RETIREMENT PLAN SPONSOR'S GUIDE TO FIDUCIARY RESPONSIBILITY.
THE PENSION PROTECTION ACT AND WHAT IT MEANS TO YOU
The Employee Retirement Income Security Act (ERISA) requires that qualified pension plans are managed to the exclusive benefit of the participants in the plan. It is the responsibility of the plan sponsor to ensure that all aspects of a plan are benefiting the plan participants and are bound by fiduciary standards. The Pension Protection Act of 2006 (PPA) comes as a response to the fact that plan sponsored participant education has been less than adequate and sponsors have not made participants fully aware of the actual cost of the investment selections or provided the same investment opportunities to all participants equally.
Reducing Liability: As a result of this deficiency, plan sponsors will need to enhance participant education and provide full disclosure of all associated fees with objective investment advice provided by an Eligible Investment Advice Arrangement (EIAA). The PPA improves upon the original ERISA legislation by encouraging plan sponsors to hire a Qualified Fiduciary Advisor and to define "safe harbor" practices to protect plan sponsors from the liability associated with the advice provided to plan participants.
BENEFITS OF THE PENSION PROTECTION ACT
The three most important parts of the PPA as the act relates to plan sponsors reducing their fiduciary liability are the definitions of Qualified Fiduciary Advisor, EIAA and Qualified Default Investment Alternative (QDIA).
Qualified Fiduciary Advisor: An individual or organization that provides specific investment advice under an EIAA to plan participants. This could be:
• A Registered Investment Advisor
• A bank
• An insurance company
• A broker dealer
Eligible Investment Advice Agreement: Under an EIAA, a fiduciary advisor is compensated for providing specific investment advice to plan participants. The EIAA must provide that:
• Fees received by the Fiduciary Advisor are "fee neutral" and do not vary on the basis of which investment options are chosen - this approach is also known as "level comp," which ERISA has always required.
• A computer model be used under an investment advice program meeting certain conditions as put forth by the Department of Labor.
Qualified Investment Default Alternative: A QDIA is an investment alternative or option, as defined under rules issued by the U.S. Department of Labor, that has been chosen by the plan's fiduciary for those instances when participants fail to provide instructions on how to invest monies in their retirement plan account. Generally, Target Date Funds would be recommended by your Qualified Fiduciary Advisor and implemented by the plan sponsor as the QDIA. A Target Date Fund is designed to provide an age-appropriate asset allocation in order to produce sufficient returns to meet retirement goals for the average participant.
SAFE HARBORS
The Pension Protection Act introduces a new safe-harbor procedure for plan sponsors. Most investment advisors and plan sponsors are familiar with 404(c) procedures, which are safe-harbor procedures for plan sponsors that offer participant-directed defined contribution plans. The PPA provides a second safe-harbor - the use of a Qualified Fiduciary Advisor. This requires the plan sponsor to demonstrate that:
• Your fiduciary advisor was prudently selected by the plan sponsor.
• Your fiduciary advisor acknowledged fiduciary status in writing via an EIAA, disclosed all conflicts of interest and disclosed all forms of compensation.
• The fees paid to your fiduciary advisor are fair and reasonable for the level of services rendered.
• Your fiduciary advisor is prudently monitored on a continuing basis by the plan trustees.
ROLE OF THE FIDUCIARY ADVISOR
A fiduciary advisor, unlike a traditional investment advisor or sales representative, doesn’t solely rely on suitability standards when providing advice. Fiduciary advisors are held to higher ethical standards and must have the knowledge to provide sophisticated and on-going wealth management services and advice. Simply put, the client must always come first.
As a fiduciary advisor we are legally bound to uphold a fiduciary standard of care when working with you. To demonstrate our on-going commitment to our clients we adhere to the Center for Fiduciary Studies Code of Ethics.
Furthering our commitment to you, c5 Wealth Management's financial advisors hold the Accredited Investment Fiduciary™ (AIF®) designation along with other important credentials such as the Certified Financial Planner™ (CFP®), Chartered Financial Consultant (ChFC), Certified Divorce Financial Analyst (CDFA) and Masters of Science in Financial Services (MSFS).