benchmarking v2.0

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  • 1. Benchmarking v2.0: Improved Outcomes for Plan Sponsors and Participants Tom Kmak, CEO Fiduciary Benchmarks
  • 2. Copyright Fiduciary Benchmarks All Rights Reserved Agenda 1. FBi Benchmarking Basics 2. Benefits to Plan Sponsors 3. Benefits to Participants 1
  • 3. Copyright Fiduciary Benchmarks All Rights Reserved What are the duties of a Fiduciary? Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; Carrying out their duties prudently; Following the plan documents (unless inconsistent with ERISA); Diversifying plan investments; and Paying only reasonable plan expenses. Source: www.dol.gov/ebsa/publications/fiduciaryresponsibility.html 2
  • 4. Copyright Fiduciary Benchmarks All Rights Reserved What does the DOL say about 401(k) Fees? When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs. If your employer has selected a bundled program of services and investments, compare all services received with the total cost. Remember, too, that higher investment management fees do not necessarily mean better performance. Nor is cheaper necessarily better. Compare the net returns relative to the risks among available investment options. And, finally, dont consider fees in a vacuum. They are only one part of the bigger picture including investment risk and returns and the extent and quality of services provider. Source: A Look at 401(k) Plan Fees, U.S. Department of Labor, October 2010 3
  • 5. Copyright Fiduciary Benchmarks All Rights Reserved Thats the trouble with the world today, nobody takes the time to do a really sinister interrogation anymore True or False: Low Fees is the Fiduciary Standard 4
  • 6. Copyright Fiduciary Benchmarks All Rights Reserved v2 Improvement: Additional Guidance for the Fiduciary 5
  • 7. Copyright Fiduciary Benchmarks All Rights Reserved True or False: Reasonable Total Plan Fees is the Fiduciary Issue 6
  • 8. Copyright Fiduciary Benchmarks All Rights Reserved v2 Improvement: Distinct Benchmarking by Service Provider 7
  • 9. Copyright Fiduciary Benchmarks All Rights Reserved Agenda 1. FBi Benchmarking Basics 2. Benefits to Plan Sponsors 3. Benefits to Participants 8
  • 10. Copyright Fiduciary Benchmarks All Rights Reserved The impact per one prominent ERISA attorney: 1. Know what your fees are 2. Compare them to benchmarks 3. Monitor on an ongoing basis 4. Make sure you have real documentation 5. Hire Third-Parties for an independent review 6. Make sure you conduct a fiduciary audit 7. Have a Fiduciary Manual Documenting the Process for Fiduciaries Marcia Wagner, Plan Sponsor interview, December 2009 $16.5 million The lesson is to benchmark your plans services against appropriate peer-group data. It would be difficult for a plaintiffs attorney to show that you were imprudent if you take that step and if the results are reasonable. Fred Reish, Drinker Biddle, Plan Sponsor 7/2011 9
  • 11. Copyright Fiduciary Benchmarks All Rights Reserved The RIGHT Way to Benchmark (U.S. Patent 8,150,198) 1. Use Data that has Integrity: Right Source Accurate Timely Comprehensive 3. Provide Output that is Simple, Transparent & Practical: Concise Actionable Timely Procedurally Prudent 2. Employ a Method that is Fair and Independent: Build an Apples to Apples Comparison Group Collect and Normalize ALL Fees Examine Value for Participants, Sponsors & Providers 10
  • 12. Copyright Fiduciary Benchmarks All Rights Reserved True or False: You can accurately benchmark using 5500 Data Question: Plan A Average Salary Deferral = $2,500 Plan B Average Salary Deferral = $2,273 Which plan actually has better Salary Deferrals? 1. Plan A 2. Plan B 3. I Dont Know This technique of normalization is critical for accurate comparisons and this is why the 401(k) discrimination test is performed as a percentage of compensation. 11
  • 13. Copyright Fiduciary Benchmarks All Rights Reserved 100% of data should come directly from the source: Service Providers All data is thus current, accurate and consistent with 408(b)(2) disclosures. v1 Holdover: Use Data That Allows Valid Comparisons 12
  • 14. Copyright Fiduciary Benchmarks All Rights Reserved The RIGHT Way to Benchmark (U.S. Patent 8,150,198) 1. Use Data that has Integrity: Right Source Accurate Timely Comprehensive 3. Provide Output that is Simple, Transparent & Practical: Concise Actionable Timely Procedurally Prudent 2. Employ a Method that is Fair and Independent: Build an Apples to Apples Comparison Group Collect and Normalize ALL Fees Examine Value for Participants, Sponsors & Providers 13
  • 15. Copyright Fiduciary Benchmarks All Rights Reserved True or False: Average Balance impacts the Benchmark Group 14
  • 16. Copyright Fiduciary Benchmarks All Rights Reserved v2 Improvement: Benchmark Groups Customized BY PROVIDER 15
  • 17. Copyright Fiduciary Benchmarks All Rights Reserved True or False: Plans with Identical Funds Have Identical Fees 16
  • 18. Copyright Fiduciary Benchmarks All Rights Reserved v2 Improvement: Plan Weighted Investment Expense 17
  • 19. Copyright Fiduciary Benchmarks All Rights Reserved True or False: General Accounts have No Fees 18
  • 20. Copyright Fiduciary Benchmarks All Rights Reserved v2 Improvement: Detail on General Accounts (and Stable Value) 19
  • 21. Copyright Fiduciary Benchmarks All Rights Reserved True or False: You Cant Predict Fees 20
  • 22. Copyright Fiduciary Benchmarks All Rights Reserved v2 Improvement: Regression Analysis on Fees 21
  • 23. v2 Improvement: Greater Emphasis on Fees AND Value Advisors Investments Vendor Mgmt Plan Mgmt Participant Svcs RKs and TPAs Plan Complexity Recordkeeping Administration Compliance Communications Participant Success Investment Mgrs Alpha Beta
  • 24. True or False: Performance Reviews are a commodity
  • 25. Provide and Review Performance Reporting Review RK/TPA- Provided Performance Reports Use Standardized Screening Tool (i.e. Morningstar, Lipper, etc.) Use Customized Version of Standard Reporting Tool (i.e. Customized Morningstar, Lipper, etc.) Create Fully- Customized Reporting