A quarterly publication of Confero Fiduciary Partners ......legal advice, nor should you consider...

Editor ’s Letter | The Roland Roundup | Partner Spotlightalso inside

“We advocate forward-looking action from t o d ay ’ s c o m m i t t e e members to ensure a better future for tomorrow’s employees and plan f iduciaries.”

Gabriel PotterSenior Investment Research Associate

Westminster Consulting, LLC

A vAriety of topics discussing Hospital Systems

Union CaSH balanCe PlanS

Managing Multiple 403(b) Vendors

CHurch Plan Status

UnloCking tHe Power of a retireMent Plan to DriVe HoSPital SUCCeSS

retireMent trenDS in HealtH Care

Articles

Sorting out legacy retirement Plans

CONFEROISSUE NO. 15

A quarterly publication of Confero Fiduciary Partners

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Confero | 1 summer 2016

Max P. KesselringEditor-in-Chief

The 15th issue of Confero is anoth-er publication by Confero Fiducia-ry Partners. Following Issue 14 is no small task. It was the inaugural issue with Confero Fiduciary Part-ners and one of our best issues to date. We are building on that suc-cess to bring you a fantastic and well-rounded Issue 15.

With the recent integration of Confero Fiduciary Partners, it has only made Confero bigger and bet-ter. Since its introduction, Confero

has become a place for thought leaders in the retirement community to share their insight and research on fiduciary topics.

In this issue, we discuss various topics related to health care systems. Managing 403(b) vendors, retirement trends in health care, ERISA 3(38)s, legacy 403(b)s, IRS regulations, and the impact of the new fi-duciary rule are some of the subjects discussed. Our goal is to exam-ine and analyze the topics that are most important to you, the plan sponsor, and provide you with insightful and timely information.

If you would like to learn more about a topic that has been covered, or if you have a question on one of the articles, please email me at [email protected].

Publisher Confero Fiduciary Partners

PartnersFiducia Group, LLC

Westminster Consulting, LLC

Editor-in-ChiefMax Kesselring

[email protected]

Editorial StaffRoland Salmi

[email protected]

Sheila [email protected]

Creative DirectorMax Kesselring

[email protected]

Staff ContributorsMark Hutter, Gabriel Potter, Roland Salmi

Featured Contributors Aaron Friedman, Yelena Gray, Robert

Goldman, Robert Patterson, Daniel Sharpe, Suzanne Smith, Bill Walsh

Online/Digital Operations

Jacob [email protected]

For a copy of the magazine, please email [email protected] or

call 800-237-0076.

The information contained in this magazine is for gen-eral information purposes only. The information is pro-vided by Confero Fiduciary Partners (CFP) and, while every effort is made to provide information that is both current and correct, CFP makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or avail-ability with respect to the magazine or the information, products, services, or related graphics contained within the magazine for any purpose. Any reliance you place on such information is therefore strictly at your own risk.

In no event will CFP be liable for any loss or damage, including, without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever aris-ing from loss of data or profits arising out of, or in con-nection with, the use of this magazine.

Please note that the articles included in this publication are general information and are not intended as

legal advice, nor should you consider them as such.

Confero | 32 | summer 2016

Roland Salmi, MBAWestminster Consulting, llC

Roland Salmi is an Associate Analyst at Westminster Consulting, LLC, in Rochester, NY. He is responsible for performance analysis, client projects, and Senior Consultant support.

Roland earned a Bachelor of Science degree in psychology and an Associate of Science degree in business administration from Elmira College and an MBA with concentrations in corporate finance and accounting from St. Bonaventure University.

Gabriel Potter, MBA, AIFA®

Westminster Consulting, llC

Gabriel is a Senior Investment Research Associate at Westminster Consulting, LLC, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits, Fiduciary News, HR Online, and Rep Magazine. Prior to joining Westminster, Gabriel worked as an Institutional Consulting Analyst with Graystone Consulting – the institutional business unit of Morgan Stanley Smith Barney.

Gabriel earned his MBA with concentrations in corporate finance and computers and information systems from the University of Rochester’s William E. Simon School of Business and his Bachelor of Arts degree in economics and a certificate of business management from the University of Rochester. He currently holds a Series 66 license from the NASD and an Accredited Investment Fiduciary Analyst designation (AIFA®) from the Center of Fiduciary Studies.

Max KesselringWestminster Consulting, llC

Max Kesselring is the Marketing & Public Relations Coordinator at Westminster Consulting, LLC, in Rochester, NY. He is involved in social media, external communications, and Senior Consultant support. He is the editor-in-chief and graphic designer for Confero.

Max is a graduate of the State University of New York at Fredonia, where he earned his bachelor’s degree in communications, more specifically media management, as well as a minor in visual arts and new media.

Mark Hutter, Aif®, QPFCFiducia Group, llC

Mark Hutter is a Principal of Fiducia Group LLC, where he leads the Taft-Hartley consulting practice. Mark also manages Fiducia Group’s Investment Committee and participant-advocacy and product-development initiatives.

Mark has over 25 years of diverse experience in the retirement and financial services industry. Prior to joining Fiducia Group in 2010, he managed the regional retirement advisory practice for a national advisory firm. He also has provided financial consulting with PricewaterhouseCoopers, and The AYCO Company (a Goldman Sachs Company.)

Mark is an Accredited Investment Fiduciary™ (AIF ® ) through the Center for Fiduciary Studies and is a Qualified Plan Financial Consultant (QPFC) through the American Retirement Association. The AIF® designation signifies that the holder has a thorough knowledge of the fiduciary standard of care, while the QPFC is the professional credential for financial professionals who sell, advise, market or support qualified retirement plans. Mark has a Bachelor of Arts in finance from Grove City College and an MBA from the Katz Graduate School of Business, University of Pittsburgh.

Editor’s LEttEr • Max KESSELRing

CoNfEro staff CoNtributors

fEaturEd CoNtributors

uNLoCkiNg thE PowEr of a rEtirEmENt PLaN to

drivE hosPitaL suCCEss • BiLL WaLSh

rEtirEmENt trENds iN hEaLth CarE - thE LifE You savE maY bE Your owN • RoBERT goLdMan

thE imPaCt of thE NEw fiduCiarY ruLE for oN-sitE advisors • daniEL ShaRPE & SuzannE SMiTh

maNagiNg muLtiPLE 403(b) vENdors -

thErE is No suCh thiNg as PErfECtioN! • AAron FrIedmAn

whY might a “3(38)” maNagEr makE sENsE for Your rEtirEmENt PLaN? • mArk HUtter

Cash baLaNCE PLaNs faCE aN amENdmENt dEadLiNE • YelenA GrAY

mEEt wEstmiNstEr CoNsuLtiNg, LLC rocHester, nY

PartNEr sPotLight • gabriEL PottEr WestmInster consUltInG, llc

thE roLaNd rouNduP • rolAnd sAlmI

sortiNg out LEgaCY rEtirEmENt PLaNs • GAbrIel Potter

ChurCh-affiLiatEd hosPitaL PENsioN PLaNs - subjECt to Erisa? • robert PAtterson

contentsConFero staFF Contributors

Confero | 54 | summer 2016

Robert Goldmantransamerica retirement solutions

Robert Goldman is a Regional Vice President – Institutional Markets, New York Regional Office at Transamerica Retirement Solutions. His responsibilities include

supporting the marketing and sale of Transamerica’s retirement plan services to both corporate and not-for-profit retirement plan sponsors.

Robert has over 25 years of extensive retirement plan sales and consulting expertise. For more about him, visit LinkedIn. Robert has a bachelor’s degree in mathematics from

the University of Rochester. He is a registered principal with Transamerica Investment Securities Corp. (TISC) in Harrison, NY and holds his insurance licenses.

Suzanne Smith, ESQ.bond, schoeneck & King

Suzanne Smith is a certified pension consultant and certified employee benefits specialist. Prior to joining Bond, she was a principal and employee benefits consultant at Milliman, Inc., where she provided consulting services on qualified, nonqualified, defined contribution and defined benefit retirement plans. She also provided guidance on IRC Section 409A and nonqualified deferred compensation arrangements.

Bill WalshPrudential Financial

Bill Walsh, Vice President, Regional Sales Director of Prudential Financial, is well-versed in all retirement markets and has extensive experience working with corporate, non-profit, and governmental organizations. He recognizes the importance of aligning retirement-plan initiatives with overall client organizational goals. His experience consulting on various organizational designs uniquely qualifies him to understand his clients’ diverse retirement challenges and develop custom solutions to address those needs. Bill has more than 25 years of expertise in retirement plan design, service, execution, and consulting. He has led teams ranging from operations and service delivery to strategic relationship and consulting. He has a Bachelor of Science degree in finance from the University of Scranton and has Series 6, 63, and various state life and health insurance licenses.

Daniel Sharpe, EsQ.bond, schoeneck & King

Daniel Sharpe has nearly 40 years of experience as a tax and employee benefits attorney and is of counsel to Bond, Schoeneck & King, PLLC. A significant part of his practice

recently has involved advising ERISA fiduciaries in best practices, governance and risk management. He is a graduate of the University of Rochester and the Ohio State

University College of Law.

Aaron Friedman, EAPrincipal Financial Group

Aaron Friedman is an Enrolled Actuary and the National Practice Leader for tax-exempt business with Principal Financial Group®. He has consulted with tax-exempt organizations for over 20 years and is a nationally known writer and speaker on tax-

exempt plan sponsor topics.

Yelena Gray ESQ.nixon Peabody llP

Yelena Gray is a member of Nixon Peabody’s Labor & Employment practice group and a member of their Employee Benefits team. She advises employers of all types and sizes on issues related to employee benefit plan design, implementation, administration, and regulatory compliance. Yelena also assists clients in negotiating employment agreements and structuring executive compensation.

Robert Patterson, ESQ.bond, schoeneck & King

Robert Patterson is a member of Bond, Shoeneck & King’s employee benefits, health care and cybersecurity practice groups. As a member of the employee benefits group, he counsels business and nonprofit clients, with respect to employee compensation and benefits matters, including pension, 401(k), and other qualified retirement plans, ESOPs, health, cafeteria and other welfare plans, deferred compensation plans, executive compensation, and benefits issues relating to mergers and acquisitions. He also advises health care providers and human services agencies with respect to compliance, reimbursement and regulatory matters, including HIPAA, federal and state self-referral and anti-kickback laws, reimbursement issues, other health care matters, as well as best practices for cybersecurity and data protection.

Featured ContributorsAs they appear in this edition

health Care systems

note: the articles included in this publication are general information and are not intended as legal advice, nor should you consider them as such. You should not act upon this information without seeking professional consent.

8 | summer 2016 Confero | 9

The Roland Roundup is a compilation of court cases that have recently been in the news. Each-case focuses on a violation of ERISA guidelines.

The outcomes of these cases may have a lasting impact on the fiduciary environment.

damberg v. laMettry’s Collision inc.The primary argument in Damberg v. LaMettry’s Collision, Inc. is that LaMettry’s 401(k) plan used higher-priced re-tail class shares when lower-priced institutional class shares were available. The plaintiffs say plan fiduciaries breached their fiduciary duties under ERISA by selecting inappropriate and imprudent mutual fund classes for plan assets that exposed plan participants to excessive fees, even when lower-cost options were available for the same set of investments and when the plan could meet required minimum investment hurdles. Additionally, the complaint blames the fiducia-ries for selecting an unduly expensive structure for the 401(k) plan – a bundled recordkeeping and investment manage-ment structure with Voya. Total fees approximated 1.22% of plan assets, for a total of $113,000. (Pending resolution)

Moore, Rebecca. “Retirement Plan Excessive Fee Suits Move Down Market.” Plan Sponsor. Asset International, 24 May 2016. Web. 16 June 2016.

estate of barton v. adt security services Pension PlanThe 9th U.S. Circuit Court of Appeals has held that in a prima facie case that Barton is entitled to pension benefits, but lacks access to the key information about corporate structure of hours worked that are needed to substantiate his claim, the burden shifts to the employer to produce this information. The employee, Bruce Barton, had given sufficient evi-dence including ID cards, W-2s, pay stubs and documentation of Social Security, and FICA withholdings from 1968 to 1980. The 9th Circuit found ADT was in a much better position than Barton to establish whether the various employers for which Barton worked participated in the plan, and whether he worked the requisite number of hours per year for vesting credit. (Pending resolution)

Rafsky, Joshua. “Estate of Barton v. ADT Security Services Pension Plan:.” The National Law Review. National Law Forum, 15 June 2016. Web. 16 June 2016.

Habib v. M&t bank CorporationM&T Bank is targeted in an ERISA complaint for self-dealing. Participants in M&T Bank retirement plans accuse the company of unfairly promoting its own mutual funds at the expense of plan performance. Targets of the suit, filed in the Western District of New York, include a handful of retirement plan fiduciaries and multiple companies that work to provide proprietary M&T mutual funds. The accusations of self-dealing are tied primarily to the plan fiduciaries’ deci-sion to offer and promote M&T Bank proprietary funds on the defined contribution (DC) plan menu, which according to plaintiffs, were “known for extraordinarily high fees and chronic underperformance.” According to the complaint, since at least 2010, eight of the plan’s 23 designated investment alternatives were M&T Bank proprietary mutual funds. “These funds were in the plan despite their obvious imprudence,” plaintiffs allege. “Their expenses were on average approximately 90% higher than similar funds found in similarly sized defined contribution plans; all but one of the M&T-affiliated funds had underperformed its benchmark index both over the past year and over the past ten years.” (Pending resolution)

Manganaro, John. “Participants File Self-Dealing ERISA Suit Targeting M&T Bank.” Plan Sponsor. Asset International, 16 May 2016. Web. 16 June 2016.

eastman Kodak erisa litigationKodak and a group of employees suing the company have reached a settlement agreement that includes a cash payment of $9.7 million. The participants alleged that Kodak fiduciaries violated ERISA by permitting the plans to offer Kodak stock as an investment option after objective information revealed that Kodak was in extreme financial distress. (Resolved - Kodak reached a settlement)

Moore, Rebecca. “Kodak Settles Stock Drop Suit for Nearly $10M.” Plan Sponsor. Asset International, 02 May 2016. Web. 16 June 2016.

Moyle v. Liberty Mutual Retirement Benefit PlanIn Moyle v. Liberty Mutual Retirement Benefit Plan, there was a material lack of disclosure about the terms of the plan, and participants sought relief under 1132(a)(1)(B) as well as equitable remedies under 1132(a)(3). The high court found that if participants are not able to recover benefits based on interpretation and enforcement of the retirement plan document, they can receive reformation of the retirement plan as an equitable remedy under 1132(a)(3). (Pending resolution)

Moore, Rebecca. “Court Allows Participants to Seek Plan Reformation Relief.” Plan Sponsor. Asset International, 27 May 2016. Web. 16 June 2016.

tibble v. edison internationalA U.S. appeals court dismissed a lawsuit by Edison International employees in California who accused the utility of fa-voring higher-cost mutual funds over lower-cost ones in its retirement plan, despite a U.S. Supreme Court ruling back-ing the workers. The 9th U.S. Circuit Court of Appeals in San Francisco said that while the Supreme Court in May 2015 ruled that federal law imposes an ongoing duty to monitor investments on fiduciaries like Edison, the workers failed to raise that argument in lower courts. The main legal issue was whether some of the lawsuit’s claims were barred by a six-year statute of limitations under ERISA. The Supreme Court said that liability is triggered by the fiduciary’s ongoing role monitoring the plan’s performance, so the six-year clock routinely resets. (Pending resolution)

Wiessner, Daniel. “Edison International Wins Dismissal of U.S. Lawsuit over 401(k) Plan.” Reuters. Thomson Reuters, 13 Apr. 2016. Web. 16 June 2016.

Treasury Rejects Central States’ Application for Suspension of BenefitsU.S. federal mediator Kenneth Feinberg rejected the Central State Pension Fund’s rescue plan that would have cut ben-efits for more than 250,000 working and retired union members. Feinberg’s decision upholds retirement obligations to members of the International Brotherhood of Teamsters. About two-thirds of the 400,000 members would have had their pension checks reduced under the rescue plan, some by 50 percent or more, documents show. Central States, one of the nation’s biggest multiemployer pension funds, pays out more than $2.8 billion in benefits a year. The decision could dim the chances for multiemployer pension funds to avoid insolvency by slashing benefits. (Resolved - Suspen-sion of benefits blocked by government)

Moore, Rebecca. “Treasury Rejects Central States’ Application for Suspension of Benefits.” Plan Sponsor. Asset International, 09 May 2016. Web. 16 June 2016.

These cases have come from various sources, and we cannot confirm the validity of any such decisions.

the RolandRoundup.


unlocking the Power of a retirement Plan to drive Hospital successbill Walsh, Prudential Financial

The U.S. hospital sector is in the midst of the most pronounced change it has seen in decades. This evo-lution is being shaped, in large part, by technological developments, a relentless wave of mergers and acquisitions (M&A), and the Affordable Care Act (ACA).

However, the goal for hospitals should not be just to weather this perfect storm. Simply acquiring a hospital system to gain scale or merging with another organization will not guarantee success or survival.

As part of Prudential Retirement’s ongoing efforts to help our healthcare industry clients tackle their biggest challenges, in collaboration with The Economist Intelligence Unit (EIU), we surveyed more than 300 CFOs and benefits executives at rural, urban and suburban hospitals of varying sizes and demographics across the country.

What we found is that those organizations are coping with a number of challenges, but three big ones stood out: • TheWarforTalent• BusinessModelInnovation• UnlockingthePowerofData

Those healthcare institutions with the will, foresight and ingenuity to solve these three challenges will likely emerge as leaders once the storm clouds clear. What may be even more surprising is that your retirement plan may actually play a significant role in addressing some of these challenges—and not in ways you may suspect.

Challenge #1: Winning the War for talent

Ultimately, the quality of a healthcare institution depends on the quality of its people. Healthcare-industry lead-ers understand this, with 74% believing their own organization needs to pay more attention to attracting and retaining the best talent. Yet most executives surveyed are still not making talent management their top priority.

Concerns about the talent pipeline are supported by government research. A report to Congress published by the Health Resources and Services Administration projects that “if current trends continue, the growing supply of intensivists [critical care physicians] will be insufficient to provide the optimal level of care to future populations through 2020.”

unlocking the Power of a retirement Plan to drive Hospital successBy: Bill Walsh


unlocking the Power of a retirement Plan to drive Hospital successbill Walsh, Prudential Financial

The American Association of Medical Colleges estimates that by 2025, the shortfall in medical, surgical and other healthcare specialists in the country will be between 28,200 and 63,700. According to the EIU survey, 65% of re-spondents see an ageing workforce presenting a problem in the long-term, with talent costs and the need for newer areas of expertise driving this chal-lenge.

So, how can your retirement plan help with your talent-management efforts? Optimizing your retirement plan is one way to align it with your business goals, such as talent recruitment and retention.

Your employees aren’t all the same. They do different jobs and hold different value to your organization. Furthermore, your retirement benefits are more important to certain groups of employees than others. So why offer uniform retirement benefits to all your employees?

The short answer is you don’t have to. You can design your retirement plan strategically to provide enhanced benefits to highly valued employees you want to retain or recruit. This will help you provide attractive retirement ben-efits that may outshine those offered by competitors.

Design changes may also allow you to improve plan efficiency while intro-ducing behavior incentives in order to drive better outcomes for employees without necessarily increasing the budget.

Challenge #2: business Model innovation

Four out of five hospital executives surveyed (81%) by EIU expect to trans-form their business models in the next three years.

When executives describe the business-model innovation their hospital is likely to adopt over the next three years, the leading activities they cite are an increased focus on niche areas of healthcare expertise; an increase in the use of e-health, m-health and non-traditional service delivery; and the use of technology to outsource services (45%, 39% and 36%, respectively).

There is no one clear path forward for all hospitals. Business-model inno-vation is unlikely to be easy. It will require cooperation between hospitals, physicians and other staff. It will also often require significant capital expen-diture.

This is why aligning your retirement plan with your broader business goals is a smart move for hospitals looking to position themselves for future success. The contributions of almost four in five (78%) of the 337 retirement plans

examined by Prudential Retirement’s Defined Contribution Optimization services were either deemed “inefficient” or “ineffective.”1

This means that by improving efficiency, many of those plans may be able to spend less money on their retirement plan while still driving the same out-comes for employees. Any savings can then be reallocated to other business initiatives. Challenge #3: unlocking the Power of data

Healthcare industry executives believe in the potential of analytics to improve services and care, according to the EIU survey respondents: 60% think Big Data will transform patient management and outcomes in the future, while 57% say it can be a game changer for operational performance in hospitals.

At present, however, nearly two thirds (63%) say the value of the data hospi-tals hold on patients and outcomes remains largely untapped. Indeed, health-care organizations lag in exploiting the wealth of data they possess. Not only have hospitals delayed investing in analytics, but just 37% of executives ex-pect their hospitals to invest specifically in analytics (to improve patient out-comes and administrative efficiencies) over the next three years.

Traditional institutions risk missing the boat or being scooped by competi-tors. Again, this is an area where improving retirement plan efficiency may be an effective strategy to free up funds for such endeavors without decreasing employee retirement benefits or harming outcomes.

If hospitals fail to respond to these challenges, competitors will emerge, which will further unsettle the healthcare landscape. Established hospitals must act quickly and creatively to identify solutions that will enable them to thrive in the new healthcare landscape.

1Internal Prudential analysis as of May 2, 2016.

Bill Walsh is VP, Regional Sales Director at Prudential Financial. He can be reached at [email protected].

For more information about the pressing challenges facing the hospital sector or to read the research report, visit healthcare.prudentialretirement.com.

Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates. PRIAC Is a Prudential Financial company.

Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.


retirement trends in Health Care: The Life You Save May Be Your ownrobert Goldman, Transamerica Retirement Solutions

How many times have you been buried by work and found yourself saying, “It’s not like I’m saving lives…!” Well, for those who work in the healthcare industry, they are literally saving lives. With such challenging and detail-focused jobs, along with balancing equally busy personal and family lives,

health care workers often have little time left to focus on their own needs. Somewhere near the bottom of the pile lies the often-neglected, but desperately important, retirement planning needs.

As financial professionals, it is our job to help plan sponsors create an optimal retirement program. By under-standing this industry and the people who work in it, we are better positioned to serve. In partnership with the American Hospital Association, Transamerica’s annual study, Retirement Plan Trends in Today’s Healthcare Market1, can be a valuable resource to help frame stronger conversations with healthcare organizations and potentially yield better results for employees.

According to the study, the majority of healthcare plan sponsors consider the primary goal of their retirement program to be helping employees accumulate income for retirement. As such, plan participation rate – histori-cally the most common benchmark of a plan’s success – has continued to trend downward for these organiza-tions, and “retirement readiness of employees” is most frequently cited as the top measure of success.

Strong plan design is critical for healthcare employers. Because employees in this field have demanding jobs and long hours, it is important that plan sponsors offer a competitive retirement plan that takes the guess work out of financial planning. Healthcare plan sponsors continue to take proactive steps to address plan challenges by holding one-on-one and group meetings, offering an employer-matching contribution, and implementing automatic features. All of these add up to a solid benefit for participants that can help them reach financial independence in retirement.

Some challenges are particularly unique to the healthcare industry. For example, more than one-third of plan spon-sors in this market have experienced a merger or acquisi-tion. The majority of mergers are based on acquisition of assets versus acquisition of stock. The surviving retire-ment plan is typically a 401(k) or Roth 401(k) plan, or, less frequently, a 403(b) or Roth 403(b). While almost half of these events utilized the services of a financial pro-fessional, there is tremendous opportunity here to assist plan sponsors with these complex transactions.

Another challenge that needs attention is employer- matching contributions. While almost all plans provide an employer contribution, the level of contribution is de-clining, which could impact employees’ ability to achieve a fully funded retirement. The most commonly reported matching formula last year was $.50 up to 6% of pay. This year, a lower employer-matching formula of $.50 up to only 3% of pay increased markedly. Healthcare organiza-tions looking to cut costs may end up inadvertently af-fecting their employees’ future nest eggs by reducing this contribution. It is crucial to have conversations with these employers about the importance of sound plan design.

While more healthcare organizations implement features such as automatic enrollment and automatic escalation, there is a tendency to implement a low default deferral rate. The most common default contribution rate is 3%, and implementation of higher default deferral rates, such as 4% or higher, has declined. And while 82% of health-care plan sponsors are concerned that the default rate is not high enough, they also express concern about raising it, citing “concern about employees’ take home pay” and “recommendation of consultant/advisor” as the most influential factors for maintaining the lower rates.

Regarding the use of a professional advisor, more than eight in 10 healthcare plan sponsors partner with an intermediary, who is most likely to be an investment or benefits consultant specializing in healthcare plans. The typical services employed by the intermediary include reviewing investment options, helping formulate

retirement trends in Health Care:The Life You Save May Be Your ownBy: Robert Goldman


retirement trends in Health Care: The Life You Save May Be Your ownrobert Goldman, Transamerica Retirement Solutions

the investment policy statement, supporting investment and service provider due diligence, and explaining pro-vider fees.

When we’re not feeling well, we turn to healthcare provid-ers and their hard-working employees for help. Not sur-prisingly, these organizations are typically paternalistic with benefits and have an innate desire to help their own employees. With 784,626 healthcare organizations in the United States, representing an annual revenue of $1.6668 trillion and employing over 16 million Americans2, there is no better time to explore this market and its many needs and challenges.

You may not be saving lives, but you may be helping those who do save for themselves.

To download or view a copy of the full survey, go to http://goo.gl/t84ycg

Robert Goldman is a Regional Vice President - Institutional Markets, in the New York Regional Office at Transamerica Retirement Solutions.

He can be reached at [email protected]

1 Transamerica Retirement Solutions’ defined contribution and de-ferred compensation retirement services are endorsed by the Ameri-can Hospital Association. AHA Solutions, Inc., a subsidiary of the American Hospital Association, is compensated for use of the AHA marks and for its support in marketing endorsed products and ser-vices. By agreement, pricing of endorsed products and services may not be increased by Transamerica Retirement Solutions to reflect fees paid to any AHA affiliate. AHA does not endorse securities or invest-ment products offered by or through Transamerica Retirement So-lutions. None of the AHA or its affiliates, including AHA Solutions, Inc. is a registered investment advisor, and none provides investment advice.

2 Source: U.S. Census Bureau, Statistic Brain Research Institute, 3/20/2016.


the on-site advisor and the new Fiduciary rulesuzanne smith, Esq., daniel sharpe, Esq., Bond, Schoeneck & King, PLLC

Many large non-profit organizations, such as educational insti-tutions and health care organizations, are accustomed to (and really like) having an “on-site advisor” available to meet one-on-one with retirement plan participants. In light of the new

fiduciary rule, this article explores how to maintain and improve on-site ad-visor services after the rule goes into effect in 2017. The new fiduciary rule is a sea of change for investment professionals. While employers can continue to have on-site advisors, the new rule will impact how on-site advisors pro-vide services to ERISA retirement plan participants.

on-site advisorEmployees at hospitals, colleges and other non-profit organizations turn to their on-site advisors for retirement plan guidance. An on-site advisor is someone employees often know on a first-name basis and who may have developed a positive long-term relationship with the employer. Employees meet with an on-site advisor for answers to retirement plan questions, to dis-cuss personal financial situations and significant life events, and to checkup on their retirement plan account investments and objectives.

The on-site advisor provides guidance to the participants relating to their re-tirement plan investments, as well as distributions from the plan. Providing general education about the plan provisions is excluded from the scope of fiduciary status. Providing guidance on plan investments and distributions, however, may trigger fiduciary status under the new fiduciary rules.

Fiduciary ruleIn April 2016, after years of waiting, the Department of Labor issued the final rule for the definition of fiduciary. This is the first revision to ERISA’s fiduciary definition since a 1975 DOL regulation.

As in the past, a person can be treated as a fiduciary of an employee benefit plan through management or administration of the plan:• Management – by having discretionary authority or discretionarycontrol regarding management of the plan or exercising any authority or control over the management or disposition of the plan assets; or• Administration–byhavingdiscretionaryauthorityordiscretionaryresponsibility in the administration of the plan.

These two paths to being a fiduciary have not changed. The change relates to the wider array of advice relationships that have developed particularly with self-directed individual account plans and IRAs since 1975. Under the new rule, beginning April 10, 2017, a person can be treated as a fiduciary, through investment advice:

the on-site advisor and the new Fiduciary ruleBy: Suzanne Smith & Daniel Sharpe


the on-site advisor and the new Fiduciary rulesuzanne smith, Esq., daniel sharpe, Esq., Bond, Schoeneck & King, PLLC

• InvestmentAdvice–byprovidinginvestmentadviceorrecommen-dations for a fee or other compensation with respect to assets of a plan or IRA. The final rule broadens who is a fiduciary with respect to investment advice. Thus, investment professionals who were not fiduciaries under the 1975 regu-lation will be treated as fiduciaries under the new definition.

How does this impact on-site advisors?On-site advisors will have to determine if they are fiduciaries under the new rule.• Dotheymakerecommendations?• Aretheirrecommendationsdirectedtoaspecificplanparticipant?• Howaretheycompensated?

Investment education, plan information and retirement education are not subject to fiduciary standards as investment advice. This means financial lit-eracy tools and educational communications that are valuable resources for plan participants can be provided without being treated as investment advice under the rule.

If an on-site advisor is providing investment education and plan information only, and does not cross the line to recommending a specific investment or investment strategy, the advisor can remain a non-fiduciary. In many cases, on-site advisors are going beyond general information and, as their title indi-cates, are advising on specific investment choices.

The rule change stems from a concern about conflicts of interest and self-dealing related to the vast movement since 1975 away from defined benefit plans to individually-directed plans and accounts. On-site advisors, working with a specific financial institution, often steer employees toward proprietary funds that pay commissions, making it difficult for the advisor to act in the employee’s best interest. Similar conflicts arise with distributions where ad-visors are better compensated when directing IRA rollovers to proprietary funds and products.

Under the new rule, advisors can continue to receive variable compensation such as commissions that could otherwise be prohibited, as long as they adhere to basic fiduciary standards aimed at ensuring that their advice is in the best interest of their participants, and they take certain steps to minimize the impact of conflicts of interest. In general, this involves the financial institution:• acknowledgingitsfiduciarystatus,inwriting;• providingadvicethatisintheparticipant’sbestinterest;• chargingnomorethanreasonablecompensation;• avoidingmisleadingstatements;and• givingparticipantstheinformationthattheyneedtoaccessfees,costsandmaterialconflictsofinterest.

next steps for Plan sponsorsPlan sponsors have a duty to monitor their service providers, including their on-site advisors. With the upcoming change in the fiduciary definition, it is a good time to confirm whether or not service providers are fiduciaries and ask if providers’ services or fees will change to comply with the new rule. Lastly, plans sponsors should carefully review new service agreements as vendors make changes to conform to the final rule.

Suzanne Smith, Esq., is senior counsel at Bond, Schoeneck & King, PLLC. She focuses on employee benefits. She can be reached at [email protected].

Daniel Sharpe, Esq., is of counsel at Bond, Schoeneck & King, PLLC. He focuses on tax and employee benefits. He can be reached at [email protected].

health.Care.Retirement.

Confero | 25

the Freedom of a blank slate

There is an underappreciated cost to establishing most systems: disassembly. There are always logistical problems when phasing out and replacing systems in pieces or running two overlapping systems concurrently. If you erect a building, the owners will have to keep updating its purpose to ensure it remains useful. Otherwise, someone will bear the cost of tearing the building down, or else the community will bear the cost of a dilapidated eyesore. If a nation sets up an infrastructure for gasoline-driven cars, there is an additional cost to repurpose it for other competing technologies such as liquid natural gas, hydrogen cell, or battery-driven electrical. Here in Rochester, part of America’s Rust Belt, being mindful of the cost of an overextended and obsolete system is an influential part of our mentality.

On a positive note, the least developed countries, companies, and communities have an advantage. They can start fresh and take advantage of modern innovations at inception. They can leapfrog several levels of development without the burden of renovation costs to an existing, obsolete infrastructure. This principle applies to quickly growing economies, like those of sub-Saharan Africa, which can take quantum leaps into cellular communica-tion and independent power generation, bypassing traditional 20th-century standards like landline and energy-transmission lines. This principle equally applies to individual busi-nesses, like JetBlue, which took advantage over larger, more established peers with newer fleets and less restrictive union arrangements.

Until now, we’ve mostly been considering the costs of change to tangible, literal systems. The same principles of restructuring cost apply equally to intangible systems. You might suspect that the costs to changing a tangible system should be greater because there are real-world physical structures that must be created, transported, and installed to replace a system. That’s true. It’s easier to scrap a few ideas on a piece of paper than make a physical object. It’s easier to change a system early in a planning stage, when everything is abstract and unrealized. However, an intangible system may mature and innovate more quickly, since it operates free of physical limitations. Thus, an intangible, abstract system can ad-vance more quickly, free of real-world burdens. So being behind the curve can be equally damaging to an intangible system since the potential for modernity advances more quickly.

Let’s be more specific and consider the changing environment of an intangible system – namely, an employer-sponsored retirement plan. For the past decade, the financial record-keeping services industry has created enormous savings for plan sponsors for both public and private retirement plans. Moreover, the service-level agreements for plan participants have never been better, with lots of customized education options, inexpensive loan ar-rangements, daily balances, and other options available to employees.

sorting out legacy retirement PlansBy: Gabriel Potter


sorting out legacy retirement PlansGabriel Potter, aiFa®, MBa, Westminster Consulting, LLC

403(b) & 457 Plans are Further behind the Curve

Startups and new companies starting fresh should be able to get great deals, in the context of history, with a little bit of com-parison shopping and modest benchmarking efforts. The competitive nature of the marketplace has pushed many cost and service benefits widely across the 401(k) universe. However, in our work as a fiduciary consultant, we have noted a number of retirement plans that have been harmed by adherence to a legacy of uncompetitive service agreements and old-fashioned thinking. Specifically, we’ve noted a particular slowness in public plans and non-profit plans, i.e.: the 403(b) and 457 uni-verses. We expect the free market and their corresponding retirement system, the 401(k), to move more quickly than government plans, but the difference between the levels of services and fees between very comparable plans is surprising.

Some of this deficiency is due to inaction at the client level, and some is due to a lack of pressure upon service providers. Why might public and non-profit plans be slow to take advantage of modern retirement plan benefits?

Group-level Contracts vs. individual Contracts

Some retirement plan providers in the government or public education arenas had prudently began a relationship with a retirement plan vendor but had implemented their contracts on an individual, plan participant level. For example, John Doe is an employee working at a Municipality. This Municipality’s retirement plan is being provided by ABC Custodial and Asset Management. The Municipality wants to fire ABC and transfer retirement plan management duties to a less expen-sive competitor. However, ABC may point out that their contracts are between ABC and individual participants, like John Doe. New and future employees at the Municipality may start a new retirement plan administered with XYZ management, and that plan itself may be portable to future competitors if necessary. However, John Doe and other employees will have to personally opt-out of their relationship with ABC to make the transition to XYZ. This is a step not everyone is willing to take. Many plan participants are famously difficult to convince to make short-term efforts to ensure a better deal, no mat-ter how objectively attractive the long-term benefits are. As a result, the Municipality will end up overseeing multiple plans concurrently, new employees with XYZ and a legacy of older employees with ABC. The plan committee and investment consultants will have to manage multiple vendors concurrently.

the long unwind

Contractual obligations that attach substandard service levels to participants are bad enough. Worse, depending on the vintage of the plan, there may be inherent lock-up periods even if you can separate plan participants en masse to a more competitive service provider. So, for example, the Municipality is now allowed to move all of their participants from ABC’s system to XYZ Asset Management, but it may not happen in a timely way. First, there are some investments like Stable Value products that have lock-up periods where the plan must allow 12 to 24 months to fully redeem the book value of the original investment. So any of the Municipality’s employees with assets in the ABC Stable Value program may have to wait a few years to move all their money to the new plan. Similarly, there are some lock-up provisions that have extended this principal to create five-to-ten-year lockups from changing service providers. So employees know that their money will eventually change hands, but it will still take years to happen. Given the inevitability of a long-term period of a plan sponsor monitoring multiple plans during this lock-up period, it understandably discourages sponsors and their planning commit-tees from making a move.

Personal relationships

Speaking anecdotally, there is a greater cultural tendency in the non-profit world to act and to portray one’s actions as be-ing separate from self-interest. It isn’t just business; it’s per-sonal. It isn’t just dollars-and-cents; it’s emotional. The re-lationships are more insular; service providers move beyond trusted professional partnerships into potentially one-sided friendships. This type of business arrangement can end up being lucrative for service providers who do not have to react as quickly to industry best practices or competitive-pricing pressure. To promote change, it becomes necessary to trans-late how the ultimate goals of the non-profit are being under-mined by the current, uncompetitive service agreements.

Making the Change

Given these discouraging elements, plans sponsors and their committees may be lulled into inertia and hopelessness. If the process is going to take years, why not simply defer the deci-sion to future committee members? There is a proverb, “The best time to plant a tree is 20 years ago; the second best time is now.” The fiduciary duty to act in participants’ best inter-est should bolster the case for action, if its benefit is deferred. Therefore, we advocate forward looking action from today’s committee members to ensure a better future for tomorrow’s employees and plan fiduciaries.

Gabriel Potter is the Senior Research Analyst at Westminster Consulting, LLC.He can be reached at [email protected] or 585.246.3750.

The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness are not guaranteed. Westminster Consult-ing, LLC, reserves the right at any time and without notice to change, amend, or cease publishing the information. It has been prepared solely for informative purposes. It is made available on an “as is” basis. Westminster Consulting, LLC, does not make any warranty or representation regarding the information. Without prior written permis-sion from Westminster Consulting, LLC, it may not be reproduced, in whole or in part, in any form. The information in this document is confidential and proprietary to West-minster Consulting, LLC, including its business units and may be legally privileged. Any unauthorized review, printing, copying, use or distribution of this document by anyone else is prohibited and may be a criminal offense. Indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results.


Church-Affiliated Hospital Pension Plans - Subject to ERiSa?robert Patterson, Esq., Bond, Schoeneck & King, PLLC

Recently, two federal appeals courts ruled that pension plans sponsored by Catholic hospitals did not qualify as exempt “church plans” and were therefore subject to minimum funding requirements, fiduciary duty, and other mandates un-

der federal pension law. More than 20 other similar lawsuits against church-affiliated health care organizations are pend-ing, in what one court labeled a “new wave of litigation.” These two decisions will have far-reaching impacts on retirement plans sponsored by church-affiliated entities, including the many such organizations in the health care industry. ______________________________________________________________________________________________

Since its enactment in 1974, the Employee Retirement Income Security Act (“ERISA”) has exempted “church plans” from most of its myriad substantive requirements, including minimum participation, vesting, reporting, and funding standards. In particular, church pension plans are exempt from the strict minimum funding requirements under ERISA and the In-ternal Revenue Code (Code) and are not covered by the Pension Benefit Guaranty Corporation (PBGC) pension insurance program.

The church plan exemption is particularly important in the health care industry since many hospitals and health care years of service are associated with churches, especially the Catholic Church. The website of the Catholic Health Association,

which represents the church’s health ministry in the United States, claims there are 639 Catholic hospitals in the U.S. and that 1 in 6 U.S. patients are cared for in a Catholic hospital.1 Although there are no publicly available data on the number of exempt church plans – since they are not subject to ERISA, they do file Form 5500s – it is safe to assume there are hundreds of U.S. pension plans that currently take advantage of ERISA’s church plan exemption.

Initially, the church plan exemption was strictly limited to plans established and maintained by churches or religious or-ders for the benefit of their employees only. However, the “church plan” definition was amended in 1980, ostensibly to permit plans that covered employees of church affiliates (like schools and hospitals), or that were administered by certain church-affiliated boards or organizations, to also qualify for exemption. As will be seen, the amended definition created an ambiguity as to whether an exempt plan still had to be established by a church, or whether being maintained by a qualifying church affiliate was enough. This ambiguity is at the center of most of the current lawsuits challenging church plan status.

Despite the apparent ambiguity, however, following the 1980 amendments and until recently, the church plan definition was consistently interpreted so as to permit pension plans sponsored and administered by church-affiliated organizations – including nonprofit hospitals and long-term care facilities – to qualify as exempt “church plans”, as long as the sponsor-ing organization was deemed to be sufficiently “associated” with a church or religious order. For example, in 1986 the IRS ruled that a retirement plan sponsored by a nonprofit hospital was an exempt church plan because the hospital entity was closely associated with a religious order. It was sponsored and controlled by the order, and was listed in the order’s official directory.2 In fact, the IRS and the Department of Labor have issued dozens of advisory opinions and letter rulings that approved of church plan exemptions for plans sponsored by health care (and other) organizations that clearly were not churches, provided that the sponsor was sufficiently associated with a church or religious order.

However, since 2013, more than 20 federal court lawsuits have been initiated that challenge the exempt status of pension plans sponsored by church-affiliated health care organizations. A listing of these lawsuits can be found on the website of the Pension Rights Center, a nonprofit organization devoted to protecting retirement benefits of American workers and retirees.3 The principal allegation in these lawsuits is that the church plan exemption should not apply to pension plans that were not established by a church, and that sponsorship or administration of the plan by a church affiliate is insufficient.

The primary issue in these lawsuits is the portion of the 1980 amendment that is sometimes called the “pension board” clause, because it was intended to permit plans administered by pension boards, or other church-affiliated committees or organizations, to qualify for exemption. As noted earlier, the original ERISA definition stated that an exempt plan had to be established and maintained by a church. The 1980 amendment added the following:

A plan established and maintained … by a church … includes a plan maintained by an organization … the principal purpose or function of which is the administration or funding of a plan … if such organization is controlled by or associated with a church or a convention or association of churches.4

Again, for 30 years the IRS and the Labor Department consistently interpreted this language so as to exempt plans estab-lished and sponsored by non-church organizations, as long as they were administered by a pension board or other entity controlled by or sufficiently associated with a church. Some of the lower courts that have issued rulings in the recent cases have agreed with this long-standing agency position.

Church-Affiliated Hospital Pension Plans -Subject to ERiSa?By: Robert Patterson

1See https://www.chausa.org/about/about/facts-statistics. 2PLR 8625073 (Mar. 26, 1986).3http://www.pensionrights.org/publications/fact-sheet/status-church-plan-litigation. 429 U.S.C. section 1002(33)(C)(i); Internal Revenue Code section 414(e)(3)(A).

30 | summer 2016

robert Patterson, Esq., Bond, Schoeneck & King, PLLC

However, two federal appeals courts recently held that the federal agencies had been misinterpreting the church plan definition, holding that an exempt church plan must be established by a church, and that plans established by church affiliates do not meet this requirement. In Kaplan v. Saint Peter’s Healthcare System, 810 F.3d 175 (3d Cir., Dec. 29, 2015), the Third Circuit Court of Appeals held that a pension plan sponsored by the St. Peter’s Healthcare System (headquartered in New Jersey) was not an exempt church plan because it was established by a nonprofit health care entity, not by a church. The fact that the Roman Catholic Diocese of Metuchen, New Jersey, controlled the nonprofit entity was, in the court’s view, insufficient, since the “plain meaning” of the statutory definition was that a church plan must be established by a church, even if it is administered or funded by a church affiliate.

More recently, the Seventh Circuit Court of Appeals reached the same conclusion. In Stapleton v. Advocate Health Care Network, 817 F.3d 517 (7th Cir, Mar. 17, 2016), the Court held that a pension plan sponsored by the Advocate health care system and established by its nonprofit predecessor was subject to ERISA for the same reason cited by the Saint Peter’s court: It was not established by a church.

So far during this “new wave of litigation” (as the Kaplan court termed it), no federal appeals court has held that a plan established by a non-church entity qualified for ERISA exemption, though several lower (district) courts have done so.5 In addition, several cases have been settled, with the challenged hospital or health system agree-ing to make substantial contributions to the plan and to take other actions consistent with coverage by ERISA.6

The implications of the two appeals court decisions (and the reported settlements) are enormous. Pension plans that have been wrongly utilizing the church plan exemption (including those in the health care sector) may find themselves subject, for the first time, to many onerous ERISA requirements, including: • theminimumfundingrules• thefiduciary-dutyprovisions• thereportinganddisclosurerules(includingtheForm5500filingrequirement)• thePBGCplanterminationinsuranceprogram,includingtheprovisionsofERISA,whichmakecon-trolled group members jointly and severally liable for pension-plan underfunding.

Sponsors of pension plans (and other ERISA plans) that have been using the church plan exemption would be wise to reexamine whether the plans are rightly using the exemption in light of these new cases.

Robert Patterson, Esq. is a member of Bond, Schoeneck, & King’s employee benefits, health care and cybersecurity groups. He can be reached at [email protected].

5E.g., Medina v. Catholic Health Initiatives, 2015 U.S. Dist. LEXIS 164343 (D. Colo. 2015); Lann v. Trinity Health Corp., 2015 U.S. Dist. LEXIS 147205 (D. Md. Feb. 24, 2015).6See, for example, “Trinity Health hospital to pay $107 million to settle pension lawsuit”, Modern Healthcare (May 25, 2016), http://www.modernhealthcare.com/article/20160525/NEWS/160529946.


Managing Multiple 403(b) Vendors - There is no such thing as perfection!aaron Friedman, Ea, Principal Financial group

Inevitably, something will go wrong. It’s just the nature of life: things break; people make mistakes. The mark of any vendor relationship is not an absence of problems, but a question of how quickly the inevitable prob-lems are solved to the customer’s satisfaction. I note that when I look up a business on the Better Business Bureau site. I’m much more comfortable seeing a complaint that is resolved than seeing no report whatsoever.

I’ve seen 403(b) provider arrangements, though, where the level of service and problem resolution are not a top priority. Certainly, advisors are necessary to serve as the advocate to go to bat for their client. However, what about plan sponsors with multiple 403(b) service-provider arrangements? Can the advisor effectively go to bat for the client if there are multiple providers? It is no secret that most providers make money on money.

• The more money the client has with the provider, the better service they are going to get. • The more money per participant that is in the client plan, the better the service.

single Versus Multiple advisors

If the plan has a single advisor, then it is likely one of two scenarios. Either the advisor has recommended mul-tiple providers, or the advisor has recommended a single provider, but due to contractual restrictions with a discontinued provider, legacy-plan assets exist with that discontinued provider. In either of these situations, the question is how much influence does the advisor really have with each of the providers when each participant’s plan assets are diluted across multiple providers? Even if the advisor has influence with the current provider, how much influence can really be exerted on a discontinued provider when the inevitable problem arises?

Multiple Providers and Multiple advisors

Another possible scenario is multiple providers and multiple advisors. This could even extend to multiple-advisors for each of the multiple-providers. Then the question is simply whether anybody has any influence to go to bat for the client with any provider?

Comments I’ve received have challenged the concept of single provider versus multiple-provider arrangements. The advocates for multiple-provider arrangements talk about the benefits of more choice and maintaining indi-vidual advisor relationships. The fact of the matter, though, is that most single providers have adequate choices available to participants today. In addition, I’m a strong supporter of individual advisors. I personally employ one. However, that isn’t the best model for a retirement plan. Those with advisors are mostly well taken care of. Those without are not, and, unfortunately, in multiple-provider arrangements, there are usually too many with-out. Finally, multiple providers cause the dilution discussed above, which makes it harder to get top-service priority from the service providers.

These are important questions for 403(b) plan fiduciaries to consider in evaluating an approach for the retire-ment plan, as they aren’t always readily apparent.

Aaron Friedman is an enrolled actuary and the National Practice Leader for tax-exempt business with Principal Financial Group®.He can be reached at [email protected].

Affiliation DisclosureThe subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You

should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

No investment strategy, such as diversification or asset allocation, can guarantee a profit or protect against loss in periods of declining value. Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial

Group® (Principal®), Des Moines, IA 50392.

Managing Multiple 403(b) Vendors -There is no such thing as perfection!By: Aaron Friedman


Mark Hutter, aiFa®, QPFC, Fiducia group, LLC Why Might a “3(38)” Manager Make sense for Your retirement Plan?

By hiring a “3(38)” advisor to serve the organization’s retirement plan, a plan sponsor can delegate some of the fiduciary responsibilities with which they are least comfortable. Not having to approve invest-ment decisions, plan sponsors can reduce the amount of due diligence needed while providing an ad-

ditional layer of fiduciary protection to the plan.

Since the 2008 financial crisis, we have seen a trend in both public and private sectors where continued financial pressures and reductions in staff have forced employers to do “more with less.” This dynamic, in concert with higher market volatility, an increase in qualified-plan regulations, and more plan litigation, has made it increasingly difficult for plans sponsors to maintain proper oversight.

These concerns are exaggerated in the healthcare industry, where an increase in both government (i.e.: Af-fordable Care Act, Recovery Act EMR/EHR) and insurance regulation has substantially increased admin-istrative burdens. As hospitals and other providers change models and band together, they must assess the most effective way to provide employees’ retirement needs.

ERISA (Employee Retirement Income Security Act of 1974) is the federal law that established standards to protect the interests of employee benefit plan participants and their beneficiaries. Part of ERISA defines and establishes standards of conduct for plan fiduciaries. ERISA 3(21) and ERISA 3(38) simply refer to ERISA section numbers that contains the definitions referring to various levels of fiduciary care.

Both 3(21) and 3(38) investment fiduciary advisors accept fiduciary responsibility and adhere to ERISA 404(a)’s duty to act solely in the interest of plan participants, along with meeting the “prudent man” stan-dard of care. Plan sponsors retain the responsibility to select and monitor the advisor, regardless of their advisor’s fiduciary status.

Any individual is a 3(21) fiduciary if s/he exercises any authority or control over the management of the plan or the management or disposition of its assets, provides investment advice for a fee, or has any dis-cretionary responsibility in the administration of the retirement plan. New laws (effective April 2017) will force brokers and other consultants who have historically denied fiduciary status to accept fiduciary respon-sibility and act accordingly.

A 3(21) investment fiduciary is a paid provider that will provide investment recommendations but does not have discretionary authority to make the decisions, as the plan sponsor may accept or reject those recom-mendations and then execute the investment decisions for the plan. The 3(21) investment fiduciary and plan sponsor in this case share fiduciary responsibility. Thus, you will often see the 3(21) investment fiduciary referred to as a co-fiduciary.

The 3(38) investment manager, however, has full fiduciary responsibility for its investment decisions, sub-ject to the terms of the plan documents and its investment policy statement. In a defined contribution plan, this means the investment manager will not only select and monitor the investment in the plan, but will also have the authority to remove and replace investment options offered to plan participants. The 3(38) investment fiduciary, typically a Registered Investment Adviser (RIA), bank or insurance company, must acknowledge its fiduciary status in writing. The plan sponsor and all other plan fiduciaries are relieved of all fiduciary responsibility for the investment decisions made by the 3(38) investment fiduciary under ERISA 405(d). Due diligence responsibilities are limited to the selection and monitoring of the advisor and not to the acts or omissions of the advisor.

Why Might a “3(38)” Manager Make sense for Your retirement Plan?By: Mark Hutter


Why Might a “3(38)” Manager Make sense for Your retirement Plan?Mark Hutter, aiFa®, QPFC, Fiducia group, LLC

For plan sponsors, some key takeaways when consid-ering appointing a 3(38) investment fiduciary:

accountability - A 3(38) investment fiduciary arrangement trans-fers the responsibility and risk associated with the selection and monitoring of the plan’s investment option away from the plan sponsor. This approach does not completely absolve the plan spon-sor of liability, as they retain the responsibility to select and moni-tor the advisor. This is an additional layer of protection provided to plan fiduciaries.

Consistency – Many industries, including health care, face a more mobile workforce, which can lead to greater personnel and organi-zational changes. A 3(38) arrangement can provide a level of con-sistency to your retirement plan. Whether decisions are made by one key decision maker or an Investment Committee, using a 3(38) arrangement allows for a consistent investment process regardless of personnel changes to the organization. This may be an attractive feature for plan sponsors looking to attract committee members.

simplicity – While the overall value of a retirement program is influ-enced by many factors, a 3(38) arrangement reduces the time that is normally involved with the investment selection and monitoring process. This approach allows the plan sponsor to focus more time on the other elements of the plan (i.e.: plan design, education, etc.) that will help drive more successful outcomes for its participants.

In the challenging health care environment, taking a step back to periodically assess your approach to managing your retirement plan and whether it is meeting your plan goals and objectives is always prudent.Just don’t forget to document. This process may lead to plan changes that could improve efficiencies and participant outcomes without increasing employer cost.

There is no one “right way” for all plans, whether you are looking at plan design, investment menu design, participant education or fiduciary oversight. However, the decision to implement a 3(38) arrangement elevates the definition of care to the greatest degree under ERISA and can add many benefits.

Mark Hutter is the Chief Investment Officer for Fiducia Group, LLC.He can be reached at [email protected] or 412.540.2303.


Cash balance Plans Face an amendment deadlineYelena Gray, Esq., nixon Peabody, LLP

Despite the proliferation of 403(b) and 401(k) plans, defined benefit plans remain an important part of the healthcare sector’s culture. They provide retirement security for employees and are still a valuable recruiting tool for hospitals. Over the past two decades, many hospitals converted these plans from traditional programs

with an age/service formula to a cash balance design that may quite possibly represent the last stand for DB plans.

Cash balance plans are true hybrids: to employees, they look a lot like defined contribution plans on the surface, but behind the scenes they remain subject to all of the complex rules governing traditional defined benefit plans. And in fact, they must jump through additional hoops that don’t apply to plain vanilla DBs. By the end of 2016 (with some leeway for certain collectively bargained plans), sponsors of cash balance plans must modify any non-compliant fea-tures in their plans. These modifications may require negotiations with the unions and that, in turn, makes this process extremely time-sensitive.

To recap, since the 1980’s, nonprofit healthcare systems have been shifting steadily to defined contribution retirement plans and deemphasizing DBs. The trend moved from traditional profit-sharing plans with fixed employer contribu-tion to more nimble 403(b) and 401(k). Many factors account for the precipitous drop in the number of surviving defined-benefit plans. Employers struggle to maintain minimum funding levels prescribed by federal law. PGBC premiums levels continue to rise. The flat per-participant rate in 2016 is $64, increasing to $69 in 2017, $74 in 2018 and $80 in 2019. For each $1,000 of unfunded vested benefits, plan sponsors pay an additional premium. The brunt of volatile investment returns falls on plan sponsors while their obligation to pay pensions remains constant. Longer life expectancies further increase the costs of providing pension benefits. The current accounting standards require employers to carry pension plan liabilities on their books. Extreme complexity also plagues pension plans. Most non-profit hospital plans have evolved over time, undergone many iterations and merged with other plans, resulting in mul-tiple grandfathered and active formulas. These plans require expensive actuarial services and extensive administration. Convoluted benefit formulas can sometimes make it difficult for employees to fully appreciate the benefits they earn.

To address pension plans’ volatility and expense, perceived lack of employee appreciation, and accounting burdens, plan sponsors resort to various risk-mitigation techniques. These include liability-driven investment, de-risking through lump-sum windows or transfers of liabilities to annuity issuers, benefit freezes, or the adoption of hybrid plan designs.

Despite the general decline, defined benefit plans retain their hold in the nonprofit healthcare sector. Moody’s Inves-tors Service indicates that 72% of the 460 nonprofit hospitals it rates still sponsor defined benefit plans. Some employ-ees continue to value these plans and often make their career decisions taking into account an employer’s commitment to continue an existing pension plan.

Although very few large employers establish new defined benefit plans nowadays, cash balance plans have gained pop-ularity among professional employers, such as physician practices. A cash balance plan provides benefit accumulation more evenly throughout an employee’s career. The plan’s costs are more predictable, and the risk of investment losses is shared by the sponsor and plan participants.

In a typical cash balance plan, a hypothetical recordkeeping account is established for a participant. Each year, the ac-count grows with pay-based credits and interest credits. Interest credits are often tied to a bond index. At retirement, the participant may take the value accumulated in the hypothetical account as a lump sum or as an annuity based on the account’s value.

Cash balance plans stirred quite a bit of controversy in their infancy. They were challenged as age-discriminatory because they seemingly favor younger employees by offering a longer period for interest credits to accumulate. As a result of legal challenges, cash balance plans with unusually high interest crediting rates had to pay out lump sums that far exceeded the value accumulated in the hypothetical accounts. This was a function of the high interest crediting rate and low discount rates prescribed for use in calculating minimum lump sums. The future of these plans does look brighter, however. The cash balance conundrum was resolved by legislative fiat. The Pension Protection Act of 2006 legitimized these plans and prescribed a set of standards they must follow to assure they are not age-discriminatory and do not shortchange participants by undervaluing lump sums. A major part of the Pension Protection Act and the IRS regulations is the ceiling on interest crediting rates. These rates must not exceed the market rate of return. The regula-tions establish the universe of acceptable interest rates. All plans must have an acceptable rate to continue in existence.

Last year, the IRS extended the deadline for cash balance plans with non-compliant rates of interest to get their act to-gether. Generally, cash balance plan sponsors have until the end of 2016 to amend their plans to conform interest cred-iting rates to the rules and incorporate other requirements of the final IRS regulations. Certain collectively-bargained plans (i.e., generally those with a substantial percentage of participants whose benefit levels are set by a collective bar-gaining agreement) may have additional time to bring their provisions into compliance with the regulations (which in all instances will not extend beyond 2018). Thus, the time is running short for amending the plans. Unfortunately, for some plans, this means a potential reduction in the rate of future benefit accruals. While plan sponsors must comply with the regulations, they often cannot unilaterally change the interest rate without negotiating with the unions where plans cover unionized workforces. Thus, plan sponsors might be finding themselves between the proverbial Scylla and Charybdis. On the one hand, they face disqualification of the plan, with draconian tax consequences. On the other hand, they may run afoul of their obligations under the labor laws. In view of these challenges, hospital plan sponsors must start a conversation immediately with their unions and work with their legal advisors and actuaries to meet the looming December 31, 2016 deadline.

Yelena Gray, Esq., is a member of the Nixon Peabody, LLP’s Labor & Employment practice group and a member of its Employee Benefits Team.She can be reached at [email protected] or 312-977-4158.

Cash balance Plans Face an amendment deadlineBy: Yelena Gray

if there is a topic that you would like more information on, please email [email protected].

Health Care Systemsthose in health care know there

are unique circumstances that are specific to their industry. Our goal with this issue of Confero was to show the knowledge of financial professionals on these specific

topics. We hope you enjoyed it!

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At Westminster Consulting, we specialize in providing incomparable fiduciary advice and counsel, coupled with thoughtful investment research, to our clients. Our services

help qualified plan sponsors and their fiduciaries fulfill their responsibilities under ERISA.

Our focus is on promoting, developing and maintaining proper and strong fiduciary governance processes for clients is central to our culture and to the services we provide. Our role as “fiduciary” consultant to plan sponsors goes beyond that of a traditional investment consultant. Pivotal to the work we do with plan committees is assisting them with the development of and compliance with sound fiduciary practices, while delivering exceptional, original investment analysis.

Our prudent process-based approach enables defined benefit and defined contribution plan fiduciaries to meet their legal obligations, as well as mitigate their potential liability in a cost-effective and prudent manner, benefiting all stakeholders of a plan.

As a leading independent, fee-only fiduciary consultants, we provide plan sponsors with the ability to better navigate and manage the demanding and changing ERISA regulatory landscape. Our independence provides objectivity, allowing Westminster Consulting to provide clients with impartial advice, time-tested industry-leading insight and improved plan results.

Whether through the development of Investment Policy Statements, intensive fiduciary reviews, education and training, or ongoing oversight and document management, the policy-and-procedures approach utilized by Westminster Consulting provides clear and thoughtful solutions to the regulatory challenges of managing a qualified plan.

The complexity of the plan-oversight process is streamlined by utilizing Westminster Consulting’s proprietary Fiduciary Compliance Resource Center™ (FCRC) technology platform. This secure portal is the first of its kind to provide consistent and accurate plan information in an easily accessible and secure location. FCRC helps plan sponsors control and manage all aspects of plan oversight consistent with Department of Labor’s ERISA requirements. FCRC is one of the most comprehensive fiduciary management tools available to plan fiduciaries.

At Westminster Consulting, we provide informed insight and seasoned expertise to help investment fiduciaries better manage their legal responsibilities through considered advice, secure technology, and on-going fiduciary education.

Meet Gabriel Potter. He is a Senior I n v e s t m e n t

Research Associate at Westminster Consulting. He is responsible for designing strategic asset allocations and conducts proprietary market research for Confero Fiduciary Partners.

Gabriel earned his MBA with concentrations in corporate finance and computers and information systems from the University of Rochester’s William E. Simon School of

Business and his Bachelor of Arts degree in economics and a certificate of business management from the University of Rochester. He currently holds a Series 66 license from the NASD and an Accredited Investment Fiduciary Analyst (AIFA®) designation from the Center of Fiduciary Studies.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits, Fiduciary News, HR Online, and Rep Magazine. Prior to joining Westminster, Gabriel worked as an Institutional Consulting Analyst with Graystone Consulting – the institutional business unit of Morgan Stanley Smith Barney.

Gabriel’s passion for his career comes from his love of problem solving and strategizing, which translates into his personal interests, including tactical games. He also enjoys traveling and is involved in the Rochester Downtown Development Corporation. Gabriel resides in Rochester, NY, with his wife, Christina, and their two cats.

Contact Gabriel Potter at [email protected] or 585-246-3750

CONFEROF I D U C I A R Y P A R T N E R S

Confero Fiduciary Partners11 Centre Park - Suite 303 Rochester, NY 14614-1115,

Phone: 800.273.0076 www.westminster-consulting.com/Publications/Confero

A quarterly publication of Confero Fiduciary Partners ......legal advice, nor should you consider...

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