Fee Policy Statement Kit: Best Practices for Managing Plan Expenses - Brian Bouchard

1. Q4 2014 TP476 2015 Fee Policy Statement: Best Practices for Managing Plan Expenses Under ERISA

2. 1974 ERIS A 1980’s 401(k) Plans 2000 - 2002 Corporate Fiduciary Governance Enron, WorldCom Tyco 2002 fi360 Fiduciary Best Practices – Investment Policy Statement 2006 Pension Protection Act 2012 408(b)2 The Game Changer 2014 Fee Policy Stateme nt Evolution of DC Plan Governance 2 This material is not for distribution to plan participants.

3. Opening “Pandora’s Box” – Fee Documentation Process 8 This material is not for distribution to plan participants.

4. Basic Fiduciary Duties ▪ Acting solely in the interests of the participants & their beneficiaries ▪ Being “prudent” ▪ Paying only reasonable and necessary expenses of the plan ▪ Following the terms of the plan ▪ Not engaged in prohibited transactions Source: U.S. Department of Labor (DoL) 4 This material is not for distribution to plan participants.

5. Investment Policy Statement & The Investment Committee How to Write an Investment Policy Statement The IPS is the cornerstone of a prudent process.  Most important fiduciary task  Defines roles and responsibilities  Defines a prudent process  Paper trail of a prudent investment process  How can a fiduciary follow a process that has not been defined in writing? Best Practices for Investment Committees Investment committees purpose and objectives 5 This material is not for distribution to plan participants.  Establish plan policies and procedures for investment fiduciaries  Establish and document formal process to make investment decisions  Create and execute Investment Policy Statement

6. Regulatory / Judicial Landscape

7. Regulatory Landscape New regulations are designed to provide plan sponsors and employees with more information from which to make better- informed decisions. Jason C. Roberts, Esq Partner at Retirement Law Group, PC & CEO of Pension Resource Institute, LLC Quotes are for information only and should not be considered an endorsement, testimonial or recommendation of any product or viewpoint. 7 This material is not for distribution to plan participants.

8. Regulatory Disclosures – 408(b)(2) & 404(a)(5) Source: Pension Resource Institute Photos and quotes are for information only and should not be considered an endorsement, testimonial or recommendation of any product or viewpoint. ERISA Sec. 408(b)(2) ▪ Disclosures to plan sponsors ▪ Effective July 1, 2012 for all new and existing contracts ▪ Disclosure by all Covered Service Providers (CSP) ▪ Compensation for services rendered ▪ Fees must be reasonable ▪ Benchmarking ERISA Sec. 404(a)(5) ▪ Disclosures to eligible employees ▪ Effective August 30, 2012 (calendar year plans) ▪ Plan more than 100 participant, add’l disclosure ▪ Non-event? The disclosures required under these regulations have the potential to highlight gaps in current fee allocation policies. 8 This material is not for distribution to plan participants.

9. New Regulations Impacting Fee Allocation Source: Pension Resource Institute Covered Service Providers Required to provide disclosures into a service contract/agreement. Any changes must be disclosed no later than 60 days from the date the service provider is notified of such change. Form 5500/Schedule C Participant Disclosures 9 This material is not for distribution to plan participants. Plan Sponsors Required to be filed annually Must be provided prior to eligible employees annually and participants quarterly

10. ▪ Settled for $35 Million ▪ Unreasonable recordkeeping & admin fees ▪ Funds with excessive fees used incorrect benchmark ▪ Multi-manager structure – unreasonable ▪ Inability to aggregate assets to obtain better pricing ▪ Delayed crediting participant contributions 10 This material is not for distribution to plan participants. ▪ Improper use of fund revenue sharing ▪ Plan document stated, “the costs of administration of plan will be paid by the company.” ▪ Plan amended to state, “the costs of administration of the plan, net of any adjustments by CSP, will be paid by the company.” ▪ +$35 Million in damages failed to monitor required fees for recordkeeping services ▪ As plan AUM grew, recordkeeper revenue grew beyond required revenue needed ▪ ABB failed to renegotiate (fiduciary breech) ▪ Improperly used revenue sharing to subsidize corporate expenses associated with payroll and health & welfare plan admin “Had these plans incorporated a Fee Policy Statement, they may have avoided significant losses of time, reputation & expense associated with litigating with plan participants” -Jason C. Roberts, Esq Partner at Retirement Law Group, PC & CEO of Pension Resource Institute, LLC Lessons Learned: Fee Monitoring & Allocation Quotes are for information only and should not be considered an endorsement, testimonial or recommendation of any product or viewpoint.

11. What Does the DoL Expect of Plan Sponsors? DoL Advisory Opinion 2013-03A ▪ Plan fiduciaries must: – Assure that the compensation the plan pays directly or indirectly to a CSP for services is reasonable, including any revenue sharing – Act prudently and in the best interests of plan participants and beneficiaries in the negotiation of the specific formula and methodology for revenue sharing – Understand the formula, methodology and assumptions used by the CSP in arriving at the amounts to be returned to the plan or used to pay plan service providers – Be capable of periodically monitoring the actions taken by the CSP in its duties to assure, that amounts to which the plan may be entitled are correctly calculated & applied Source: U.S. Department of Labor (DoL), Pension Resource Institute 11 This material is not for distribution to plan participants.

12. Refresher: Understanding Plan Costs & Revenue Sharing Most of a plan’s costs are offset by the investments in a practice known as “revenue sharing” here’s how it works: 12 This material is not for distribution to plan participants. Understanding your plan's costs: Investment expenses (Expense ratios and management fees) + Recordkeeping and administration fees + Advisory expenses (Investment advisors, consultants, accountants, attorneys) = Total Plan Cost

13. Understanding Service Provider Economics ASSET GROWTH IN THE PLAN OVER TIME Assets Time 13 This material is not for distribution to plan participants.

14. Fee Policy Statement: Controlling and Allocating Plan Expenses

15. What is a Fee Policy Statement? ▪ A plan governance tool to provide plan fiduciaries with a documented and systematic approach to making decisions affecting the management of the plan. – Who is paying the fee to the recordkeeper of the plan? – How are plan expenses paid or allocated? – How is excess revenue being captured and allocated? – How often are fees monitored? 15 This material is not for distribution to plan participants

16. Creating a Fee Policy ▪ Purpose – To satisfy ERISA and prudently discharge duties to pay expenses ▪ Fee policies – How to pay for and allocate plan expenses ▪ Monitoring frequency ▪ Method of revenue sharing recapturing – PERA / ERISA account – Fee equalization – Ensure CSPs are following the policy 16 This material is not for distribution to plan participants

17. The Fee Documentation Process

18. Are you Familiar with PERAs? PERA – Plan Expense Recapture Account ▪ Mechanism to collect 12b-1,Sub-TA other forms of revenue sharing ▪ Maintained by recordkeeper to pay for eligible plan expenses Two Structures ▪ In-Plan Account – revenue sharing amounts are considered plan assets ▪ Recordkeeper Account – revenue sharing payments are not considered plan assets Distinction is important as it impacts the Plan fiduciaries’ duties under ERISA Note: If amounts held in PERA are considered plan assets, fiduciaries must determine the method in which any refunds (excess revenue) will be credited back to participant accounts. 18 This material is not for distribution to plan participants

19. 19 This material is not for distribution to plan participants Settlor v. Non-Settlor Expenses What are eligible plan expenses under ERISA? Source: Jason Roberts, PRI The following fees typically are considered non- settlor fees and can be paid from plan assets: Recordkeeping fees Participant education fees Trustee fees Legal fees (related to non-settlor functions, i.e. preparation of required ongoing plan amendments) Custodial fees Investment management fees Plan accounting fees Plan fidelity bond fees Plan audit fees Fees associated with IRS determination letter application Plan actuarial service fees Loan administration fees Reporting fees (Form 5500, etc.) QDRO fees Participant communication fees The following fees typically are considered settlor fees and cannot be paid from plan assets: Plan design or other fees associated with the establishment of the plan EPCRS/VCP compliance fee Plan termination fees VFC correction fees Fees associated with discretionary plan amendments Amendment of plan for a merger or spin-off Audit CAP sanctions

20. Does the Provider Offer a Recapture Account or Other Equalization Method? 20 This material is not for distribution to plan participants Questions ▪ If PERA, then how are credits accounted for (e.g. on books of provider vs. unallocated plan account)? ▪ What process does the plan have to monitor the credits? ▪ If equalized, how does the method affect various classes of participants? ▪ Is the arrangement reasonable?

21. Expense Allocation Methods

22. Background: Expense Allocation Methods 22 This material is not for distribution to plan participants Traditional methods for allocating plan expenses include: ▪ Solely paid for by the company (from corporate assets) ▪ By the company less any credits received from investments (revenue sharing) ▪ Solely paid by the plan’s participants Methods for administrative expenses paid by the plan/participants: ▪ CSPs billing plan directly deducting expenses from participants’ accounts or from forfeiture accounts ▪ CSPs offsetting fees with revenue sharing, deducting additional cost from participants ▪ Use of PERA to collect revenue sharing to pay CSPs directly and excess revenue sharing returned to Plan or retained by the recordkeeper. Fiduciaries must determine if the expense is properly paid from plan assets and fee allocation method among participants (e.g. on pro rata or per capita basis). Source: Jason Roberts, PRI

23. Allocating Expenses and/or Credits 23 This material is not for distribution to plan participants ▪ Pro Rata: allocated on the basis of the account size of the participant in relation to the plan’s total assets ▪ Per Capita: spread out equally among all participants ▪ Hybrid Method: combined pro rata & per capita approach ▪ Fee Equalization: recordkeeping costs are applied evenly across all funds in the plan ▪ Individual Charges: charges to individuals who receive specific services, such as loan fees, QDROs, etc. Source: Jason Roberts, PRI

24. Which Approach is Reasonable? - Appropriate? - Fair? Source: Callan DoL’s FAB 2003-3: Choosing dollar or basis point fee deemed “most appropriate” depends on what is “solely in the interest of participants”. It can disfavor one class of participants - “provided that a rational basis exists for the selected method”. Flat dollar into basis point charge 24 This material is not for distribution to plan participants Fees assessed on a percentage basis Hypothetical Plan Example: Plan Assets: $100M # Participants: 2,000 Admin Costs: $100k

25. Fixed Fees – Changing How Services are Paid Example of Fixed Fee Arrangement Source: Callan 25 This material is not for distribution to plan participants

26. What is the Right Choice? ▪ Determine the source of fee payment—the plan sponsor, participant, or a combination of both. ▪ Evaluate and select the method of fee payment—fixed fee or asset-based fee. ▪ Establish the payment approach—percentage fee, dollar fee, 12b-1, revenue sharing, and/or an internal allocation. Source: Callan 26 This material is not for distribution to plan participants

27. Ethos and the Prudent Process

28. 401k Ethos & the “Prudent” Process Don Trone Co-Author of 401k Ethos 28 This material is not for distribution to plan participants Ethos (ē-thäs) gr. The link between leadership behaviors, core values and a decision-making process

29. Ethos and Governance 29 This material is not for distribution to plan participants Provides a decision-making framework which grants the capacity to manage all three facets: regulatory, governance, and stewardship. This framework is the essence of ethos. Source: 3Ethos Licensed to the Leadership Center for Investment Stewards

30. 5 Step Decision-Making Process Source: 3Ethos Licensed to the Leadership Center for Investment Stewards CSP disclosures to determine the nature and sources of Compensation Examine Competing Interests of Plan Participants and Available Allocation Methods Develop a Fee Policy Statement that aligns with the Chosen Strategy Implement Fee Policy Statement and Incorporate Into Plan Documents Monitor Fees and Reconcile Payments 1 2 3 4 30 This material is not for distribution to plan participants 5

31. 31 This material is not for distribution to plan participants Leadership does not come with detailed maps – only a general sense of direction. Don Trone Co-Author of 401k Ethos Quotes are for information only and should not be considered an endorsement, testimonial or recommendation of any product or viewpoint.

32. Advisor Best Practices and Getting Started

33. Plan Sponsor Guide – for introducing the conversation and explaining how the FPS can help plan fiduciaries manage risk and save time ERISA Plan Expense Worksheet – for helping plan fiduciaries evaluate plan expenses Sample Fee Policy Statement – a framework for documenting decisions about expenses Implementing the Fee Policy Statement – Process and Sales Ideas Beyond Benchmarking: Advisor Best Practices & Tools The Advisor Guide and kit materials are designed to provide a framework for Reviewing plan expenses and working with plan sponsors to develop and implement a Fee Policy Statement. What Plan Sponsors need to access 33 This material is not for distribution to plan participants CSP(s) 408(b)(2) Disclosures Fiduciaries DOL / IRS Schedule C Form 5500 Employees/Participants 404(a) Disclosures

34. Document with a Fiduciary Audit File ✓ Fee Policy Statement Audit Files Checklist ▪ One of the most important best practices: Prudent process and consistent documentation ▪ The fiduciary audit file is one of the most valuable tools to document prudent process. ▪ Get it right, and get it in writing. ✓Plan Documents ✓Gov’t / Regulatory Requirements & Communications ✓Journals and Ledgers ✓Section 404(c) Compliance ✓ERISA Fidelity Bond ✓Participant Communication Documents ✓Investment Policy Statement ✓Third Party Service Provider Documents ✓Procedures and Minutes of All Meetings 34 This material is not for distribution to plan participants

35. Brian P. Bouchard Brian P. Bouchard, AIF ®, CRPC ®, CRPS ® Regional Retirement Consultant Brian Bouchard is the regional retirement consultant for the Northeast Region at Thornburg Investment Management. He has over 20 years of experience in qualified plan sales. At Thornburg, he is responsible for delivering the firm’s investment only retirement plan focused sales strategy and value-added services to plan advisor and retirement plan platform alliances. Prior to joining Thornburg, Brian was a retirement plan consultant at Merrill Lynch in New England, and a regional retirement director for the Morgan Stanley Smith Barney Retirement Group. Brian received his BA from The Catholic University of America, and a Graduate Certificate of Special Studies in Administration and Management from the Harvard University Extension School. He is currently registered with FINRA with a Series 7 and also holds the AIF, CRPC and CRPS designations. 35 This material is not for distribution to plan participants.

36. www.thornburg.com Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing. Not FDIC Insured. May lose value. No bank guarantee. Thornburg Funds are distributed by Thornburg Securities Corporation. 2300 North Ridgetop Road Santa Fe, New Mexico 87506 877-215-1330

Fee Policy Statement Kit: Best Practices for Managing Plan Expenses - Brian Bouchard

Fee Policy Statement Kit: Best Practices for Managing Plan Expenses - Brian Bouchard

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Fee Policy Statement Kit: Best Practices for Managing Plan Expenses - Brian Bouchard