plan sponsor investment oversight/ investment performance

The National Association of Government Defined Contribution Administrators, Inc. (NAGDCA)

presents

2009 NAGDCAST #4:

Plan Sponsor Investment Oversight/ Investment Performance

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Program Introduction

David Turla

Plan Administrator

County of Los Angeles

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Many thanks to the following 2009 NAGDCAST series

sponsors: Prudential

TIAA-CREF

Wells Fargo

Great-West

ICMA-RC

ING

Nationwide Retirement Solutions

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Continuing Education CreditCredits: This NAGDCAST is worth 1.5 continuing

education credits to InFRE CRA and CRC designees!

To Receive Credit:

• InFRE designees must report attendance at a NAGDCAST when they submit continuing education with their annual certification renewal.

• NAGDCA will provide InFRE with a final participant list (not registrant list) so that those seeking certification credits can be verified. Individuals must be signed in separately to receive continuing education credits.

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Don’t forget the on-line NAGDCAST evaluation – NAGDCA needs your

continued input about the

NAGDCAST series!

The evaluation takes

2 minutes to complete!

THANK YOU!

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Today’s Speakers

Barbara Healy, SST Benefits

Marie Swartzwelder, Prudential Retirement

David Turla, County of Los Angeles

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Investment Fundamentals: Governance

Fiduciaries

1. Who are they?

2. What are their responsibilities?

3. What liability do they carry?

4. What some common fiduciary best practices?

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Navigating the Defined Contribution World

Keeping your Defined Contribution plans on track in an increasingly complex retirement and

regulatory world

Barbara Healy

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? ? ?Who are the fiduciaries of your plan?

How much is your

organization paying for your

Defined Contribution

plan?

What process do you follow to

select or change the investment

choices in your plan?

Three Questions

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Agenda

The Defined Contribution Landscape Is ChangingThe Defined Contribution Landscape Is Changing

What You Need to Know NowWhat You Need to Know Now

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The Defined Contribution Landscape Is Changing

Increasing Responsibility Increasing Responsibility

Expanding Litigation Expanding Litigation

Anxious Plan Participants Anxious Plan Participants

The Perfect Storm Is Brewing

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Increasing Responsibility

Fiduciary Liability

Investment Monitoring and Selection

Participant Education

If you don’t take responsibility, the lawyers (and the Supreme Court) will help you refocus

MoreResponsibili

tyAhead

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Expanding Litigation

Sources: 1 One Minute Memo, Seyfarth Shaw Attorneys LLP & 401khelpcenter.com, April 2008.2 Defined Contributions In The Crosshairs, Ashlea Ebeling, Forbes, Oct. 4, 2006. 3 Jenna Gottlieb, Pensions & Investments, Nov. 12, 2007.4 Kiplinger Magazine, Thursday, April 10, 2008.5 One Minute Memo, Seyfarth Shaw Attorneys LLP & 401khelpcenter.com, April 2008.

Lawsuits& Lawyers

Danger Ahead

“The lawsuits name the employer as the defendant, and in some cases, plan fiduciary committees and their various individual members.” 4

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Anxious Plan Participants

People are retiring in record numbers

Markets feel very volatile

Many people didn’t plan to fail, they failed to plan

Sources: 1 MSNBC.com, Associated Press, Oct. 30, 2007.2 Ben Rooney, CNNMoney.com, April 9, 2008.3 Becky Barrow, Daily Mail, March 26, 2008.

Why?

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Anxious Plan ParticipantsInvestment Returns vs. Investor Returns

Average Annual Returns of S&P 500 vs. Equity Investors

(1987 – 2006)

11.8%

4.3%

S&P 500 Average EquityInvestor Return

Source: 2007 DALBAR, Inc. QAIB

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Anxious Plan Participants

The Retirement Crisis

Frontline Documentary

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What are your peers saying*?

I think our Defined Contribution is a good thing for our employees, but I don’t want to spend any time worrying about it.

All I want is not to have to think about it.

The Defined Contribution rules are taking too much time away from my business.

*Assorted quotes from interviews of plan sponsors, Spring 2008

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Now what?

We understand that the Defined Contribution plan isn’t your primary focus, but you need to monitor your plan

We understand that the Defined Contribution plan isn’t your primary focus, but you need to monitor your plan

Why?The penalties for not knowing and not caring are too high to ignore…especially now.

Why?The penalties for not knowing and not caring are too high to ignore…especially now.

Let me make it easier“Defined Contributions: What You Need to Know Now” Executive Summary

Let me make it easier“Defined Contributions: What You Need to Know Now” Executive Summary

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Fiduciary Liability Fiduciary Liability

Expense DisclosureExpense Disclosure

Investment Selection & Monitoring Investment Selection & Monitoring

Participant EducationParticipant Education

Need To Know. Not Nice To Know. Need To Know. Not Nice To Know.

What You Need to Know NowSection Two:

Four Key Concepts

Go to

Page 5

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Fiduciary Liability Are you a retirement plan fiduciary?Are you a retirement plan fiduciary?

Have any discretionary authority or discretionary responsibility in the administration of the plan

Exercise any authority and/or control over the management or disposition of plan assets

Render investment advice to the plan and/or its participants for a fee or other compensation whether direct or indirect

Expense Disclosure


Investment Selection and

Monitoring Process

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What’s expected of you as a fiduciary?

Demonstrate loyalty to the plan

Proceed with prudence

Diversify investment options

Act in accordance with plan terms

Expense Disclosure



Monitoring Process

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You can be heldpersonally liable

Expense Disclosure



Monitoring Process

Reimburse LossesReimburse Losses

Reimburse losses incurred by the plan or plan participants

Criminal PenaltiesCriminal Penalties

Civil ActionsCivil Actions

Penalties of up to $100,000 for individual fiduciaries ($500,000 for corporations) and up to 10 years in prison

In addition to suits filed by individual participants, the DOL itself imposes an automatic 20% civil penalty for certain fiduciary breaches

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Strategies to ReduceYour Personal Liability

Take advantage of ERISA section 404(c)Take advantage of ERISA section 404(c)

Create an investment policy statementCreate an investment policy statement

Review plan operations Review plan operations

Monitor investments and plan expensesMonitor investments and plan expenses

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ERISA section 404(c) Reduce liability by giving participants control of their

investments decisions

Offer a diverse range of investment options

Allow frequent exchanges between investment alternatives

Provide information to help participants make informed investment decisions

Select a qualified default investment alternative

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Create an InvestmentPolicy Statement

Serves as a map for choosing the plan’s investment options

Sets a course of action for monitoring investments

Although not required, an Investment Policy Statement…

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Review Plan Operations

Conduct a review of plan operations at least once a year

Examine the plan’s routine operations

Ensure that fees and expenses paid by the plan are reasonable

Document your review of plan operations

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Monitor Investmentsand Plan Expenses

Asset allocation is one of the keys to monitoring investments

You need to make sure you give your employees the right selection of the right assets so they can make the right asset allocation choices for themselves

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Fiduciary LiabilityExpense

DisclosureParticipant Education


Monitoring Process

You can limit your liability by knowing and following the rules

You can delegate some of your responsibility

You can’t delegate all of your responsibility

SummarySummary

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Expense Disclosure Investment Selection and

Monitoring Process

Sources: 1 Mark Bruno, Worker Defined Contribution fee suits find friend in Labor Department, Financial Week, March 31, 2008.2 Matt Brady House Panel Oks More Defined Contribution Fee Disclosure, National Underwrite Life & Health, May 12, 2008.

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DOL Proposed RegulationsInvestment

Selection and Monitoring

Process

Expense Disclosure

“If the Department of Labor’s proposed 408(b)(2) Regulation is enacted, Defined Contribution service providers and plan administrators would be required to disclose:• Administrative fees• Investment management fees• Transaction fees• Other fees

Other provisions in the regulations would require serviceproviders to disclose anyfinancial relationships to avoid conflicts of interest.”

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Hard Dollar Fees (typically paid by employer)

Annual Recordkeeping and Admin. Fee

$_______

Per Participant Annual Fee $_______

Other Fees (e.g. custodian, trustee) $_______

Asset Based Fees (typically paid by employees)

Asset / Wrap Fee charged by provider

______%

Average Mutual Fund Expense ______%

How much are you really paying? Expense Disclosure

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*Potential Expense Difference – This chart is presented for illustrative propose only. Source: 403bwiseValue after 35 years, assuming $250 contributed monthly with an 8% average annual return (source: Meridian Wealth Management)The “average variable annuity” costs cited above are just that, an average. Frequently, in K-12 plans the “all-in” costs on an annuity can be 300-400 bps (or 3-4%). If that were the case in the example cited above then the value would likely be less than $300,000.

Fees and Charges on Contracts offered

Changing Times and New Opportunities

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Expense Disclosure

Seemingly insignificant fees make a big difference over time

Uncovering hidden fees is your greatest challenge

Everyone is paying attention: Legislators, Lawyers and Employees

You should, too

SummarySummary

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Participant EducationWhat it isWhat it is

What it isn’tWhat it isn’t

Best PracticesBest Practices

• Ongoing process• Directed at employees• Increase their ability to make better decisions about their Defined Contribution

• Website + Workbook• Annual Lunch• Something to ignore

• Written plan to educate employees• Multi-faceted: Workshops, Tutorials, Tools, Website, Workbooks• Coordinated effort lead by you


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Investment Selection and Monitoring Process


Monitoring Process

Sources: 1 Donald Stone, Investment Selection and Monitoring: A Practical Approach to Best Practices, 401khelpcenter.com, May 11, 2008. 2 Matt Brady House Panel Oks More Defined Contribution Fee Disclosure, National Underwrite Life & Health, May 12, 2008.

Note: This is another strategy to reduce your personal fiduciary liability exposureNote: This is another strategy to reduce your personal fiduciary liability exposure

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Investment Selection and Monitoring Process


Monitoring Process

Key QuestionsKey Questions

Key Deliverables Key Deliverables

• What is your selection and monitoring process? Is it in writing? • What criteria determine your investment decisions?• What is your procedure for replacing underperforming funds?

• Written Investment Policy Statement• Regular Meetings with Written Minutes • Utilize Third Party Investment Expertise • Regularly Monitor Fund Choices

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Investment Selection & Monitoring Meets

Fiduciary Liability


Monitoring Process

Discretionary Trustee

Delegate decisions and minimize liability

Directed Trustee

Keep control of investment decisions and liability

2 Kinds of Trustees

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Two Choices

Paper Map Approach

Directed Trustee

GPS Approach

Discretionary Trustee

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Paper Map Approach

The Roles You Need to Fill

The Rules You Need to Follow

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The GPS ApproachAssume Fiduciary LiabilityAssume Fiduciary Liability

Complete Expense Disclosure Complete Expense Disclosure

Complete the Investment Selection and Monitoring ProcessComplete the Investment Selection

and Monitoring Process

Perform Ongoing Participant EducationPerform Ongoing Participant Education

Provide Outstanding Service Provide Outstanding Service

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We’ve Arrived!

The GPS Approach

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? ? ?Who are the fiduciaries of your plan?

How much is your company paying for your

Defined Contribution

plan?

What process do you follow to

select or change the investment

choices in your plan?

Three Questions

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David Turla

Best Practices

1. Conflict of Interest Code

2. Investment Policy

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Conflict of Interest Code

• Adopt a Conflict of Interest Code applicable to all fiduciaries

• Disclose personal and immediate family sources of income, including investments in securities, business interests, gifts, etc.

• Require filing upon assuming and leaving office• Require annual updates• Assign a governance officer to review

disclosures• Make available upon public request• California model code: www.fppc.ca.gov

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Investment Policy Checklist

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Investment Policy Objective

1. Identify the Plan’s objective – is it designed to be the primary retirement plan or supplement a DB plan?

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2. Identify the investment model objective – 404(c) compliance– Complement participant behavior– Qualified Default Investment Alternatives (QDIA)

» Safe harbor versus fiduciary philosophy

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3. Describe the investment structure– Identify the types of investments on the participant

menu (name brands, target date funds, asset class funds, brokerage window)

– Role of passive and/or active management– Asset class allocations– Plan-level diversification strategies

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Investment Policy Objective4. Identify Fund Manager Requirements

– Resources: personnel depth in portfolio management and research, systems and reporting capabilities

– Investment philosophy: index, core, growth, value, compliance history

– Assets under management: total AUM, % in the target strategy, maximum % Plan assets will comprise target fund

– Governance: management structure (top-down/bottom-up/team/superstar), corporate stability, regulatory investigations/lawsuits, transparency

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5. Fund Manager Search (aka beauty contest)– Establish an objective and timeframe– Screening process: Comparing apples to apples, or is

that a lemon?– Making sense of YTD, Annual Returns, Rolling

numbers, and all those tables and charts– Understanding the organization, philosophy, and

product (what’s really in there)? – Does it fit your Plan?– Transition issues: participant notices, logistics– Consultant recommendation (detailed later)

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6. Performance Review– How often is enough?– Identifying an appropriate benchmark– Develop a compliance checklist: governance,

performance, fees, strategy, etc– In-person fund manager due diligence updates– “Watch” policy: what does this term really mean?

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Investment Policy Objective7. Policy reassessment

– Annual review– Addition/deletion of a fund– Major structural changes– Regulatory changes

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A Fiduciary’s Best Friend?

ConsultantsTheir role in helping your meet your

fiduciary responsibility and

mitigating liability

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Consultant Selection

• Criteria: resources, investment philosophy, assets under management, governance

• Willingness to accept fiduciary responsibility Firm's Conflict of Interest Code

– Sources of revenue: hard/soft dollars, subsidiary/affiliate/parent firm

– Fee structure (retainer vs. per project) – Performance review and search - is there an

incentive to initiate searches?• Investment Policy review, compliance, and

development

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Consultant Selection (cont’d)

• Understand the screening process, universe, Plan specific criteria (Investment Policy)

• Firm experience with due diligence visits and calls• Experience of other clients• Third party information (word on the street)

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Investment Policies

Marie Swartzwelder

0166305-00001-00

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You’re Not Alone

Investment Consultants come in all shape and sizes

• National or Regional Firms

• Specialists and Generalists– Tax Exempt vs. Corporate Focus– Retirement Focus vs. Broad Investment Market

• Conflicts of Interest

• Fiduciary Responsibility

For Financial Professional use only. Not for plan participants or the general public.

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Getting to Where You Need to GoCompass or a Global Positioning System

• Compass– Guidance – Provides you with communication, direction and

support – No recommendations

• Global Positioning System– Advice– Provides you with a recommended road map– Accepts Fiduciary Responsibility


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Consultant Solutions

• Knowledge: Understanding the evolving landscape of investment opportunities

• Advice: Developing and preparing the IPS, recommendation of asset allocation/fund lineup, and manager selection.

• Responsibility: Sharing the fiduciary burden, avoiding conflicts of interest

• Research: Reviewing individual fund management firms, understanding their business, people and investment processes, and formulating skill ratings

A consultant is your resource – your window of information – in an increasingly complex field


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Investment Policy Statement

• Provides a road map for asset allocation and investment decisions

• Sets forth the process and the benchmarks used to monitor the managers and al major decisions

• Provides a clear communication tool for response to inquiries by employees, regulators, management, and boards

• Provides continuity as personnel changes

ERISA standards dictate that investment policies should be documented. A written policy statement provides a blueprint for the management of your investments.


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Why are you documenting policy?To whom are you communicating?

Why do you offer this particular plan?What are you trying to accomplish with this benefit?

What are your investment goals?What are you trying to accomplish through your investment choices?

What criteria are critical for plan assets?What are your chief considerations in asset class selection?

For each investment decision, why are you making it?How can you spell out the underpinnings of your decisions so that you will know to

make changes when circumstances change?

Which asset classes have you chosen? Why?Are there any asset classes you reject? Why?

How will you evaluate standards?Which indices and universes will you use as your measure?

What time period(s) will you reference?What are your goals relative to the indices/universes?

What factors will you evaluate other than return?

Which managers/funds do you choose within asset class categories?On what basis are you choosing these?

How often will you evaluate performance?Who will evaluate?

What documentation will you need? From whom?How often will you evaluate your policy?

What quantitative basis do you have for your decisions?What is your current array of managers/funds?

When was this document last reviewed? By whom?

Purpose of Policy Statement

Objectives

Specific Considerations

Underlying Rationale

Asset Classes

Performance Standards

Account Selection

Monitoring Process

Exhibits

Questions to be Addressed in Investment Policy Statement


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Compliance : Policies and Procedures

• Establish Investment/Benefit Committees• Establish regular meetings to monitor investments

and assess any necessary action to be taken– Performance Evaluation/Investment Review– Decisions Made , add/drop watch list– Competitive Analysis

• Benchmarking• Fees• Market Coverage – Fund Options

• Retain detailed minutes of each meeting for review by appropriate parties to the plan

Documentation, Documentation, Documentation


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• Quantitative Evaluations– Absolute performance against benchmark– Relative performance against peer

universe– Volatility relative to indices and peers

• Qualitative Evaluations– Adherence to investment mandates– Key changes to portfolio/fund management – Ethics violations

Performance Review Process


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• Need to understand what you’re being charged– Fee transparency and disclosure– Revenue sharing to record keeper

• Are you being charged a competitive fee?– Plan size– Assets within strategy

• Direct access

• Commingled option

Performance Review Process

Pay attention to Fees


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Benchmark Fees based upon Strategy

0.00

0.30

0.50

0.70

0.90

1.10

1.30

1.50P

ote

nti

al R

an

ge

of

Exp

en

se

R

ati

os

Peer Group Target MedianTarget Manager Expense Reference


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Watch List Considerations

• Sub-standard investment results– Failure to meet established criteria

• Concerns regarding future performance– Portfolio team/process instability– Unexplained style changes– Key personnel departures– Financial instability– Organizational change

• Legal or regulatory issues


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Process for action or follow-up

• Closer Scrutiny• Alternatives to consider

• Freeze investment – for how long?• Identify replacements• Terminate and replace

Watch List Action

Duty to Remove Underperforming Investment Options


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Investments & Manager Search

Manager Search includes:• Search and selection process• Investment Transition• Documentation

Responsible for guiding a disciplined and rigorous investment process to enable the Committee to meet its fiduciary responsibilities


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Search Process

• Satisfy client demands– Proactively identify gaps within the investment line up– Proactively identify replacement based upon Watch List results

• Robust and independent – Universe to include full market of available investment managers– Employs multiple databases (both institutional and retail) to

ensure both broad coverage and redundancy to ensure accuracy of data

• Encompasses qualitative and quantitative criteria• Consistent with IPS selection criteria• Leverage internal analytic resources for both screening, and

independent on site due diligence


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Further Considerations

In addition to standard investment evaluation criteria , additional considerations should include:

• Direct or commingled investments• Competitiveness of management fees• Potential redemption cost and holding period• Firm level

• Investment philosophy• Compliance and oversight • Infrastructure and resource commitment

• Management team consistency


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Transition Management

• Retail - Commingled funds– Remove and replace (map assets) with an alternative

investment option of similar characteristics identified through selection process

– Communicate

• Direct investments– Mitigate costs of transaction– Evaluate and Hire transition manager– Evaluate results

Investment option to be terminated addressed using procedural and substantive prudence


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• Satisfies your needs for an investment resource• Communicates updates on market trends• Includes annual meeting• Assures at least quarterly contact• Emphasizes clear documentation of

– Meetings– Decisions– Actions– Underlying rationale

This investment resource provides you access to the expertise you require to manage your fiduciary responsibility.

Creating and documenting a process for your investments requires that you continue to evaluate and update your work. A consultant is your resource – your window of information – in an increasingly complex field.

Value of a Consultant


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Disclosures• Keep in mind that application of asset allocation and diversification concepts does not ensure a profit or protect against loss

in a declining market. It is possible to lose money by investing in securities.

• Prudential Retirement is a registered service mark of The Prudential Insurance Company of America, Newark, NJ and its affiliates.


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Speaker Contact Information

Barbara Healy, SST Benefits(480) 314-0307 [email protected]

Marie Swartzwelder, Prudential Retirement (860) 534-7588 [email protected]

David Turla, County of Los Angeles(213) 893-2377 [email protected]

mailto:[email protected]



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Questions

From

Audience

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