Fiduciary Governance Training

FACS™

Comprehensive Fiduciary Examination

Investment Analysis

We can. It is in the realm of serving as an ERISA retirement plan fiduciary.

Why is it that an activity as critical as responsibly managing the financial interests of your most valuable corporate assets - your people - may not reflect the level of excellence in other corporate arenas?

The benefits of reviewing work practices, setting clear goals and providing the training to achieve them are self-evident for successful companies. Today, in the post-Enron era and with Sarbanes-Oxley adding to the penalties of ERISA legislation, there is more than a “feel good” factor driving the management of retirement plans; companies with responsible fiduciary best practice policies are better placed to avoid litigation.

The first step in achieving excellence in your fiduciary governance is to assess your current practice. DFM consulting and examination services provide Plan Sponsors with the perspective and tools to make their retirement plans reach the best practice standard their employees deserve and avoid the litigation problems that may beset more complacent companies.

Why should our company have a Comprehensive Fiduciary Examination?

The IRS and DOL have both set up audit task forces since 2003 to actively examine the conduct of fiduciaries in charge of retirement plans. Both audits provide correction programs if Plan Sponsors are able to identify their own problems and take steps to remedy them. The penalties for IRS and DOL discovery of fiduciary misconduct are far more punitive. Plan Sponsors who are active in examining their own conduct by commissioning their own examination will be better placed to weather an IRS or DOL Audit if it occurs.

What does the DFM Comprehensive Fiduciary Examination do?

The primary goals of our fiduciary examination are to:

• Assess the ERISA fiduciary responsibility and compliance of the Plan’s fiduciaries in their management and operation of the Plan.
• Identify specific areas of concern, if any, in which there is potential liability exposure; and
• Produce practical recommendations that can be used to enhance the actual standards of fiduciary conduct and Plan governance.

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What legal standards does the examination refer to?

Ultimately, the conduct of ERISA fiduciaries must be guided by ERISA’s fiduciary responsibility provisions. Our fiduciary consulting service examines compliance with:

• ERISA section 404(a), including:
• section 404(a)(1)(A)(i) and (ii) (the “Exclusive Benefit Rule”);
• section 404(a)(1)(B) (the “Prudent Investor Rule”);
• section 404(a)(1)(C) (the “Diversification Rule”); and
• section 404(a)(1)(C) (adherence to plan documents and instruments).
• ERISA section 404(c) (participant direction of investment);
• ERISA sections 406, 407 and 408 (the duty to avoid prohibited transactions described in section 406 that are not exempted under section 407 or 408).

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How do you assess compliance with the Exclusive Benefit Rule and Prudent Investor Rule?

We examine the details of how these two legal principles have been applied to the Plan Sponsor’s and Committee’s decision-making and governance processes. As ERISA contains few definitive standards regarding fiduciary conduct, we use a prudent investor standard as the basis for our commentary.

This standard is more rigorous than one required to comply with a minimum legal standard of care. Where appropriate, we will note a distinction between a prudent investor standard and a minimal standard of care.

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What monitoring functions do you examine?

Parties-in-Interest Monitoring
It is a fiduciary duty to periodically monitor the performance of all Plan vendors. The term “vendor” includes all parties who touch the Plan or provide the Plan, the Plan Sponsor or the Committee with advice or services regarding the Plan’s administration or assets.
We examine:

• Oversight of compensation arrangements with all vendors. Those vendors paid from plan assets, either directly or indirectly, are a specific focus
• The compensation paid from plan assets to any service provider to assess whether it is reasonable.
  The clarity of the vendors’ disclosures.
• Vendor-provided documentation and other evidence of conduct to determine whether any vendor may inadvertently have served the plan in a functional fiduciary capacity.
• All vendor service agreements.
• The relationship of other parties-in-interest both to the plan and to one another.
• Conduct that either represents or appears to represent a transaction prohibited under ERISA. As we cannot practice law we are unable to offer a legal opinion as to the legitimacy of any particular set of circumstances. However, we do note such events and will recommend an examination of the facts and circumstances for the purposes of identifying prohibited transaction violations.

Investment Monitoring
We examine:

• The processes Plan fiduciaries used to fulfill this fiduciary duty.
• Whether those processes are consistent with the Prudent Investor Rule.
• The Investment Policy Statement (IPS), if any, for the presence or absence of appropriate standards by which the Plan’s assets are to be managed.
• Whether the Plan fiduciaries are operationally compliant with the IPS
• Whether the investment monitoring done by the Plan fiduciaries is consistent with the terms and conditions of the IPS. Where there is no written IPS, we will comment upon whatever processes and standards are discernable from the available documentation.
• Whether the fiduciaries have satisfied the Diversification Rule
• The extent to which the plan fiduciaries have monitored the Plan’s diversification as well as the methods it employed to do so.

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How do we know what we are supposed to be doing with the retirement plan?

We assess whether the documents that govern the Plan are internally consistent, consistent with actual Plan operations and do what they were designed to do. We identify any discrepancies and offer suggestions for resolutions. The documents we examine include the following:

• Plan and Trust Documents
• Summary Plan Descriptions, Summaries of Material Modifications, and other Plan change announcements
• Board resolution(s)
• Form 5500 filings
• Plan tax filings, if any
• Investment Policy Statement (as amended)
• Loan Policy Statement (as amended)
• Committee member appointments and terminations
• Compensation disclosure(s)
• Any formal investment monitoring documents
• Minutes from prior Plan committee meetings
• SEC filings from the Plan’s investment funds and investment managers

Note: this portion of the examination process only addresses the salient points governing the internal consistency of the Plan documents, and does not represent an audit of the Plan’s internal controls as may be required under Sarbanes-Oxley.

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What about 404(c) compliance?

ERISA section 404(c) provides details as to how a plan fiduciary may obtain “limited” relief from fiduciary liability that might otherwise arise from the investment decisions made by plan participants. The provisions of §404(c) are extensive and highly detailed. The granting of such relief is not automatic. It can only be granted by the court and therefore §404(c) is not the equivalent of a safe harbor as that term is commonly understood. Without §404(c) compliance, the responsibility and liability for investment decisions made by plan participants are likely to fall directly at the feet of the Plan’s fiduciaries.
If a Plan currently does not comply with section 404(c) we will make recommendations regarding how the Plan may, if desired, comply with §404(c).

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We don’t have a fiduciary governance process at the moment. What should we do?

You do have a governance process, but it may not be as formalized, efficient and effective as it could be. Like any other business project, Plan management is made much easier when the purpose of the Plan and the goals to achieve it are well defined. We will:

• Interview Plan Administrative Committee members to assess the knowledge base of the Plan’s fiduciaries and their understanding of procedural prudence.
• Recommend the creation of a Mission Statement, if none exists.
• Work with the Plan Administrative Committee to establish goals to achieve the plan mission.
• Recommend a system of checks and balances to assign accountability and promote transparency.

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Will you confine your examination to the Plan Administrative Committee?

As well as examining the fiduciary activities of the Plan Administrative Committee, we examine the monitoring work that the appointing fiduciaries have done. The appointing fiduciaries are typically members of the Board of Directors or its Compensation Committee, and have overall responsibility for monitoring the management of the retirement plan. To the extent that such monitoring has been modest or absent we make recommendations as to how to improve upon it so that it reflects a best practices standard of care.

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How do you communicate your findings?

We recommend that ERISA counsel commissions DFM to carry out the fiduciary examination. At the end of our examination we produce a written report giving recommendations for compliance with ERISA’s fiduciary responsibility rules appropriate to the circumstances of the Plan and Plan Sponsor, including, when possible, alternative recommendations for compliance. We deliver the report only to ERISA counsel who will then be responsible for sharing the results of the report with the Committee. Once we deliver our final report we destroy our working notes of our examination and consultation.

We endeavor to finish the report within two weeks of the time in which we leave the company offices. If there is a delay in issuing the final report, (e.g., if we must ask the vendor to respond to a list of questions) we inform counsel of that delay as soon as possible.

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Do you train the fiduciaries as part of your services?

Our examination and consulting services do not include fiduciary training. Though we expect that Committee members would find the examination process to be highly informative, the curriculum for a formal training project would first have to be defined. We cannot do that until this examination assignment uncovers the specific needs. The committee may take the DFM/FEI “Introduction to Fiduciary Governance” web based training course independently at any time. See www.fei.org for details.

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