Investment Fiduciary Responsibility - AICPA

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Investment Fiduciary



Responsibility





…Understanding The



Role of Plan Fiduciaries



This presentation is designed to help
you better understand:



Who is an investment fiduciary and when
might you be considered one;


If you
are

considered a fiduciary, what
are the minimum standards of care that
must be met;


If you advise others in your company,
what do you need to know to do job.

Course Objectives


Two categories of Fiduciaries:


Designated Fiduciaries;


“de facto” Fiduciaries



Who are the Designated
Fiduciaries?


Who are “de facto” Fiduciaries?


Definition of a Fiduciary

According to ERISA, relating to qualified plans,
a Fiduciary is one who . . .


1.
Exercises
any

discretionary authority or control
over management of the plan;

2.
Exercises
any

authority/control over management,
or disposition, of assets;


[continued]

Definition of a Fiduciary

According to ERISA, relating to qualified plans,
a Fiduciary is one who . . .


3.
Renders investment advice (
direct or indirect
) with
respect to plan assets
for compensation;


4. Has
any

discretionary authority or responsibility in
administering the plan. This includes: Plan
Administrators; Committees (such as Investment
Committee, Retirement Committee, Boards of
Trustees, etc); Plan Trustees (e.g. bank trustees,
individuals, committees, etc); and “Named
Fiduciaries”.

Definition of a Fiduciary

Designated Fiduciaries

ERISA says certain people automatically
become a Fiduciary by holding a position:



Plan Administrators;


Committees (such as Investment Committee,
Retirement Committee, Boards of Trustees, etc);



Plan Trustees (e.g. bank trustees, individuals,
committees, etc); and “Named Fiduciaries”.

Definition of a Fiduciary

By the very nature of these positions, the plan
administrator or a trustee of the plan must have
“discretionary authority or discretionary responsibility in
the administration of the plan”.

“de facto” Fiduciaries


An “Investment Fiduciary” is one who has
authority in the management or disposition
of plan assets.



This is true even if person is not designated a
fiduciary in plan documents.



Criteria is whether the person undertakes the
described
functions.



Thus,

ERISA employs concept of “functional
fiduciary”


Definition of a Fiduciary

“de facto” Fiduciaries


Definition of a Fiduciary

Other company positions should be examined to
determine whether they involve the performance
of any of the functions described (e.g.
discretionary responsibility or control).



The officers of a corporation will be functional
fiduciaries if they perform fiduciary activities, for example,
if they select the investments for a 401(k) Plan.



Members of the board of directors will be fiduciaries
only to extent they have responsibility for specified
functions. (e.g. selection of plan fiduciaries)




Accountants, Attorneys, Actuaries and
“Consultants” [i.e.
non
-
discretionary

advisors

to
decision makers];



Individuals performing
ministerial functions
. In
other words they:


apply rules determining eligibility for
participation/benefits


calculate benefits


prepare government agency reporting


allocate contributions according to plan documents


maintain participant records


process claims


make recommendations regarding plan administration
.



Participants (if all they do is “participate”)

Definition of a Fiduciary

According to ERISA, the following are
NOT

Fiduciaries:

Definition of Non
-
ERISA Fiduciary

According to the Foundation for Fiduciary
Studies:



“Persons who have legal responsibility for
managing someone else’s money”



See website at http://www.fi360.com

DOL Interpretive Bulletin 94
-
1
describes “Procedural Prudence”


Procedural Prudence



If investment fiduciaries follow a “
Prudent Process”
, they will have
satisfied their fiduciary duties.



Procedural Prudence requires the plan fiduciary to follow the proper
steps (or process) in making the investment decisions.



Courts have said, “The court’s task is to inquire whether the individual
trustees employed the appropriate methods to investigate the merits of
the investment.”



ERISA’s prudence standard is not that of a prudent lay person but
rather that of a prudent fiduciary with experience dealing with a similar
enterprise.

. . . Twenty Seven Practices

Leading To Procedural
Prudence

A Handbook for Investment Fiduciaries”


Prudent Investment Practices


Written by the Foundation for Fiduciary Standards

Edited by the American Institute of Certified Public Accountants

Published by the Center for Fiduciary Studies



1.
Know standards, laws, and trust provisions.

2.
Diversify assets to specific risk/return profile
of client.

3.
Prepare investment policy statement.

4.
Use “prudent experts” (money managers)
and document due diligence.

5.
Control and account for investment
expenses.

6.
Monitor the activities of “prudent experts.”

7.
Avoid conflicts of interest and prohibited
transactions.

Uniform Fiduciary Standards of Care



FIVE
-
STEP INVESTMENT
MANAGEMENT PROCESS



Analyze

Current

Position

Step 1

Diversify


Allocate

Portfolio

Step 2

Formalize

Investment

Policy

Step 3

Implement

Policy

Step 4

Monitor

and

Supervise

Step 5

Rebalance

Investment Fiduciary Process



Practices provide the following benefits:



Reduce fiduciary liability by uncovering
omissions;


Provide educational outline;


Should improve long
-
term performance;


Enable fiduciaries to compare practices and
procedures;


Assist in prioritizing projects;


Establish benchmarks to measure progress.

The Benefits of Having Practices

Practice No 1.1

-

Investments are managed in
accordance with applicable laws, trust documents,
and written investment policy statements.



Practice No. 1.2

-

Fiduciaries are aware of their
duties and responsibilities.



Practice No. 1.3

-

Fiduciaries and parties in interest
are not involved in self
-
dealing.

Analyze Current Position

Practice No. 1.4

-

Service agreements and contracts
are in writing, and do not contain provisions that
conflict with fiduciary standards of care.



Practice No. 1.5

-

There is documentation to show
timing and distribution of cash flows, and the
payment of liabilities.



Practice No. 1.6

-

Assets are within the jurisdiction
of U.S. courts, and are protected from theft and
embezzlement.

Analyze Current Position

Practice No. 2.1

-

A risk level has been identified.




Practice No. 2.2

-

An expected, modeled return to
meet investment objectives has been identified.



Practice No. 2.3

-

An investment time horizon has
been identified.


Diversify: Allocate Portfolio

Practice No. 2.4

-

Selected asset classes are
consistent with the identified risk, return, and time
horizon.



Practice No. 2.5

-

The number of asset classes is
consistent with portfolio

size.

Diversify: Allocate Portfolio

Practice No. 3.1

-

There is detail to implement a
specific investment strategy.


Practice No 3.2

-

The investment policy statement
defines the duties and responsibilities of all
parties involved.


Practice No. 3.3

-

The investment policy statement
defines diversification and rebalancing
guidelines.


Practice No. 3.4

-

The investment policy statement
defines due diligence criteria for selecting
investment options.

Formalize The Investment Policy

Practice No. 3.5

-

The investment policy statement
defines monitoring criteria for investment options and
service vendors.



Practice No. 3.6

-

The investment policy statement
defines procedures for controlling and accounting for
investment expenses.



Practice No. 3.7

-

The investment policy statement
defines appropriately structured, socially responsible
investment strategies (when applicable).


Formalize The Investment Policy

1.
Adoption of 404

2.
Decision on number of investment options.

3.
Decision on which asset classes per option.

4.
Due diligence on investment options.

5.
Monitoring of investment options and expenses.

Key Components of the DC IPS

Practice No. 4.1

-

The investment strategy is
implemented in compliance with the required level of
prudence.


Practice No. 4.2

-

The fiduciary is following applicable
“Safe Harbor” provisions (when elected).


Practice No. 4.3

-

Investment vehicles are appropriate
for the portfolio size.


Practice No. 4.4

-

A due diligence process is followed in
selecting service providers, including the custodian.

Implement Policy

Safe Harbors


Practice No. 4.2

-

The fiduciary is following
applicable “Safe Harbor” provisions, in
general.


Use prudent experts to make the
investment decisions;


Demonstrate that the prudent expert was
selected by following a due diligence
process;


Give the prudent expert discretion over
the assets;


Have the prudent expert acknowledge
their co
-
fiduciary status;


Monitor the activities of the prudent expert
to ensure that the expert is performing the
agreed upon tasks.


Practice No. 4.2

-

The 401(k) fiduciary is
following applicable “Safe Harbor” provisions
for DC Plans (when elected).


Plan participants must be notified that the
plan sponsor intends to constitute a 404(c)
plan;


Participants must be provided at least three
different,
prudently selected
, investment
options;


Participants must receive education on the
available investment options;


Participants must be provided the
opportunity to change their investment
strategy/allocation with a frequency that is
appropriate in light of market volatility.

Safe Harbors

Key Components of the DC IPS

20 steps to comply with ERISA Section 404(c)*

* As identified by Mr. Fred Reish, Esq.



The

participant

has

an

opportunity

to

obtain

written

confirmation

of

his

instructions
.


The

person

to

whom

the

instructions

are

given

is

an

identified

plan

fiduciary

who

is

obligated

to

comply

with

the

instructions
.



Key Components of the DC IPS

20 steps to comply with ERISA Section 404(c) (continued)*

* As identified by Mr. Fred Reish, Esq.

The

participant

is

provided,

by

an

identified

plan

fiduciary,

with

the

following
:


(
1
)

An

explanation

that

the

plan

is

intended

to

be

a

404
(c)

plan
;


(
2
)

An

explanation

that

the

fiduciaries

of

the

plan

may

be

relieved

of

liability

for


losses
;


(
3
)

A

description

of

the

investment

alternatives

available

under

the

plan
;


(
4
)

A

general

description

of

the

investment

objectives

and

risk

and

return



characteristics

of

each

designated

alternative
;


(
5
)

Identification

of

any

designated

investment

managers
;


(
6
)

An

explanation

about

giving

investment

instructions
;


(
7
)

A

description

of

any

transaction

fees

and

expenses

which

affect

the


participant’s

account

balance
;


(8) The name, address, and phone number of the plan fiduciary responsible for


providing information;


(9) Specified information regarding employer securities;


(10) A copy of the most recent prospectus provided to the plan for investment


alternatives subject to the Securities Act of 1933;


(11) Any materials provided to the plan relating to the exercise of voting, tender or


similar rights.

Key Components of the DC IPS

20 steps to comply with ERISA Section 404(c) (continued)*


* As identified by Mr. Fred Reish, Esq.

The participant is able to obtain upon request
:



(
1
)

A

description

of

the

annual

operating

expenses

of

each

designated

investment


alternative
;


(
2
)

Copies

of

any

prospectuses,

financial

statements

and

reports

provided

to

the


plan
;


(
3
)

A

list

of

the

assets

comprising

the

portfolio

of

each

designated

investment


alternative
;


(4) Information concerning the value of shares or units in designated investment


alternatives;


(5) Information concerning the value of shares or units in designated investment


alternatives held in the account of the participant.


Key Components of the DC IPS

20 steps to comply with ERISA Section 404(c) (continued)*


* As identified by Mr. Fred Reish, Esq.



Plan

permits

participants

to

give

investment

instructions

with

a

frequency

which

is

appropriate

in

light

of

market

volatility
.




The

core

investment

alternatives,

constituting

a

broad

range,

permit

instructions

at

least

once

within

any

three
-
month

period
.




Key Components of the DC IPS

Exhibit I

Annual Notification Requirement for

Maintaining a Valid Section 404(c) Election


Notice 98
-
52, I.R.B. 1998
-
46, November 16, 1998.

V. ADP TEST SAFE HARBOR

C. Notice Requirement


1.
Content Requirement



The content requirement of this section is satisfied if the notice (1) is sufficiently accurate and
comprehensive to inform the employee of the employee's rights and obligations under the plan and
(2) is written in a manner calculated to be understood by the average employee eligible to
participate in the plan. For purposes of the preceding sentence, a notice is not considered
sufficiently accurate and comprehensive unless the notice accurately describes (i) the safe harbor
matching or nonelective contribution formula used under the plan (including a description of the
levels of matching contributions, if any, available under the plan); (ii) any other contributions under
the plan (including the potential for discretionary matching contributions) and the conditions under
which such contributions are made; (iii) the plan to which safe harbor contributions will be made (if
different than the plan containing the CODA); (iv) the type and amount of compensation that may
be deferred under the plan; (v) how to make cash or deferred elections, including any
administrative requirements that apply to such elections; (vi) the periods available under the plan
for making cash or deferred elections; and (vii) withdrawal and vesting provisions applicable to
contributions under the plan.

Key Components of the DC IPS

Exhibit I

Annual Notification Requirement for

Maintaining a Valid Section 404(c) Election


Notice 98
-
52, I.R.B. 1998
-
46, November 16, 1998.

V. ADP TEST SAFE HARBOR

C. Notice Requirement


2.
Timing Requirement


a. General Rule


The timing requirement of this section V.C.2 is satisfied if the notice is provided within a reasonable
period before the beginning of the plan year (or, in the year an employee becomes eligible, within a
reasonable period before the employee becomes eligible). The determination of whether a notice
satisfies the timing requirement of this section V.C.2 is based on all of the relevant facts and
circumstances.

b. Deemed Satisfaction of Timing Requirement


The timing requirement of this section V.C.2 is deemed to be satisfied if at least 30 days (and no
more than 90 days) before the beginning of each plan year, the notice is given to each eligible
employee for the plan year. In the case of an employee who does not receive the notice within the
period described in the previous sentence because the employee becomes eligible after the 90th
day before the beginning of the plan year, the timing requirement is deemed to be satisfied if the
notice is provided no more than 90 days before the employee becomes eligible (and no later than
the date the employee becomes eligible). Thus, for example, the preceding sentence would apply
in the case of any employee eligible for the first plan year under a newly established section 401(k)
plan, or would apply in the case of the first plan year in which an employee becomes eligible under
an existing section 401(k) plan.

Practice No. 5.1

-

Periodic reports compare
investment performance against appropriate index,
peer group, and investment policy statement
objectives.


Practice No. 5.2

-

Periodic reviews are made of
qualitative and/or organizational changes of
investment decision
-
makers.


Practice No. 5.3

-

Control procedures are in place to
periodically review policies for best execution, soft
dollars, and proxy voting.


Monitor and Supervise

Practice No. 5.4

-

Fees for investment management are
consistent with agreements and with the law.



Practice No. 5.5

-

“Finders fees,” 12b
-
1 fees, or other
forms of compensation

that have been paid for asset
placement are appropriately applied,

utilized, and
documented.

Monitor and Supervise

1.
Determine if YOU are a fiduciary


2.
Determine which of your Employees are
fiduciaries


3.
Understand the responsibilities that go with
being a fiduciary

What Next?

4.
Understand and communicate to your
employees the personal liability that goes
with being a fiduciary

5.
Ensure that all aspects of fiduciary
responsibility are being met by you and
others in your firm

6.
Document the processes in place that are
consistent with prudent investment
practices

What Next?

Summary &
Questions

Investment Fiduciary Responsibility

. . .
Understanding the Plan Sponsor’s Role