MMC Securities.

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