stopping the race to the bottom - thomas kmak

Stopping the Race to the Bottom

May 2015

Copyright© Fiduciary BenchmarksAll Rights Reserved

Agenda

1. The Emotion of Fee Comparisons and Benchmarking

2. ERISA Benchmarking Basics

3. 7 Benchmarking Essentials

4. Benefits for Sponsors – Participants – Service Providers

2


The Problem: A Race to the Bottom

“my client doesn’t appreciate the work we do”

“people are offering to do the same work at absurdly low prices”

“I do more work than anyone serving this plan and I have the lowest profit margins”

3


The Solution:FBi’s Benchmarking Service (U.S. Patent 8,150,198)

vs.

FeesCost Drivers

Value Factors

Quality of Provider

4


The Solution:Return on Investment is 10 for 1…in the first year

5


Agenda





6


What are the duties of a Fiduciary?• Fiduciaries have important responsibilities and are

subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;

• Carrying out their duties prudently;• Following the plan documents (unless

inconsistent with ERISA);• Diversifying plan investments; and• Paying only reasonable plan expenses.

Source: www.dol.gov/ebsa/publications/fiduciaryresponsibility.html7


What does the DOL say about 401(k) Fees?“When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs. If your employer has selected a bundled program of services and investments, compare all services received with the total cost. Remember, too, that higher investment management fees do not necessarily mean better performance. Nor is cheaper necessarily better. Compare the net returns relative to the risks among available investment options. And, finally, don’t consider fees in a vacuum. They are only one part of the bigger picture including investment risk and returns and the extent and quality of services provider.”Source: A Look at 401(k) Plan Fees, U.S. Department of Labor, October 2010

8


“Make things as simple as they can be…but no simpler”

“When you are courting a nice girl an hour seems like a second. When you sit on a red-hot cinder a second seems like an hour. That's relativity.”

True or False:Low Fees is the Fiduciary Standard

9


Question:Which of these variables changed by 20% will have the GREATEST IMPACT on Retirement Readiness:1. Retiring 5 years early at age 622. Contributing 8 years earlier at age 343. Increasing the 7.11% ROR by 20%4. Increasing the 6.00% Deferral by 20%5. Increasing the 50 cent match by 20%6. Decreasing the 72bp fee by 20%

Why Low Fees is NOT the Fiduciary Requirement – part 1• Female Age 42• 3% Inflation Rate• Saving 6%• Company Match 50% on 6%• Rate of Return of 7.11%• Fees of .72%• Retirement age of 67

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• The analysis below shows the impact on the Retirement Readiness Ratio of 87% by changing 6 important retirement assumptions by 20% (except for Early Retirement where the reduction is the earliest age one can begin receiving Social Security):

Why Low Fees is NOT the Fiduciary Requirement – part 2

11


True or False:Reasonable Total Plan Fees is the Fiduciary Issue

Total Plan Fees vs. Benchmark Group (in Percent)

0.66%

0.83%

0.99%1.06%

1.15%

1.42%

12


INVESTMENT MANAGER ANALYSIS

REPORT BASICS

RECORDKEEPER ANALYSIS

Report Key

The following designations are referred to throughout the report:

Chart Designations

= This Plan

= Benchmark

Group/Standard

Blue = Greater than Median

Red = Less than Median

Table of Contents 1

Fiduciary Benchmarks’ Evaluation Process 2

Total Plan Fee Detail 3-4

Total Expense Ratio Breakdown 5

Benchmark Group 14

Provider Quality 15

Scope of Services 16

Value Delivered 17

Fees 18

Summary 19

Table of Contents

Benchmark Group 6

Provider Quality 7

Scope of Services 8

Value Delivered 9

Fees 10-12

Summary 13

DISCLAIMERS 20

13


Fiduciary Benchmarks’ Evaluation Process

First, we build a customized benchmark group from your plan to allow valid comparisons. PROPRIETARY DATABASE

The FBI proprietary database has tens of thousands of plans sourced directly from hundreds of service providers.

The DOL has specifically noted that you can consider the quality of your service provider when determining fee reasonableness of your Service Provider.Therefore, Fiduciary Benchmarks provides a framework to help you examine this important factor that is customized for each type of Service Provider for your plan.

THE QUALITY YOU’RE GETTING

Another important factor to consider is the Scope of Services being delivered by each of your service providers. In that regard, Fiduciary Benchmarks has relied on our extensive industry experience to develop a comprehensive list of services with varying degrees of difficulty that are most pertinent to the services delivered by each provider.

We then built proprietary mathematical models that allows you to easily compare the level of services you receive from your Service Providerto a market standard based on the applicable benchmark group.

THE SERVICES YOU’RE GETTING

THE VALUE YOU’RE GETTING

The Employee Retirement Income Security Act (ERISA) REQUIRES fiduciaries to make sure they pay only reasonable expenses to all service providers and investment managers. BUT…per the Department of Labor’s booklet on 401(k) Plan Fees: “don’t consider fees in a vacuum. They are only one part of the bigger picture including investment risk and returns and the extent and quality of services provided.”This report from Fiduciary Benchmarks can help you determine whether the fees being paid to your various Service Providers are reasonable by following a logical and patented process (U.S. Patent 8,150,198) as shown below.

NORMALIZED DATAAll data is scrubbed for accuracy and normalized before being placed in our database. This helps enure all comparisons are valid and consistent.

MATHEMATICALLY DRIVENWe use a four-step method designed to provide you an economically logical, statistically valid and properly diversified benchmark group.

After looking at the services that drive fees for your Service Provider, we then examine the Value being delivered to you as Plan Sponsor and to your Participants.

For you as Plan Sponsor, we provide data that is generally related to the quantity and quality of services you receive as the Plan Fiduciary.

For your Participants, we compare the Participant Success Measures for your plan versus your industry. We also project the difference in total account balances at retirement versus the typical industry, assuming all participants are “average.”

COMPAREBecause services can vary greatly, we compare your fees to the benchmark group and to our proprietary FeePoint – a market-based benchmark that reflects the unique services provided by your Service Providers.

UNDERSTANDWe explain how FeePoint works in detail so you can gain better insight regarding the value of the services provided by your Service Providers.

Examine Value Delivered

Assess Scope of Services

Review Provider Quality

Customize Benchmark Group

Evaluate Fees

The Employee Retirement Income Security Act (ERISA) REQUIRES fiduciaries to make sure they pay only reasonable expenses to all service providers and

investment managers. BUT…per the Department of Labor’s booklet on 401(k) Plan Fees: “don’t consider fees in a vacuum. They are only one part of the bigger picture including investment risk and returns and the extent and

quality of services provided.”

14


The 3 Major Points Regarding Fee Reasonableness

1. Fees need to be REASONABLE…NOT LOW

2. Fees should NOT be considered in a vacuum

3. This determination needs to be made at the Service Provider Level

15


Agenda1. The Emotion of Fee Comparisons and Benchmarking




16


The Problem:Firms Using 5500 Data to Reach Wrong ConclusionPlan A Average Salary Deferral = $2,500Plan B Average Salary Deferral = $2,273

This technique of normalization is critical for accurate comparisons and this is why the 401(k) discrimination test is performed as a percentage of compensation.

Question:Which plan has better Salary Deferrals?1. Plan A2. Plan B3. I Don’t Know

17


▪100% of data should come directly from the source: Service Providers

▪All data is thus current, accurate and consistent with 408(b)(2) disclosures.

Essential #1:Use the RIGHT Data

RKs and TPAs Investment Mgrs Advisors

18


The Problem:No Repeatable Process

Your Clients WANT/NEED Guidance on how to make this increasingly important fiduciary decision

19


Essential #2:Build a Fair and Repeatable Process

Examine Value

Delivered


Review ProviderQuality

Customize Benchmark

Group

Evaluate Fees

Judging:“to form an opinion about through careful weighing of evidence and testing of premises”

20


The Problem:Building Benchmark Groups for various Service Providers

RKs and TPAs Investment Mgrs Advisors

21


Essential #3:Customize Benchmark Group by Service Provider

• Economically Driven• Plan Assets• Participants• Average Account Balance

Customize Benchmark

Group• Statistically Valid

• REMOVE the Outliers• Strive for Predictability

• Diversified by Recordkeeper• At Least 25 plans• At Least 10 Recordkeepers• All 5 Business Models• Representative of Market Segment

22


The Problem:The Quality of Your Firm is “lost in the shuffle”…the DOL has specifically noted in prior rulings that the quality of a Service Provider can be considered when determining fee reasonableness”

24


Essential #4:Consider the Quality of the Service Provider

• Recordkeeper• Expertise with Retirement Plans• Non-401(k) Plan Expertise• Cultural Fit

• Services/Processes• Definition of Plan Success• Process to Mitigate Conflicts of Interest• Protecting/Improving the Plan

• People/Technology/Resources• Team• Technology• Profitability/Sustainability

Review ProviderQuality

25


The Problem:People think Recordkeeping is a Commodity

Versus

27


Essential #5:Explain Scope of Services which Drives Plan Costs

Small Cost Impact Large Cost Impact√ More Services

✓ Fund Additions✓ Fund Deletions✓Managed Account✓ Self Directed Account✓Model Portfolios

❑Extra Contribution Types❑Extra Funds❑Extra Payrolls❑Extra Loan Activity❑Extra Terminations

✓ Rollovers IN to plan✓ Investment Transfers✓ Age 59 ½ Withdrawals✓ Hardship Withdrawals✓MRDs and QDROs

Core Services

❑Company Stock❑Bad/Inconsistent Data❑M&A Activity❑Plan Design Changes❑Periodic Valuation

Medium Cost Impact


28


PLAN SPONSORS PARTICIPANTS

The Problem:Demonstrating Value to BOTH of your clients

30


Essential #6:Examine Value Delivered to Plan Sponsor

Examine Value

Delivered

31


Essential #6:Examine Value Delivered to Participants

Examine Value

Delivered

32



Examine Value

Delivered

33



Examine Value

Delivered

34


The Problem:Clients Don’t Appreciate the “Extras”

36


Essential #7:Track & Compare Fees BUT…Allow for Extra Credit

Evaluate Fees

• Start with a Base Fee and Adjust for:A. Fiduciary ResponsibilityB. Extra CommunicationsC. Extra Meetings/Work

37


Essential #7:Track & Compare Fees BUT…Allow for Extra Credit

38


7 Benchmarking Essentials1. Use the RIGHT Data2. Build a Fair and Repeatable Process3. Customize Benchmark Groups by Service Provider4. Consider the Quality of the Service Provider5. Examine Scope of Services which Drives Plan Costs6. Examine Value Delivered: to the Plan Sponsor and their Participants7. Track & Compare Fees BUT…Allow for “Extra Credit”

40


Agenda




4. Benefits for Sponsors – Participants – Service Provider

42


The impact per one prominent ERISA attorney:1. Know what your fees are2. Compare them to benchmarks3. Monitor on an ongoing basis4. Make sure you have real documentation5. Hire Third-Parties for an independent review6. Make sure you conduct a fiduciary audit7. Have a Fiduciary Manual

Documenting the Process for Fiduciaries

Marcia Wagner, Plan Sponsor interview, December 2009

$16.5 million

“The lesson is to benchmark your plan’s services against appropriate peer-group data. It would be difficult for a plaintiff’s attorney to show that you were imprudent if you take that step and if the results are reasonable.”

Fred Reish, Drinker Biddle, Plan Sponsor 7/2011

43


• If a service provider can demonstrate that their communication and education programs actually results in deferral rates that are 1.20% higher than average, that will be worth $38,148 to just that one participant

• This is an example of how the proper use of benchmarking can result in a situation that is a Win-Win-Win for all parties

Improving Outcomes for Participants

44


Stopping the Race to the Bottom…And Starting the Race to the Top

• Risk Losing Clients• Does NOT Help Participants• Reduces Revenue• Increases Expense• Decreases Margins• Fees BEFORE Value

• Protect Plan Sponsors• Truly Help Participants• Retain Revenue• Lower Expense• Expand Margins• Value Before Fees

Versus

45


Closing Thought

“…you listen to me, if you're not a part of the solution, you're a part of the problem. Quit being a part of the problem and put the other guy back on!” 46

“Now we do not want your help. Is that clear? We don’t want your help. I’ve got a hundred people down here and they’re covered with glass.”


This material has been prepared solely for informational and educational purposes. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

www.fiduciarybenchmarks.com 5335 Meadows Road, Suite 210 Lake Oswego, OR 97035 866.516.4909 ⎮ ⎮

stopping the race to the bottom - thomas kmak

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