The document discusses the current challenges facing 401(k) plan fiduciaries. It notes that fiduciaries are under increased pressure due to numerous lawsuits alleging excessive fees. The document recommends that fiduciaries delegate responsibilities, adopt passive investment strategies, provide full fee transparency to participants, offer education and advice programs, and regularly monitor fees and services. Fiduciaries need to ensure fees are reasonable and avoid potential conflicts of interest to limit their liability.

1. Current State of the 401(k) Market -It’s a tough time to be a fiduciary January 6, 2011 Presented by Peter S. AnastasianManaging Director – CJM Fiscal Management peter@cjmfiscal.com Charles MassimoPresident – CJM Fiscal Managementcharlie@cjmfiscal.com Twitter: @CJMFiscal

2. The Problem- It’s a Tough Time To Be A Fiduciary Pension law requires the fees for a 401(k) plan to be “reasonable” by service provider.

3. It’s A Tough Time To Be A Fiduciary “Small 401(k) Plans Often Pay Big Fees” Wall Street Journal August 3, 2009 “ Many small-business workers and employers are unaware of the magnitude of those charges.”

4. Eleanor Laise, "Earlier Retirement: Beating Back High Fees," Wall Street Journal, March 6, 2010. It’s A Tough Time To Be A Fiduciary Trend Toward Transparency and Lower Fees Wall Street Journal March 6, 2010 “. . . [courts recently] seem to be suggesting there are conflicts beneath the surface that need to be made more transparent . . .”

5. It’s A Tough Time To Be A Fiduciary Employee Allegations of Excessive 401(k) Fees Gain Ground July 29, 2010 “. . . The Edison case is one of more than two dozen lawsuits filed against U.S. employers in recent years. The suits allege that companies allowed 401(k) providers to stuff the plans with high-cost investments in exchange for reducing the administrative costs paid by the employers themselves. . . .” “. . . It's frustrating and disappointing that you expect to be treated honestly and fairly, and when you find out that you're not you almost feel cheated," said Suhadolc, a former maintenance mechanic at an Edison subsidiary in Illinois . . .” In the Edison case, Judge Wilson ruled that the company should have offered employees less costly "institutional" shares of the mutual funds in its plan rather than the normal "retail" shares available to regular investors. Employee Allegations of Excessive 401(k) Fees Gain Ground, Los Angeles Time, July 29, 2010

7. The Wal-Mart fee case has been sent back to the courts for review.

10. It requires disclosures in writing of information relating to fees, all direct and indirect compensation, and potential conflicts of interest and their status as an advisor or fiduciary.

12. It’s A Tough Time To Be A Fiduciary However, that just because a contract or arrangement is not covered by this regulation, those contracts or arrangements still have to be reasonable. This “obligates plan fiduciaries to obtain and carefully consider information necessary to assess…the reasonableness of the fees and expenses being paid for such services, and the potential conflicts of interest that might affect the quality of the provided services.”

13. How To Reduce Fiduciary Exposure While Creating A More Successful Investment Experience for Participants: Delegate fiduciary responsibility away. 3(21) vs. 3(38) Provide prudent portfolios which adopt a passive approach. Have complete fee transparency. Offer education and professional advice. Maximize plan design.

14. Fiduciary Advisor Salesman? Fiduciary?

15. Fiduciary ResponsibilitiesRecap of Key Principles The law (ERISA) focuses primarily on process, not results. Fiduciary decisions must be made with only the participant’s interest in mind. Fiduciaries may not have conflicts of interests. Fiduciaries must be knowledgeable regarding their areas of responsibility or hire independent professional advisors. ERISA has provisions for transfer and delegation of certain responsibilities and attendant liabilities to qualified third parties.

17. Co-fiduciaries may also be liable for “knowing participation,” enabling other fiduciaries to commit a breach, or knowledge of a breach, without taking efforts to remedy the breach.Implications of Fiduciary RolesFiduciary Liability for Breach of Duties

20. No explicit acknowledgement of fiduciary responsibility with respect to the plan or its participants.

21. May be subject to conflicts of interest.

22. Sole discretion for the investment options, such as mutual funds or model portfolios, placed on a plan’s menu.

23. Must be a bank, insurance company, or RIA.

24. Agrees to adhere to a fiduciary standard and is thereby subject to sole interest and exclusive purpose responsibilities.Broadly speaking, advisors may service 401(k) plans while assuming varying levels of fiduciary responsibility.

25. Fiduciary Responsibility and Financial Advisors ERISA § 3(21) Fiduciary (Limited Scope) ERISA § 3(38) Fiduciary Non-Fiduciary (compass image) (map image) (GPS image)

26. Provide Prudent Portfolios

27. Recipe for Increased Trustee Responsibility

29. Provide Prudent Portfolio's More Choices Lower Participation

30. Provide Prudent Portfolio’s Workers dislike having to chose investments more than anything else related to their 401K plan. Merrill Lynch study 2010

31. Provide Prudent Portfolio’s Global Portfolio Series Balanced 50% Equity 50% Fixed Income Equity 98% Equity 2% Fixed Income Conservative 40% Equity 60% Fixed Income Capital Appreciation 86% Equity 14% Fixed Income Defensive 26% Equity 74% Fixed Income Moderate 64% Equity 36% Fixed Income

32. Adopt A Passive Approach

33. Adopt A Passive Approach “The greater a trustee’s departure from one of the valid passive strategies, the greater it is the likely to be the burden of justification and also of continuous monitoring.” The Prudent Investor Act

34. Adopt A Passive Approach “Index funds are the only rational alternative for almost all mutual fund investors.” “A growing number of big investors are concluding that stock & bond pickers failed to add any value during market turmoil and shifting to index funds…” New York Times, July 13, 2008 “The best course for the average investor is to buy and hold an index fund for the long term.” Wall Street Journal, June 22, 2009 New York Times, March 9, 2008

35. Adopt A Passive Approach Percentage of Active Public Equity Funds That Failed to Beat the IndexJuly 2004-June 2009 % of Active Funds That Failed to Outperform Benchmark US Large Cap US Mid Cap US Small Cap Global International International Small Emerging Markets Equity Fund Category Source: Standard & Poor’s Indices Versus Active Funds Scorecard, August 20, 2009. Index used for comparison: US Large Cap—S&P 500 Index; US Mid Cap—S&P MidCap 400 Index; US Small Cap—S&P SmallCap 600 Index; Global Funds—S&P Global 1200 Index; International—S&P 700 Index; International Small—S&P Developed ex. US SmallCap Index; Emerging Markets—S&P IFCI Composite. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database.

36. Adopt A Passive Approach Percentage of Active Fixed Income Funds That Failed to Beat the IndexJuly 2004-June 2009 % of Active Funds That Failed to Outperform Benchmark Government Long Government Intermediate Government Short Investment-Grade Long Investment-Grade Intermediate Investment-Grade Short National Muni CA Muni Fixed Income Category Source: Standard & Poor’s Indices Versus Active Funds Scorecard, August 20, 2009. Index used for comparison: Government Long—Barclays Capital US Long Government Index; Government Intermediate—Barclays Capital US Intermediate Government Index; Government Short—Barclays Capital US 1-3 Year Government Index; Investment Grade Long—Barclays Capital US Long Government/Credit; Investment Grade Intermediate—Barclays Capital US Intermediate Government/Credit; Investment Grade Short—Barclays Capital US 1-3 Year Government/Credit; National Muni—S&P National Municipal Bond Index; CA Muni—S&P California Municipal Bond Index. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC.

37. Mutual Fund Performance Compared to the Market 32 Years (1977 – 2009) 0.6% Outperformed the market That’s only 1 in 166! Barras, Laurent, Scaillet , O. and Wermers, Russ R., "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas" (May 2008). Robert H. Smith School Research Paper No. RHS 06-043 http://ssrn.com/abstract=869748 Adopt A Passive Approach

38. Adopt A Passive Approach Professionally managed portfolios result in higher rates of return for 401(k) participants Annual Rate of Return in 401(k) account Source: Schwab press release dated Nov. 28, 2007, titled “New Schwab Data indicates Use of Advice and Professionally-Managed Portfolios Results in Higher Rate of Return for 401(k) Participants”

39. Offer Fee Transparency

40. Offer Fee Transparency Jerry was told by his employer, Elcon Associates that its total 401(k) fees were only 0.10%. After 12 years of questioning, Jerry finally learned that he pays at least seven other charges for his John Hancock plan, including: Disclosed Fees 0.10% Mutual fund providers 0.50% John Hancock Administration 1.32% John Hancock Advisory Fee 0.75% Commissions to traders 0.76% Jerry’s Total Fees: Over 3.5% As seen in Bloomberg Television’s Emmy Award winning documentary.  Hidden Fee  Hidden Fee Hidden Fee  Hidden Fee  Source: Darrell Preston, Bloomberg Markets March 2008

41. Offer Fee Transparency 0.29% 3-4% Total +/- 1.70% Total 0.38% 0.60% Our Plan Typical Plan

42. Offer Fee Transparency “Do You Know How Much in Fees and Expenses you are Paying for your 401(k) Plan?” YES 17% NO 83% Sources: http://edlabor.house.gov/issues/401kfees.shtml; AARP, “401(k) Participants’ Awareness and Understanding of Fees” July 2007

43. Offer Fee Transparency $3,000 per year invested into retirement plan- the 2% difference Difference $260,310 Interest compounded annually

44. Offer Fee Transparency $260,310 Difference is . . Assume 5% Annual Withdrawal Rate Upon for 20 Years Upon Retirement: $27,453 more per year!

45. Fees May Delay Retirement Additional Months Required to work to receive the same monthly retirement benefit* 64 Months Additional Months 48 Months 32 Months 16 Months Annual Fee Charged** *Inflation adjusted. ** As a share of assets (in percent of assets) Source: Center for American Progress, “Building 401(k) Wealth One Percent at a Time”; from the April 16, 2008 Congressional hearing.

46. Offer Fee Transparency “Employers struggle to understand how much their 401(k) plan costs. . . Our experience has shown the low cost plans cost 3% of plan assets annually. More expensive plans can cost as much as 5% per year. This is substantially more than what most employers understand their costs to be.” ‐ John Bogle, Founder of Vanguard http://www.401khelpcenter.com/mh/MH_Uncovering_401k_Fees.html and http://www.forbes.com/business/services/feeds/ap/2006/12/11/ap3243156.html

47. Educate Advise Monitor For Advisor Use Only – Not for Public Distribution

48. Percentage of employers who identify offering advice as a top priority. 82% Source: Hewitt Associates, 2002 survey; 401khelpcenter.com

49. Many workers continue to be unaware of how much they need to save for retirement. Less than half of workers (46%) have tried to calculate how much money they need to save to retire comfortably. Of those who did, 44% relied on guess work rather than a detailed review or professional advice. BRI 20th Retirement Confidence Survey

50. Yet only about half of plan sponsors now offer professional advice- up from 17% ten year ago. Source: Hewitt 2010

51. http://www.totalretirement.com/

53. Putting the puzzle together Successful Retirement Plan