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4/15/2015
Fully Understanding Your Fiduciary Responsibilities as an Investment Steward
Presented by: Patrick Geary, AIF® Managing Principle, Cornerstone Wealth Advisory April 27, 2015 3:30 pm – 4:20 pm
GFOA‐PA 2015 Annual Conference
“Non‐ERISA” ≠ “Non‐Fiduciary”
• ERISA does not apply to government‐sponsored plan
• Absent ERISA, does a fiduciary standard still apply to government plan sponsors?
YES!
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Fiduciary Standards Precede ERISA
The concept of managing another’s property with the duty of good faith, loyalty and prudence is deeply rooted in antiquity:
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The code of Hummurabi (c. 1700 B.C.)
Judeo‐Christian tradition
Confucius & Qing Dynasty law (1644‐1911)
Roman Law (mandatum) & philosophy (Cicero)
Magna Carta, (chs 2‐5 (1215 AD))
English Common Law
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
State Laws Govern Non‐ERISA Plans
Alabama
Alaska
Arkansas
California
Arizona
Colorado
Connecticut
Florida
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Massachusetts
Michigan
Mississippi
Missouri
Montana
Nevada
Pennsylvania
Ohio
Oklahoma
Tennessee
Texas
Virginia
Washington
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
State Laws Govern Non‐ERISA Plans
• At least 31 states have adopted fiduciary standards similar to ERISA “prudent man” standard
• At least 15 states use the ERISA standard word for word
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
PA Code: Title 20 ‐ Chapter 73
Definition of FIDUCIARY
GOOD NEWS
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A fiduciary may accept, hold, invest in, and retain, any of the investments authorized by this chapter, and shall not be liable for loss on such investments so long as he exercises due care and prudence in the performance of his duties in regard to them. “Legal investment” or “authorized investment” or words of similar import used in a trust instrument shall be constructed to mean any investment authorized by this chapter.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
PA Code: Title 20 ‐ Chapter 73
Definition of FIDUCIARY
BAD NEWS
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Any investment shall be an authorized investment if a purchased or retained in the exercise of that degree of judgement and care, under the circumstance then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income to be derived therefrom as well as the probable safety of their capital. The authorization to make and retain investments pursuant to this subsection shall be in addition to, and independent of, authorization to make investments pursuant to other provisions of this chapter shall not affect investments also authorized by this subsection.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
General Guidelines in Behavior
Generally speaking the investor has to:
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Exercise reasonable care, skill and caution
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Must review the trust assets
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Invest and manage the pension funds solely in the interest of the beneficiaries
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Act impartially in investing and managing funds
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complies with the prudent investor rule followed in light of the facts and circumstances existing at the time of a particular decision, i.e. constantly changing
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Plan Sponsors Worry About Fiduciary Risk
HOW IMPORTANT IS THIS TO YOU?
Very
Quite
Neutral
Somewhat
Not at All
Providing the right investments
40%
49%
7%
3%
1%
Retirement readiness of active participants
34%
44%
17%
5%
0%
Reducing plan risk and potential fiduciary responsibility
31%
42%
17%
8%
2%
Improving participant education
29%
52%
12%
7%
0%
Better understanding and potentially reducing plan expenses
25%
49%
18%
7%
1%
Improving plan governance, compliance, and controls
23%
34%
28%
13%
2%
Fee disclosure regulations – 404(a) and 408(b)(2)
22%
38%
22%
14%
4%
Improving the quality of administrative services
18%
42%
26%
11%
Improving asset allocation
14%
46%
29%
8%
3%
Introducing new retirement income solutions
7%
22%
42%
19%
10%
3%
Source: Deloitte Annual Plan Benchmarking Survey 2013 to 2014 edition
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
Plan Sponsors Worry About Fiduciary Risk
HOW IMPORTANT IS THIS TO YOU?
Very + Quite
Providing the right investments
89%
Improving participant education
81%
Retirement readiness of active participants
78%
Better understanding and potentially reducing plan expenses
74%
Reducing plan risk and potential fiduciary responsibility
73%
Fee disclosure regulations – 404(a) and 408(b)(2)
60%
Improving the quality of administrative services
60%
Improving asset allocation
60%
Improving plan governance, compliance, and controls
57%
Introducing new retirement income solutions
29%
Source: Deloitte Annual Plan Benchmarking Survey 2013 to 2014 edition
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Did You Know Plan Sponsors are Confused?
A survey of 100 random plan sponsors revealed startling observations:
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> 50% did not think of themselves as a fiduciary
>50% thought a Fiduciary Warranty would defend them from a participant lawsuit
< 50% understood that the fiduciary must only be loyal to the plan participant
< 50% understood that the fiduciary standard of care is that of an expert
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Did You Know Plan Sponsors are Confused?
A survey of 100 random plan sponsors revealed startling observations:
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Most thought their vendor accepted full discretion and liability, while they almost certainly did not.
Finally, an astonishing 98% are either “very comfortable” or “somewhat comfortable” that they have taken every reasonable precaution to insulate themselves against legal challenges stemming from a breach of fiduciary responsibility.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
Plan Sponsors Think Fiduciary Status is All or None
VS
Fiduciary Responsibility
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Some Vendors Offer Fiduciary Warranties
“We stand with you, but not as a fiduciary.”
ABC™ Fiduciary Warranty
Plan sponsors of qualified plans subject to ERISA rule (“Plan”) have a series of education and fiduciary management tools available to them through the ABC™ Group Retirement Series. These management tools, provide a comprehensive and systematic process to help plan fiduciaries select, evaluate and monitor finds using Fiduciary Responsibility
generally accepted investment principles and modern portfolio theories. These are the same standards as ERISA places on fiduciaries for satisfying there investment duties under ERISA’s prudent man rule. While we are not acting as a fiduciary for the Plan in selecting and monitoring the investment options in our offering, we stand behind our comprehensive fiduciary program.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Some Vendors Accept “Co‐Fiduciary” Status
Manage fiduciary As a sponsor of retirement plans, you carry a great deal of responsibility for managing your plan on behalf of your plan participants. At XYZ Financial Group ™, we understand this is a significant obligation and we’re prepared to share some of that burden.
As for your retirement plan service provider, the XYZ Financial Group™ helps you by sharing some of the fiduciary responsibilities for the Separate Accounts that are part of our Foundation Funds.
ABC‐XYZ Life Insurance Company, a member company of XYZ Financial Group™, as an investment manager, is a co‐fiduciary with regard to the selection, monitoring, and retention of the portfolio managers for its Separate Accounts.
responsibility
• Accurate processing of information
• Helping prevent fraud and embezzlement
WHAT DOES THIS MEAN TO YOU?
You can rest assured we have done the homework necessary to make sure the Separate Accounts we offer have been selected with the care and the portfolio managers are consistently monitored.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
Some Vendors Offer 3(38) Services
Providing You Peace of Mind
You have an ongoing responsibility to monitor investment performance and adjust the investment lineup of your plan as needed. Our due‐
diligence process, backed by the expertise of third‐party consultants, will help provide you with the peace of mind that you are meeting your obligations and provides a platform for you and your advisor to make informed decisions for your plan.
In additions to the protection for investment selection provided at the product level, we also provide protection for investment selection at the plan level, as well as protection for administrative duties related to your plan.
You have selected these services:
Investment Manager Service 3(38)
Administrative Support Service – 401(k) Admin Advantage
Participant Notice Delivery –Level 1
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
The Sales Process Gives Many Promises
“Don’t worry, we are a co‐fiduciary!”
But in Court, Vendors Take a Vastly Different Position
“Page 45 says we are not a plan fiduciary”
Fiduciary Responsibility
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
DID YOU KNOW?
• One of the largest providers of ERISA 3(38) investment manager services limits their contractual liability to $4,000 on a $10,000,000 plan! (4 pbs)
• The directed corporate trustee, according to a judge’s decision is “Immune from judicial inquiry.” Renfro v. Unisys Corp., 671 F. 3d 314 – Court of Appeals, 3
rd Circuit 2011
• One of the largest providers of 401(k) services “Was pleased with the outcome” after the judge ruled their client faces upwards $100 million in fiduciary liabilities but they themselves were not a fiduciary.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
DID YOU KNOW?
• A very large 401(k) vendor filed suit claiming their client (the plan trustee) was “Reckless” in “Failing to monitor the vendor” for its alleged breaches of fiduciary duty. The vendor demanded the trustee pay for the vendor’s prohibited transactions. Haddock v Nationwide Life and Financial Services, Case 3:01 – cv‐01552‐SRU Document 290 Filed 10/12/2007
• The resulting harm to the Plans and/or the Plan participants was the fault of the Trustees, each of whom breached his fiduciary responsibility to manage and control the assets of his respective Plan; Read and understand the terms of contracts, prospectuses, and other documents relating to the Plan and its participants. Haddock v Nationwide Life and Financial Services, Case 3:01 – cv‐01552‐SRU Document 290 Filed 10/12/2007
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
DID YOU KNOW?
• Assure that any fees, charges or other compensation being paid directly or indirectly was reasonable in relation to the services provided; and investigate alternatives in the marketplace. Haddock v Nationwide Life and Financial Services, Case 3:01 – cv‐01552‐SRU Document 290 Filed 10/12/2007
• Despite providing fiduciary warranties covering billions of dollars of plan assets—there is no record anywhere of any fiduciary warranty paying a single dollar to a plan participant or sponsor.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Fiduciary Roles
Named Fiduciary (Plan documents commonly name the plan sponsor/employer)
Plan Administrator
Trustee
Investment Manager
Investment Advisor
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
Fiduciary Roles
The Directed Trustee is “Immune from Judicial Inquiry”
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As we have explained, a directed trustee is essentially “immune from judicial inquiry” because it lacks discretion, taking instructions from the plan fiduciary that it is required to follow. Renfro v. Unisys Corp., 671 F. 3d 314 – Court Appeals, 3 Circuit 2011
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Tussey V Abb Should be Read by all Plan Sponsors
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$36.9 Million Award
$13.5 Million Plaintiff Legal Fees
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$92.9 Million and Counting
6.64% of Plan Assets ($1.4 Billion)
$42.5 Million Defense Legal Fees
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Fiduciary Roles
Fidelity is “Pleased with the Outcome,” Says Spokesman
• Despite the fact that the legal battle with ABB and Tussey will continue, Fidelity is pleased with the outcome, says Fidelity spokesman Vincent G. Loporchio who said “Fidelity has prevailed on all claims asserted against it in this case.”
• There is no liability for Fidelity.
• The claim is against ABB because they are a fiduciary.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Find, Win & Keep Fiduciary Clients
THERE IS HELP
Getting stewards to appreciate their fiduciary duties is often a kin to getting a dog to swallow a pill.
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
Global Fiduciary Precepts
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5.
6.
7.
Know standards, laws, and trust provisions
Diversify assets to specific risk/return profile of client
Prepare investment policy statement
Use “prudent experts” and document due diligence
Control and account for investment expenses
Monitor the activities of “prudent experts”
Avoid conflicts of interest and prohibited transactions
fi360® global fiduciary insights
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
From Precepts to Practices
• Precepts are principles founded in law.
• Practices are applications of the precepts, founded in law and research. • A Standard of Practices constitutes a body of knowledge as to what is required for a person or organization to meet recognized expectations
fi360® global fiduciary insights
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Periodic Table of Fiduciary Practices
1 2 ORGANIZE FORMALIZE
4 3 MONITOR IMPLEMENT
fi360® global fiduciary insights; Periodic table of Global Fiduciary Practices for Investment Stewards
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
Investment Steward and Advisory Practices: Step 1 ‐ Organize
1.1 – The Investment Steward demonstrates an awareness of fiduciary duties and responsibilities.
1.2 – Investments and investment services under the oversight of the Investment Steward are consistent with applicable governing documents.
1.3 – The roles and responsibilities of all involved parties (fiduciaries and non‐fiduciaries) are defined and documented.
1.4 – The Investment Steward identifies conflicts of interest and addresses conflicts in a manner consistent with the duty of loyalty.
1.5 – The Investment Steward requires agreements with service provides to be in writing and consistent with fiduciary standards of care.
1.6 – Portfolio assets are protected from theft and embezzlement.
1 ORGANIZE
fi360® global fiduciary insights; Periodic table of Global Fiduciary Practices for Investment Stewards
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Investment Steward and Advisory Practices: Step 2 ‐ Formalize
2.1 ‐ An investment time horizon has been identified for each investment portfolio.
2.2 ‐ An appropriate risk level has been identified for the portfolio.
2.3 ‐ An expected return to meet each investment objective for the portfolio has been identified.
2.4 – Selected asset classes are consistent with the portfolio’s time horizon, risk, and return objectives.
2.5 – Selected asset classes are consistent with implementation and monitoring constraints.
2 FORMALIZE
2.6 – The investment policy statement contains sufficient detail to define, implement, and monitor the portfolio’s investment strategy.
2.7 – When socially responsible investment strategies are elected, the strategies are structured appropriately.
fi360® global fiduciary insights; Periodic table of Global Fiduciary Practices for Investment Stewards
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Investment Steward and Advisory Practices: Step 3 ‐ Implement
3 IMPLEMENT
3.1 – A reasonable due diligence process is followed to selected each service provider in a manner consistent with obligations of care.
3.2 – When statutory or regulatory investment safe harbors are elected, each investment strategy in implemented in compliance with the applicable provisions.
3.3 – Decisions regarding investment strategies and types of investments are documented and made in accordance with fiduciary obligations of care.
fi360® global fiduciary insights; Periodic table of Global Fiduciary Practices for Investment Stewards
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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4/15/2015
Investment Steward and Advisory Practices: Step 4 ‐ Monitor
4.1 – Periodic reports are used to compare investment performance against appropriate index, peer group, and investment policy statement objectives.
4 MONITOR
4.2 – Periodic reviews are made of qualitative and/or organizational changes of Investment Advisors, Investment Managers, and other service providers.
4.3 – Control procedures are in place to periodically review policies for trading practices and proxy voting.
4.4 – Periodic reviews are conducted to ensure that investment‐related fees, compensation, and expenses are fair and reasonable for the services provided.
4.5 – There is a process to periodically review the Steward’s effectiveness in meeting its fiduciary responsibilities.
fi360® global fiduciary insights; Periodic table of Global Fiduciary Practices for Investment Stewards
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
Handouts
• fi360® Self‐Assessment of Fiduciary Excellent for Investment Stewards
• fi360® Periodic Table of Global Fiduciary Practices
• AIF™ The Benefits of Choosing an Accredited Investment Fiduciary®
Fiduciary Responsibilities * GFOA‐PA 2015 Annual Conference * Patrick Geary, AIF®
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