IMA Webinar

Navigating the 401(k) World

2

Fiduciary Management – Increasing Fiduciary Liability

“Plan Sponsors are generally unaware that being a fiduciary can put their personal assets at risk… Fiduciary Risk Mitigation should be an important concept for all plan sponsors”

3

Fiduciary Management – Increasing Fiduciary Liability

ERISA CRACKING DOWN !

ERISA Conducting additional audits

Over 1000 new ERISA employees hired to conduct additional audits

AUDITS growing for middle market firms “In the past, plan sponsors could

practically ignore their plans. Now, because of litigation and regulatory

scrutiny of plan fiduciaries, chief financial officers are realizing they

can’t just turn to their golf buddy as a plan advisor.” – Benefit PRO

26%

74%

DOL ERISA AUDITSCompliant plans

Non-Compliant

Source: FORBES

4

Four Ways to Manage Fiduciary Responsibility

Model 1: Most Basic Do it Yourself

Model 2: Outsource and Partially Delegate Investment Management Responsibilities

Model 3: Outsource and Fully Delegate Investment Management 3(38)

Model 4: Outsource and Fully Delegate the Named Fiduciary Responsibilities to an Independent Fiduciary

Multiple Levels of Liability Mitigation

5

Fiduciary Management – By the numbers ERISA

ERISA 3(16) is limited to plan administration. A 3(16) is a first party administrator and not a “Third Party Administrator.” The 3(16) administrator is a plan fiduciary and assumes the liability that comes with it. Is responsible for all filings with the federal government (form 5500 , etc.). Plan sponsor delegates duties and discretionary control.

3(16)ERISA 3(21) includes individuals with discretionary authority or control over the Plan or the Plan’s assets. The amount of discretion given to appointees varies by the terms of the Plan and/or appointment.Risk and responsibility of a 3(21) can vary widely. To address this Full, Specific, or Limited Scope code sections are associated with the 3(21).

3(21)ERISA 3(38) sets strict requirements on who can qualify. A 3(38) must be a bank, an insurance company, or an Registered Investment Advisor. A 3(38) is given full discretionary control over the plans investments.

3(38)

There are Various Industry Expert Classifications

6

3(38) Investment Management Service

Investment Policy Statement Development & Review

Quarterly Investment Monitoring Reports

Fund selection & Replacement

Custom Model Portfolio Construction

QDIA Selection / Review

FEE base structure 100% transparency

“Among the most important duties of fiduciaries for 401(k) plans are diversifying the risk of the planinvestment options, controlling plan costs and helping make sure plan participants are contributingenough to succeed financially at retirement.” –

7

Participant Services

Most participants are lacking the knowledge to properly manage their 401(k) portfolios

Traditional Education materials are extensive, but overwhelming and time consuming for most participants

Most want professional help managing their portfolio

Participants want more dynamic interaction

* Charles Schwab Report

8

Participants Are Unprepared

9

Recent Performance Bias

10

Why Not Target Dated Funds? Pros

Simple Reduces Investor Mistakes

Cons Varying Glide Paths Bias Fund Choices Misunderstood One Size Does Not Fit All Lack of Manager Ownership Poor Performance Lack of Transparency No Investor Education No Fiduciary Help

“The three industry leaders by assets--Fidelity, T. Rowe Price, and Vanguard--all feature closed-architecture target-date funds. Both types of target-date series have average overall Morningstar Ratings of 2.7 stars across their vintages. Morningstar's figures suggest that open-architecture funds on average provide a performance advantage.”– Janet Yang, CFA, Morningstar

11

Steps to a Secure Retirement

Personal Finance Earnings

Budgeting

Saving

Protection

Investing Economics

Fundamentals

Technical Analysis

Cycles

Retirement Health Care

Income/Spending

Transitioning

“I believe that the biggest mistake that most people make when it comes to their retirement is they do not plan for it. They take the same route as Alice in the story from “Alice in Wonderland,” in which the cat tells Alice that surely she will get somewhere as long as she walks long enough. It may not be exactly where you wanted to get to, but you certainly get somewhere.” 

- Mark Singer, Author of The Changing Landscape Of Retirement - What You Don't Know Could Hurt You

12

The 401(k) Solution Fiduciary Liability Mitigation as a 3(38)

Advisor

Fully Discretionary Investment Management

Dynamic Education

Decades of Experience

Investment and Plan Expertise

Strategic Partnerships TPAs

ERISA Experts

CPAs

Plan Providers

“36% of 401(k) participants used professionally managed

accounts in 2012 – a percentage double what it

was five years earlier and on track to hit 55% in five years.”

- Vanguard

13

Investment Management Process Multi-factor Approach

Technical Rankings Fundamental Analysis Top-down Macro View Sentiment Analysis Cycle Analysis

Riskalyze™ Analysis Risk Questionnaire Retirement Success Calculator

Dynamic Allocation

Parallel Investing Aligned Interests Risk Focused

14

Riskalyze Software

Questionnaire

Based on Prospect Theory which won the 2002 Nobel Prize for Economics

Emailed directly to participants

Just minutes to complete

Creates custom risk profiles

Results expressed 0-99 (higher number means higher risk tolerance)

Investment Models &Retirement Map

Uses historical risk/reward data

Calculates risk tolerance based on 6 month volatility probabilities

Custom retirement snapshot

Suggested retirement changes based on: Investment Amount

Monthly Savings

Investment Risk Level

Retirement Year

Monthly Withdrawal

15

Retirement Map Fail

16

Retirement Map Success

17

Custom Investment Models

18

Continuing Participant Education

InvestTalk Network Radio Show

4-5 pm PST M-F

Podcast iTunes Tune-in Radio InvestTalk Website

Bay Area and San Diego

24–Hour Listener Line

InvestTalk Personal Finance Minute

InvestTalk 101

InvestTalk Insider

KPP Financial

Weekly E-Newsletter Market Guidance

Investment Education

Personal Finance Advice

Regular In-Person Wealth Conferences & Webinars

Annual Employee Education Workshop & Webinar

19

Current Key Takeaways Plan Sponsors have huge

liability Vast majority are not aware Scrutiny is increasing fast Various ways to reduce exposure

Participants are unprepared Most admit they are unprepared to

be successful Most want professional help Investors underperform due to

emotions and lack of education Target Dated funds fall short as a

solution

Education process is not dynamic Usually once a year

workshop Most do not review the

material Usually investment

focused only

20

The 401(k) SolutionProtecting your Tomorrow, Today

For more info contact:Justin Klein at JKlein@KPPFinancial.com

Or Call 800-557-5461