nationwide® retirement plans · education or experience to handle the job, then they should seek...
TRANSCRIPT
NATIONWIDE® RETIREMENT PLANSWe stand with you.
For Plan Sponsor Use Only
Your comprehensive fiduciarY handbook for your company and employees
Helping you do wHat's rigHt
Before investing, understand that mutual funds are not insured by the FDIC, NCUSIF, or any other federal government agency and are not deposits or obligations of, guaranteed by, or insured by, the depository institution where offered or any of its affiliates. Mutual funds involve investment risk and may lose value.
NATIONWIDE FINANCIAL FIDUCIARY SERIESSM
a fiduciarY handbook for participant– directed Qualified retirement plans
Fred Reish is the chair of the firm’s Employee Benefits Practice Group. He has authored over 100 articles and four books about fiduciary responsibility for plan investments and the tax qualification rules for retirement plans. Fred has spoken at major benefits conferences across the country and is regarded as a knowledgeable professional on fiduciary responsibilities for 401(k) plans.
He is a Charter Fellow of the American College of Employee Benefits Counsel, which recognizes the top employee benefits attorneys in the country. His contributions to the benefits community have been recognized by the IRS and the American Society of Pension Actuaries.
Fred is regularly quoted in pension publications and in the general media, such as Fortune, Inc., the New York Times, the Los Angeles Times, and USA Today.
Reish Luftman Reicher & Cohen is nationally-known for its employee benefits practice. That practice includes advising plan sponsors and fiduciaries and litigation on the full range of retirement plan issues.
Advice to fiduciaries on their responsibilities about operating and investing for retirement plans and investment plan assets
Counsel to employers on 401 (k) plans, ESOPs, 403(b) arrangements, 457 plans and other qualified and nonqualified retirement plans
Representation of employers and fiduciaries in correcting tax qualification defects in the documentation and operation of the plans
Representation of employers and fiduciaries in IRS audits and DOL investigations
The fiduciary handbook and the accompanying materials contain a general discussion of ERISA’s fiduciary responsibility and prohibited transaction rules. This discussion is not intended to be legal or investment advice, but rather to be an introduction to rules and guidelines for your qualified plan. ERISA has other rules and regulations, beyond those discussed in these materials, which govern your responsibilities and the operation and investment of your plan. Further, the rules are discussed as they generally apply to plans and are not specific to the circumstances of any plan. As a result, the materials cannot be relied on as a specific and detailed analysis of the issues in operating your plan. For detailed advice on your plan’s circumstances, you should consult a qualified attorney, investment professional or pension consultant, as appropriate.
The firm’s areas of education are:
tHe reisH luftman reicHer & coHen employee Benefits practiceFred Reish
A 401(k) plan is a valuable benefit for your employees. The tax-deferral features coupled with high-quality mutual funds or other investment options can generate enthusiasm and appreciation by your employees.
However, it is also a responsibility. To get the best results, the plan needs to be designed and administered properly. The investments must be selected prudently and reviewed at least annually. At some point, it will probably be necessary to remove an underperforming fund to protect your employees. ERISA—the federal law regulating retirement plans—imposes these and other duties on employers who sponsor retirement plans, including 401(k) plans.
Are you aware of your legal responsibilities?
Are you satisfying them?
The materials accompanying this letter contain a Fiduciary Responsibility Success Quiz so that you can grade the job you are doing—it may point out where you need to improve. Take the test. For a 15-minute commitment, you should be able to improve the performance of your plan, increase the quality of your employees’ benefits (as well as your own) and better protect yourself from fiduciary liability.
If you have questions about your responsibilities, the explanation following the scorecard may provide you with many of the answers.
The job of an investment fiduciary is difficult, but manageable—if you know the rules and have the right tools. Hopefully, the Success Quiz and this handbook will help youbetter understand some of your most important duties.
— Fred Reish
foreword
taBle of contentsIntroduction to This Handbook 1
cHapter 1: 2It Really Happened: Examples of Fiduciary Violations
cHapter 2: 3Who Is a Plan Fiduciary? A Plan Fiduciary... the legal definition Named fiduciary Allocation and delegation of fiduciary duties Selection of plan trustees Plan fiduciary meetings
cHapter 3: 6What Are Your Duties as a Fiduciary? Duty of loyalty Exclusive benefit rule Prudent person rule Diversify the plan’s investments Act in accordance with plan documents Monitor the investments
cHapter 4: 9How Are Plan Investments Selected?Investment fiduciaries Duty to select and monitor investments Three key investment decisions Investment policy statement Self-directed brokerage accounts Investment advice vs. investment education
cHapter 5: 13How Can Plan Fiduciaries Help Limit Their Liability for Investment Losses? DERISA Section 404(c)
cHapter 6: 17What Are Prohibited Transactions? Party in interest transactions Acts of self-dealing Prohibited transaction exemptions
Publication of this work has been made possible by Nationwide® Financial and is under copyright protection. This information is general in nature and is not intended to constitute legal or investment advice on any particular matter. This guide and accompanying tools do not create an attorney-client relationship.
cHapter 7: 19Other Important GuidelinesMaking timely plan contributions Paying expenses from plan assets Co-fiduciary responsibilities Selecting and monitoring service providers Fiduciary resignations and replacements Documenting decisions and maintaining a due diligence file Fiduciary protection and insurance ERISA bonding requirement Timely government filing and response to participant requests A final word to plan fiduciaries
The Best of America® Group Retirement Series 23
Fiduciary Tools CD-ROM Back PocketModel Investment Policy Statement ERISA 404(c) Requirements Checklist ERISA Notification Letter (Q&A Brochure) Plan Audit Due Diligence File Checklist Plan Fiduciary Meeting Checklist Why Use an Institutional Trustee?
Fiduciary Responsibility Success Quiz in Back Pocket
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans1
Handbook
Navigating the complex rules for qualified retirement plans can be a daunting experience. If your company sponsors a retirement plan, the owners, officers and directors should understand their responsibilities for managing this employee benefit. To fulfill their duties, the owners, officers and directors need to be aware of their responsibilities as fiduciaries under the Employee Retirement Income Security Act (ERISA), the federal law that governs the management of retirement plans.
ERISA was enacted to protect the participants and beneficiaries of retirement and welfare plans. Persons serving as fiduciaries of those plans must follow ERISA’s standards to properly perform their duties and avoid liability. While it may seem that common sense would be enough to satisfy these rules, ERISA has a high standard of conduct for plan fiduciaries — a standard that goes beyond mere good faith efforts.
Plan fiduciaries are expected to act with the “care, skill, prudence and diligence” of a qualified and experienced person in fulfilling their duties.
Fiduciaries who do not follow ERISA’s fiduciary
guidelines are personally responsible for violations of those rules, known as fiduciary breaches. This means that, if you commit a fiduciary breach, you may lose your personal assets, your home and your business. However, if you follow ERISA’s standards, you and your employees could enjoy high-quality and secure retirement benefits.
The U.S. Department of Labor and the Internal Revenue Service enforce ERISA for 401(k) and other participant-directed plans. In addition, participants can “enforce” the fiduciary rules through lawsuits.
Being a fiduciary isn’t an easy task, but it is possible to provide an important employee benefit while avoiding unwelcome surprises from ERISA’s enforcement agencies.
This handbook is an important first step in the right direction and will help you:Understand the fiduciary rules and regulations
Identify possible shortcomings concerning the operation of your company’s plan
Better meet your fiduciary obligations by using The Nationwide Financial Fiduciary Handbook and Tools
Is your company one of the businesses not following the fiduciary rules for managing their qualified retirement plans?
Introduction to this
Chapter 2
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 2
It Really Happened...Examples of Fiduciary Violations
example: Failure to submit deferrals on timeA company decides to simplify its procedures for investing employee deferrals in the mutual funds in the company’s 401(k) plan. Participants defer from their pay on a bi-weekly basis, but the employer has decided to hold all deferrals until the end of the month. The deferrals were previously mailed to the investment provider immediately following each payroll.
This is a fiduciary breach and a prohibited transaction, because the company is able to invest the employee deferrals shortly after each payroll, but has decided to hold on to the money for a longer period.
It’s a good idea to review your procedures to determine if you’re submitting deferrals as timely as possible — even a delay of a few days could be a concern if the deferrals could easily be submitted sooner. Although the deferrals are deposited within the outside time limit under the Department of Labor guidelines — before the 15th business day of the next month — the company has held plan assets for its own benefit, since it could have deposited and invested them earlier.
So why is this delay in investing employee deferrals a problem?
Consider two possible scenarios:
1. The market experiences a dramatic rise during the beginning of the month. However, the participants’ assets are not invested and they do not receive that gain. In this case, fiduciaries would be liable for lost earnings.
2. The company goes bankrupt and its creditors seize the company’s assets, including the deferrals that were not deposited. It is common in this situation for the employees to notify the Department of Labor about their loss. In that case, the DOL will sue the fiduciaries, typically settling for a reallocation of money out of the fiduciaries’ accounts in the 401(k) plan into the accounts of the employees who lost money because their deferrals weren’t put into the plan.
Example: Poor investment selection and monitoring process The plan committee for a large bank is charged with choosing an investment provider for the bank’s 401(k) plan. The committee members consider only one investment provider. The bank is eventually sued for the investments in its 401(k) plan because the participants felt the investments did not perform well and had unreasonable fees for the investments and services provided. The plaintiffs’ attorneys allege the underlying funds used by the plan were “overly expensive and mediocre performing.” The attorneys also assert that the committee members who were responsible for ongoing monitoring of the funds failed to monitor the funds and to remove underperforming options.
This example highlights the importance of the plan fiduciaries initially selecting investment options with:
Average or below-average expense ratios
Above-average performance records
More importantly, the investments must be monitored regularly to help ensure they continue to be reasonably priced and perform well relative to funds in their peer group. Finally, if committee members do not have the education or experience to handle the job, then they should seek expert assistance.
By offering a qualified retirement plan to your employees, you’ve accepted fiduciary responsibilities for managing the plan and selecting the investments. Unfortunately, the rules for retirement plan fiduciaries aren’t always clear — and even good intentions can go awry if you don’t follow the rules. As illustrated by the following examples of fiduciary violations — or breaches — those who commit mistakes may have had good intentions but simply didn’t understand the standards for fiduciary conduct.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans3
Chapter 2
The first step in understanding ERISA’s requirements is knowing who the plan fiduciaries are: a fiduciary is anyone who exercises authority or control over the management of a retirement plan or its assets.
The plan sponsor and plan trustees are always fiduciaries. The fiduciaries who are identified in the plan document—either by name or through an appointment process described in the plan—are called “named fiduciaries.” But you don’t need to be formally named in the plan document to be considered a plan fiduciary. Anyone may be a fiduciary if they act in a fiduciary role—for example, if they select the investments for a plan or hire an advisor for the plan. Such a person is known as a “functional fiduciary.” For example, the president of the company may become a functional fiduciary by selecting investments for the plan, even if he or she is not formally given that responsibility by the plan.
Most plan documents provide for the appointment of a committee to oversee the plan administration and the investments. Typically, the committee members are appointed by the company’s board of directors. In that case, the committee is the ERISA plan administrator and its members are fiduciaries. If a committee is not appointed, then the officers who oversee the operation of the plan will be the ERISA administrator and plan fiduciaries.
The plan committee for a retirement plan is given certain jobs and generally makes decisions about the operation of the plan, especially the investments. The members of the board of directors are also fiduciaries since they appoint the committee members. As fiduciaries, the directors have a duty to prudently select and monitor the committee members. Both the directors and committee members are named fiduciaries because they are identified through the plan document.
In general, fiduciaries are responsible for:
Managing the plan for the exclusive benefit of participants and beneficiaries
Acting prudently
Selecting and monitoring diversified plan investments
Selecting and monitoring the services for the plan
Abiding by the plan’s provisions
Plan Fiduciary?WHO IS A
A PLAN FIDUCIARY... the legal definition
Under ERISA section 3(21), a fiduciary is a person who:
Exercises any discretionary authority or control respecting the management of a plan or exercises any authority or control over the management or disposition of its assets.
For a 401(k) plan, the people who fall under this category are usually inside the company, such as the officers and the plan committee members who select and monitor the investments and oversee the general management of the plan.
Renders investment advice for a fee or other compensation (direct or indirect) as to any monies or other property of a plan, or has any authority or responsibility to do so.
This is typically someone outside of the company, such as a registered investment professional who has been hired to assist the plan fiduciaries with selecting the investment options.
Has discretionary authority or discretionary responsibility in the administration of the plan.
This generally includes officers and plan committee members who oversee the administration of the plan, including calculation of benefits and determining who is covered under the plan.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 4
Chapter 2
Named fiduciary The plan document must provide for one or more named fiduciaries who are authorized to control and manage the operation and administration of the plan. The named fiduciary can be a person or group of people who are named in the plan document or who can be identified by a procedure described in the plan document. For example, the plan document may state that the named fiduciary will be a committee that is selected and monitored by the employer’s board of directors.
When choosing the named fiduciary, the board of directors acts in a fiduciary role. Make sure your board:
Carefully considers the qualifications of the named fiduciary
Documents in meeting minutes its discussion and rationale for selecting the named fiduciary
Documents ongoing and periodic evaluation of the named fiduciary’s performance
Because the named fiduciary need not be an expert in all areas, plan documents usually allow the named fiduciary to hire outside experts. If fiduciaries act prudently in selecting the outside experts, this will generally fulfill their fiduciary obligations and protect themselves from personal liability. However, the fiduciaries must also monitor the performance of outside experts.
Who is not a plan fiduciary?In the day-to-day administration of a retirement plan, some individuals are responsible for performing administrative functions that do not require discretionary decisions or the provision of investment advice. Individuals who perform administrative functions for the plan but who cannot make decisions about plan assets, policies or interpretations are not fiduciaries.
The following are examples of administrative functions that are not considered fiduciary activities:
Applying rules to determine eligibility for participation or benefits
Preparing employee communication materials
Calculating benefits according to the rules in the plan document
Receiving contributions and applying them as provided in the plan
A retirement plan may have different fiduciaries who have different duties for the plan. Most of the time, their skillsets are not the same. Consequently, it is appropriate to allocate duties among the fiduciaries based on their interests and abilities.
The plan sponsor is the ultimate fiduciary. Acting through its board of directors, it appoints the key fiduciaries — the trustee and the members of the plan committee. In appointing the key fiduciaries, the company board must act prudently in making its selections, taking into account the responsibilities of the positions and the abilities of the people they appoint. The board also has a duty to monitor their performance, to make sure they do a good job and continue to do a good job for the plan and its participants.
The plan committee manages the plan. In some plans, there are two committees, one responsible for the selection of investments and another for the administrative operations. The committee has the duty to oversee the proper administration of the plan and the prudent selection and monitoring of the funds offered to the participants. The committee members do not perform all the duties themselves, but they are responsible for selecting those who can perform them well.
Plan committees also get help by hiring outside professionals, generally where the committee members lack knowledge about investments or administration. Some of the experts are also fiduciaries, such as registered investment advisors whose duties may include preparing the plan’s investment policy, selecting investments, monitoring investments, recommending changes, etc. Other parties are typically not fiduciaries, such as attorneys, accountants, recordkeepers and administrators. These experts help with drafting and reviewing documents, completing and filing government forms, keeping track of participant account balances and processing distributions. For all of these jobs, the plan fiduciaries have the duty to make sure that all individuals are properly filling their roles and to replace any party who is not performing properly.
Allocation and delegation of fiduciary duties
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans5
Selection of plan trustees Qualified plans are required to hold their assets in trust. This separation from the sponsoring employer’s assets assures that the plan’s assets are protected from the creditors of the sponsor and always available to provide benefits to participants.
Some plan sponsors prefer to name individuals as trustees; others prefer to delegate this function to an outside, institutional trustee that is licensed and knowledgeable in providing trustee services. For more information about deciding whether to choose an institutional trustee, see “Why Use an Institutional Trustee?” in the fiduciary tools provided with this handbook.
Plan trustees must follow the terms of the plan and trust documents in performing their duties.
After accepting an appointment as trustee, the trustee has the authority to manage and control plan assets, unless:
The plan states the trustees are subject to the direction of a named fiduciary (for example, a plan committee) who is not a trustee
The authority to manage, acquire or dispose of plan assets is delegated to one or more investment managers
Plan fiduciary meetings The plan committee and other fiduciaries are required to monitor the operation of the plan and the investment of its assets. To fulfill that responsibility, the fiduciaries should pay attention to issues that arise in the course of the year and also should meet at least annually to review the plan document, plan operation and administration, and the plan’s investments. A detailed due diligence file of the meetings should be maintained with the notes, minutes, agenda, background information and supporting documentation for plan and investment decisions.
The meeting is a good way for fiduciaries to:
Review the plan’s investments
Review any recent law changes that may affect the plan's operation and costs
Review participant education and communication materials
Review service provider performance and fees
See the fiduciary tools provided with this handbook for a Plan Fiduciary Meeting Checklist, a Due Diligence File Checklist and a Model Investment Policy Statement for more information. The Fiduciary Responsibility Success Quiz included with this handbook may also be used during scheduled plan fiduciary meetings to help ensure that your plan continues to meet the responsibilities and best practices outlined on the list.
Chapter 2
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 6
What Are Your Duties AS A FIDUCIARy?
Act solely in the interest of plan participants and beneficiaries.This is also known as the “duty of loyalty.” In fulfilling this duty, plan fiduciaries may not place their own interests over those of the plan participants and beneficiaries. Fiduciaries may not engage in conflicts of interest or “self-dealing”— acts that serve personal interests or those of the company sponsoring the plan. The foremost responsibility of a fiduciary is the sound administration of the plan and management of its assets for the sake of plan participants and beneficiaries.
As an example, if a plan holds employer stock, the fiduciaries are obligated to vote the stock (unless the voting is passed through to the participants) in the best interests of the participants, even if that conflicts with the goals of the company officers.
Hold and deal with plan assets for the exclusive purpose of providing plan benefits and defraying reasonable expenses of administering the plan. This is also known as the “exclusive benefit rule.” When serving as a plan fiduciary, it’s important to remember the primary purpose of your plan: to provide retirement benefits for the participants and beneficiaries. The prudent oversight of plan investments is key to meeting this long-term responsibility.
For example, the fiduciaries must make sure that the employee deferrals are promptly paid to the plan and not used by the sponsor for its business operations. Also, the fiduciaries should not allow the plan assets to be used for their benefit or for the company’s benefit—for example, a loan from the plan to the company.
Additionally, fiduciaries must be aware of and fully understand all the expenses paid from the plan. The decision to pay expenses from plan assets is a fiduciary act. Fiduciaries must ensure that expenses are reasonable and are in the interests of plan participants and beneficiaries.
Please see the Other Important Guidelines section of this guide for more information on paying expenses from plan assets.
Act with the care, prudence, skill and diligence that a prudent person acting in like capacity under similar circumstances would act. This is also known as the “prudent person rule.” This rule applies when selecting investments and weighing issues related to investment activities, including diversification, appropriateness, risk and anticipated return—as well as when assessing the need for and performance of outside service providers.
These ERISA rules govern the conduct of a fiduciary:
Procedural prudence: Investigation and documentation
A common theme throughout ERISA regulations is procedural prudence. Procedural prudence is the process fiduciaries use to make sure their decisions are in the best interests of participants and their beneficiaries. Note that the emphasis is on the process, the fiduciary’s research and documentation involved in making a decision, rather than on the results. Plan fiduciaries must be able to show they properly investigated and documented each plan fiduciary decision.
This process also applies to the selection and ongoing monitoring of service providers and plan investments. Following the right steps as a fiduciary can satisfy your responsibilities regardless of the outcome. In this case, the old adage is true: it's not who wins or loses, but how you play the game that counts. It is important, however, that you keep records to document the steps you took in per-forming your duties.
1.
3.
2.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans7
4.
6.
5.
Diversify the plans' investments unless it's clearly imprudent to do so.Plan fiduciaries must diversify the plan’s assets to minimize the risk of large losses to the plan—unless it’s clearly prudent not to do so. Mutual funds and other pooled investment vehicles may meet this requirement, provided the mutual funds or the underlying assets of the pooled investment vehicles are diversified. Special rules also apply to investments in stock of the company sponsoring the plan.
Participant-directed plans must diversify at two levels. First, the core investment options, a broad range of prudently selected investments, must be diversified. For example, each core fund must be adequately diversified to minimize the risk of unreasonably large losses. Most mutual funds are adequately diversified. However, some are not—for example, sector funds (technology, health-care funds, etc.) and single region international funds. Also, the participants must be provided with a slate of funds that constitutes a broad range, to allow them to assemble a portfolio adjusted to their personal risk and reward needs. Please see the section How Are Plan Investments Selected ? in this guide for a discussion of the broad range requirement.
Act in accordance with plan documents.Understanding and fulfilling your fiduciary duties is a combination of the laws governing retirement plans and the provisions of the plan document. As a plan fiduciary, you must carefully follow the terms and provisions outlined in the plan documents and any trust agreement. The only exception is when these documents violate the provisions of ERISA. If the plan document conflicts with ERISA, then plan fiduciaries must follow ERISA’s rules.
Monitor the investments.Once the committee has selected the investment funds for the plan, their performance must be monitored at least annually. This means periodically assessing each fund’s performance, using evaluation guidelines set forth in the plan’s investment policy statement (IPS) and removing funds that are not performing satisfactorily. This is a critical job, equally as important as the initial fund selection process. It recognizes that things change over time, and you have to respond to those changes in meeting your fiduciary obligations.
For example, in selecting and monitoring the plan’s investment options, the fiduciaries must act with the prudence and skill of a knowledgeable long-term investor. That means that the fiduciaries must investigate the alternatives available to the plan and make a reasoned and informed decision about the investment options being offered to the participants.
In doing that investigation, the fiduciaries (for example, the plan committee) need to review information about the investment alternatives, the expenses and other important factors. You will review information about fund alternatives to select the funds to be offered to the participants. The failure to gather and review the necessary information is a fiduciary breach. The benefit of reviewing such information is that the fiduciary’s decisions will be informed and reasoned, satisfying ERISA’s standards.
If you don’t have the expertise to perform certain duties, you should seek guidance from others, such as an investment professional or a consultant. In fact, prudence requires that you seek outside help if you don’t have the expertise. But like other decisions you make, you have to investigate the credentials and experience of the professionals before you hire them to make sure they are qualified for the task at hand. You also need to carefully read and understand the reports to make sure the professional did sufficient analysis of the relevant facts. Finally, fiduciaries cannot blindly rely on the advice of outside professionals. You must review and understand the advice of professionals before you can comfortably rely on their guidance.
Chapter 3
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 8
Some criteria that are often considered when evaluating plan investments include:
Performance for 1, 3, 5 and 10 years for the investmentrelative to its peer group or other benchmark
Expense ratio and other costs relative to the investment’s benchmark
Style and asset allocation consistency
Risk and volatility
Additional characteristics such as changes in the size of the fund and portfolio manager tenure
While ERISA does not specifically require plans to have investment policy statements, investment experts generally consider the preparation and use of an IPS to be a “best practice” for fiduciaries. And at least one court has found that, under the facts of the case it decided, an IPS was required to satisfy ERISA’s general fiduciary standards.
Investment reviews, along with supporting materials, should be documented and maintained in a due diligence file. See the section How Are Plan Investments Selected ? and the Model Investment Policy Statement in the fiduciary tools provided with this guide for more information.
Although an IPS is a valuable tool to assist in selecting and monitoring plan investments, many plans do not have one in place. One benefit of an IPS is the formal identification of the criteria the fiduciaries will use in reviewing or monitoring the plan’s investment options.
Chapter 3
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans9
Plan Investments Selected?Certain plan fiduciaries are considered investment fiduciaries. These are the people who select and monitor the investment options offered to the participants.
HOW ARE
Chapter 2
Investment fiduciariesCertain plan fiduciaries are considered investment fiduciaries. These are the people who select and monitor the investment options offered to the participants. If the employer’s board of directors appoints a committee or officers to select and monitor the investments, the directors are responsible for prudently selecting and monitoring the investment fiduciaries. In cases where the responsibility for selecting the investments is not assigned to a specific committee or officers, it remains with the employer. In that case, the investment fiduciaries are the officers who select the investments for the plan.
Investment fiduciary activities include:
Determining the range of investment options and selecting the specific options
Designating the person who will make the decisions about plan investments
Selecting the investment provider
As a fiduciary, your job is to establish the investment policy, decide on the positions (asset classes) to be filled and then select the investments for the participants. The committee must select a combination of investment funds that have the potential to perform well individually and that fit together properly as a team. Committee members must seek outside assistance if they lack the education and experience to confidently perform this duty. As mentioned previously, outside professionals must be prudently selected and monitored. Again, the importance of “procedural prudence” must be emphasized. Fiduciaries have the duty to investigate and document their work when selecting and monitoring investments and service providers.
Choosing an investment provider
The duty to prudently select and monitor the funds in your plan means that, at some point in the future, you may, or probably will, need to remove one or more under-performing funds. An investment package withinvestment options from only one management company or that offers limited availability of funds fromoutside providers may cause problems with fund selection and monitoring. Because investment management companies often follow the same investment philosophies for all their funds, many of the mutual funds managed by the same company may concentrate in the same stocks, making difficult to achieve appropriate diversification.
Additionally, if providers force plans to choose a certain number of their own proprietary funds, it may be difficult for the fiduciaries to fulfill their duties to monitor the plan investments because a suitable replacement may not be available if a fund underperforms. Fiduciaries should determine whether the investment package offers a sufficient number and variety of choices so that if an investment option (e.g., a small-cap value fund) were to underperform, it could be replaced by another qualified fund of the same type.
Chapter 4
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 10
Chapter 4
Duty to select and monitor investmentsAlthough many plan fiduciaries seek ERISA Section 404(c) protection, it’s important to note that the preamble to the final 404(c) regulations states:
" The act of designating investment alternatives is a fiduciary function to which the limitation on liability provided by section 404(c) is not applicable."In other words, plan fiduciaries retain the responsibility for selecting and monitoring the investment options made available to participants, even if the plan intends to comply with ERISA Section 404(c). See the ERISA 404(c) section of the fiduciary overview and the ERISA 404(c) Checklist and 404(c) Q&A Brochure in the fiduciary tools provided with this guide for more information.
Three key investment decisionsThere are three key investment decisions fiduciaries must make when selecting investment options for a 401(k) or other participants-directed plan:
1. Each individual investment option must be carefully selected. After researching the possible funds to offer in the plan, the fiduciaries should believe each investment option chosen will perform well relative to its peer group.
2. The group of funds available in the plan must cover a broad range. ERISA Section 404(c) regulations define a broad range as:
“ A broad range of options where a participant has a reasonable opportunity to materially affect the potential risk and return …at any point within the range normally appropriate for the participant. ”
Many investment professionals believe that to cover the broad range requirement, the plan should consider having investments in at least the following investment categories:
Stable value investment such as a guaranteed invest-ment contract (GIC) or money market fund. Because the value of the securities held by stable value funds will fluctuate, there is the risk that an investor will lose money investing in stable value funds.
U.S. government or corporate bonds. While the fund invests primarily in securities of the U.S. Government and its agencies, the fund’s value is not guaranteed by these entities.
Large-cap U.S. equities. Invest in the largest 5% of companies in the market. These are larger, more established, profitable and well-known companies.
Mid/small-cap U.S. Equities. Small cap stocks have higher risks than stocks of larger, more established companies and have significant short-term price volatility. Small company funds involve increased risk and volatility.
International or global equities. International investing involves additional risks, including: currency fluctuations, political instability and foreign regulations.
3. The investment options individually and as a whole must be appropriate for the particular workforce. Employees must understand the investment options so they can invest successfully for retirement. Ensuring that the investment options are suitable for employees involvesproviding the right investments, communication and education.
Participants are entitled to have prudently selected investment options available to them. This means that the committee must assess the needs of the participants and choose funds that meet those needs.
The process of selecting the plan’s investment options is similar. The committee needs to choose funds to fill different investment categories, from cash to bonds to domestic and international equities: funds with stocks of large and small companies and funds with growth and value styles. The objective is to offer quality funds that work together as a winning team to give participants a range of choices that allows them to customize their investments to help meet their individual needs.
Asset allocation funds and modelsBecause participants vary widely in their investment knowledge, determining the right combination of plan funds can be a difficult task. That’s why it might be a good idea to include asset allocation funds or models for those participants who do not have the knowledge or desire to allocate assets on their own.
Offering asset allocation funds or model and educational materials to participants also helps satisfy ERISA's requirement that the investments be suitable for the participants. Many investment education programs include a questionnaire to help participants determine their investor profiles. Asset allocation does not guarantee a profit or protect against loss in a declining market. However, with this information, participants can choose the appropriate asset allocation model based on their risk tolerance and investment time horizon. The use of asset allocation does not guarantee returns or insulate you from potential losses.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans11
Employer and employee responsibilities for investments in a 401(k) plan
Employer responsibilities:
• Establishinvestmentpolicy
• Selectinvestmentoptionsor investment manager
• Monitorinvestments
• Educateparticipants
Employee responsibility:
• Selectamongtheavailable investment options
Named fiduciary An important job of the investment fiduciary is to lay out the strategy for a winning group of investments. In other words, you have to develop the plan’s investment policy—the guidelines. Although an investment policy statement is not specifically required under ERISA or its regulations, it’s wise for every plan to have one.
Without an investment policy statement, fiduciaries may have only limited protection under “procedural prudence” because there is no clear documentation of how the plan’s investment options are selected and monitored.
The investment policy statement should be designed to:
Assure that the plan has documented investment objectives
Ensure that the investments selected meet the plan’s objectives
Provide a basis for periodic review and documentation of existing investments
Investment fiduciaries need to be aware that they are responsible for the initial selection of plan investments as well as the monitoring of these funds. When necessary, investment fiduciaries must replace investment options that are under-performing the appropriate benchmarks outlined in the investment policy statement. Careful documentation of the monitoring and analysis of the plan’s investment options should be maintained in a due diligence file. To assist you with your plan’s investment selection and monitoring process, a Model Investment Policy Statement is included in the fiduciary tools provided with this guide.
Fund Window Option
Some plans offer participants the option of mutual fund windows. Similar to brokerage accounts, mutual fund windows allow participants to select from a large universe of investments (in this case, mutual funds). Fiduciaries are responsible for determining if it is prudent to offer this option to their participants. If offered, the fiduciaries should warn participants that these mutual funds have not been prudently selected and monitored. As a result, participants who use these windows are responsible for determining both the quality of the fund, as well as the portion of their account to allocate to it. This wider range of options should only be provided by plans whose participants are either knowledgeable or willing to take the time to learn the strengths and weakness of the funds.
Chapter 4
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 12
Self-directed brokerage accountsIn recent years, self-directed brokerage accounts have become popular options in retirement plans. Plan sponsors considering self-directed brokerage accounts may be concerned about the greater possibility of participant investment loss in a self-directed brokerage account. In a self-directed brokerage account, participants are responsible for both selecting quality funds and diversifying their accounts in order to minimize the risk of large losses.
Plan fiduciaries should weigh the potential liability of offering these accounts by considering the following:
You have a fiduciary responsibility to determine whether it’s prudent to offer self-directed brokerage accounts to plan participants and to prudently investigate the brokerage provider—including the appropriateness of fees, commissions and expenses, trade execution and other services.
It’s best to prohibit leveraged investing, such as margin trading, which could result in taxable income in the plan. Also, be sure that the brokerage provider can enforce any restrictions you may require to be comfortable with this offering.
If your plan offers a self-directed brokerage option, the offering must be communicated to all participants. Participants should be warned that the investments available through the self-directed brokerage account have not been prudently selected and monitored.
Finally, be certain to cover this key point with participants about the additional investment risk of self-directed accounts: participants will be investing in securities of their own choice. Unlike the core investment options offered in the plan, investments selected as part of a self-directed account have not been prudently selected and monitored by the employer.
Employer securitiesKeep in mind that if you offer employer stock as a plan investment option, the fiduciaries have the responsibility for overseeing the investment in employer stock. Employer securities held within the plan must be qualifying employer securities as defined in ERISA Section 407.
Investment advice versus investment educationMany plan fiduciaries struggle with how to provide participants with the best support to enable them to make informed investment decisions that are appropriate for investing for retirement. Some of the answers are to provide a broad range of core funds, asset allocation funds, and investment education and investment advice (see the discussion of the three key investment decisions and asset allocation funds and models earlier in this section. Investment education is just that—education on investment concepts. Investment advice, on the other hand, points the participants to the specific funds that are appropriate for them. In a manner of speaking, investment education points you in the right direction, while investment advice takes you to the specific location.
In most cases, both investment education and advice are delivered to the employees through outside services selected by the sponsoring employer or the plan fiduciaries. Investment advice is most often provided by independent businesses unrelated to the investments—because of the potential for bias if they were closely associated with the investments.
Because investment education does not point the participants to specific investments, it is not considered fiduciary investment advice. However, the provider of investment advice to the participants is a fiduciary under ERISA.
Investment information can cover the following topics and not be considered advice (see DOL Interpretive Bulletin 96-1.):
Plan information
General financial and investment information
Asset allocation models
Interactive investment materials
Both investment educators and advisors are chosen by the plan fiduciaries and accordingly must be prudently selected and monitored. The information gathered and reviewed in that process should be kept in the plan’s due diligence files.
Chapter 4
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans13
Investment Losses?Certain plan fiduciaries are considered investment fiduciaries. These are the people who select and monitor the investment options offered to the participants.
HOW CAN PLAN FIDUCIARIES LIMIT THEIR LIAbILITy FOR
Chapter 5
ERISA Section 404(c)Under ERISA Section 404(c), a plan fiduciary is not liable for investment decisions made by plan participants who direct their own investments, as long as several requirements are met.
Investment selection and monitoring
Communicating certain information about the plan investments to participants
Ensuring that participants have adequate account access to effectively manage their investments
Relief from fiduciary liability under Section 404(c) is available only if the participants have the opportunity to exercise control over their investments. The regulations state that participants can’t exercise this control unless they have the opportunity to provide investment direction “to an identified plan fiduciary.” Most employers give that job to the plan committee, but some appoint an officer to fill that role (for example, the vice-president for human resources).
A 404(c) fiduciary must be named who is responsible for carrying out participant investment direction. Although these duties may be delegated—subject to prudent selection and monitoring—the appointment of a 404(c) fiduciary should be appropriately documented, and the 404(c) fiduciary’s performance should be monitored.
If a plan intends to comply with ERISA Section 404(c), this fact should be indicated in the plan document, summary plan description and Form 5500.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 14
Chapter 5
Department of Labor requirements for ERISA Section 404(c) complianceThe plan must allow participants to invest in a broad range of investment options, each with materially different risk or return characteristics. These funds, called “core options,” must be diversified to help minimize the risk of large losses. As a result, stock of the company sponsoring the plan cannot be a core investment option.
Employer stockIf employer stock is selected as an investment option, plan fiduciaries must give participants a written description of the procedures for maintaining the confidentiality of stock purchase and sale information, as well as procedures for exercising voting, tender and other shareholder rights.
Employer securitiesKeep in mind that if you offer employer stock as a plan investment option, the fiduciaries have the responsibility for overseeing the investment in employer stock. Employer securities held within the plan must be qualifying employer securities as defined in ERISA Section 407.
Assets held in a default accountMany 401(k) plans use a default account for deferrals when participants fail to provide investment directions. The default account is often the most conservative investment option in the plan, such as a money market account. Keep in mind that placing the funds in the default account is not “participant direction.” As a result, plan fiduciaries are responsible and accountable for the investment of such funds under ERISA. It may not be prudent to use the plan’s most conservative investment option for the default account when a long-term investment would be more appropriate.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans15
Chapter 5
Blackout periodsFiduciaries are generally responsible for investment performance during a “blackout period,” a period of time when participants cannot control their investments due to a plan conversion from one investment provider to another. A blackout period may be difficult to avoid, but plan fiduciaries must minimize the impact on participants by making it as short as possible and providing notice of the blackout period in advance, so that the participants can properly arrange their investments for the blackout period.
Allow appropriate frequency of participant investment direction The plan must allow participants to give investment direction at an appropriate frequency considering the market volatility of the investment. Thus, more volatile investments must allow participants a greater exchange frequency. At least three of the core investments (that is, the investments that satisfy the broad range requirement) must permit changes at least every three months. However, in today’s world of daily changes, this is seldom an issued.
Provide required participant information Plan fiduciaries must provide participants with sufficient information to make informed investment decisions. Certain information must be provided automatically to participants, while other information must be made available to participants at their request.
Either via a written notice or a provision in the summary plan description, the following information should automatically be given to the participants:
Participants will be able to direct investments in the plan
The plan intends to comply with 404(c) and the plan fiduciaries may be relieved of liability for losses
The name, address and phone number of the 404(c) plan fiduciary responsible for providing information upon request and for receiving and complying with participant investment instructions
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 16
Chapter 5
Additionally, plans are required to include a statement in the summary plan description indicating if the plan intends to comply with ERISA 404(c) requirements.
Other information that must be provided to participants for the mutual fund options includes:
A list of investments and appropriate information about each investment
A description of all charges and fees related to the purchase or sale of investments in their accounts (“transaction fees”)
An explanation of how to give investment direction, any applicable limitations and the frequency with which investment direction may be made
An explanation that participants have an opportunity to obtain written confirmations of their investment instructions
Identification of designated investment managers, if any;
• A list of the information available on request and the name, address and phone number of the 404(c) fiduciary responsible for providing the information
• A copy of the most recent prospectus provided to the plan, to be given immediately before or after a participant's initial investment in a mutual fund
Participant information for the mutual fund options that can be given automatically or supplied on request
Prospectuses, financial statements/reports and other information relating to the investment options to the extent they are provided to the plan
Confirmations of investment instructions
A description of the annual operating expenses of the investment options, such as investment management fees
Information concerning the value of shares or units of investment options in the plan, as well as past and current investment performance information
A list of the holdings in the portfolio of each investment option
Other sources of information that may help participants make informed decisions include:
Periodic account statements (an annual comprehensive statement is required)
Automated voice response unit/Internet access to account and investment information (if available)
General investment education, such as participant newsletters and payroll stuffers
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans17
Chapter 6
Prohibited Transactions?ERISA also contains significant rules on prohibited transactions, including transactions between a plan and a “party in interest” and acts of self-dealing. Prohibited transactions are strictly forbidden — even if the results are favorable for the plan.
WHAT ARE
Party in interest transactionsA party in interest is generally anyone who is closely related to the plan, including:
Plan fiduciaries
Owners
Employer sponsoring the plan
Relatives of plan fiduciaries
Any person providing services to the plan
Although certain exemptions apply, the following are some of the prohibited transactions with a party in interest:
The sale, exchange or lease of property
Loans or other extensions of credit
The furnishing of goods, services or facilities
The transfer or use of plan assets
A plan fiduciary is also prohibited from acquiring or holding any securities issued by the plan sponsor other than “qualifying employer securities,” as defined by ERISA.
Acts of self-dealingERISA also says that a plan fiduciary must avoid self-dealing —any transaction which serves his or her personal interests or those of the company sponsoring the plan.
The following are examples of self-dealing:
An investment professional who is a golfing partner of a plan fiduciary offers a discount on the fiduciary’s personal investments if the advisor’s investment firm is selected to manage the plan’s assets. If the plan fiduciary accepts the offer, this action could constitute both a prohibited transaction and a fiduciary breach—even if the investments the advisor recommends perform favorably for the plan.
The trustee of a profit-sharing plan invests his personal funds in a start-up business. He later needs more capital to help the business grow, and he invests the plan’s assets in the business. Again, this is a prohibited transaction and a fiduciary breach, even if the investment performs well.
A plan fiduciary is also prohibited from acquiring or holding any securities issued by the plan sponsor other than “qualifying employer securities,” as defined by ERISA.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 18
Chapter 6
Civil penalty—20% of amount recovered in a fiduciary breach, if the amount is collected due to Department of Labor intervention. This penalty is in addition to the amount necessary to correct the breach.
Tax—15% of amount involved in each prohibited transaction. If the prohibited transaction is not corrected in a timely manner, an additional tax of 100% may be assessed. Severe violation of prohibited transaction rules could also result in a violation of the “exclusive benefit rule,” which could cause the Internal Revenue Service to disqualify the plan.
Prohibited transaction exemptionsThere are three kinds of exemptions from the prohibited transaction rules:
Statutory exemptions are included within ERISA and its regulations. An example is the exemption under ERISA Section 408(b)(2) for using plan assets to pay reasonable fees to service providers.
Class exemptions are issued by the Department of Labor and are available to anyone who meets the requirements of the exemption
Administrative exemptions are requested by individuals under special circumstances and apply only to that individual
A plan fiduciary is also prohibited from acquiring or holding any securities issued by the plan sponsor other than “qualifying employer securities,” as defined by ERISA.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans19
Important GuidelinesOTHER
Chapter 2
Determining if fees are reasonable
The DOL has published materials to assist fiduciaries with evaluating retirement plan fees and expenses. The materials include brochures for participants and employers and a 401(k) fee worksheet, which describes the information fiduciaries should gather from providers to evaluate the fees and expenses charged to the plan. These materials can be obtained from the DOL’s Employee Benefits Security Administration Web site at http://www.dol.gov/dol/pwba.
In reviewing the fees and services of different providers, try to make sure you’re comparing apples to apples.
It’s important to understand the assumptions each provider makes in completing the worksheet to adequately compare providers. Also, keep in mind that you’re not required to choose the least expensive investments or providers. Rather, you should examine fees in light of the products and services provided and make sure you’re satisfied that the plan and its participants receive value in relation to the expenses.
Chapter 7
Making timely plan contributionsEmployee contributions must be paid to the plan on the earliest date by which the money can reasonably be segregated from the employer’s assets, but no later than the 15th business day of the month following the month in which the money would have been paid to the employee. As the example at the beginning of this overview illustrated, deferrals should be sent as soon as possible. As noted in our examples of fiduciary violations, failure to deposit contributions in a timely manner is both a prohibited transaction and a fiduciary breach. The employer and responsible fiduciaries may be liable for the amount of contributions and lost earnings, plus prohibited transaction penalties.
Paying expenses from plan assets In general, expenses that are necessary for the operation of the plan — investment management expenses, annual administration and government reporting costs—can be paid by the plan. The Department of Labor offers guidelines on paying expenses from plan assets in its Department of Labor Advisory Opinions 97-03A and 2001-01A.
Expenses paid from plan assets should be consistent with ERISA standards of fiduciary conduct and the plan document. The DOL has taken the position that if the plan documents are silent—that is, the documents don’t have language specifically authorizing or disallowing expenses—then reasonable expenses for administering or operating the plan may be paid from plan assets. If the fees are unreasonably high, you risk breaching your fiduciary duties and engaging in a prohibited transaction. However, you aren’t required to select the least expensive investments or services. Instead, you must determine if the services provided are of value to the plan and if the costs are reasonable in light of the services provided.
The advisory opinions also identify expenses that can’t be paid from the plan: costs for the design, creation and termination of the plan. These expenses are termed “settlor”—or employer—functions.
It’s important to note the actual decision to terminate a plan is a settlor function, and any related expenses or services associated with the decision may not be paid from the plan. However, the Department of Labor has stated that because the act of terminating a plan—after the decision is made—is fiduciary in nature, reasonable expenses involved withimplementing an orderly plan termination are payable by the plan. This may include a plan audit, preparing benefit statements, calculating accrued benefits and other responsibilities to ensure that the plan termination is handled in a way that benefits plan participants and beneficiaries.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 20
Chapter 7
Common plan service providers
Plan administrator — typically performs ministerial or administrative day-to-day functions and is not usually a fiduciary. (Note: This is not the same as a statutory plan administrator under ERISA, which is a fiduciary responsible for the operation of the plan. The ERISA plan administrator typically makes administrative decisions like determining eligibility to participate and to receive plan benefits.
Investment provider — provides investment vehicles for the plan and is typically an insurance company, mutual fund company or bank.
Auditor — an independent accounting firm that verifies that plan assets exist and are reported properly.
Appraiser — values plan assets that are not readily marketable, such as closely held employer securities.
Legal counsel — provides legal advice on fiduciary responsibilities, plan administration and investment management.
Co-fiduciary responsibilitiesERISA Section 405 covers co-fiduciary rules. Even if you do a good job performing your duties, you may be responsible for breaches or violations made by other fiduciaries. For example, you can be responsible for other fiduciaries if you:
Knowingly participate in a breach by another fiduciary
Knowingly help conceal an improper act or omission of another fiduciary
Enable another fiduciary to commit an improper act by failing to carry out your duties
Fail to take steps to correct a breach by another fiduciary when you know about the other fiduciary’s breach
For example, if the trustee of a plan becomes aware that employee deferrals are not being forwarded to the trust, then the trustee must take reasonable steps to protect the participants. If the trustee does not act, then he could be personally liable for any losses that could have been avoided by timely action.
If you suspect that a fiduciary is not doing his or her job, you must take steps to address the problem and document those steps to protect the participants, the beneficiaries and the plan. However, it should be noted that a fiduciary is not responsible for directly overseeing the activities of other fiduciaries, unless the first fiduciary appointed the second fiduciary. In that case, it’s a direct fiduciary responsibility (not a co-fiduciary duty) of the fiduciary to prudently select and monitor the activities of the appointed fiduciary.
For more information on your rights as a plan fiduciary and how Nationwide® stands with you, check out the Nationwide Bill of Rights and the Nationwide Fiduciary Warranty.
Selecting and monitoring service providersERISA allows plan fiduciaries to hire outside professionals to provide assistance or advice. In fact, it may be a necessity to seek outside assistance because the laws are so complex. A good rule to follow is: when in doubt, seek expert assistance.
The plan fiduciaries or plan committee is responsible for hiring and supervising the plan’s service providers. While seeking the assistance of competent professionals may mitigate some of the risk involved with managing a retirement plan, fiduciaries must review, understand and accept the advice provided and then make the appropriate decisions based on the advice. The professional or outside service provider can’t make the decisions for the fiduciary.
The selection and monitoring of outside service providers must be done in a prudent manner. A few additional guidelines should be followed to help minimize risks involved with using outside service providers:
A due diligence file should be maintained for each advisor, documenting the extent of the initial provider inquiry and appointment, fees and ongoing monitoring.
Fiduciaries should enter formal agreements with each provider to document responsibilities, fees, service standards, etc.
Arrangements with providers must be reasonable as to duties, conditions and fees. If the arrangements are not reasonable, then payment of fees from plan assets is a prohibited transaction, and a fiduciary breach has occurred. Penalties and restitution may result.
Fiduciaries should verify that providers have appropriate insurance and check their policies to verify adequate coverage for the services provided.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans21
Chapter 2
Chapter 7
Fiduciary resignations and replacementsPlan and trust documents typically include resignation and replacement provisions for fiduciaries. Agreements with service providers, including an investment manager, should also include resignation and replacement procedures. Resigning is itself a fiduciary act and must be done according to the procedures in the plan document. If there is no qualified replacement, the resigning fiduciary may be exposed to liability.
Documenting decisions and maintaining a due diligence fileTo show you were procedurally prudent in your selection and monitoring of plan investments and any outside experts or service providers, be sure to keep a well-documented due diligence file.
These files are helpful if a government agency investigates or audits your plan. With a properly documented due diligence file, you’ll be able to promptly provide the information they require. A sample Due Diligence File Checklist is included in the fiduciary tools provided with this guide.
Fiduciary protection and insuranceRemember, plan fiduciaries may be personally responsible for any breach of their fiduciary duties. Plan fiduciaries may be sued for plan losses, benefit discrepancies, or compliance issues.
ERISA liability claims can be filed as an individual action, a class action suit, or as a result of an investigation by a government agency, such as the Department of Labor or Internal Revenue Service. Litigation can potentially drain your personal assets and your company’s assets.
Fiduciaries can manage their risk by following the rules, seeking expert assistance when needed and following prudent, well-documented procedures. In case errors do occur, though, it’s important to have insurance.
ERISA permits the purchase of fiduciary liability insurance. If the insurance is purchased with plan assets, the insurance policy must permit recourse by the insurer against the fiduciary. Recourse allows the insurer to try to collect from the fiduciary if a breach is determined to have occurred. A nonrecourse rider is a supplemental insurance policy that may be available which eliminates the insurer’s right of recourse. A nonrecourse rider costs extra and may not be paid for with plan assets.
Other insurance that may be used to provide protection against liability include:
Directors & officers insurance—your company’s directors and officers insurance may or may not cover fiduciary breaches. Check the insurance policy, because many policies specifically exclude ERISA plans.
Errors and omissions insurance—“E&O” insurance protects against liability for administrative errors and omissions. This insurance typically covers plan administrators, accountants and attorneys.
ERISA bondingWith a few exceptions, every fiduciary and person who “handles” funds or other plan assets must be bonded, according to ERISA Section 412. This regulation requires a bond to reimburse the plan for losses resulting from fraudulent or dishonest acts by plan fiduciaries and others who handle the assets. Certain entities, such as banks, savings and loan institutions and insurance companies, may be exempt from the bonding requirement.
Handling of plan assets is not limited to physical contact. Handling occurs whenever a person’s duties or activities present the risk that plan assets could be lost due to fraud or dishonesty, whether by an individual or group acting in collusion. The required bond amount is $1,000 or 10% of the amount of funds handled, whichever is greater, and it need not exceed $500,000.
The Department of Labor allows the use of plan assets to pay for an ERISA Section 412 bond.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 22
Chapter 7
Timely government filing and response to participant requestsFines may be assessed for failure to file the plan’s annual report (Form 5500) and other filings as well as failure to respond to a participant request for benefit information.
Failure to timely file the plan’s annual reportBoth the Department of Labor and the IRS may impose civil penalties for failure to file the plan’s annual report on time. Both agencies view Form 5500 filing violations to be serious, and the penalties, which are typically measured daily, can quickly reach several thousand dollars.
It’s also important to note that the statute of limitations doesn’t begin until the Form 5500 and related schedules are accurately completed and filed. The Internal Revenue Code contains a statute of limitations that permits only the IRS to challenge matters covered in the Form 5500 for three years from the date of filing, provided that the form and related schedules were completed properly and in good faith.
Failure to respond to a participant request for benefit information reportUnless a response is provided to the participant within 30 days, the plan administrator named in the plan document (usually either the employer or a plan committee) may be subject to a civil penalty of up to $110 per day.
A final word to plan fiduciariesKeep your reputation and your personal assets intact and establish a game plan for a winning team by:
Prudently investigating, documenting and monitoring all decisions affecting the plan, the investments and service providers
Following ERISA and its regulations
Seeking expert assistance when you don’t know the answers or lack expertise
Your retirement plan could be more successful because of your efforts, and you could potentially have the satisfaction of helping your employees work towards a secure financial future.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans23
Group Retirement SeriesTHE bEST OF AMERICA®
Chapter 2
Under ERISA Section 404(c), a plan fiduciary is not liable for investment decisions made by plan participants who direct their own investments, as long as several requirements are met.
Quality plan design and administration
Nationwide understands the need for innovative plan design and quality administration services. As a result, Nationwide has developed strategic alliances with plan administrators across the country who provide a hands-on approach to customized plan design and high-quality administration.
Nationwide and its network of plan administrators recognize that the rules and regulations related to employee benefit plans are complex and challenging. Your plan administrator will assist you with plan design and administrative services and help you maintain proper compliance with ever-changing pension law.
Diverse investment options Nationwide Retirement Programs offer a wide array of investment options. Nationwide realizes that no one investment company has the best options for every participant’s investment objective and style. For this reason, Nationwide was one of the first to build partnerships with many of America’s best-known money managers to provide a diverse and comprehensive package of fund options.
Nationwide Retirement Programs offer:
More than 70 nationally recognized investment companies offering a number of underlying fund choices with varying risk levels and management styles, enabling you to offer a broad range of investment alternatives to your plan.
Professionally managed Preset Allocation funds for those employees who prefer managed portfolios.
The freedom to choose the funds and fund families that are appropriate for your plan. Nationwide does not favor its own family of funds over the funds of other money managers offered in Nationwide Retirement Programs.
The use of asset allocation does not guarantee returns or insulate you from potential losses.
Certain of the underlying funds are not publicly traded mutual funds and are not available directly for purchase by the general public. They are only available through variable life insurance policies or variable annuity contracts issued by life insurance companies, or in some cases, through participation in certain qualified pension or retirement plans.
Nationwide recognizes your fiduciary obligations under ERISA to prudently select and monitor the plan investments. Nationwide also understands the difficulty plan sponsors may face if their investment provider places restrictions on the funds the plan may invest in. Unlike many investment providers, Nationwide does not require investment in any specific fund families. Plan sponsors are free to choose the funds that are most suitable for their plan. With a wide array of funds from many fund houses, you are free to choose investment options that meet your plan’s specific needs.
A Fiduciary Handbook for Par t ic ipant-Directed Qual i f ied Ret i rement Plans 24
Comprehensive fiduciary management program
In recognition of the importance of your fiduciary responsibilities, Nationwide® has developed a thorough fiduciary management program. In addition to this handbook, your investment professional and you have access to a variety of tools and an online investment analysis system.
These tools provide education and research spanning several issues, including:
The adoption of a meaningful investment policy statement
The selection and ongoing monitoring of your investments
Addressing other important fiduciary obligations through productive fiduciary meetings
The documentation and due diligence process
Access to fidelity bond and fiduciary liability insurance programs
Nationwide is dedicated to not only helping you effectively manage your fiduciary obligations from start to end, but the program is designed to accomplish that in a very efficient and user-friendly manner.
Timely and accurate participant recordkeepingNationwide has developed a proprietary state-of-the-art participant recordkeeping system, which is electronically linked to the plan administrators. Nationwide’s daily valuation of underlying investment options gives participants access to their retirement accounts and allows you and your plan administrator to respond to the needs of your plan. The Nationwide electronic link to plan administrators is unique in the industry and offers the flexibility the plan needs to remain an attractive option for the participant. Nationwide’s adherence to time standards gives you the assurance you need that plan requirements will be performed on a timely basis.
CommunicationMaking sure employees understand their investment options and have the tools they need to guide them toward their retirement goals is integral to the success of your retirement plan.
Glossary or TermsGlossary or TermsDirected Trustee:A trustee that provides no discretionary services to the plan and has no decision-making authority over the plan or its assets. A directed trustee acts only upon the direction of the plan sponsor, named fiduciary or their designees.
Fiduciary: Under ERISA section 3(21), a fiduciary is a person or legal entity who:1) exercises discretionary authority or control in the management
of the plan or exercises any authority or control over the management or disposition of the plan assets;
2) renders investment advice for a fee or other compensation (direct or indirect) for any assets of the plan, or has any authority or responsibility to do so; or
3) has discretionary authority or discretionary responsibility in the administration of the plan.
Functional Fiduciary:ERISA has a functional definition of fiduciary. This means that even if you are not formally appointed, if you exert authority or control over the management of the plan or its assets, you will be a fiduciary.
Investment Fiduciary:The person or persons responsible for selecting and monitoring the investment options offered to the plan participants. Investment fiduciary activities include determining the investment categories, selecting the specific options for each of the categories, monitoring the designated investment options and selecting and monitoring the investment provider.
Investment Manager:Under ERISA, an investment manager is a fiduciary who:1) exercises discretionary authority or control in the management
of the plan or exercises any authority or control over the management or disposition of the plan assets;
2) renders investment advice for a fee or other compensation (direct or indirect) for any assets of the plan, or has any authority or responsibility to do so; or
3) has discretionary authority or discretionary responsibility in the administration of the plan.
Investment Policy Statement:A written document of the guidelines and standards used in the selection of the plan’s investment options. The investment policy statement also provides a basis for the periodic evaluation of investment option performance.
Named Fiduciary:One who is authorized in the plan document to control the operation and administration of the plan. A named fiduciary can be a person or group of people who are actually named in the plan document or who can be identified by a procedure described in the plan document.
Plan Administrator: The person or entity responsible for administering a pension plan. The plan document may designate a plan administrator by name or may describe a procedure for appointing that person(s) or committee. If an administrator is not appointed, the plan sponsor (employer) is the plan administrator. The plan administrator is not a third-party administrator who performs administrator functions for the plan and lacks discretionary authority. Instead, the plan administrator has responsibility and authority for administering the plan.
Plan Sponsor: The entity that establishes an employee benefit plan — usually an employer, an employee organization, or both.
Trustee: An entity or person who holds title to assets in trust for the benefit of participants. Trustees have exclusive authority and discretion to manage and control plan assets; however, this authority and discretion is limited to the extent that the plan states that the trustees are subject to the direction of participants or of a named fiduciary who is not a trustee, or the authority to manage, acquire or dispose of plan assets is delegated to one of more investment managers.
Why Use an Institutional Trustee?This one-page document explains the ERISA requirement that plan assets be held in trust and lists the advantages of using an institutional trustee.
ERISA 404(c) Checklist This checklist provides the requirements plan fiduciaries must meet to achieve protection under ERISA Section 404(c). The checklist may help you identify what your responsibilities are as well as how Nationwide, your plan administrator or investment professional can provide assistance with each requirement.
Q&A BrochureA Q&A brochure is also provided to enable you to communicate much of the required information to participants under section 404(c).
Model Investment Policy StatementDesigned for use with our online fiduciary management tools, the model investment policy will help you establish written guidelines to follow when selecting and evaluating plan investments and may be customized to suit the needs of the plan and its participants. The IPS was designed by an independent expert, enabling you to create a sound investment policy for your plans.
Plan Administrator: The person or entity responsible for administering a pension plan. The plan document may designate a plan administrator by name or may describe a procedure for appointing that person(s) or committee. If an administrator is not appointed, the plan sponsor (employer) is the plan administrator. The plan administrator is not a third-party administrator who performs administrator functions for the plan and lacks discretionary authority. Instead, the plan administrator has responsibility and authority for administering the plan.
Due Diligence File Checklist An important theme in ERISA regulations is procedural prudence, that is, the proper investigation and documentation of each plan fiduciary decision. Use this checklist to ensure that you are properly documenting all plan-related events and decisions and to be thoroughly prepared in the event of DOL or IRS plan audit.
Plan Fiduciary Meeting Checklist Plan fiduciaries should meet at least annually to review the plan document, plan operation and administration, and the plan’s investments. Use this checklist as a guide to assist you with covering the appropriate topics and documenting them in the meeting minutes.
Fiduciary Tools:yOUR TICkET TO FIDUCIARy bEST PRACTICES
Nationwide® provides convenient tools to assist you in meeting your fiduciary obligations. Many of the tools may be customized, with the assistance of your plan administrator, investment professional, or your plan’s legal counsel, to meet the needs of your plan.
The Nationwide® Group Retirement Series includes unregistered group fixed and variable annuities and trust pro-grams. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB a division of Nationwide Bank®. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.
Nationwide, Nationwide Bank, Nationwide Financial, the Nationwide framemark and On Your Side are federally registered service marks of Nationwide Mutual Insurance Company.
The Nationwide Financial Fiduciary Series is a service mark of Nationwide Life Insurance Company.
The Nationwide Financial Fiduciary Series is made possible by Nationwide Financial and is protected by copyright. The materials are designed for exclusive use with Nationwide products, programs and services.
The Nationwide Financial Fiduciary Series is general in nature and not intended to constitute legal or investment advice on any particular matter. Neither Nationwide nor any of its representatives provide tax, financial or legal advice. The Nationwide Financial Fiduciary Series is not for participant use.
Each fund is evaluated on the basis of six evaluation measures (fund evaluation measures) that quantify the relative operating expenses, total returns and risk-adjusted performance of a fund within its peer group. The total returns of cash equivalents and index funds are evaluated against their specific market benchmarks. The evaluation methodology is not an attempt to predict a fund’s future potential; it summarizes how well each fund has historically balanced expenses, returns and risk. The six evaluation measures together provide a systematic process to evaluate and monitor funds using generally accepted investment principles and modern portfolio theories. For each of the six evaluation measures, all funds are ranked using percentile rankings ranging from 1% (best) to 100% (worst) within their respective peer group to determine each fund’s relative performance. Percentile ranks for each evaluation measure are translated into “batting averages” for presentation purposes. Batting averages range from 0.400 (best) to 0.100 (worst). The six evaluation measures are equally weighted to compute each fund’s overall batting average within its peer group, which is used to determine each fund’s status rating. This ranking system provides for appropriate comparisons of funds with similar objectives and investment styles. The batting average is not adjusted for any plan or Nationwide charge’s or expenses (if applicable). This report must be accompanied by the Fund Evaluation and Monitoring Methodology with is available at www.fiduciaryseries.com. Detailed batting average information for each fund can also be obtained at this website.
Self-directed brokerage services are available through TD Ameritrade Corporate Services, Division of Ameritrade, Inc., a registered broker-dealer not affiliated with Nationwide.
Fund Windows investment options may require investment expertise and/or professional management advice to prudently manage. In addition, some of these investment options may have higher Nationwide asset fees than the designated investment options. Nationwide does not make recommendations or give investment advice.
The Nationwide Fiduciary Certificate of Warranty is not insured by any Federal or State government agency. Nationwide reserves the right to change or discontinue this Warranty.
PNM-0117AO.3 (08/08)
For more information about the available underlying investment options, including all charges and expenses, please consult a fund prospectus. Fund prospectuses and additional information relating to your retirement plan can be obtained by contacting your pension representative. Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. The fund prospectus contains this and other important information. Read the prospectus carefully before investing.
How to Calculate Your Fiduciary Score*Count the boxes you marked on the reverse side.
If your total was:
24-29: You seem to be on the right track. Continue to prudently
investigate, monitor and document.
20-23: You’re headed in the right direction, but need to improve in a
few areas to manage your risk.
16-19: You’ve taken a few steps toward managing your fiduciary
responsibilities, but may be exposing yourself to liability in several areas.
15 or fewer: If you do not take steps immediately to meet your obligations
you may find yourself in hot water.
Use this Success Quiz to determine where you have definite areas for improving the
management of your fiduciary duties. However, regardless of your score, it's always
a good idea to refresh your knowledge of the fiduciary guidelines and ensure you're
meeting your fiduciary responsibilities to the fullest potential. You should even
periodically review items that you were able to mark "yes", to determine if there's
more that could be done in those areas. Your score will provide a general idea of
how you're fulfilling your responsibilities, but it does not include all your obligations
under ERISA.
*To make the Quiz easy to use, each item is given the same value. However, while
all of the items are important, some can have a greater impact than others. For
example, from an investment perspective, numbers 15, 16, 17, 19 and 23 are
critical to fulfilling your responsibilities to provide the participants with a prudent
investment program.
Take advantage of the Fiduciary Handbook and Tools provided by Nationwide to
better understand how to meet your obligations as a retirement plan fiduciary.
Our goal is to provide you with the information that will help you make better
decisions and reduce your fiduciary risk.
Publication of this work has been made possible by Nationwide Financial® and is under copyright
protection. This information is general in nature and is not intended to constitute legal or investment
advice on any particular matter. This handbook and accompanying tools do not create an attorney-client
relationship. For plan sponsor use; not for participant use.
Federal income tax laws are complex and subject to change. The information in this brochure is
based on current interpretations of the law and is not guaranteed. Neither the company nor its
representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to
specifi c questions.
The Nationwide® Group Retirement Series includes unregistered group fi xed and variable annuities
and trust programs. The unregistered group fi xed and variable annuities are issued by Nationwide Life
Insurance Company. Trust programs and trust services are off ered by Nationwide Trust Company, FSB
a division of Nationwide Bank®. Nationwide Investment Services Corporation, member FINRA. In MI
only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affi liated
Companies, Home Offi ce: Columbus, OH 43215-2220.
Nationwide, Nationwide Bank, Nationwide Financial, the Nationwide framemark and On Your Side
are federally registered service marks of Nationwide Mutual Insurance Company.
© 2006-2008, Nationwide Financial Services, Inc. All rights reserved.
PNM-0118AO.3 (08/08)
Plan sponsor use only - not for use with the public
SUCCESS QUIZNATIONWIDE FINANCIAL FIDUCIARY SERIESSM
Plan Document and Design
1. Does your plan have an IRS-approved
document in place and is the document
up-to-date for recent law changes?
Consult your plan administrator for
more information
2. Has your plan been designed with the
assistance of a competent professional so
it is customized to help meet the needs of
your company?
Consult your plan administrator for more information
3. Does your plan have an up-to-date summary
plan description (SPD) and have you
distributed the SPD to participants at the
times required by law?
Consult your plan administrator for more information
4. If you have any workers (including
independent contractors or temporary
employees) at your company who are not
covered under the plan, does your plan
document specifically exclude them from
participation?
Consult your plan administrator for more information
5. If you, your family or your company have
ownership rights in any other businesses,
have you received advice concerning the
possible consequences to your plan?
Consult your plan administrator for more information
Plan Fiduciaries
6. Are the plan fiduciaries (e.g., plan committee,
trustees, officers and owners) aware they are
fiduciaries and have they been informed of
their responsibilities under ERISA?
See Fiduciary Handbook Chapters 2 and 3
7. Have the plan’s investment fiduciaries been
appointed in accordance with the plan and
trust documents?
See Fiduciary Handbook Chapter 2
8. Do the plan committee and
other fiduciaries meet at least annually?
See Fiduciary Handbook Chapter 2
9. Is a due diligence file maintained with
the notes, minutes, agenda, background
information and supporting documentation
for plan and investment decisions made at
the fiduciary meetings?
See Fiduciary Handbook Chapter 2
10. Have the plan fiduciaries reviewed the costs
associated with the plan? Do they understand
the services provided by the following various
parties and find their value reasonable
and appropriate?
(a) Product provider
(b) Investment professional
(c) Mutual fund companies(regarding the
underlying mutual fund expenses)
(d) Plan administrator
(e) Other advisors and consultants, as utilized
See Fiduciary Handbook Chapter 5, Fiduciary
Tools: Model Investment Policy Statement
11. Do the plan fiduciaries ensure the plan
collects and invests the employee deferrals
as timely as possible?
See Fiduciary Handbook Chapters 1 & 7
12. Is your plan covered by a fidelity bond of at
least 10% of plan assets (up to $500,000) and
does the bond cover plan fiduciaries as well as
other employees or third parties that handle
or have access to plan assets?
See Fiduciary Handbook Chapter 7
13. Are the plan fiduciaries covered by fiduciary
liability insurance to protect business and
personal assets?
See Fiduciary Handbook Chapter 7
Plan Investments
14. Does your plan have a written investment
policy statement?
See Fiduciary Handbook Chapter 4, Fiduciary Tools:
Model Investment Policy Statement
15. Does your plan have investments in at least
the following investment categories so that
participants may invest in a “broad range” of
funds?
(a) Stable value investment, guaranteed
investment contract (GIC) or money
market fund;
(b) U.S. government or corporate bonds;
(c) Large-cap U.S. equities;
(d) Mid/small-cap U.S. equities;
(e) International or global equities
See Fiduciary Handbook Chapter 4
16. Have the plan fiduciaries reviewed the plan’s
investments in the last 12 months? Was each
investment compared to its peer group and
the appropriate index for performance over
periods of 1,3,5, and 10 years?
See Fiduciary Tools: Model Investment
Policy Statement
17. Was the review conducted in accordance with
the investment policy statement?
See Fiduciary Handbook Chapter 4
18. In order to properly review the investment,
did your investment provider give you
information on the proper peer group and
indices, historical performance expenses,
volatility and other significant factors? If
not, did you accumulate that information
for review?
See Fiduciary Tools: Model Investment
Policy Statement
19. Was the review documented in a plan
fiduciary/investment committee due
diligence file, including the materials
reviewed by the committee and any other
notes or analysis used to determine whether
to retain, add or remove investment options?
See Fiduciary Tools: Model Investment
Policy Statement
20. Do you have a procedure (and acted upon it,
when necessary) for replacing an investment
within the plan, or placing it on “watch,”
because of its under performance or other
failure to satisfy the investment policy
statement or ERISA’s requirements?
See Fiduciary Tools: Model Investment
Policy Statement
21. Does your plan minimize overlap of similar
stock holdings among investment options
by offering options from more than one
investment management company?
See Fiduciary Handbook Chapter 4
22. Are you not limited in your ability to select
superior funds because your investment
provider limits the number of funds from
other providers?
See Fiduciary Handbook Chapter 4
23. Does your plan provide employee enrollment
programs explaining the importance of
participation in the plan, investing for
retirement, and investment basics?
See Fiduciary Handbook Chapter 4
24. Does your plan provide ongoing employee
investment education materials and/
or programs?
See Fiduciary Handbook Chapter 4
25. Does your plan provide lifestyle funds
target maturity or asset allocation models
for employees who lack the investment
knowledge to evaluate and select individual
investment options and allocate their
accounts among them?
See Fiduciary Handbook Chapter 4 ERISA Section
404(c) Requirements
26. If your plan intends to obtain the fiduciary
protections available under ERISA Section
404(c), does the SPD or a written notice to
participants provide the following disclosures:
(a) Participants will be able to direct
their investments;
(b) The plan intends to comply with 404(c) and
plan fiduciaries may be relieved of liability
for losses; and
(c) The name, address and phone number
of the 404(c) plan fiduciary responsible
for providing information upon request and
for receiving and complying with participant
investment instructions.
See Fiduciary Handbook Chapter 5, Fiduciary
Tools: 404(c) Checklist and Q&A Brochure
27. Have all participants received information
about each of the options available under
the plan?
See Fiduciary Handbook Chapter 5, Fiduciary
Tools: 404(c) Checklist and Q&A Brochure
28. Have all participants received
or had access to information regarding
investment concepts (including explanation
of the types of investments, risk/return
applicable to each, impact of time horizon
on investment decisions, etc.), in the last
12 months?
See Fiduciary Handbook Chapter 5, Fiduciary
Tools: 404(c) Checklist and Q&A Brochure
29. Does the Form 5500 indicate your
plan intends to comply with ERISA
404(c) requirements?
See Fiduciary Handbook Chapter 5, Fiduciary
Tools: 404(c) Checklist and Q&A Brochure
Total number ofboxes marked:
This Fiduciary Success Quiz will
assist you in determining the
extent to which you are meeting
the requirements of the Employee
Retirement Income Security
Act (ERISA) and your fiduciary
obligations. Although this quiz
is not a complete list of your
fiduciary responsibilities, it does
include many ERISA requirements,
as well as items considered
fiduciary best practices for 401(k)
plans and other participant-
directed plans.
Plan Name: Date:Please check the boxes below if your answer is “yes”
s e e r e v e r s e s i d e
mittee,
ey are
d of
een
and
?
market fund;
(b) U.S. government or corporate bonds;
(c) Large-cap U.S. equities;
(d) Mid/small-cap U.S. equities;
(e) International or global equities
See Fiduciary Handbook Chapter 4
16. Have the plan fiduciaries reviewed the plan’s
investments in the last 12 months? Was each
investment compared to its peer group and
the appropriate index for performance over
periods of 1,3,5, and 10 years?
See Fiduciary Tools: Model Investment
Policy Statement Total number ofboxes marked:
s e e r e v e r s e s i d e
The Model Investment Policy Statement should be completed with the assistance of a competent
investment professional. The model is designed to reflect the investments and services offered by
Nationwide Financial through The BEST of AMERICA® Group Pension Series and, thus, is not
drafted for the specific needs or fiduciary decisions of any plan or plan sponsor. As a result, this
is only a sample, and it is the responsibility of the plan fiduciary to adopt a policy that meets the
needs of the plan and its participants. This Model should be customized by the responsible plan
fiduciaries to reflect the decisions made by the fiduciaries concerning the investment structure
and the investment options for the plan and its participants.
Publication of this work has been made possible by Nationwide Financial and is under copyright protection. This
information is general in nature and is not intended to constitute legal or investment advice on any particular
matter. This handbook and accompanying tools do not create an attorney-client relationship. These materials are
designed exclusively for use with a Nationwide retirement plan product or program. Not for participant use.
i
___________________________
401(k) Plan
Investment Policy Statement
Table of Contents
I. Overview and Purpose ....................................................................................................................... 1
A. Overview of Investment Policy
B. Purpose of Investment Policy
II. Investment Structure .......................................................................................................................... 3
A. Overview of Structure
B. Designated Funds for Broad Range
C. Additional Designated Funds
D. Investment Education and Models for Participant Direction
E. Asset Allocation Funds
III. Standards for Selection of Portfolio .................................................................................................. 5
A. Overview of Portfolio and Performance Standards
B. Selection of Funds
C. Investment of Accounts Without Participant Direction
IV. Monitoring of Investment Alternatives.............................................................................................. 8
A. Overview of Monitoring
B. Monitoring of Designated Funds
C. Monitoring of Asset Allocation Funds
V. Other Provisions ................................................................................................................................ 10
A. Proxy Voting
B. Investment Fiduciary Discretion
Exhibit A: Designated Funds and Benchmarks ................................................................................. 11
Exhibit B: Asset Allocation Models.................................................................................................. 12
Exhibit C: Fund Evaluation Measures............................................................................................... 13
Exhibit D: Fund Warning Signs ........................................................................................................ 14
Exhibit E: Fund Status ....................................................................................................................... 15
ii
1
_____________________________
401(k) Plan
Investment Policy Statement
I. Overview and Purpose
A. Overview of Investment Policy The ____________________ 401(k) Profit Sharing and Savings Plan (“401(k) Plan” or
“Plan”) is a retirement plan established by __________________(“Plan Sponsor”) for the benefit of the participating employees and their beneficiaries. The Plan is qualified under Section 401(a) of the Internal Revenue Code (“IRC”) and is also a 401(k) plan that permits voluntary pre-tax deferrals by participants from their pay.
The Plan offers eligible employees a convenient, tax-deferred and flexible method to save
for retirement. At the Plan Sponsor’s discretion, employer-matching contributions may be made.
The Plan permits participants to direct the investment of their accounts.
The responsibility for the amount of retirement benefits belongs in part to each
participant. Eligible employees are responsible for:
• determining how much to contribute as a deferral of their pay, up to the allowable limit each year;
• deciding whether to use the Plan’s withdrawal and loan provisions; and
• allocating their monies among the investment alternatives offered by the Plan. The provisions of the Plan document govern the investment structure of the Plan, the
identification of the Plan fiduciaries, and the authority and responsibilities of those fiduciaries. The Federal law governing the operation of retirement plans—the “Employee Retirement Income Security Act” or “ERISA”—requires that fiduciaries follow the terms of the Plan (unless the Plan’s provisions conflict with ERISA). Accordingly, the provisions of the Plan document govern the selection of Plan fiduciaries and the allocation and delegation of duties among the fiduciaries.
2
The ultimate authority to establish the investment structure, to prepare and amend this Investment Policy Statement and to select and review the investment alternatives resides with the Plan Sponsor. The Plan Sponsor may retain those functions or, if authorized by the Plan document, may appoint specific officers or a committee to fulfill those functions. The Plan Sponsor, the designated officers or the committee, as the case may be, is designated as the Investment Fiduciary for the plan and shall have the responsibilities and authority provided in this Investment Policy Statement.
B. Purpose of Investment Policy The purpose of this Investment Policy Statement (“IPS”) is to establish the investment
structure for the Plan and to adopt a set of guidelines for the selection of the Plan’s investment alternatives and for the periodic evaluation, or monitoring, of the investment alternatives. These guidelines do not constitute a contract or a statement of mandatory requirements, but are instead an explanation of the general principles established for the selection and retention of the investment alternatives. The Investment Fiduciary will determine the weighting to be given to each of these principles and may consider factors in addition to those described in these guidelines.
This IPS explains how the Investment Fiduciary will discharge its obligations to:
• prudently select investment alternatives;
• periodically monitor and evaluate those alternatives; and
• based on such periodic evaluations, determine whether or not the alternatives will continue to be made available to the participants.
These guidelines will be reviewed informally at appropriate intervals and will be reviewed on a formal basis as circumstances warrant. The alternatives, along with their benchmarks, descriptions and performance evaluation measures, may be changed from time to time; so this information, and other decisions which may be periodically reviewed and changed, are attached as exhibits, which can be amended without modifying the principles of the IPS.
` This IPS is intended to be consistent with the criteria for an “ERISA Section 404(c) Plan”
as described in Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the regulations thereunder. To comply with ERISA Section 404(c), the Plan must satisfy the conditions in the regulations under ERISA Section 404(c), including the designation of a broad range of investment alternatives that permit participants to make independent choices regarding the manner in which the assets in their individual accounts are invested, and which afford the participants the opportunity to materially affect the potential returns on their accounts and the degree of risk involved.
3
II. Investment Structure
A. Overview of Structure
The investment structure of the Plan will allow participants to create investment portfolios by allocating their accounts among a group of prudently selected and monitored investment alternatives that together constitute a broad range of asset classes and investment styles. From time to time the Plan’s investment structure will be reviewed by the Investment Fiduciary. The Plan’s designated investment alternatives shall be look-through investment vehicles as that term is defined in the regulations under ERISA Section 404(c) (the “Funds”), although other types of investment alternatives may also be offered.
In addition, the structure will include asset allocation funds, which will enable
participants to direct the investment of their accounts into a single diversified vehicle designed to be consistent with their time horizons and risk tolerances.
B. Designated Funds for Broad Range In order to offer a broad range of investment alternatives so that each participant and
beneficiary has a reasonable opportunity to:
• materially affect both the potential return and degree of risk relating to his or her accounts,
• choose from diversified investment alternatives, and
• diversify his or her investment to minimize the risk of large losses, the Plan will offer a selection of open-ended registered investment companies (i.e.,
mutual funds) or similar investment vehicles, each of which consists of internally diversified portfolios within their asset classes.
In the process of selecting the funds to be used as the Plan’s investment alternatives, the
Investment Fiduciary will first select the asset classes and investment styles (“asset classes”) intended to satisfy the broad range requirement. At a minimum, the Plan’s investment alternatives should provide participants the opportunity to invest in vehicles designed to maintain a stable principal value (i.e., cash equivalents), vehicles designed to primarily target domestic bonds, vehicles designed to primarily target domestic equities, and vehicles designed to primarily target international equities.
Once the asset classes are determined, the Investment Fiduciary will, utilizing the
procedures described in section III of this IPS, identify one or more funds to represent each of those asset classes.
The asset classes and the funds selected as the Designated Funds, along with their
benchmarks, are identified on Exhibit A.
4
C. Additional Designated Funds The Investment Fiduciary may also decide to offer funds in addition to those selections
for the broad range requirements. These funds are also known as Designated Funds, and they may include, but are not limited to, those that target a specific sector or sectors, country or region, whose managers take greater than normal risk, or whose managers tactically reallocate asset classes within their portfolio. These funds may be added to provide additional investment alternatives and accommodate participant interest.
In selecting these additional Designated Funds, the Investment Fiduciary will consider factors such as: the nature of the participant workforce; investment education, communication and advice programs; the needs and preferences of the participating employees and/or of certain groups of employees.
The additional Designated Funds are also listed on Exhibit A.
D. Investment Education and Models for Participant Direction
The plan will provide participants with general financial and investment information, including asset allocation models to educate and assist them in making their allocation decisions. Participants will be provided with a questionnaire that measures their individual risk tolerance and investment time horizon and may select a model portfolio -based on the results of that questionnaire. Participants may then select from among the funds offered by the Plan to build their own asset allocation portfolio consistent with their individual risk tolerance and investment time horizon. The asset allocation models are described in Exhibit B.
E. Asset Allocation Funds To enable participants to benefit from the asset allocation expertise of investment
professionals, the Plan will provide participants with five asset allocation funds. Those funds, and the purpose of each, are:
• Conservative: This fund seeks to maximize total investment return through income, and secondarily through long-term growth of capital.
• Moderately Conservative: The fund seeks to maximize total investment return through income and secondarily through long-term growth of capital.
• Moderate: This fund seeks to maximize total investment return through growth of capital and income.
• Moderately Aggressive: This fund seeks to maximize total investment return primarily through growth of capital, but also through income.
• Aggressive: This fund seeks to maximize total investment return through growth
of capital.
The purpose of the asset allocation funds is to provide participants with investment options professionally designed to take into account risk tolerances and investment time horizons. Additionally, the asset allocation funds will automatically be re-balanced periodically to maintain the strategic asset allocation. The asset allocation funds are described on Exhibit B.
5
III. Standards for Selection of Portfolio
A. Overview of Portfolio and Performance Standards
The Investment Fiduciary will engage in a process to prudently select, monitor and, where appropriate, remove Designated Funds. The Funds will be selected from among a universe of investment alternatives such that there is reasonable assurance that an adequate number of funds have been reviewed and, therefore, that the Designated Funds are representative of superior investment alternatives available to the Plan.
The Designated Funds will be regularly monitored and, where appropriate, will be
removed. If a Designated Fund is removed, it will normally be replaced by a similar Designated Fund. However, the Investment Fiduciary may, in its discretion, determine that a removed Fund will not be replaced.
The following are the guidelines for the selection, monitoring, retention and removal of Funds.
B. Selection of Funds
1. Selection of Designated Funds
For the selection of Designated Funds (other than cash equivalents and index funds), the Investment Fiduciary will evaluate a reasonable universe of mutual funds using the guidelines set forth in this section of the IPS. The Investment Fiduciary will evaluate the total returns of cash equivalents and index funds against their specific market benchmarks.
a. Evaluation Guidelines. The Investment Fiduciary will initially create a
peer group of funds for each targeted asset class consisting of mutual funds or other diversified investments (“funds”) with similar investment styles, then screen the universe of funds based on the following evaluation guidelines:
i. Operating Expenses. The expense ratio of the funds will be evaluated
to consider the reasonableness and effect of the costs, with preference being given to low-cost funds unless the additional cost can be justified by other factors.
ii. Sharpe Ratio. The investment performance of the funds, relative to the risk taken by the managers, will be evaluated.
iii. Trailing performance. The investment performance of the funds will be evaluated using weighted trailing annualized total returns.
iv. Rolling Information Ratio. The consistency of risk-adjusted investment performance of the funds, relative to their benchmarks, will be evaluated.
6
v. Rolling Performance Consistency. The total returns of the funds will be evaluated using rolling periods to minimize the end period dominance of recent performance history and to provide more comprehensive performance data to evaluate.
vi. Rolling Selection Return. Each fund’s returns will be compared to the market benchmarks of various investment styles to determine the custom portfolio benchmark that best explains the pattern and consistency of each Fund’s returns. The Investment Fiduciary will then compare each fund’s performance to its custom portfolio benchmark to determine the value added or subtracted by its manager.
The specific evaluation guidelines (“fund evaluation measures”) applied to each fund are listed on Exhibit C.
b. Fund Warning Signs. As a secondary screening process in selecting the fund, the Investment Fiduciary will also evaluate certain factors, called “warning signs.” Warning signs could be an indication of a fund’s inability to consistently outperform its peers in the future and will be carefully considered by the Investment Fiduciary. When selecting between two funds that have similar results under the evaluation guidelines (listed above), preference will normally be given to the fund with fewer warning signs. The Investment Fiduciary will evaluate warning signs such as the following:
i. High operating expenses ii. High individual holding concentration iii. High economic sector concentration iv. High performance volatility v. High portfolio turnover vi. Low style purity vii. High duration bet viii. Low credit quality average ix. Low manager tenure x. Low asset base
The specific warning signs applied to each fund are listed on Exhibit D.
c. Fund selection. For each peer group, the Investment Fiduciary will review
a minimum of 2 funds which best satisfy the evaluation guidelines, with the Investment Fiduciary determining the relative weighting of any warning signs or other relevant considerations. The Investment Fiduciary will then select, from those finalists, one or more Designated Funds that the Investment Fiduciary determines to be most suitable for the Plan and the participants to provide a broad range of investment alternatives to the participants.
7
2. Selection of Additional Designated Funds
For the selection of additional Designated Funds, the Investment Fiduciary will use the same procedures and guidelines used for the selection of funds selected to satisfy the broad range investment options above, with the following exceptions:
a. The Investment Fiduciary normally will not consider the following warning
signs as grounds for elimination when selecting additional Designated Funds:
i. Lack of internal diversification. ii. Lack of investment style purity and consistency. iii. Funds with highly volatile past performance relative to their peer
group. iv. Funds with high portfolio turnover relative to their peer group. v. Funds with insufficient assets or portfolio management experience
to adequately handle large cash flows and/or significant increases in fund assets.
b. Other than those exceptions, the Investment Fiduciary will use the same
evaluation guidelines and fund selection criteria for reducing the universe of funds to a minimum of 2 alternatives within each selected peer group and for selecting among those alternatives.
C. Investment of Accounts Without Participant Direction
If a participant fails to provide the Plan with an investment direction, the Investment
Fiduciary will direct the investment of the participant’s account, until such time as the participant provides his or her first affirmative direction. In consideration of the risk tolerances, time horizons and investment needs of the average participant, and of the common investment allocations by fiduciaries of large retirement plans, accounts for participants who do not affirmatively select their investment alternatives will be invested to the moderate asset allocation portfolio or another appropriately diversified fund allocation. Such monies will continue to be invested in the moderate asset allocation portfolio, or another appropriately diversified fund allocation, until and unless the Investment Fiduciary decides to change this decision for all participants who have not provided investment directions or until the Investment Fiduciary determines that a different investment selection is appropriate for a participant. In making these decisions, the Investment Fiduciary is not responsible for inquiring into the specific goals or needs of a participant.
8
IV. Monitoring of Investment Alternatives
A. Overview of Monitoring The Investment Fiduciary will periodically monitor and evaluate the specific investment
alternatives to determine if they continue to be suitable and appropriate for the Plan and the participants.
B. Monitoring of Designated Funds 1. Procedures for Review of Investment Information. The Investment Fiduciary will
obtain and review the following information, as well as any other information that the Investment Fiduciary finds valuable in fulfilling its responsibilities:
The Investment Fiduciary will periodically obtain reports for all Designated Funds which include a full and comprehensive review and evaluation of each Fund with respect to the portfolio and performance standards in this IPS. The Investment Fiduciary will meet at appropriate intervals to review this Investment Policy Statement, the investment structure and the investment alternatives offered by the Plan. While it is contemplated that the Investment Fiduciary will meet annually, that is a guideline and not a requirement.
2. To continue to be offered to the participants, a Fund will be expected to maintain an overall rating (“fund status”) of above average, based on the evaluation guidelines (fund evaluation measures) in the section of this IPS on Standards for Selection of Portfolio. However, if a Fund is rated below average for one or two quarters, that normally will not be cause for the removal of the Fund. If a Fund is rated below average for three (3) or more quarters out of the past four (4) quarters as of the annual review date, it will normally, but not necessarily, be removed by the Investment Fiduciary. The Investment Fiduciary may keep the Fund as an investment alternative if the Investment Fiduciary determines in its discretion that it is prudent to do so. If a fund is removed, the Investment Fiduciary will normally replace the Fund with another similar fund, using the procedures in this IPS for the selection of a fund. However, the Investment Fiduciary may, in its discretion, determine that a removed Fund will not be replaced.
The criteria for determining a Fund’s overall rating (“fund status”) are listed on Exhibit E.
3. If a Fund is removed for future contributions, the following procedures will generally be followed by the Investment Fiduciary:
a. The monies will ordinarily be transferred to the replacement Designated Fund, if one is selected by the Investment Fiduciary. Alternatively, the Investment Fiduciary may inform the participants of its intention to remove
9
the Fund and permit the participants to direct the transfer of their monies from the Fund being removed. In that case, any monies remaining in that Fund at the time of its removal will be transferred by the Investment Fiduciary to the replacement Fund, if one is selected. Otherwise, the monies will be transferred to the most appropriate investment alternative, as determined by the Investment Fiduciary.
b. The Investment Fiduciary may implement reasonable procedures, including
blackout periods, to accomplish these changes. c. The Investment Fiduciary may decide to preclude the investment of
additional participant money in a Fund, but not remove the Fund as an investment alternative in the Plan to the extent participants are already invested in that Fund (that is, investment in that Fund may be “frozen”). For example, the Investment Fiduciary may determine that, while another Fund better serves the needs of the Plan and its participants, the frozen Fund remains a prudent and suitable alternative for the participants who are invested in it, and therefore restrict additional investments in that Fund for the administrative purposes of the Plan.
C. Monitoring of Asset Allocation Funds
The Investment Fiduciary will periodically obtain and review information necessary to determine whether the asset allocation funds are performing in a manner consistent with the objectives described in section II, Investment Structure, of this IPS.
10
V. Other Provisions
A. Proxy Voting
The Investment Fiduciary will determine the proper voting of proxy proposals related to the Funds. Because the Funds are prudently selected and monitored, and underperforming Funds are removed, the Investment Fiduciary will usually vote in support of the management proposals in the proxies. However, the Investment Fiduciary will review the proxy statements for proposals which could be detrimental to the interests of the Plan and the participants and will vote the Plan’s shares against those proposals. For example, the Investment Fiduciary will generally vote against proposals which:
1. Increase the expenses of the Funds. 2. Increase the risk of the investments in the Funds. 3. For Designated Funds, would result in a change to an investment style
inconsistent with the objective and targeted asset class for which the Fund was chosen.
While the Investment Fiduciary is responsible for deciding on how to vote the Fund
shares, it may delegate the ministerial tasks of implementing its voting directions and submitting the votes.
B. Investment Fiduciary Discretion The Investment Fiduciary has the sole and absolute discretion to interpret, implement and
amend this Investment Policy Statement, including any decisions to select, remove and replace investment alternatives for participant direction.
11
Exhibit A: Designated Funds and Benchmarks
As of the effective date of this Investment Policy Statement (IPS), the Designated Funds and
their respective benchmarks are:
Asset Class
Fund Name
Market Index
Peer Group
Cash
SB 3-month T-Bill Index
S&P Money Market Taxable
Bonds
LB Aggregate Bond Index
S&P Fixed Income General Intermediate
Large-Cap Stocks
S&P 500, S&P/ BARRA 500 Value or S&P/ BARRA 500 Growth Index, depending on the fund selected
S&P Equity Large-Cap Value or Growth, depending on the fund selected
Mid-Cap Stocks
Russell Mid-Cap, Russell Mid-Cap Value, or Russell Mid-Cap Growth Index depending on the fund selected.
S&P Mid-Cap Value or Growth, depending on the fund selected
Small-Cap Stocks
Russell 2000, Russell 2000 Value or Russell 2000 Growth Index, depending on the fund selected
S&P Equity Small-Cap Value or Growth, depending on the fund selected
International Developed Equity
MSCI EAFE Index or MSCI Emerging Markets Free Index, depending on the fund selected
S&P Equity International or S&P Equity Emerging Markets, depending on the fund selected
12
Exhibit B: Asset Allocation Models
Asset allocation models will be offered to participants as a part of the Plan’s investment education program. The asset allocation models will assist participants in allocating the investment of their accounts at the appropriate point on the risk/reward spectrum, as determined by each participant. A risk tolerance questionnaire designed for use with the models has been adopted by the Investment Fiduciary. Based upon an analysis of the completed risk tolerance questionnaire and other relevant criteria, the participant will be responsible for selecting an appropriate asset allocation model. The asset allocation models are as follows: Strategic
Asset Class
Conservative Moderately
Conservative
Moderate Moderately Aggressive
Aggressive
Cash 15 10 5
Short-Term Bonds
25 15 10 5
U.S. Bonds 40 35 25 15 5
U.S. Large-Cap Stocks
10 20 30 35 40
U.S. Mid Cap Stocks
5 10 10 15 15
U.S. Small-Cap Stocks
5 5 10
International Stocks
5 10 15 25 30
The asset allocation models are designed to assist participants in making strategic asset allocation decisions, based on the participant’s investment time horizon and risk tolerance. [COMMENT: The asset allocation models are structured to consider and include the six asset classes listed above. To enable participants to obtain full advantage of the models and the related investment education services, the Investment Fiduciary should include at least one fund from each of the six asset classes.] In addition to asset allocation models in the investment education program, the Plan offers asset allocation funds to the participants. Similar to the models, the asset allocation funds have been strategically designed to afford participants with the opportunity to select an investment that matches their risk-and-reward profile, based on a questionnaire completed by the participant. However, this alternative enables the participant to select an investment option (that is, the asset allocation fund), rather than selecting individual funds to implement the model approach. Further, the asset allocation funds are periodically automatically re-balanced (while, in the model, the responsibility for re-balancing remains with the participants). The asset allocation funds consist of the same asset classes and the same percentages described earlier in this Exhibit. The underlying fund within each asset class is an index fund for a common benchmark index for that asset class.
13
Exhibit C: Fund Evaluation Measures
Each fund is evaluated on the basis of six evaluation measures (fund evaluation measures) that quantify the relative operating expenses, total returns and risk-adjusted performance of a fund within its peer group. The total returns of cash equivalents and index funds are evaluated against their specific market benchmarks. The evaluation methodology is not an attempt to predict a fund’s future potential; it summarizes how well each fund has historically balanced expenses, returns and risk. The six evaluation measures together provide a systematic process to evaluate and monitor funds using generally accepted investment principles and modern portfolio theories. For each of the six evaluation measures, all funds are ranked using percentile rankings ranging from 1% (best) to 100% (worst) within their respective peer group to determine each fund’s relative performance. Percentile ranks for each evaluation measure are translated into “batting averages” for presentation purposes. Batting averages range from 0.400 (best) to 0.100 (worst). The six evaluation measures are equally weighted to compute each fund’s overall batting average within its peer group, which is used to determine each fund’s status rating. This ranking system provides for appropriate comparisons of funds with similar objectives and investment styles. The fund evaluation measures are as follows:
Short-term Measures
• Expense Ratio (current) peer group ranking
• Sharpe Ratio (trailing 36-month) peer group ranking
Intermediate-term Measures
• Trailing Performance (3-year, 5-year and 10-year annualized total returns; weighted) peer group ranking
• Information Ratio (36 rolling 36-month information ratios) peer group ranking
Long-term Measures
• Performance Consistency (rolling 12-month total returns for the past 10 years) peer group ranking
• Style Selection Return (rolling 36-month style selection returns for the past 10 years) peer group ranking
14
Exhibit D: Fund Warning Signs
The following fund screening criteria (fund warning signs) are evaluated in order to highlight exposure to potential risks that could possibly make the fund an unsuitable investment alternative. These criteria are evaluated and monitored to reveal potential risks and provide relevant information to assist the Investment Fiduciary in making prudent investment decisions.
• High operating expenses (equity, bond, hybrid): Rank each fund within its peer group on based on recent operating expense data. Flag funds that have an operating expense ratio above the peer group average.
• High individual holding concentration (equity, hybrid): Flag equity and hybrid funds with more than 10% of assets in any one stock, OR more than 50% of assets in the top ten holdings (excluding real estate funds), OR less than 40 holdings (excluding real estate funds).
• High economic sector concentration (equity, hybrid): Flag equity and hybrid funds with more than the greater of 25% of assets or 1.5 times the peer group
average sector weight in any one economic sector. The economic sector concentration flag applies only to the equity portion of a hybrid fund. Flag economic sector funds with less than 75% of assets invested in the targeted economic sector.
• High performance volatility (equity, bond, hybrid): Rank each fund within its peer group by 3-year average annualized standard deviation of monthly returns. Flag the funds in each peer group with a standard deviation of returns in the highest 10% of their peer
group.
• High portfolio turnover (equity): Rank each equity fund within its peer group by portfolio turnover. Flag the funds in each equity peer group with portfolio turnover in the highest 10% of their peer group.
• Low style purity (equity): Rank each equity fund within its peer group by correlation with the market benchmark assigned to the fund’s S&P style classification. Regress each equity fund’s monthly returns against the monthly returns of its corresponding market benchmark using a single 36-month trailing period computation. Flag equity funds within the lowest 10% of R-squared for each peer group. The market benchmarks assigned to each peer group are identified in Exhibit A.
• High duration bet (bond, hybrid): Flag bond and hybrid funds with a 3-year average duration 1.5 or more years above or below the 3-year
average duration of the peer group. The high duration bet flag applies only to the bond portion of a hybrid fund.
• Low credit quality average (bond, hybrid): Flag bond and hybrid funds with a current average credit rating below single A (S&P ratings).
• Low manager tenure (equity, bond, hybrid): Flag funds whose portfolio managers have less than one year of tenure managing the fund.
• Low asset base (equity, bond, hybrid): Flag funds with less than $50 million in assets.
15
Exhibit E: Fund Status
Each fund with three or more years of performance history is evaluated and monitored on a quarterly basis and assigned an overall fund status rating according to the following criteria:
Above-Average Quality Fund:
• Equity, bond and hybrid funds: Overall fund batting average of 0.250 or higher
• Index funds: 5-year tracking error of 1.00% or lower (use 3 years if fund has less than 5 years of performance history).
• Cash equivalents: Expense ratio less than or equal to 0.80%.
Below-Average Quality Fund:
• Equity, bond and hybrid funds: Overall fund batting average less than 0.250
• Index funds: 5-year tracking error greater than 1.00% (use 3 years if fund has less than 5 years of performance history)
• Cash equivalents: Expense ratio greater than 0.80%.
Note: Overall fund batting average is based on the six individual fund evaluation measures listed in Exhibit C (weighted equally).
ERISA 404(c) Requirements Checklist
Nationwide®, your plan administrator and your investment professional offer plan fiduciaries a variety of services and materials aimed at helping your retirement plan comply with the requirements of Section 404(c) of ERISA. The checklist may help you identify what your responsibilities are as well as who can provide assistance with each requirement. This checklist highlights issues that you need to address in your role as a plan fiduciary. To make this a useful and practical tool, however, some items are stated in abbreviated form. As a result, this checklist should not be viewed as legal advice and is not a complete list of all your responsibilities. Please consult with your company’s or the plan’s legal counsel for advice regarding compliance with the law and your role as a fiduciary.
For more information about the available underlying investment options, including all charges and expenses, please consult a fund prospectus. Fund prospectuses and additional information relating to your retirement plan can be obtained by contacting your pension representative. Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. The fund prospectus contains this and other important information. Read the prospectus carefully before investing.
Requirements How providers can assist you with complying
Key Elements What Nationwide® provides to assist you with complying
InvestmentProfessional
Retirement PlanAdministrator
Plan Sponsor Actions
Offer a broad range of investment alternatives – at least three investment alternatives that are diversified and provide different risk and returncharacteristics (core investment options).*
Nationwide’s programs and products offer a wide range of investment options from dozens of fund managers with varying risk levels and management styles.
Provide information such as fund performance and prospectuses to assist with fund selection and monitoring.
Select a broad range of investments and monitor them at least annually. Seeking protection under ERISA 404(c) does not eliminate the duty to prudently select and monitor the plan’s investments.
Allow participants to elect to transfer funds between core investment options at least quarterly or with a frequency which is appropriate relative to the investment’s volatility.
Participants can move their money as often as daily via a toll-free voice response unit and the Internet.
Ensures that the plan document permits the participants to direct the investment of their own accounts.
Required Participant Notification
Either via a written letter or the Summary Plan Description (SPD), provide the following notification to participants:* Participants will be able to direct investments* The plan is intended to comply with ERISA 404(c), and the fiduciaries of the plan may be relieved of liability for losses, and* The name, address and phone number of the 404(c) plan fiduciary responsible for providing information upon request and for receiving and complying with participant investment instructions.
Nationwide provides a sample 404(c) Questions and Answers (Q&A) brochure that you may use to notify participants.
Distributes the Q&A brochure to participants in enrollment meetings and/or assists with communication via the SPD. The plan adminstrator or the plan’s legal counsel may modify and complete the Q&A brochure.
Determine who should serve as the 404(c) plan fiduciary and provide this information to your plan administrator. Assist your plan administrator with the distribution of the Q&A brochure. Remember to provide the Q&A brochure and the SPD to new employees when they become eligible to participate in the plan. Your plan administrator may assist you with providing this information to new participants in the plan.
Provide a description of investment alternatives available under the plan, including a general description of the investment objectives and risk/ return characteristics of each alternative.
Investment information and fund performances are available to participants via the Internet. Other information is available upon request.
Provides information at enrollments and other client meetings via the Q&A brochure, the Investment Profiles and performance summary.
Assists with the completion and distribution of the Q&A brochure, the Investment Profiles and performance summary.
Remember to provide the Q&A brochure and information on investment alternatives to new plan participants.
Provide a description of all charges and fees taken from participant accounts.
Nationwide asset fees and fund-level fee information are provided with the Investment Profiles, performance summary and investment information available via the Internet.
Provides information to participants using the Q&A brochure, the Investment Profiles, and performance summary.
Remember to provide the Q&A brochure, Investment Profiles and performance summary to new plan participants.
Explain to participants how they can provide investment instructions and any applicable limitations.
Provides information to participants using the Q&A brochure.
Explain to participants that they have a right to obtain written confirmation of their investment instructions.
Participants may print confirmations for transactions processed via the Internet. Other confirmations are available upon request.
Provides information to participants using the Q&A brochure. Provides written confirmations upon request.
Requirements How providers can assist you with complying
Key Elements What Nationwide® provides to assist you with complying
InvestmentProfessional
Retirement PlanAdministrator
Plan Sponsor Actions
Required Participant Notification
Explain to participants that they have a right to obtain written confirmation of their investment instructions.
Participants may print confirmations for transactions processed via the Internet. Other confirmations areavailable upon request.
Provides information to participants using the Q&A brochure. Provides written confirmations upon request.
Identify designated investment managers, if any. Provides information to participants using the Q&A brochure and Investment Profiles.
Provide a copy of the most recent prospectus provided to the plan, to be given immediately before or after a participant’s initial investmentin a mutual fund.
Nationwide makes prospectuses available to plan fiduciary for distribution.
Assists with obtaining and distributingprospectuses.
Assists with obtaining and distributing prospectuses.
Assist with distribution of prospectuses.
If company stock is an investment option, provide a written description of the procedures for maintaining confidentiality of purchase and sale information of the stock and procedures for exercising voting, tender and other shareholder rights.
Provide information to participants, if applicable. Assistance of legal counsel should be sought to determine the appropriate written description and procedures when employer stock is offered in the plan.
Participants May Obtain Upon Request
Annual operating expenses that apply to each investment option. Copies of any prospectuses, financial statements and reports provided to the plan.
A list of the investment portfolio holdings or the name of the insurance company issuing groupannuity contracts.
Information concerning the value of shares or units in designated investment alternatives.
Available upon request.
Available upon request or via the Internet.
Available upon request.
Available upon request.
Available upon request.
Available upon request.
Available upon request.
Available upon request.
Available upon request.
Available upon request.
Available upon request.
Available upon request.
Contact your plan administrator or investment professional to obtainthe requested information and then provide it to participants.
* Although only the plan fiduciaries or investment advisor may decide whether an investment option is a core investment, Nationwide believes that the Retirement AdvisorSM Indexed Fixed option will qualify as a core option (unless you have a competing fixed investment offered). Because of the 20% restriction on exchanges, Nationwide believes that the Advisor Fixed option will not qualify as a core option.
Please be aware that to obtain the protections of 404(c), the participants must be given sufficient information to enable them to make informed investment decisions. The 404(c) regulations list items that constitute the minimum threshold for complying with this requirement. In certain circumstances, it may be necessary to provide more information. This checklist addresses only the items specifically listed in the regulations.
Publication of this work has been made possible by Nationwide Financial® and is under copyright protection. This information is general in nature and is not intended to constitute legal or investment advice on any particular matter. This handbook and accompanying tools do not create an attorney-client relationship. These materials are designed exclusively for use with a Nationwide® retirement plan product or program. For plan sponsor Use; not for participant use.
Federal income tax laws are complex and subject to change. The information in this document is based on current interpretations of the law and is not guaranteed. Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions. Certain underlying investment options are not publicly traded mutual funds and are not available directly for purchase by the general public. They are only available through variable annuity/variable life insurance policies issued by life insurance companies or in some cases, through participation in certain qualified pension or retirement plans.
Before investing, understand that mutual fund, annuities and/or life insurance products are not insured by the FDIC, NCUSIF, or any other Federal government agency and are not deposits or obligations of, guaranteed by, or insured by, the depository institution where offered or any of its affiliates. Annuities and/or life insurance products that involve investment risk may lose value.
The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities and trust programs. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB a division of Nationwide Bank®. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.
Nationwide, Nationwide Bank, Nationwide Financial, the Nationwide framemark and On Your Side are federally registered service marks of Nationwide Mutual Insurance Company.
Contract numbers: BEST of AMERICA® Retirement AdvisorSM: APO-2241, APO-2241, APO-2241-OR, APO-2957 (TX); APO-2242, APO-2242-OR, APO-2243, APO-2243-OR, APO-2954 (TX)© 2007-2008, Nationwide Financial Service, Inc. All rights reserved
For plan sponsor use; not for participant use.
PNM-0160AO.3 (08/08)
ChecklistPlan Fiduciary Meeting
Note to plan sponsor: This Plan Fiduciary Meeting Checklist provides specific topics that can be built into an agenda for
such a meeting. This checklist can also be a source for action items that need to be addressed.
Read minutes from previous plan fiduciary
meeting and provide approval
Review plan investments (see Model
Investment Policy Statement)
Conduct a plan review:
Review recent changes in the law that
may affect the plan since the last review
Review Internal Revenue Service,
Department of Labor or other
governmental agency regulations or
proposals that may affect the plan
Consider potential changes in plan design
Review recent plan amendments
Review participant education and
communication:
Review the results of any enrollment
meetings held since the last review and
discuss changes for future meetings
Schedule the next enrollment meeting
Review the results of any participant
educational meetings held since the
last review and discuss changes for
future meetings
Schedule the next participant
education meeting
Review the plan operations
Review service providers’ performance against
plan needs and service provider agreements,
including a review of fees and expenses
Ensure that plan contributions are being
segregated and invested into the plan as
soon as possible
Ensure that the plan continues to qualify for
relief under ERISA 404(c), if applicable (see
ERISA 404(c) Requirements Checklist)
Review any miscellaneous items or issues
Finalize changes and/or assignments to
document in the meeting minutes for
review and approval in the next meeting
Fiduciary Scorecard
Investment Policy Statement
ERISA 404(c) Checklist
Due Diligence File Checklist
Additional Fiduciary Tools that may be useful in conducting the plan fiduciary meeting include:
Publication of this work has been made possible by Nationwide Financial® and is under copyright protection. This information is general in nature and is not intended to constitute legal or investment advice on any particular matter. This handbook and accompanying tools do not create an attorney-client relationship. These materials are designed exclusively for use with a Nationwide® retirement plan product or program.
Federal income tax laws are complex and subject to change. The information in this brochure is based on current interpretations of the law and is not guaranteed. Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specifi c questions.
The Nationwide Group Retirement Series includes unregistered group fi xed and variable annuities and trust programs. The unregistered group fi xed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are off ered by Nationwide Trust Company, FSB a division of Nationwide Bank®. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affi liated Companies, Home Offi ce: Columbus, OH 43215-2220.
Nationwide, Nationwide Bank, Nationwide Financial, the Nationwide framemark and On Your Side are federally registered service marks of Nationwide Mutual Insurance Company.
© 2007-2008, Nationwide Financial Service, Inc. All rights reserved
For plan sponsor use; not for participant use.PNM-0151AO.3 (08/08)
ChecklistPlan Fiduciary Meeting
Note to plan sponsor: This Plan Fiduciary Meeting Checklist provides specific topics that can be built into an agenda for
such a meeting. This checklist can also be a source for action items that need to be addressed.
Read minutes from previous plan fiduciary
meeting and provide approval
Review plan investments (see Model
Investment Policy Statement)
Conduct a plan review:
Review recent changes in the law that
may affect the plan since the last review
Review Internal Revenue Service,
Department of Labor or other
governmental agency regulations or
proposals that may affect the plan
Consider potential changes in plan design
Review recent plan amendments
Review participant education and
communication:
Review the results of any enrollment
meetings held since the last review and
discuss changes for future meetings
Schedule the next enrollment meeting
Review the results of any participant
educational meetings held since the
last review and discuss changes for
future meetings
Schedule the next participant
education meeting
Review the plan operations
Review service providers’ performance against
plan needs and service provider agreements,
including a review of fees and expenses
Ensure that plan contributions are being
segregated and invested into the plan as
soon as possible
Ensure that the plan continues to qualify for
relief under ERISA 404(c), if applicable (see
ERISA 404(c) Requirements Checklist)
Review any miscellaneous items or issues
Finalize changes and/or assignments to
document in the meeting minutes for
review and approval in the next meeting
Fiduciary Scorecard
Investment Policy Statement
ERISA 404(c) Checklist
Due Diligence File Checklist
Additional Fiduciary Tools that may be useful in conducting the plan fiduciary meeting include:
Publication of this work has been made possible by Nationwide Financial® and is under copyright protection. This information is general in nature and is not intended to constitute legal or investment advice on any particular matter. This handbook and accompanying tools do not create an attorney-client relationship. These materials are designed exclusively for use with a Nationwide® retirement plan product or program.
Federal income tax laws are complex and subject to change. The information in this brochure is based on current interpretations of the law and is not guaranteed. Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specifi c questions.
The Nationwide Group Retirement Series includes unregistered group fi xed and variable annuities and trust programs. The unregistered group fi xed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are off ered by Nationwide Trust Company, FSB a division of Nationwide Bank®. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affi liated Companies, Home Offi ce: Columbus, OH 43215-2220.
Nationwide, Nationwide Bank, Nationwide Financial, the Nationwide framemark and On Your Side are federally registered service marks of Nationwide Mutual Insurance Company.
© 2007-2008, Nationwide Financial Service, Inc. All rights reserved
For plan sponsor use; not for participant use.PNM-0151AO.3 (08/08)
File ChecklistDue Diligence
Note to plan sponsor: Plan fiduciaries must carefully document the processes they have followed in fulfilling their duties. A complete and detailed due diligence file will help illustrate the prudent steps you have taken in fulfilling your fiduciary responsibilities.
The following due diligence file checklist will assist you not only in selecting and monitoring service providers, but will also assist you with the ongoing task of monitoring the plan investments, operation, and administration.
Plan and Trust Documents Plan and Trust Documents, including amendments Summary Plan Description (SPD), including updates and record of participant receipt IRS Determination Letter and a copy of the application package for the determination letter
Employee Communications & Education ERISA 404(c) communications (Q&A brochure and any additional information provided) Correspondence announcing the plan Pre-enrollment and enrollment communications Summary Annual Report (SAR)
Filings Form 5500 Auditors’ statements, if applicable
Provider selection criteria and comparisons Request for Proposal and/or other documentation of provider search and requirements Documentation of criteria used for selection of provider, including provider proposal materials, consultants reports, references, etc. Cost comparison (e.g., Department of Labor fee worksheet)
Service Provider Agreements and Insurance Investment provider and plan administrator agreements and any updates or amendments Proof of insurance supplied by service providers Fidelity Bonds to comply with ERISA Section 412, if applicable
Selection of Investments Options Investment Policy Statement Documentation used to select investment options (e.g., Investment Profiles, performance summary and other information gathered for investment analysis)
Plan Records
Selection of Investment and Service Providers
Publication of this work has been made possible by Nationwide Financial® and is under copyright protection. This information is general in nature and is not intended to constitute legal or investment advice on any particular matter. This handbook and accompanying tools do not create an attorney-client relationship. These materials are designed exclusively for use with a Nationwide® retirement plan product or program.
Federal income tax laws are complex and subject to change. The information in this brochure is based on current interpretations of the law and is not guaranteed. Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions.
The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities and trust programs. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB a division of Nationwide Bank®. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.
Nationwide, Nationwide Bank, Nationwide Financial, the Nationwide framemark and On Your Side are federally registered service marks of Nationwide Mutual Insurance Company.
© 2007-2008, Nationwide Financial Service, Inc. All rights reserved
For plan sponsor use; not for participant use.PNM-0480AO.2 (08/08)
Insurance Policies and Bonds
Fidelity bonds to comply with ERISA Section 412 Fiduciary liability and directors and officers policies, if applicable Proof of insurance by service providers
Employee Communications & Education
Documentation of new participants’ receipt of plan communications (e.g, SPD, Q&A brochure and other required communications. Please see 404(c) checklist for more details) Notification to participants regarding plan changes
Investment Monitoring
Documentation of periodic investment review including any updates to the Investment Policy Statement or investment monitoring criteria
Updated investment information provided by investment provider, including fund performance and expense information (Investment Profiles, performance summaries)
Other information gathered for analysis of plan investments
Plan Administration
Records of annual plan administration provided by the plan administrator
Additional Monitoring
Documentation of service provider’s performance against plan needs Minutes of any plan fiduciary meetings
Ongoing Monitoring
Institutional Trustee?Why use an
Qualified plans are required to hold their assets in trust by one or more trustees. This separation
from the sponsoring employer’s assets assures that the plan’s assets are protected from the
creditors of the sponsor and always available to provide benefits to participants.
Some plan sponsors prefer to name individuals as trustees; others prefer to delegate this
function to an outside, institutional trustee that is licensed and knowledgeable in providing
trustee services.
Features of using an institutional trustee include:
• Outside trustees provide an extra layer of protection by holding the plan’s assets at arms
length from the sponsoring employer. Participants and beneficiaries receive extra
protection to ensure that plan assets will be used solely to pay benefits and reasonable
plan expenses.
• Outside trustees may provide a variety of services to the plan, as specified in the
trust agreement. These may include discretionary services, or may be limited to
non-discretionary services.
• An outside trustee that provides no discretionary services and has no decision-making
authority with respect to the plan or its assets is referred to as a directed trustee. A
directed trustee operates only at the direction of the plan sponsor, named fiduciary, or
their designees.
• Directed trustee services may be preferred by plan sponsors who want the security of
utilizing an outside trustee, but wishes to retain control over the plan.
• The use of an outside trustee distributes fiduciary responsibility and may help reduce the
possibility of conflicts of interest.
The outside trustee usually prepares quarterly and annual trust statements that provide
information pertinent to qualified employee benefit plans. When plan assets are held through
an institutional trustee, the plan may benefit from a “limited scope audit” or reduced audit costs
because the trust statements are generally designed to facilitate the plan’s annual audit. This is
particularly important when a plan has more than 100 participants, which subjects it to specific
audit requirements.
Publication of this work has been made possible by Nationwide Financial and is under copyright protection. This information is general in nature and is not intended to constitute legal or investment advice on any particular matter. This handbook and accompanying tools do not create an attorney-client relationship. These materials are designed exclusively for use with a Nationwide retirement plan product or program.
Federal income tax laws are complex and subject to change. The information in this brochure is based on current interpretations of the law and is not guaranteed. Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions.
The Nationwide® Group Retirement Series includes unregistered group fixed and variable annuities and trust programs. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB a division of Nationwide Bank®. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.
Nationwide, Nationwide Bank, Nationwide Financial, the Nationwide framemark and On Your Side are federally registered service marks of Nationwide Mutual Insurance Company.
© 2007-2008, Nationwide Financial Service, Inc. All rights reserved
For plan sponsor use; not for use with the public. PNM-0150AO.3 (09/08)