Plan Sponsor Fiduciary Roles and Responsibilities:

Best Practices for Overseeing 403(b) Plan Investments

Joseph Trainor Mark WetzelSenior VP for Finance & CFO PresidentUniversity of the Sciences Fiduciary Investment Advisors, LLC

1) The 403(b) Landscape

2) Fiduciary Roles & Responsibilities

3) Single vs. Multiple Provider Models

4) Sample Lineups & Fee Analysis

5) Case Studies

6) Conclusion

Agenda

Historically, 403(b) Plans:

• Have had little employer involvement

• Have had little to no formalized oversight

• Have often been simply a payroll function

• Have been the responsibility of the human resources staff

• Have relied upon their investment & recordkeeping vendor to drive fund menu decisions, fee & revenue discussions, etc.

Where We’ve Been

403(b) plan sponsors must now operate their plans much more like 401(k) plans:

• Written Plan Document Requirement

• Form 5500 Filing Requirement

• Plan Audit Requirement (generally for plans over 100 participants)

• Heightened Fiduciary Scrutiny

The Final 403(b) Regulations

403(b) Sponsors and their Fiduciaries are looking to:

• Manage their Fiduciary Risk

• Construct a Best-in-Class 403(b) Benefit to attract, retain and reward valued faculty and staff

• Improve their Participant Outcomes

Sound simple?

Plan Sponsor Goals

Fiduciary Roles & Responsibilities

“ERISA’s prudent standard is not that of a prudent lay person but rather that of a prudent fiduciary with experience dealing with a similar enterprise.”

- Marshall v. Snyder 1EBC 1878, 1886 (E.D.N.Y. 1979)

Under ERISA, a Fiduciary is a person who:

• Exercises any discretionary authority over the management of a benefit plan or plan investments,

• Has any discretionary authority or discretionary responsibilities in the administration of a plan, and/or

• Directly or indirectly renders investment advice for compensation.

Who is a Fiduciary?

Under ERISA, a Fiduciary is required to discharge duties*:

• Solely in the interest of the participants & beneficiaries;

• For the exclusive purpose of:• Providing benefits to participants & beneficiaries;• Defraying reasonable expenses of administering the plan.

• With the care, skill, prudence & diligence that a prudent person would use.

* “Avoiding the Breach,” Diversified Investment Advisors, 2009

Overview of ERISA Fiduciary Duties

Potential liability for breaches of fiduciary responsibility:

• Personal liability

• Civil action

• Monetary penalties & excise taxes

• Criminal penalties

• Audit exposure

Fiduciary Liability

• Establish an oversight committee & committee charter

• Review bonding & fiduciary insurance

• Implement written Investment Policy Statement

• Hire independent third party

• Review quarterly performance

• Communicate with participants/beneficiaries

• Work with an ERISA attorney

The Process of Managing Fiduciary Risk

A strong committee charter establishes the following:

• The purpose(s) of the committee

• Guidelines for appointing and removing committee members

• Frequency of committee meetings

• Duties and powers of the committee

• Voting procedures

Committee Charter

• Fiduciary liability insurance covers claims for alleged failure to prudently act within the meaning of the Pension Reform Act of 1974.

• Fidelity bonds are required by law & cover claims involving dishonesty by administrators or trustees.

• Employee liability insurance covers claims for administrative errors or omissions.

• D&O Insurance typically does not cover ERISA related matters.

Bonding and Fiduciary Insurance

A strong investment policy statement should:

• Contain detail to define, implement & manage investment strategy;

• Define the duties & responsibilities of all parties;

• Define diversification;

• Define due diligence criteria for selecting investment options;

• Define monitoring criteria for investment options.

Investment Policy Statement

A strong advisor should provide the following:

• A comprehensive committee charter & investment policy statement;

• Clear goals, objectives & methodology;

• Guidance in designing a diversified fund menu;

• A method to objectively evaluate performance.

Third Party Oversight

A strong advisor should provide the following:

• A basis for evaluating fee structures;

• Improved participant outcomes;

• A comprehensive fiduciary governance process;

• Confidence that you are meeting your obligations as a fiduciary.

Third Party Oversight ctd.

A quarterly performance review should cover the following:

• Performance against a benchmark and/or peer group.

• Fees relative to other similar investments.

• Organizational changes.

Quarterly Performance Review

Communication with participants & beneficiaries can include:

• Targeted campaigns;• Communications focused on retirement readiness;• Formal employee education.

Communication can occur:

• In person;• Via mail;• Electronically.

Communication

Single vs. Multiple Provider Model

• Multiple provider model is the most prevalent, but it is changing.

• Sponsors are reexamining retirement plan providers through a well-documented RFI or RFP process.

• There are significant benefits to utilizing a single provider.

Single vs. Multiple Provider Model

• One provider = fewer investment choices to monitor;

• Increased purchasing power;

• Less confusion for the average participant;

• Improved administrative efficiencies.

Benefits of a SingleProvider Model

• Liquidity

• Politics

• Communications

• Resistance to Change

Obstacles in Moving Toward a Single Provider

Sample Lineups and Fee Analysis

TIAA-CREF Annuity Menu

Money Mkt / SV Bond Balanced Domestic Equity Int’l / Global / Other

TIAA Traditional CREF Bond Market

CREF Social Choice

Large Value

Large BlendCREF Equity Index,CREF Stock

Large GrowthCREF Growth

CREF Global Equities

TIAA Real Estate

CREF Money Market

CREF Inflation Linked Bond

Mid Value Mid Blend

Mid Growth

Small Value

Small Blend

Small Growth

Fidelity Unconstrained Investment Menu

Money Mkt / SV Bond Balanced Domestic Equity

Large Value

Fidelity Equity IncomeFidelity Large Cap ValueFidelity Blue Chip Value

Large Blend

Spartan US Equity Idx InvFidelity Growth & Income

Fidelity Fidelity FundSpartan Total Mkt Idx Inv

Spartan 500 Index InvFidelity Disciplined EquityFidelity Value DiscoveryFidelity Dividend Growth

Large Growth

Fidelity MagellanFidelity Contrafund

Fidelity Growth CompanyFidelity Blue Chip GrthFidelity OTC PortfolioFidelity Independence

Fidelity TrendFidelity Fifty

Fidelity Asset Mgr 85%Fidelity Cap AppreciationFidelity Large Cap GrowthFidelity Large Cap Stock

Fidelity Export Multi

Mid Value

Fidelity ValueFidelity Mid Cap Value

Mid Blend

Fidelity Leveraged Co StkFidelity Low Priced StkSpartan Ext Mkt Idx InvFidelity Value Strategies

Mid Growth

Fidelity Mid Cap StockFidelity Mid Cap GrowthFidelity Growth Strategies

Small Value

Fidelity Sm Cap Value

Small Blend

Fidelity Sm Cap DiscoveryFidelity Small Cap Stock

Small Growth

Fidelity Sm Cap Independence

Intl /Global Other

Fidelity US Gov’t Res

Fidelity Cash Reserve

Fidelity Ret Gov’t Money Mkt

Fidelity Rtmt Money Mkt

Fidelity Money Mkt

Fidelity US Treas Money Mkt

Fidelity US Gov’t Money Mkt

Fidelity Sel Money Mkt

Fidelity High Income

Fidelity US Bond Idx

Fidelity Cap Income

Fidelity Ginnia Mae

Fidelity Invt Grade Bond

Fidelity Interm. Bond

Fidelity Gov’t Income

Fidelity Strategic Income

Fidelity New Mkt Income

Fidelity Mortgage Sec

Fidelity Short Term Bond

Fidelity Inflation Prot Bond

Fidelity Inter Gov’t Inc

Fidelity Asset Mgr 20%

Fidelity Freedom Funds

Fidelity Balanced

Fidelity Puritan

Fidelity Asset Mgr 50%

Fidelity Asset Mgr 70%

Fidelity Strat Real Ret

Fidelity NordicFidelity Int’l Cap ApprecFidelity OverseasFidelity Pacific BasinFidelity Southeast AsiaFidelity Diversified Int’lFidelity JapanFidelity CanadaFidelity EuropeSpartan Int’l Idx InvFidelity Emerging MktsFidelity Int’l Real EstateFidelity China RegionFidelity Int’l DiscoveryFidelity Japan Smaller CoFidelity Int’l Sm CapFidelity Latin AmericaFidelity Global Balanced

Fidelity Select:LeisureMedical DelHealthcareEnergyMed Equip SysTechnologyComm EquipNatural GasCons StaplesEnergy SvcsDefenseGoldMaterialsFinancialNatural ResourcesPharmaceuticalEnvironmentFidelity Real Estate InvsFidelity Telecom UtilFidelity Convertible SecFidelity Real Estate Income

Sample Optimized Fund Menu

Cap. Preserv. Fixed Income Hybrid Domestic Equity Int’l / Global / Other

Primary Stable Value

Active Intermediate Term Bond

Suite of Target

Retirement Date Funds

Large ValueActive

Manager

Large Blend

Passive Manager

Large GrowthActive

Manager

Active Manager

(ACWI ex US)

Secondary Money Market

Passive Intermediate Term Bond

Small/Mid ValueActive

Manager

Small/Mid Blend

Passive Manager

Small/Mid GrowthActive

Manager

Passive Manager

(ACWI ex US)

International Intermediate Term Bond

Active Manager

(Small Cap)

Emerging Markets

Qualified Default Investment Alternative

• Lifecycle / Target Date Fund

• Balanced Fund

• Professionally-Managed Account

• Capital Preservation Product (for the first 120 days of participation)

“ERISA’s test of prudence…is one of conduct and not a test of the result of performance of the investment. The focus of the inquiry is how the fiduciary acted in his selection of the investment, and not whether his investment succeeded or failed.”

- Donovan v. Cunningham 716F. 2d 1455, 1467 (5th Cir. 1983)

• 12b-1 Fees

• Subtransfer Agency Fees

• Revenue Sharing Arrangements

• Recordkeeping Costs / Vendor “Required Revenue”

• Fiduciaries must benchmark plan fees & revenue structures to determine reasonableness and competitiveness of the services.

Understanding Vendor Fees & Revenue

A fiduciary’s obligations are:

• To know & understand all charges;

• To ensure they are reasonable;

• To evaluate all revenue sharing agreements, disclosure of 12b-1, sub-transfer agency or other commission-based fees and all contract charges, surrender charges & other fees that participants or the plan may incur.

Fee Transparency

Fiduciaries should establish a required revenue benchmark:

• This benchmark acts as the basis for determining if any excess revenue exists in the plan.

• Excess revenue may be used to enhance participant services, access lower cost share classes for participants or pay for other plan-related costs.

Fee Transparency

Sample Full Fee Disclosure Worksheet – TIAA-CREF

Fund Name 9/30/2010 Assets Fees (%) Fees ($)

Assumed/Actual Recordkeeping

Offset (%)

Assumed/Actual Recordkeeping

Offset ($)

Vendor Fee Per

ParticipantCREF Stock $79,267,304 0.44% $348,776 0.24% $190,242CREF Global Equities $14,441,828 0.46% $66,432 0.24% $34,660CREF Grow th $12,480,263 0.43% $53,665 0.24% $29,953CREF Equity Index $7,689,695 0.39% $29,990 0.24% $18,455CREF Money Market $7,718,615 0.38% $29,331 0.24% $18,525CREF Social Choice $8,266,756 0.41% $33,894 0.24% $19,840TIAA-CREF S&P 500 Index Instl $1,017,184 0.09% $915 0.00% $0Vanguard Total Bond Market Idx Inv $0 0.22% $0 0.00% $0TIAA-CREF International Eq Idx Instl $1,750,129 0.16% $2,800 0.00% $0Vanguard Extended Mkt Index $3,239,255 0.30% $9,718 0.00% $0CREF Bond Market $7,863,655 0.41% $32,241 0.24% $18,873CREF Inflation-Linked Bond $11,394,405 0.41% $46,717 0.24% $27,347Vanguard Inf lation Protected Secs $0 0.25% $0 0.00% $0TIAA-Traditional $109,899,379 0.51% $560,487 0.15% $164,849Vanguard Target Retirement Income $0 0.18% $0 0.00% $0Vanguard Target Retirement 2020 $340,613 0.18% $613 0.00% $0Vanguard Target Retirement 2025 $976,766 0.19% $1,856 0.00% $0Vanguard Target Retirement 2010 $92,337 0.17% $157 0.00% $0Vanguard Target Retirement 2015 $370,447 0.17% $630 0.00% $0Vanguard Target Retirement 2030 $541,190 0.19% $1,028 0.00% $0Vanguard Target Retirement 2035 $467,137 0.20% $934 0.00% $0Vanguard Target Retirement 2040 $1,404,285 0.20% $2,809 0.00% $0Vanguard Target Retirement 2045 $50,953 0.20% $102 0.00% $0Vanguard Target Retirement 2050 $19,865 0.20% $40 0.00% $0TIAA Real Estate $6,102,269 1.06% $64,684 0.24% $14,645Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.20% $537,389 $209

Plan Administration:Participant Maintenance # of participants = 2,576 0.00% $0 0.00% $0

ERISA Budget $0 0.00% $0 0.05% $137,697Transaction BasedLoans, QDROs, MRDs, ROEs, ISWs, etc. $0 0.00% $0 0.00% $0

Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.15% $399,691 $155

Sample Full Fee Disclosure Snapshot – TIAA-CREF

Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.20% $537,389 $209Plan Administration:Participant Maintenance # of participants = 2,576 0.00% $0 0.00% $0

ERISA Budget $0 0.00% $0 0.05% $137,697Transaction BasedLoans, QDROs, MRDs, ROEs, ISWs, etc. $0 0.00% $0 0.00% $0

Plan Fees / Vendor Fees $275,394,330 0.47% $1,287,819 0.15% $399,691 $155

Other fiduciary duties:

• Hold committee meetings at regular intervals;

• Maintain detailed meeting minutes;

• Monitor investment options;

• Establish investment, fee & revenue benchmarks;

• Evaluate benchmarks periodically;

• Document all decisions.

Fiduciary Duty to Monitor

Case Studies

• University of the Sciences• 403(b) ERISA plans• Two plan vendors – TIAA-CREF (Annuity Menu) & Vanguard

(Limited Fund Menu)___________________________________________________

Sponsor Goals:Manage fiduciary risks and work to improve participant outcomes.

Case Study #1

University of the Sciences Process:

• RFP for independent plan consultant /

• Established structure

• Evaluated

• Decided

• Documented

• Implemented

Case Study #1

• Prominent University• 403(b) and 401(a) plans – both ERISA plans• Two plan vendors – Fidelity (Unconstrained Fund Menu) & TIAA-

CREF (Annuity Menu)___________________________________________________

Sponsor Goals:Manage fiduciary risks and work to improve participant outcomes.

Case Study #2

Case Study #2 Process:• Established structure

• RFP for independent plan consultant

• Revised structure

• Evaluated

• Decided

• Documented

• Implemented

Case Study #2

Where They Were:• Offered entire lineup of Fidelity Funds – approximately 175

investments.• Offered the full suite of TIAA-CREF annuity accounts.____________________________________________________

Where They Are:• Reduced menu of core TIAA-CREF accounts.• Offer a core lineup of Fidelity Funds, including Target Date

Retirement Funds.• Offer a self-directed brokerage window.

Case Study #2

• A well-managed fiduciary process.

• A well-designed “best-in-class” fund menu – highly simplified, yet still offering broad diversification opportunities.

• Improved participant outcomes.

Results

• Purdue University• Consolidated vendors down to one (Fidelity)• Incorporated a 4-Tier Investment Menu

• Stanford University• Incorporated a 4-Tier Investment Menu with a decidedly

indexed approach (Vanguard)

• Pepperdine University• Consolidated from four vendors to one (Diversified

Investment Advisors)

Well-Publicized Decisions

An Ongoing Fiduciary Process

• Investment Review

• Administrative Fee Review

• Investment Expense Analysis

• Benchmarking & Trends

• Recordkeeper Negotiations

• IPS Review

• Regulatory/Legislative Update

• Committee Best Practices

• Bonding & Fiduciary Insurance

Fiduciary Governance: Annual Checklist

• Recordkeeper Svcs Update

• Plan Demographic Review

• Education & Advice Plan

• Plan Design Benchmarking

• Investment Menu Review

• Asset Class Updates

• Trends & Best Practices

• QDIA Analysis

Overall Considerations:

• Establish a fiduciary committee and appoint members;

• Adopt a written committee charter;

• Review bonding & fiduciary insurance;

• Adopt a comprehensive Investment Policy Statement (IPS);

• Evaluate service providers & document your findings;

• Hold regular committee meetings & maintain meeting minutes.

In Closing

When evaluating service providers:

• View investment management fees;

• Understand your vendor’s revenue structure;

• Monitor investments;

• Benchmark for reasonableness and competitiveness;

• Consider employing an RFI or RFP process.

In Closing

“There is risk in doing nothing.”- TIAA-CREF, “Investment Menu Construction,” NACUBO, July

2010

Questions?

• Joseph Trainor, University of the Sciences• j.trainor@usciences.edu, 215.596.8862

• Mark Wetzel, Fiduciary Investment Advisors, LLC• mwetzel@fiallc.com, 860.697.7410

Contact Information

Joe is Senior Vice President of Finance for University of the Sciences. USciences is a healthcare and science focused institution founded as the first college of pharmacy in North America. USciences has a current enrollment of 2,850 students in undergraduate, professional and graduate programs and is located in the University City section of Philadelphia.

In 1997 he became the founding Treasurer for the University City District. The UCD is a special service district formed to focus upon commercial revitalization and quality of life in the areas surrounding the various universities and healthcare campuses in West Philadelphia.

He is also a CPA who received his Bachelor of Science degree from The Pennsylvania State University. He has served various nonprofit organizations including EACUBO and The Savoy Company. The latter is the oldest amateur theater company in the world dedicated solely to the production of the works of Gilbert and Sullivan.

Joseph Trainor

Mark is President of Fiduciary Investment Advisors, LLC (FIA). Prior to founding FIA, he was a Senior Vice President and PRIME Consultant at UBS Financial Services Inc. He chaired their PRIME advisory committee and was a member of the firm’s pension and 401(k) committee. In 2009 and 2010 401kWire named Mark one of the 300 Most Influential Advisors in Defined Contribution.

Mark received a Bachelor of Science degree from the University of Vermont and a Masters of Business Administration from the Tuck school at Dartmouth, where he graduated as a Tuck Scholar with distinction. He is a trustee of the Ellsworth Foundation, a chairperson of the trustees for McLean and a director of the Granby Land Trust. He is a member of the investment committee for the Ellsworth Foundation, McLean, The Northfield Mount Hermon School and Hartford Hospital, as well as a paid member of the pension committee for Novartis Corporation.

Mark Wetzel

• Fee only independent registered investment advisory firm

• 100% employee owned

• 32-person staff with considerable experience working together

• Over 130 institutional clients with more than $16 billion in fiduciary assets

• Over 70 defined contribution clients with $7.9 billion in assets under advisement

About Fiduciary Investment Advisors, LLC

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