The Ultimate 401(k) Fiduciary’sQuick Guide & Checklist

The 3 things every fiduciary needs to managea top-ranking morale-boosting and retirement

dominating 401(k) plan(and stay out of trouble with the Department of Labor and IRS!)

Wealth Management

© Redrock Wealth Management | 9484 W. Flamingo Rd. Ste. 205, Las Vegas, NV 89147702.987.1607 | 401k@redrockwealth.com

1. UNDERSTANDING FIDUCIARY ROLES, RESPONSIBILITIES, & RISKS

2. MANAGING YOUR 401(K) INVESTMENTS

3. YOUR FIDUCIARY CHECKLIST

ARE YOU A PLAN FIDUCIARY?

COMPLYING WITH ERISA 404(C)

THE THREE MOST COMMON PLAN FIDUCIARIES:

PROVIDE GREAT INVESTMENTS & GIVE THEM CONTROL

WHAT IS A BLACKOUT PERIOD?

TRANSFERRING INVESTMENTS

HIRING A PLAN INVESTMENT ADVISOR FEE DISCLOSURES

CREATE COMMITTEES & OUTSOURCE SERVICES

CREATE A PRUDENT PROCESS & DOCUMENT IT THOROUGHLY

EDUCATING YOUR EMPLOYEES

BLACKOUTS & RESTRICTIONS

INVESTMENT POLICY STATEMENT BASICS

OUTSOURCING INVESTMENT MANAGEMENT

FEE DISCLOSURES

PERIODICALLY REVIEW ALL SERVICE PROVIDERS

FIDUCIARY DUTIES DEFINED

MINIMIZING YOUR FIDUCIARY RISK

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The Ultimate 401(k) Fiduciary’sQuick Guide & Checklist

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NOTABLE RECENT 401 (K) SETTLEMENTS

AMOUNT DEFENDANT

$370,732 Edison International

12 Million Fidelity

27.5 Million Ameriprise Financial

32 Million Novant Health

57 Million Boeing

62 Million Lockheed Martin

ERISA is the Employees Retirement Income Security Act. It became federal law in 1974 to protect the interests of plan participants (and their beneficiaries) for several types of employee benefit plans. The laws’ primary purpose was to ensure those who control ERISA plans act in the best interests of participants while handling plan assets and management both diligently and prudently.ERISA created a set of rules and standards plan fiduciaries must abide by. Since it’s the law of the land, failure to follow these rules may lead to fines or other actions by the Department of Labor. The DOL takes these rules so serious in fact, that you may even be personally liable for any adverse events which occur under your watch as a fiduciary.

Being personally liable is noteworthy, since in 2013, there were: • 3,677 401(k) investigations by the DOL, • 73% of them resulted in fines or other actions, • 111 of them resulted in full blown lawsuits.

Of all the Department of Labor investigations over the years, the 62 million dollar Lockheed Martin settlement was the largest ever. Lockheed plan fiduciaries hid or ignored excessive fees which lowered participant’s investment returns, requiring them to work longer or live on less during retirement. Put simply, the plan fiduciaries didn’t act with prudence in managing the plan for the best interests of the participants.

While the bar is set high for plan fiduciaries, it’s not unreachable. With the right processes in place, fiduciaries can rest easy knowing they’ve reduced their liability as much as possible and done their best to help their employees work towards retirement.

1. Understanding Fiduciary Roles, Responsibilities, & Risks

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THE THREE MOST COMMON PLAN

FIDUCIARIES:

If you exercise any control or decision making authority over an employeebenefit plan like a 401(k), you are a plan fiduciary! Every ERISA plan must haveat least one fiduciary named in the plan document. Other fiduciaries aren’t alwaysnamed in the plan document, but rather appointed (for example, the plans investmentadvisor).

It’s important to know who is - and who is not - a fiduciary. A substantial amount ofresponsibility comes with the position and as you can see from the lawsuits noted,a lot of risk and liability as well.

Are you a plan fiduciary?

EMPLOYER

Plan assets must always be held in a trust or custodial account for participants(assuming it isn’t 100% funded with insurance contracts). The plan trustee is always considered a fiduciary because they have direct management authority over plan assets and takes legal title to them.

Identified by their company position (CEO, CFO, etc.) or name, they’re the main fiduciary listed in the plan document. They manage service providers, committees, plan policies, procedures and practices, and have a heightened fiduciary responsibility to the plan and its participants.

TRUSTEEPLAN ADMINISTRATOR

The plan administrator isgenerally the plan sponsor and is responsible for day-today plan management. They manage activities such as authorizing disbursements and changing contributionamounts.

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ERISA created some pretty high hurdles in establishing your fiduciary responsibilities,then made things even more challenging by leaving a whole lot of grey areasurrounding them. As a plan fiduciary, you must:

Additionally, plan fiduciaries must monitor prohibited transactions, respond to participant inquiries, and maintain an ERISA section 412 bond.

Fiduciary duties defined

1. Act solely in the best interests of plan participants and their beneficiaries

Your actions must be for the exclusive purpose of providing benefits to plan participants and ultimately their beneficiaries. You must disclose and avoid any and all conflicts of interest, and must never act with any intent to benefit yourself above others.

The plan must provide investment options which can be diversified enough to avoid large losses and allow participants to vary their investment risk and returns.

2. Carry out your duties with prudence

4. Follow the plan documents

3. Diversify plan investments

You must investigate, analyze, hire, and monitor plan service providers which charge reasonable fees. This is the single largest area the Department of Labor is investigating and plan fiduciaries are failing at!

5. Ensure plan expenses are reasonable

Always exercise skill, care, and diligence in your fiduciary responsibilities and be able to prove it. This requires a thorough investigation and documentation process for all decisions. If you don’t have the expertise or ability to manage certain plan aspects, you’re required to hire a competent professional who does.

Plan documents serve as the basis for plan operational and management decisions. You may not deviate from them.

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Minimizing your fiduciary risk

The ultimate goal of ERISA is to protect your plan participants and help them save for retirement. As such, ERISA gave participants the right to file lawsuits to the EBSA (The Employee Benefits Security Administration). The EBSA is the division of the Department of Labor which enforces ERISA rules. In short, the DOL can pursue both civil and criminal actions against you for failure to follow ERISA’s fiduciary roles and responsibilities guidelines.Should you breach your fiduciary responsibilities you may even be personally liable under ERISA. This means you may personally be responsible for restoring plan losses including interest and other expenses relevant to the breach. To make things even scarier, you may be responsible for the ERISA regulation breaches which other plan fiduciaries make.

As a plan fiduciary you must also maintain an ERISA fidelity bond. This bond doesn’t protect you (the fiduciary), but rather it protects the participants from fiduciary breaches which you may have participated in.

Acting in the best interests of plan participants and their beneficiaries brings a great deal of liability with it.

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Create committees & outsource services

Outsourcing services to competent providers and getting other people involved with the process by creating plan committees helps reduce your fiduciary risk.

Administrative Committee.

Administrative committee members are considered plan fiduciaries. They assist with investment decisions, operations, IRS filings, and other administrative tasks. They may hire and manage the recordkeeper, the third party administrator, a plan attorney, and an accountant to perform plan audits if necessary. Perhaps their most important function is to thoroughly investigate all services providers and document the process.

Investment Committee.

The investment committee manages the process of hiring an investment advisor and/or selecting and managing the investments in the plan. Since they have a fiduciary duty to the plan, it’s critical they avoid all conflicts of interest, thoroughly investigate alternatives, and document the process.

Plan Investment Advisor.

Most plan sponsors outsource investment decisions in full or in part to an investment advisor. Depending on whether they want investment advice or an investment decision maker, they may engage a 3(21) non-fiduciary advisor or a 3(38) fiduciary advisor. The plan sponsor always has a residual duty to monitor the investment advisor and ensure they’re providing education and services appropriate for the fees they charge.

Administrative Services.

Most plan sponsors hire a third party administrator (TPA) to deal with compliance testing and IRS filings. They’ll also choose a recordkeeper to reconcile data and transaction processing.

Custodial Services.

Sponsors cannot directly handle or take title to any plan assets, so they must choose a custodian to hold them separate from company or sponsor assets.

Legal & Accounting Services. In some cases an attorney or accountant may also be appropriate for plan legal filings or audits.

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Create a prudent process & document it thoroughly

The Department of Labor is far more concerned with the processes you use to manage your 401(k) plan than the ultimate success or failure of decisions you make. A best practice is to follow the “widows and orphans” rule and create every policy, practice, and procedure for the ultimate benefit of participants assuming they’re all “widows and orphans”. This is a cautious and highly diligent approach to making decisions regarding your 401(k) plan.

Create Operating Policies & Procedures.

All of the management, monitoring, and maintenance of your 401(k) plan should have a specific policy covering it, and prudent procedures in place. For example:

a. Processes for timely employee contributions

b. Processes for changing committee members

c. Plan disclosure practices

d. Participant complaint management process

e. Educational practices and processes

f. Service provider selection and monitoring processes

Document All Procedures & Activities.

The decisions you make and actions you participate in must be thoroughly documented. For example, meeting notes should include the agenda, participants, date, location, and time, followed by a copy of the minutes and all materials discussed. That’s a process which if followed and documented properly will help ensure ERISA compliance and reduces your fiduciary liability.

Maintaining Plan Records.

Plan records and documents must be kept easily accessible for at least 6 years, however in this day and age of electronic document storage it’s prudent to keep them indefinitely as there’s no reason (other than hiding something) to destroy any historic plan records.

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Periodically review all service providers

In order to fulfill your fiduciary obligations under ERISA, you must not only select the most appropriate service provider, but monitor and manage them prudently and diligently. The first step in doing this is to review and each of your service provider agreements taking special note of certain very important aspects.

Fiduciary Status

All fiduciaries must acknowledge their status in writing. For investment advisors it’s important to note whether they’re a 3(21) “advisor” or a 3(38) “investment manager”.

Make sure you’re aware of the service providers pro-cess to make your plan and participants whole in the event of an error. Also review their insurance coverage and liability limitations.

Does the service provider clearly define their offering in writing? Does it meet the needs of you and your plan participants?

Fees

Roles & Responsibilities

Liability

All fees must be reasonable for the services provided. You’re not required to select the lowest fee provider, but rather the best combination of fees and services prudent for your plan and its participants.

Service Arrangements Important Aspects To Note

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Complying with ERISA 404(c)

Perhaps one of the most effective ways to mitigate your fiduciary risk is to comply with ERISA 404(c) standards. When done correctly, compliance with ERISA section 404(c) effectively transfers the risk of making investment decisions directly from you to your participants.

Compliance with ERISA 404(c) does not however remove all of your investment related fiduciary responsibility. You’re still required to maintain prudent practices in selecting and managing your investment menu (in the case of no investment fiduciary or a 3(21) advisor). Should you choose to engage an ERISA 3(38) investment manager fiduciary, you transfer as much investment related liability as possible from you to the them.

Provide great investments & give them control

To comply with 404(c) standards, participants must be able to control their retirement accounts directly and select investments from a broad range of options. More specifically, the “broad range” of investment options must meet the following standards:

You’re required to notify participants that your plan is designed to comply with ERISA 404(c), and that plan fiduciaries may be

relieved of liability for any losses as a result of participant investment instructions.

Opportunity

Choice

Diversification

Participants must have the ability to select from investment options which provide a wide variance of risk and expected rate of return.

The investment options must allow participants to diversify their investments sufficiently in order to reduce the risk of large investment losses.

The minimum standard is at least three materially different risk/return investment alternatives.

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Educating your employees

While the standards for ERISA 404(c) investment compliance are minimal (and completely inadequate), as a plan sponsor you’re still required to educate your participants on the investment options available. If you fail to educate your participants, you may still retain some liability for their poor investment decisions.

It’s best to follow the “widows and orphans” rule here again - in fact just assume that rule applies to every fiduciary decision you make! You must also assume your participants are completely ignorant when it comes to investing, then educate them as such.

Your investment education process must be documented and include at a minimum:

• The name and description of each investment option • The objectives and risk/return characteristics of each investment option � A list of investment fees

If you’re willing to settle for the minimum standards, you won’t need much of an education program. If however, you’re one of those plan fiduciaries that really does want their participants to excel into retirement with confidence, you’ll make sure your participants get real education.

Participants - and people in general - need a great deal of financial education:

� Investment basics. How stocks, bonds, real estate, and alternative assets work • Diversification. How to create a well balanced portfolio to minimize risk • Saving for retirement. How to save, how much to save, and the benefits of dollar cost averaging • Understanding tax implications. 51% of 401(k) plans offer a Roth feature, do your

It’s highly common for uneducated participants to choose investments based on past performance. Selecting investments with the highest returns can easily expose them to disastrous

losses in following periods, which could be considered the sponsor’s fault for not educating the participant.

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participants know when it’s more beneficial than pre-tax contributions? � Investor behavior. How most investors do the wrong thing at the wrong time which forces them to work longer and live on less in retirement � And on and on…

A 2014 survey done by Charles Schwab showed that 62% of participants said their 401(k) was their largest - or only - source of retirement savings.That’s a startling statistic considering 63% of participants realized they haven’t saved enough for retirement. Put the two together, and it’s a recipe for retirement disaster!

The stage is set for disappointing retirements nationwide. The good news is you can be part of the solution by putting a strong emphasis on a broad-based participant education program. In doing so, you’ll help your employees, help yourself, and reduce your fiduciary liability in the process!

Only Largest Medium Smallest

17%

45%30%

30%

401(k) as a source of retirement savings

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Blackouts & Restrictions

Part of ERISA 404(c) compliance is ensuring participants have access to manage their accounts at least quarterly. Logistically this may conflict with other fiduciary obligations at certain points, specifically if you change service providers like your investment advisor, the custodian, or recordkeeper. While participants lose temporary access to manage their accounts, you may still be protected under ERISA if you follow proper “Blackout Period” procedures.

What is a Blackout Period?

A blackout is any period longer than 3 consecutive days in which participants cannot direct or diversify the investments, and plan loans or withdrawals are unavailable. Plan sponsors must provide participants with a “Blackout Notice” in writing at least 30 days but less than 60 days prior to the blackout, it should include:

• The reasons for the blackout • The description of the blackout detailing the inability to direct or diversify account investments • The start date and length� A reminder for participants to review their investments and make appropriate changes � Your contact information

Transferring investments.

When plans change investments, they have the option of liquidating current investments and moving them into a money market, or “mapping” them. Fund mapping is the process of moving investments with a certain set of objectives and risk/return characteristics into new and “reasonably similar” investments. Since the process involves moving “fund A” into a similar “fund B”, mapping enables plan assets to remain invested as long as possible.

Mapping is usually done by the investment advisor or manager. If the investments are “reasonably similar”, plan sponsors maintain their fiduciary protection under ERISA 404(c). Sponsors must provide employees with written notice of mapping decisions at least 30 days but less than 60 days before the change will occur. Part of this notice is a comparison of old investments and new investments, and the offer for each participant to provide other investment instructions if they so choose.

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Along with making sure your plan fees are reasonable for the services provided, investment risk is perhaps the biggest potential liability you face as a fiduciary. The most important thing you can do to protect yourself is do the right thing for your plan participants. This means creating, following, and documenting a prudent due diligence process for your investment decisions.

Investment Policy Statement basics

You’ve already seen a key theme recurring over and over - prudent processes! The DOL wants to see you have a prudent process in place for all 401(k) related decisions.

You don’t have to be Carnac The Magnificent with your investment choices, but you do need a great process for selecting and managing investments in your plan. This investment process must be documented in the Investment Policy Statement (IPS).

2. Managing Your 401(k) Investments

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Executive Summary

The executive summary contains basic information on the company sponsoring the plan, including the type of plan it is, the intention to comply with ERISA 404(c), and the plans’ tax identification number.

Disclosure Requirements

Explains the procedures for disclosing fees, intention for ERISA 404(c) compliance, plan fiduciaries, and prospectuses.

The plan objectives section should include information on complying with ERISA provisions and requirements, and the use of prudent experts to help fulfill fiduciary responsibilities.

Purpose of the IPS

Statement of Objectives

Details basic asset classes, specific investments, and the procedures for monitoring and replacing them if necessary.

Investment Options & Strategy

Lists the appropriate and relevant benchmarks which the plan investments will be measured against.Benchmarks

The IPS should be reviewed annually for it’s appropriateness.IPS Review

This section of the plan describes the roles of investment committees, custodians, investment advisors, and fiduciary advisors.

Duties & Responsibilities

The purpose of the IPS is to describe in detail the plans objectives and processes for monitoring and managing investment options.

IPS Element What To Focus On

The following are the basics of a good 401(k) Investment Policy Statement. You’ll need to customize your own specific to your plan needs.

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Assuming you lack the competence, skill, and experience to make investment decisions for your plan, you’re required under ERISA to hire a professional advisor. Fortunately this is the easiest way to reduce your fiduciary liability.

There are two types of investment advisors under ERISA. The main difference between the two is if your advisor provides investment recommendations or actually makes investment decisions.

Outsourcing investment management

ERISA 3(21) INVESTMENTADVISOR

A 3(21) investment advisor makes recommendations which fiduciaries may use to manage investments. For example, they may recommend a list of mutual funds they consider suitable, then monitor and suggest replacement funds when appropriate. It’s the plan fiduciaries which ultimately make the investment decisions however. A 3(21) investment advisor is generally not considered a plan fiduciary.

ERISA 3(38) INVESTMENTMANAGER

Only banks, insurance companies, or registered investment advisors can be a 3(38) investment manager. A 3(38) has a much broader scope of responsibility to the plan and it’s participants. Instead of solely providing advice, they actually make investment decisions. Plan sponsors always hold a residual fiduciary duty because they’re responsible for selecting and managing the 3(38) investment manager.

Your investment advisor may not be a plan fiduciary. To be a plan fiduciary, the investment advisor must receive fees for

investment advice which are not related to mutual fund “trails” or “commissions” such as 12b-1 fees. Non-fiduciary investment advisors are also referred to as “registered representatives” or

“brokers”.

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There are many things to consider when interviewing and hiring an advisor for your 401(k) plan. The right advisor can remove a great deal of liability from you as a plan fiduciary, likewise the wrong one can actually increase your liability.

Here are some things to consider when interviewing a plan advisor:

Hiring a plan investment advisor

Services

� What services do they provide? Are they a full 3(38) investment manager, a 3(21) advisor, or simply a broker? • Does their agreement detail a specific schedule of services?

• Do they carry professional liability insurance (Errors & Omissions) in case something goes wrong? • Does their insurance coverage include ERISA 3(38) coverage?

� What are the fees? � Are the fees reasonable and easily determined?

Insurance

Experience

Fees

• Does the advisor have a consistent process for decision making? • Do they document this process in writing for you? • Does the advisor communicate with you? How Often? • Does the advisor educate your employees? How Often?

Process

� How long has the advisor been providing advice to 401(k) or other defined contribution plans? � Are they heavily committed to the retirement plan market? � What industry credentials do they hold? Are they relevant to retirement plans? Investment Manage ment? Participant Education? � Can the advisor provide references?

The 2015 62 million dollar

Lockheed Martin settlement

highlights the attention plan

costs are drawing. It was the largest 401(k) settlement in history, and it’s

sure to bring a swarm of

shark-like tort lawyers circling

expensive 401(k) plans.

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Fee disclosures

and the requirement to consult with prudent experts. The reports are so good in fact the Department of Labor uses them when they investigate plan complaints.Should your 401(k) plan service provider fail to disclose the 408(b)(2) information, you must terminate your arrangement with that provider. Continuing engagement with a service provider failing their fee disclosure requirements is The 2015 62 million dollar Lockheed Martin settlement highlights the attention plan costs are drawing. It was the largest 401(k) settlement in history, and it’s sure to bring a swarm of shark-like tort lawyers circling expensive 401(k) plans.a breach of your fiduciary responsibilities under ERISA.

The 2008 meltdown has brought a great deal of change to Wall Street, most of it for the better. Most notably, the fees participants pay for their 401(k) plan investments have been under intense investigation and scrutiny.

In 2012 the Employee Benefits Security Administration (EBSA is a division of the DOL) put a service provider disclosure rule into action to expose plan fees. The rule forces plan service providers to provide a complete accounting of all fees and expenses to plan sponsors.Service providers are now required by law to provide plan fiduciaries the information necessary to:� Assess the reasonableness of direct and indirect compensation � Identify conflicts of interest • Satisfy reporting and

disclosure requirements under Title I of ERISAThis disclosure is called a “408(b)(2), and it’s important for plan fiduciaries to document:� When they received the 408(b) (2) information, � When it was reviewed and by whom, � How they benchmarked the “reasonableness” of plan fees and expenses, and •A summary of experts consulted and their analysis.Brightscope is the industry leader in 401(k) analysis and reporting. Their analytical reports help fulfill your benchmarking duties

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3. Your Fiduciary Checklist

Investment Policy Statement (last review: _____________)

Summary Plan Description (SPD)

Plan Amendments

Investment Review Reports

Plan Documents

Adoption Agreement

Board Resolutions

Non-Discrimination Testing Results

Form 5500

Compliance Documentation

Plan Communications to Employees

ERISA Fidelity Bond Dated: ___________Amount of Coverage: ____________

Create and document all policies and procedures

Organized the right in-house fiduciary team

Interviewed and hired appropriate service providers

Interviewed and hired appropriate service providers

Are you educating your participants on a regular basis? When was your last educational meeting? (date:____________)

Do you have the following documents? Yes No

Do you have the following documents? Yes No

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Have you identified all plan fiduciaries in writing?

Do participants have access to investment prospectuses?

Are your investment options considered “prudent”?

Do participants have access to account statements?

Have you given participants a notice of your intent to comply with ERISA 404(c)?

Do you provide at least three investment options with varying risk and return characteristics?

Have you educated participants on how to change investments?

Are participants directing their own accounts directly, and can they change their investments at least quarterly?

Do participants have detailed descriptions of all investment options including all fees and expenses?

Are you complying with ERISA 404(c)? Yes No

Need help or have further questions?

401k@redrockwealth.com | 702.987.1607

You must answer yes to all questions above to comply with ERISA Section 404(c).