Stopping the Race to the Bottom - Thomas Kmak

Stopping the Race to the Bottom
May 2015

Copyright© Fiduciary Benchmarks
All 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
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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”
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The Solution:
FBi’s Benchmarking Service (U.S. Patent 8,150,198)
vs.
Fees
Cost Drivers
Value Factors
Quality of Provider
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The Solution:
Return on Investment is 10 for 1…in the first year
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Agenda
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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.html
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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
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“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
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Question:
Which of these variables changed by 20% will have
the GREATEST IMPACT on Retirement Readiness:
1. Retiring 5 years early at age 62
2. Contributing 8 years earlier at age 34
3. 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
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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%
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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
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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 Provider
to 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 DATA
All data is scrubbed for accuracy
and normalized before being placed
in our database. This helps enure all
comparisons are valid and
consistent.
MATHEMATICALLY DRIVEN
We 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.”
COMPARE
Because 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.
UNDERSTAND
We 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.”
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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
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Agenda
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The Problem:
Firms Using 5500 Data to Reach Wrong Conclusion
Plan A Average Salary Deferral = $2,500
Plan 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 A
2. Plan B
3. I Don’t Know
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▪ 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
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The Problem:
No Repeatable Process
Your Clients WANT/NEED Guidance on
how to make this increasingly
important fiduciary decision
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Essential #2:
Build a Fair and Repeatable Process
Examine
Value
Delivered
Assess
Scope of
Services
Review
Provider
Quality
Customize
Benchmark
Group
Evaluate
Fees
Judging:
“to form an opinion about through careful weighing of
evidence and testing of premises”
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The Problem:
Building Benchmark Groups for various Service Providers
RKs and
TPAs
Investment Mgrs Advisors
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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
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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”
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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
Provider
Quality
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The Problem:
People think Recordkeeping is a Commodity
Versus
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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
Assess
Scope of
Services
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PLAN SPONSORS PARTICIPANTS
The Problem:
Demonstrating Value to BOTH of your clients
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Essential #6:
Examine Value Delivered to Plan Sponsor
Examine
Value
Delivered
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Essential #7:
Track & Compare Fees BUT…Allow for Extra Credit
Evaluate
Fees
• Start with a Base Fee and Adjust for:
A. Fiduciary Responsibility
B. Extra Communications
C. Extra Meetings/Work
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7 Benchmarking Essentials
1. Use the RIGHT Data
2. Build a Fair and Repeatable Process
3. Customize Benchmark Groups by Service Provider
4. Consider the Quality of the Service Provider
5. Examine Scope of Services which Drives Plan Costs
6. Examine Value Delivered: to the Plan Sponsor and their Participants
7. Track & Compare Fees BUT…Allow for “Extra Credit”
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The impact per one prominent ERISA attorney:
1. Know what your fees are
2. Compare them to benchmarks
3. Monitor on an ongoing basis
4. Make sure you have real documentation
5. Hire Third-Parties for an independent review
6. Make sure you conduct a fiduciary audit
7. 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
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• 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
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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
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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.”

All Rights Reserved
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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Stopping the Race to the Bottom - Thomas Kmak