PLAN SPONSOR RESOURCES

Current Issues Affecting the Industry | How We Got Here | What's Being Done About It | The Evolution of the US Retirement System | Facts Are Facts - Statistical Evidence

Current Issues Affecting the Industry

Fiduciary Risk Management was founded by a diversified team of industry experts in response to the continuing unaddressed issues facing Plan Sponsors and Employees:

1) Litigation - Retirement plan litigation continues to arise due to common industry practices and a misunderstanding of actual law. Plan Sponsors have become an easy target for plaintiff attorneys and investigators.

<According to the US District Court Reports, there were approximately 10,000 ERISA related lawsuits last year alone.>

2) Misinformed – Even the most sophisticated Plan Sponsors fail to actually understand their position as a Governing Fiduciary and are exposed to unnecessary liability, most of which is discovered too late.

<Most Plan Sponsors forced to defend a Fiduciary matter, believed they were fully protected from liability.>

3) Responsibility Shift – It’s clear that since the responsibility of planning for retirement has shifted to Employees in recent decades, more and more American’s are not on track to reach their minimum goals.

<According to EBRI research and the 2007 Minority Confidence Survey, almost half, 48% of Americans have less than $25,000 in total savings & investments.>

How We Got Here

1) Conflicts of Interest & Misaligned Goals - The industry is dominated by large companies who inherently form relationships to market and service retirement plans that impose significant conflicts of interest and goals that are not aligned with Employees and Plan Sponsors.

<Few Plan Sponsors view this as a “real” problem that poses consequences and just view it as a “strategic” alliance to effectively deliver the package; however, ERISA specifically forbids these types of relationships of Plan Fiduciaries, so why is it permitted by Service Providers, if they were considered Fiduciaries – this wouldn’t be permitted at all. So do these relationships really impose no harm?>

2) Inappropriate Oversight - Few Plan Sponsors have adequately developed and practiced appropriate Fiduciary oversight policies, as they have relied on the guidance of service professionals operating in specific areas of the overall retirement plan arena. Unknowingly, the Plan Sponsor is left with considerable “holes” in the overall fiduciary process.

<The industry has trained Plan Sponsors to dedicate a great deal more effort on monitoring investment options (usually using data resources supplied by the Service Provider), than monitoring Service Providers.>

3) Lack of Professional Accountability - Plan Sponsors tend to rely on the advice and services of industry professionals and large service providers, and rightfully so, as these people are the experts. However, due to the naturally conflicting environment in which most of these “experts” operate, they have crafted carefully written disclosures and service agreements that contain alarming anti-liability statements that will be detrimental to the Plan Sponsor if and when an investigation or complaint is filed.

<This can easily be verified by reviewing the fine print in your current service agreement or retirement product prospectus.>

4) Core Business of Service Providers – The majority of service providers in this industry, regardless of classification (bundled plan vendors, advisor, consultant, etc.), are “investment focused” not “plan experts” even though they are commonly represented as such. They entered the retirement business to gather assets for the investments they manufacture to maximize their market share, not necessarily because of their passion for the American Employee. Their expertise begins and ends with investments, and even though they are most frequently looked upon by Plan Sponsors and Employees as the experts, they tend to be silo focused in their response.

<According to EBRI Research, in 2005 alone, Americans received $2.7 Trillion in retirement benefit payments, and Employers & Employees spent $1.4 Trillion on retirement savings and benefit contributions.>

5) Industry Consolidation – Continued industry consolidation is forcing service models to all appear the same. Providers have sort of set the bar for Fiduciary duties, yet they are not qualified to provide such advice. Service Providers are not appropriate resources to create industry standardization.

6) Inadequate Employee Solutions – Plan Sponsors that offer employee education programs lack access to the proper metrics to determine the success of their education plans. Plan Sponsors today have available statistics and computer-based tools to analyze participation rates and trends, but they do not have the tools necessary to turn the raw data into a successful action plan that broadly improves the success rate of their Plan. Most current forms of success measurement focus on the plan as a whole instead of considering the individual impact on employees of specific demographic groups, making it almost impossible for the Plan Sponsor to identify problem areas.

<According to EBRI research and the 2007 Minority Confidence Survey, almost half, 48% of Americans have less than $25,000 in total savings & investments.>

7) Employee Service Motives - Most large financial service companies creatively market “3rd Party Education Services” to large employers and many don’t charge a fee for providing these services or if they do, the fee is not enough to effectively deliver services to all Participants. Surprisingly, Plan Sponsors have bought into this service gimmick and invited these advisors into their organization, assumed all liability by doing so, and then unknowingly endorsed their non-retirement plan related advice and product offerings to their Employees. This creates a dangerous liability environment for Plan Sponsors that is commonly misunderstood. This is also common practice in the large Plan Provider arena, even though they agree to supply employee education meetings as part of their agreement, their goal is to take advantage of ancillary business opportunities.

<This is easy for a Plan Sponsor to verify, simply ask your education representative if they are licensed to sell securities.>

8) Goals Not Always Clear - Oftentimes with all of the regulatory requirements, focus on liability reduction, internal hassles, and Service Provider recommendations, Plan Sponsors loose sight on what is most important - their Employees retirement security.

9) Rise of Retirement Plan Focused Plaintiff Attorneys - Attorneys’ have caught on to this newly discovered lucrative opportunity and have begun mass marketing campaigns to capture the interest of the Employees, most of whom have concerns about their retirement plan account. Class actions are easily formed as the word spreads within a company, loyalty from Employees is not what it used to be, and Plan Sponsors are generally unaware of their level of exposure.

<For the skeptics, simply conduct an internet search on ERISA litigation, you will find more than you ever wanted to know about open cases and current class action suits.>

What’s being Done About it

1) Increased Congressional Attention

More Regulations & Increased Responsibility

a) (Link to Information on New 403(b) Regulations of 2007) – Congress is also focused on the much needed and long overdue reformation of the non-profit 403(b) plan industry, where the same reporting and Fiduciary requirements required of for-profit Plan Sponsors should be broadened to include non-profit Sponsors as well. Just recently in July, Congress released the new guidelines, which we believe to be the 1st of future attempts to improve the environment for Participants.

b) (Link to Information on Pension Protection Act of 2006) – Congress reacted last summer with the passing of the PPA, among other pertinent changes to pension regulations, Plan Sponsors are encouraged to provide professional investment advice and other services to participants to better equip them to make these critical decisions. This legislation has offered both further liability exemptions for Fiduciaries and increased governance responsibilities.

c) (Link to Information on Retirement Security Act of 2007) – Congress is addressing the conflicts of interest and lack of disclosure commonly practiced in the industry by debating over the appropriate revenue disclosure requirements set forth in the upcoming ERISA Section 408(b)(2) that was originally expected to be finalized by the end of the 2007 summer. Now a new Bill is on the docket for review that addresses this issue called the Retirement Savings Act of 2007.

2) Marketplace Reaction

A New Era

a) Rise of the Independent Fiduciary - Plan Sponsors are looking to unbiased expert guidance, professional accountability, and tangible results for both themselves and their Employees that can only be provided by an Independent Plan Fiduciary Partner. These Partners work with the Plan Sponsor to effectively govern the other Fiduciaries and Service Providers and see that the plan is effectively utilized by Employees.

Further Distractions

b) Creative Marketing - Service Providers and Advisors continue to redirect Plan Sponsor focus away from the independent environment instead of accepting the necessity of their role. Most believe these Independent Plan Fiduciaries are a threat to their relationship with the Plan Sponsor.

Give Up & Do it Yourself

c) Manage Internally - Many Plan Sponsors have responded to this lack of accountability prevalent in the marketplace by turning to internal expertise to develop their oversight and employee communication practices. This too has proven to be an ineffective solution for both the Plan Sponsor and Employees. The Plan Sponsor has shifted none of the liability exposure to industry professionals and usually fails to adequately address all necessary areas of exposure as this is not a core focus of their organization. The education and communication provided to Employees under this model is most often not adequate to produce the desired results.

The Evolution of the US Retirement System

The retirement plan industry is currently experiencing big changes, and many more are coming!

The responsibility for providing our American workers with retirement benefits has taken a massive shift in recent decades.

Traditionally… most mid size and large companies have taken on this duty by providing pension plans to dedicated employees to ensure they are financially secure long after their working days are through. In addition, the majority of American’s have depended on the benefits provided by Social Security. Americans had very little to do with the actual “planning” for retirement. There were no investments to choose from, optional participation, nor savings decisions to make. You worked and then you retired, it was pretty straight forward.

For smaller employers and the self employed, Americans saved more in those days and paid down their debt. Many opened personal IRA accounts to take advantage of tax benefits. Savings rates for the average American were much higher than today.

In today’s world… things are much different. Instead of providing retirement income to employees, the mindset has changed completely, now the typical arrangement is to provide a “vehicle” to save for retirement through 401(k) and other Profit Sharing Plans. And, while at this point, Social Security is still available as promised to retirees, the future of that promise is unknown and quite frankly, the outlook is pretty grim. The trend is to allow participants to self-direct their accounts, meaning they decide how the account will be invested and how much will be contributed out of their paychecks. In addition, they must personally understand the amount of savings necessary to reach their retirement goals. And then be disciplined enough to follow through with their plan in a society obsessed with personal possessions. Unfortunately, even with all of the statistical evidence and media attention these issues have received, Americans remain alarmingly confident about their financial futures.

The US Congress… has finally realized this is a significant issue in our country. These changes in society have had a diminishing effect on retirement savings and if something doesn’t change soon, we could be facing severe economic repercussions in the years to come.

Facts are Facts – Statistical Evidence