INCORPORATING FIDUCIARY SERVICES Adding value to your practice ERISA Section 3(38) & 3(21)
HOW DOES THE LATEST NEWS AFFECT ME? THE GOVERNMENT…THE COURTS • Department of Labor Conflict of Interest Rules • SEC Best Interest Rule • Fifth Circuit vacates Fiduciary Rule! NEW PARTIES EMERGE • SEC • Litigation • States • Broker-Dealer requirements
WHAT DOES THE FUTURE HOLD? FOR PLAN SPONSORS • Their liability didn’t change – still want protection FOR PLAN ADVISORS • Advisors • Do I have to be a fiduciary? Exclusions (platform, monitoring, and education) • Can I be a 3(21) Fiduciary with a 3(38) plan level fiduciary? • Impartial Conduct Standard • Contracts! 25% o fall litigation now includes advisors
WHAT DOES THE FUTURE HOLD? FOR LITIGATION NEW INFLUENCES New wave of litigation: 125 unheard cases; it State enforcement • • is not slowing down! Connecticut, Nevada, New Jersey, New • Low hanging fruit has moved to lower York, California, Missouri, South • hanging fruit. – process under fire. Carolina, South Dakota, and Massachusetts (Scottrade) Proprietary products • Any arrangement where the plan Broker-dealers – Merrill, Cetera, and Waddell • • participant is caused to pay more than & Reed they otherwise would (Plan putting the plan interests ahead of the PROCESS, PROCESS, PROCESS = The key to participant interest) • arguing “prudent” versus “perfect” ERISA buckets, Revenue Sharing, etc. • Party in interest litigation • Chevron litigation – Big victory for Plan • Sponsor Process is the key to success • Invesco – New wave of litigation? • Seeded ETFs, 150 options, liquidity • risk, and participant data
WHAT IS THE RISK? Failure to Diversify Brings $15 Million Judgement SEC exam questions dive deeply into retirement-account advice Excessive-fee suit targeting $9 million 401(k) plan could be 'harbinger' for industry Ramifications of Supreme Court decision on 401(k) fee lawsuit run deep Money market funds come under fire in spate of 401(k) suits MassMutual Sued Over Stable New 401(k) suit targets Vanguard fund fees Value Fund Fees
WHAT IS THE DEPARTMENT OF LABOR RISK? DOL, 2017: • 2,014 investigations closed • 65.3% resulted in violations • $1.1 billion collected by the DOL • 174,603 informal inquiries by participants • 735 cases opened as a result of DOL inquiries • The DOL has increased enforcement under the Trump Administration Source: United States Department of Labor
THE VALUE PROPOSITION OF A 3(38) FIDUCIARY Investment Methodology • CFA-led and CEFEX-certified • Supports open architecture and platform specific lineups including index, asset allocation, and target date funds • Independence; no conflicts of interest Centre for Fiduciary Excellence (CEFEX) has certified IRON Financial. Fund Selection/Monitoring • Daily monitoring of plan investments An industry-level certification helps ensure • Systematic model-based approach that the advice given is both • Cost efficient, high-quality fund conflict-free and managers with established track independent. record
RETIREMENT PLANS FOR THE 21 ST CENTURY Platform 3(38) Fiduciary Services Advisor 3(21) Fiduciaries IRON Financial ERISA 3(38) Plan Level Fiduciary Services Non Fiduciary Advisor, 3(21) Protection for the Fiduciary Advisor, Plan Sponsor Managed Accounts ERISA 3(38) Participant level Services Participant level advice to address participant outcomes
PLATFORM LEVEL ERISA SECTION 3(21) VS. ADVISOR 3(21) FIDUCIARY ERISA Section 3(21) • Allows Plan Sponsors to choose the investment selections on their own. Alternatively, they may hire an INFLUENCE advisor or investment manager to assist them. In either case, the Sponsor is still a fiduciary. ERISA Section 3(38) CONTROL • A 3(38) investment manager is hired by the Plan to make all investment decisions. The hiring of a 3(38) fiduciary alters the Plan Sponsor’s fiduciary responsibility as the liability DISCRETION now relates to the choosing and monitoring of a 3(38) investment manager.
3(38) and 3(21) Advisor Guide
DIFFERENTIATING FIDUCIARIES Flexible 3(38)… What you don’t know could come back haunt you. • Why do some ERISA 3(38) Fiduciaries allow flexibility and others do not? • Process • performance standards • Convenience • 1104(a)(1) comes into play as advisor or plan sponsor will be deemed a co-fiduciary - must monitor the 3(38) • Are there any ramifications of doing that? • Would the DOL hold the advisor/plan sponsor as a fiduciary? • Plaintiff’s attorneys?
PERFORMANCE STANDARDS • All factors should be considered • Service fee • Weighted average fund cost • Performance • What would Schlicter say? Quartile 1 Quartile 2 Quartile 3 Quartile 4 IRON Most other 3(38)s
The Sample Benchmarking Analysis is representative of the type of report that IRON can prepare to assist Plan Fiduciaries in determining the performance and fees of Current Plan Funds versus Proposed Plan Funds. This Example is not based on any particular platform and in no way represents actual Savings for any Plan. This Sample report is intended to demonstrate IRON’s ability to provide the Plan Fiduciaries with the knowledge necessary to make an informed decision when reviewing all the relevant factors in deciding on an Advisor. Plan Fiduciaries should not base any decisions on this or any other report that is not specifically prepared for the Plan based on the Plan Investments and expenses. The case studies in this presentation are for illustration purposes only.
WHY IRON FINANCIAL? AS A FIDUCIARY AS A FIRM • Complete independence – • Headquartered in Northbrook, IL National Platform level CEFEX • Approximately $4.1 billion in certified Investment Manager AUM* • Over 2,900 plans managed as ERISA 3(38) Fiduciary • Backed by a diverse team Employees/partners: 31/6 • Clear contrast with IRON 3(38) (Including 2 CFAs and 5 AIFs) service level vs. competitors’ “canned approach” with potential • SEC Registered Investment conflicts of interest Advisory Firm • Business insurance coverage (reviewed annually) – $10m per claim • Nationally recognized Wagner Law Group serves as legal counsel *As of 6/30/2018
The above Sample Benchmarking Analysis is representative of the type of report that IRON can prepare to assist Plan Fiduciaries in determining the performance and fees of Current Plan Funds versus Proposed Plan Funds. This Example is not based on any particular platform and in no way represents actual Savings for any Plan. This Sample report is intended to demonstrate IRON’s ability to provide the Plan Fiduciaries with the knowledge necessary to make an informed decision when reviewing all the relevant factors in deciding on an Advisor. Plan Fiduciaries should not base any decisions on this or any other report that is not specifically prepared for the Plan based on the Plan Investments and expenses. The case studies in this presentation are for illustration purposes only. Investments within portfolios, and therefore, portfolios, involve risk and the possibility of loss, including a permanent loss of principal. Actual returns for individual portfolios managed by IRON Financial, LLC may vary and do not necessarily coincide exactly with the returns for the performance group. Actual performance of client portfolios may differ materially due to the timing related to the actual deployment and investment of a client portfolio, the reinvestment of dividends, length of time various positions are held, client objectives and restrictions, and fees and expenses incurred by the individual portfolio. Please see the Advisors ADV Part 2 for further disclosures. Investment results shown above are based upon the particular securities selected. The charts, tables, performance and other information shown are provided to you for informational purposes only and are not intended to be and do not constitute investment or tax advice nor an opinion or recommendation regarding the appropriateness of any investment. The material contained in this document is for general information purposes and is not intended as an offer or a solicitation for the purchase and/or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. Future returns may differ significantly from the past due to materially different economic and market conditions. Diversification does not ensure a profit or guarantee against loss. Performance results for the above are unaudited. Past performance should not considered indicative of future performance.
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