Required reading for sponsors of corporate retirement plans. Describes best practices in light of today's regulatory and legal framework and how we at Artifex Financial design state-of-the-art programs to limit fiduciary liability and create better performing, lower cost pension and retirement plans.

THE FORK IN THE ROAD Implications of The Pen sion Protection Act of 2006 And the Evolution of Fiduciary Respon sibility AN ARTIFEX FINANCIAL GROUP WHITE PAPER Doug Kinsey CFP AIFA Darren Harp AIF 28 Eas t Ra h n Road Sui t e 209 Dayto n O H 4 5429 t el e p ho n e 9 37 660 8316 f ax 480 287 9566 w w w ar ti f e x fi n a n cial com
THE FORK IN THE ROAD Implications of The Pen sion Protection Act of 2006 And the Evolution of Fiduciary Respon sibility  A...
Introduction You stand at the fork in the road The road on the left represents doing nothing the path of least resistance It s a well traveled road used by many sponsors of retirement plans over time It provides for your basic needs but may cause you to encounter many more potholes and dangers than the road less traveled The alternate route takes some additional thought and due diligence while embracing change for the benefit of yourself and your employee participants Once embarked upon the path is smooth and enables you to travel more safely and swiftly toward your destination a fruitful retirement As a retirement plan sponsor you are witnessing a time of unprecedented change and volatility in the financial services industry Traditional providers of 401 k plans are swept up in rapid evolution and regulatory scrutiny as a result of misconduct market turmoil and technological innovation How do you respond to this creative destruction and what steps should you take to ensure the well being of your employee participants as well as yourself In this white paper we will address the changes taking place and identify potential pitfalls and opportunities presented by this time of change Evidence of the growing importance of the role of Fiduciary can be seen in a variety of ways within the financial planning and investment communities Consider these developments that have occurred in the last 10 years The Center for Fiduciary Studies at the Joseph M Katz Graduate School at the University of Pittsburgh was established in 1999 to evaluate and promote best practices for fiduciaries including retirement plan sponsors In 2007 the successful challenge of the Merrill Lynch Rule by the Financial Planning Association has prompted a thorough critique and analysis of the non fiduciary status of Wall Street brokerage firms Effective July 2 2008 revisions to the CFP Code of Ethics that recognize and codify a Fiduciary Responsibility on the part of CFP Certificants The Focus on Fiduciary campaign initiated by the National Association of Personal Financial Advisors An increasing awareness by the plaintiff s bar of breaches of fiduciary duty and a noticeable rise in classaction lawsuits against retirement plan sponsors Possibly most importantly for employers offering 401 k plans the passage of the 2006 Pension Protection Act We will make the argument that following sound fiduciary principles will enhance investment performance and efficiency over time and reduce the exposure to plaintiff lawsuits 2
Introduction You stand at the fork in the road The road on the left represents doing nothing - the path of least resistanc...
Before we go on perhaps a definition of Fiduciary is in order According to Encyclopedia Britannica a Fiduciary is In law a person who occupies a position of such power and confidence with regard to the property of another that the law requires him to act solely in the interest of the person whom he represents Examples of fiduciaries are agents executors and administrators trustees guardians and officers of corporations The Center for Fiduciary Studies defines an Investment Fiduciary as Someone who is managing the assets of another person and stands in a special relationship of trust confidence and or legal responsibility It should be noted that anyone who sponsors makes purchase or investment decisions hires advisors provides investment advice or manages money for a corporate retirement plan is considered to be in a fiduciary position Two roads diverged in a yellow wood And sorry I could not travel both And be one traveler long I stood And looked down one as far as I could To where it bent in the undergrowth Then took the other as just as fair And having perhaps the better claim Because it was grassy and wanted wear Though as for that the passing there Had worn them really about the same And both that morning equally lay In leaves no step had trodden black Oh I kept the first for another day Yet knowing how way leads on to way I doubted if I should ever come back I shall be telling this with a sigh Somewhere ages and ages hence Two roads diverged in a wood and I I took the one less traveled by And that has made all the difference Robert Frost The Road Not Taken 1920 3
Before we go on, perhaps a definition of Fiduciary is in order. According to Encyclopedia Britannica, a Fiduciary is     I...
How did we get here In the beginning the 401 k concept was born Many would say that the idea of a retirement plan that provides additional opportunities for employees to invest and save toward their own retirements while taking advantage of the United States tax code was a giant leap forward When these programs were originally developed insurance companies were the main providers The investment vehicle of choice was a group annuity with individual subaccounts that resembled or mirrored mutual funds The primary advantage to the employer was that it was a bundled plan that provided all of the record keeping valuation testing and investment options in one program The fees and expenses could basically be buried within the accounts so the participants wouldn t be bothered with such trivialities as advisor administrative and investment manager compensation The advantage to advisors was that all you really needed to have to sell on of these plans was a state life insurance license The banks and stock brokerage firms soon got into the game and also provided their own brand of bundled 401 k programs that provided similar advantages and disadvantages to the participants and sponsors Over time corporations increasingly replaced traditional defined benefit pension plans with these new plans that share responsibility with the employee for their retirement well being Many employers were not fully aware of the fiduciary responsibilities of offering and managing these plans and are just now starting to educate themselves on best practices Commissions and high expense charges were collected by money managers administrators banks insurance companies and brokers Trusted financial advisors rushed to the party to provide their business owner clients with their version of a packaged 401 k plan Very little attention was paid to real due diligence Meanwhile the stock market kept roaring ahead so why worry about these plans The participants will be just fine all they have to do is put all their money into technology stocks right With the bursting of the stock market bubble in 2000 2001 regulatory attention became focused on the investment and securities industry Eliot Spitzer began his investigations into all manner of improprieties and inattention to fiduciary responsibility Financial planners who believed in acting as fiduciaries began to voice their opinions about the state of the industry The Center for Fiduciary Studies was founded Morningstar created Investment Stewardship reviews and ratings The CFP Board began to reconsider the importance of Fiduciary within their Code of Ethics and the Financial Planning Association successfully sued the Securities and Exchange Commission over rule 202 a which exempted brokers licensed with the NASD from registering as investment advisors when delivering financial planning advice and further called into question their acceptance of their roles as fiduciaries for their clients Today employee participants are becoming more aware of their rights as beneficiaries of corporate 401 k plans and employers are becoming more aware of their responsibilities After all a sizable portion of the assets in these plans belongs solely to the participants it is the employee deferrals that predominantly drive the asset growth in 401 k plans The employer s role as plans sponsor is strictly that of fiduciary for the plan participants 4
How did we get here  In the beginning, the 401 k  concept was born. Many would say that the idea of a retirement plan that...
Where are the Potholes and Washouts We have reviewed all of the developments that effect your role as a retirement plan sponsor and offer the following summary of 10 potential dangers for fiduciaries 1 The plan has not been reviewed in the last year by an independent fiduciary consultant Preferably a professional with one of the following designations a Certified Financial Planner who is also a Registered Investment Advisor and or a member of the National Association of Personal Financial Advisors NAPFA the only advisor association that is truly fee only b Accredited Investment Fiduciary c Accredited Investment Fiduciary Analyst d Certified Public Accountant CPA e Lawyer f An actuary specializing in employee retirement plans 2 All plan fiduciaries have not been identified and a formal process for selecting monitoring and reporting on the various investment choices has not been established 3 An Investment Policy Statement has not been created at the plan level and at the portfolio level if appropriate 4 If an Investment Policy Statement exists it is not being adhered to in terms of monitoring performance benchmarking and making investment decisions 5 Procedures benchmarks and monitoring criteria have not been identified regarding investment options service providers plan expenses investment expenses and vendor compensation 6 Investment decisions are not delegated to prudent fiduciary advisors 7 Safe harbor provisions are not being followed 8 Number and type of investment vehicles are not appropriate for the plan size number of participants and or sophistication level of participants 9 Regular periodic reviews of the investments are not being prepared and presented to the plan investment committee 10 The plan allows for education or investment advice but it is not delivered by either an automated model or a qualified fiduciary advisor This may seem like a daunting task and the Center for Fiduciary Studies has actually identified 46 best practices that a prudent plan fiduciary should consider incorporating as proof that they adhere to a defined global fiduciary standard of excellence The upside is that by educating yourself and following these guidelines your investment performance should be improved over the long term while reducing hidden costs 5
Where are the Potholes and Washouts  We have reviewed all of the developments that effect your role as a retirement plan s...
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Your Compass Rose To find your way in your fiduciary journey rely on a carefully designed investment policy statement IPS that accurately reflects the various goals benchmarks processes selection criteria limitations and ongoing due diligence that you will follow as a plan sponsor Don t rely on a template IPS that is loaded with terminology and criteria that either don t adhere to a fiduciary standard or with which you cannot possibly comply To start with you should contact an independent fiduciary advisor for an initial consultation and review of your IPS Summary Plan Description latest 5500 filing investment choices fees and participation statistics The advisor should then advise you as to whether or not your IPS should be amended and if your plan should be thoroughly reviewed and possibly redesigned If your plan is large enough consider hiring a consultant to provide a CEFEX Center for Fiduciary Excellence certification that involves a documented review and a certification based on an internationally recognized ISO registration process The destination should be to have a 401 k plan that adheres to fiduciary best practices which will provide you with a defensible position and better performing investment vehicles The IPS and the criteria identified within this document are truly your compass rose which will keep you on your selected path Let s take a look at a sample investment selection and some of the criteria that identify a top performing fiduciary fund on the next page 7
Your Compass Rose  To find your way in your fiduciary journey, rely on a carefully designed investment policy statement  I...
This is a recent fund summary report that illustrates some of the criteria that should be incorporated into an investment due diligence process and an effective investment policy Our firm utilizes a tool which integrates selected IPS requirements into the monitoring process so that the fiduciary due diligence that a plan sponsor or advisor says they are performing is actually followed General statements and limitations regarding performance and timeframes ratios fund composition fees and expenses etc can be defined in the IPS At the time of this report Brandywine Blue represents a fund that exceeds the fiduciary criteria in practically every category 8
This is a recent fund summary report that illustrates some of the criteria that should be incorporated into an investment ...
Be Prepared Perhaps you ve heard the Boy Scout motto once or twice in your lifetime It s actually one of the best things a young person can learn The various lessons taught by the Boy Scouts tend to favor outdoors activities such as planning a hike or being prepared in case you are involved in an emergency of some sort getting lost or injured for example We may never need to rely on our preparations but we have to be ready nevertheless Imagine starting a journey without first plotting your course Doesn t make much sense does it This may not be the most exciting thing for a young person to learn but by the time we reach adulthood we understand the importance of that simple phrase Many young people and some adults test this motto at various times of their lives Ever flunk a midterm or final exam How about that term paper that you didn t score too highly on What about that client presentation that you waited until the last minute to prepare for Not many of us need to learn the lesson more than once Being prepared when it comes to investments and serving as a fiduciary is not very exciting either however positive differences in performance have been documented as a result of following a diligent and robust process To illustrate this potentially large benefit we show an actual plan review in Exhibit A that we conducted this year for a client Although the data is historical in nature it shows how adherence to best practices can enhance returns and reduce costs In this case the plan had never been reviewed by an independent fiduciary and was currently advised by a broker with a large New York brokerage firm The administration firm was a national payroll firm and the mutual funds available on the custodial platform were very limited The client employs 300 people throughout Ohio with various levels of investment knowledge By hiring us to perform a thorough analysis and provide recom mendations the client and the employee participants will realize the following benefits Lower investment costs on average the expense ratios of the funds selected are over 1 33 less with the recommended plan Better historical and expected returns looking at the average returns over a 5 year period the recommended funds have outperformed the existing funds by 8 20 Significantly better historical Alpha manager outperformance and Sharpe risk adjusted performance ratios which can add substantiation to return analyses Much lower portfolio turnover rates which can significantly impact the costs to the fund portfolios as trading costs and commissions are not part of mutual fund expense ratio reporting Overall costs to the plan were reduced by 95 including the fees for administration recordkeeping and for ongoing fiduciary investment advice and monitoring Ongoing access to education provided by independent fiduciary advisors This is typical of the results that can be obtained by incorporating a fiduciary process into your plan and ensuring that you are taking advantage of the latest technological and design flexibility that is now available in the marketplace We encourage you to contact us if you would like to discuss your situation in more detail or if you simply have questions about anything contained in this report We are happy to serve as your guides on your fiduciary journey and help you to arrive safely at your destination 9
   Be Prepared    Perhaps you   ve heard the Boy Scout motto once or twice in your lifetime. It   s actually one of the be...
Resources Foundation for Fiduciary Studies http www fi360 com main foundation_studies jsp Certified Financial Planner Board of Standards Inc http www cfp net aboutus Standards asp Press Guide to the Pension Protection Act Fi360 http www fiduciarystudies com press pdfs ppa pdf National Association of Personal Financial Advisors NAPFA Focus on Fiduciary Website http www focusonfiduciary org Financial Planning Association FPA Challenge to SEC Broker Dealer Rule http www fpanet org member govt_relation lawsuit against sec broker dealer rule cfm Link to summary of recent 401 k plan lawsuits http www americanbenefitscouncil org documents 401k_feechart_032607 pdf Department of Labor Pension Reform Website http www dol gov EBSA pensionreform html 10
Resources Foundation for Fiduciary Studies  http   www.fi360.com main foundation_studies.jsp Certified Financial Planner B...
EXHIBIT A Current Investment Options Fund Name BlackRock International Value B Evergreen Core Bond B Loomis Sayles Core Plus Bond B Davis NY Venture B BlackRock Fundamental Growth B Van Kampen Aggressive Growth B Oppenheimer Quest Balanced B BlackRock Value Opportunities B JPMorgan Dynamic Small Cap B BlackRock Global Allocation B Sample Co 401 k Plan Ticker MBIVX ESBBX NERBX NYVBX MBFGX VAGBX QGRBX MBSPX VSCBX MBLOX Peer Group 1 Yr Rtn 3 Yr Rtn 5 Yr Rtn Expense Ratio Foreign Large Value Intermediate Term Bond Intermediate Term Bond Large Blend Large Growth Mid Cap Growth Moderate Allocation Small Blend Small Growth World Allocation AVERAGE Alpha Sharpe Turnover Deferred Load 12B1 Fee 15 22 5 61 6 43 11 72 1 36 1 33 7 33 2 86 1 23 10 63 18 00 2 31 2 83 10 70 5 59 8 64 5 65 9 75 9 32 12 16 13 55 4 33 4 49 8 92 1 63 5 41 5 16 8 02 6 82 11 68 2 06 1 45 1 80 1 65 1 90 2 12 1 95 2 03 2 10 1 83 1 23 0 97 0 48 1 69 4 01 4 78 4 13 2 71 4 71 2 00 1 42 0 38 0 22 1 12 0 26 0 42 0 31 0 55 0 42 1 33 81 184 91 6 60 129 63 77 86 40 4 50 5 00 5 00 4 00 4 50 5 00 5 00 4 50 5 00 4 50 1 00 1 00 1 00 1 00 1 00 1 00 1 00 1 00 0 75 1 00 6 11 8 50 7 00 1 89 1 93 0 52 82 4 70 0 98 Recommended Investment Options Fund Name Permanent Portfolio Dodge Cox International Stock Dodge Cox Income Fidelity Spartan Total Market Index Inv T Rowe Price Growth Stock Vanguard Windsor II Vanguard Mid Capitalization Index T Rowe Price Balanced Vanguard Short Term Investment Grade Northern Small Cap Value T Rowe Price Retirement 2025 Ticker PRPFX DODFX DODIX FSTMX PRGFX VWNFX VIMSX RPBAX VFSTX NOSGX TRRHX Peer Group 1 Yr Rtn 3 Yr Rtn 5 Yr Rtn Expense Ratio Conservative Allocation Foreign Large Value Intermediate Term Bond Large Blend Large Growth Large Value Mid Cap Blend Moderate Allocation Short Term Bond Small Value Target Date 2015 2029 AVERAGE DIFFERENCE Alpha Sharpe Turnover Deferred Load 12B1 Fee 14 58 25 26 5 10 16 95 19 88 16 02 17 95 14 27 5 32 4 88 17 03 12 02 24 97 3 93 13 96 14 85 14 89 17 75 11 59 3 85 12 67 14 37 13 52 29 62 4 54 16 33 16 40 17 49 19 41 12 97 3 77 17 92 1 11 0 66 0 44 0 10 0 70 0 34 0 22 0 68 0 21 1 00 0 74 0 05 0 93 0 07 0 29 0 87 2 48 2 35 0 45 0 25 2 56 0 10 1 07 1 84 0 14 1 15 1 18 1 37 1 23 1 42 0 32 0 70 1 34 7 9 30 4 38 34 18 42 43 41 9 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 14 29 13 17 15 20 0 56 0 41 0 99 25 0 00 0 00 8 18 4 67 8 20 1 33 2 35 0 47 57 4 70 0 98 This scenario is derived from actual analysis of a corporate 401 k plan reviewed by Doug Kinsey in May of 2007 Plan was advised by a major NY Brokerage firm and a national payroll firm provided the administration The client opted for an unbundled solution incorporating the recommended investment options and customized model portfolios 1 Averages are simple averages of all funds included in the plan divided by the number of funds 2 Difference represents the advantage provided by the recommended mutual funds over the current funds Data provided by Fiduciary Analytics Inc May 07
EXHIBIT A  Current Investment Options  Fund Name BlackRock International Value B Evergreen Core Bond B Loomis Sayles Core ...