Westminster Consulting Brochure Defined Contribution & Defined Benefit by Westminster Consulting

WESTMINSTER CONSULTING

Fall 2015

Also Inside Expert Opinions on The Future of Retirement Plans

The Biggest Myth for

investment consultants By Gabriel Potter

Fiduciary Due Diligence

Best Practices Project Engagements

Defined Benefit Plans: A Changing Landscape 7 Reasons Plan Sponsors Need Retirement Plan Advisors

Fiduciary Compliance Resource Center

Reengineering

Fiduciary

And More!

Welcome. Inside you will find everything you need to familiarize yourself with our firm, our work and the many ways that we are

Re engineering

Flip through

fiduciary

as we introduce ourselves, our services, our process. Let us explain Confero: our quarterly Magazine, and familiarize you with FCRC: a program we uniquely designed to make The Fiduciary process simpler. Give us just a few minutes, and we will give you a complete tour of Westminster Consulting. A firm that can be yours, too. We care about people and organizations just like you, so let us take a moment

& not just tell,

but show

you how very different we really are.

contents Meet Westminster Consulting

Stay in the Loop

The Partners

Why Should You De-Risk Your Pension Plan?

Project Engagements

The Biggest Myth for Investment Consultants

Comprehensive Retainer Services

Improper Roles for Advisors

Our Process

22 Defined Benefit Plans: A Changing Landscape

Fiduciary Compliance Resource CenterSM

By Sean Patton

By Gabriel Potter

Expert Opinions on the Future of Retirement Plans A Transamerica Study

A Transamerica Study

7 Reasons Plan Sponsors Need Retirement Plan Advisors By Danielle Andrus, ThinkAdvisor

Action Step Checklist

Vendor Benchmarking

26 Fiduciary Due Diligence

Confero

Best Practices

Why Choose Us

Re-engineering Fiduciary | 1

Meet Westminster Consulting At Westminster Consulting, we specialize in providing incomparable fiduciary advice and counsel coupled with thoughtful investment research to our clients. Our services help Investment fiduciaries and particularly qualified plan sponsors fulfill their responsibilities under ERISA and applicable law. Our singular focus on promoting, developing, and maintaining proper and strong fiduciary governance processes for clients is at the core of our culture and the services we offer. We believe that our role as a “fiduciary” consultant to plan sponsors goes beyond that of a traditional investment consultant. Central to the work we do with trustees 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 practical manner, benefiting all stakeholders of a plan. In addition, the wide array of services offered by Westminster Consulting enables us to provide solutions to the regulatory challenges of managing a qualified plan.

As a leading independent, fee-only fiduciary consultant, 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 insights and improved plan results.

Westminster Consulting is focused on promoting a culture of fiduciary responsibility. We do this through providing comprehensive fiduciary advice to investment plan sponsors and fiduciaries: giving them the information, tools and confidence to better navigate and manage the demanding and changing regulatory landscape around qualified plans.

The complexity of the fiduciary plan oversight process is streamlined by utilizing Westminster Consulting’s proprietary Fiduciary Compliance Resource CenterSM (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 the Department of Labor’s ERISA requirements. FCRC is one of the most comprehensive fiduciary management tools available to investment fiduciaries. At Westminster Consulting, we provide informed insight and seasoned expertise in helping investment fiduciaries better manage their legal responsibilities through considered advice, secure technology, and ongoing fiduciary education.

Sean D. Patton Thomas F. Zamiara Partner Partner

The Partners

Here at Westminster Consulting, We focus on teamwork. Communication and collaboration help us to be successful at meeting the needs of our clients, and our unique array of team members brings a variety of talents and strengths to the table - allowing us to better serve you.

Thomas F. Zamiara, AIFA®

Sean D. Patton, AIF®

Partner, Senior Consultant

Tom is a founding partner of Westminster Consulting and today serves as the managing partner where he currently works with corporate, nonprofit and foundation clients.

Sean is a founding partner of Westminster Consulting where he currently works with corporate, non-profit and foundation clients.

Tom began his career in the financial services industry managing the fixed income desk of the Regional Institutional Sales Group for the Lehman Brothers division of Shearson in Rochester NY. In 1994, he joined Prudential Securities, Inc. and helped develop the Private Client Group and Qualified Plan Consulting Group practices. A graduate of Boston College, Tom also attended The Wharton School at the University of Pennsylvania where he earned his Certified Investment Management Analyst (CIMA®) certification as well as the University of Pittsburgh’s Katz School of Business Accredited Investment Fiduciary Analyst (AIFA®) designation. Today, he also serves as a member of the Brothers of Holy Cross Investment Advisory Committee. tfzamiara@ westminster-consulting.com 800.237.0076

Prior to founding Westminster Consulting, Sean began his career in the financial services industry in 1988 at Dean Witter in Rochester, where he focused on the analysis of mutual funds and how they impacted returns. In 1994 he joined Prudential Securities, Inc. as a Vice President and helped develop their Private Client Group and Qualified Plan Consulting Group practices. In 2009, 401kWire named Sean one of the 300 Most Influential Advisors in Defined Contribution. He is a member of the Goldman Sachs Retirement Advisor Council and the Blackrock DC Leaders Circle. In addition, he is the President of the Board of Directors for Camp Haccamo, a Rotary Camp for individuals with disabilities. Sean is a graduate of the University of Dayton, and earned his designation of Accredited Investment Fiduciary (AIF®) from the Center for Fiduciary Studies (in association with the University of Pittsburgh). spatton@westminster-consulting.com 800.237.0076

Re-engineering Fiduciary | 3

David Bard, CRPS®, AIF® Senior Consultant David is a Senior Consultant at Westminster Consulting where he provides fiduciary governance and oversight services to the fiduciaries and plan committees of qualified plans. Prior to joining Westminster Consulting, David was a corporate retirement plan advisor at Courier Capital Corporation. David’s extensive career experience includes the positions of: Vice President of Investments with Smith Barney, Associate Vice President with McDonald Investments in Buffalo NY, Director of Fixed Income trading for CIBC Oppenheimer, and Vice President of Corporate Bond Sales for Mabon Securities in New York City.

dbard@westminster-consulting.com 716.445.4518

David earned his BA in Economics from Hobart College. He is a Chartered Retirement Plan Specialist (CRPS), has achieved his Series 7, 31, 63, and 65 securities licenses and holds a New York State Life/Accident/Health Insurance license. He is also holds the Accredited Investment Fiduciary (AIF) designation.

Gabriel Potter, MBA, AIFA® Senior Investment Research Associate Gabriel is the Senior Investment Research Associate at Westminster Consulting where he designs strategic asset allocations and conducts proprietary market research. Prior to joining Westminster Consulting, Gabriel previously worked as an Institutional Consulting Analyst with Graystone Consulting – the institutional business unit of Morgan Stanley Smith Barney.

gpotter@westminster-consulting.com

Gabriel earned a BA in Economics and a Certificate of Business Management from the University of Rochester and an M.B.A. with concentrations in Corporate Finance and Computers & Information Systems from the University of Rochester’s William E. Simon School of Business. He currently holds the Series 66 license from the NASD and the Accredited Investment Fiduciary Analyst designation (AIFA®) from the Center of Fiduciary Studies.

800.237.0076

Lawrence R. Peters, CPA, EA Senior Consultant Larry joined Westminster Consulting in January 2010 as a Senior Consultant, where he leads the firm’s defined benefit practice. Larry is a seasoned Human Resources Professional with extensive experience developing and executing Human Resources and Benefit strategies designed to meet corporate objectives. For most of his career, Larry was a Principal at Mercer Human Resource Consulting where he managed client relationships and consulted to clients on benefit and other human resource related issues.

lpeters@westminster-consulting.com 609.462.0524

Larry is currently a member of the American Academy of Actuaries (AAA), American Institute of Certified Public Accountants, New Jersey Society of Certified Public Accountants and a Fellow for the American Society of Pension Actuaries (FSPA). Larry holds a BA in Economics from Upsala College and an M.B.A. in Accounting from Fairleigh Dickenson University and is both a Certified Public Accountant and an Enrolled Actuary.

Roland Salmi Associate Analyst Roland is an Associate Analyst of Westminster Consulting where he is involved in performance analysis, client projects, and Senior Consultant support. Prior to joining Westminster Consulting, Roland held positions as a financial advisor with Morgan Stanley Wealth Management, and a Junior Accountant at St. Bonaventure University. Roland earned his A.S. in Business Administration and B.S. in Psychology from Elmira College. He then earned his M.B.A. from St. Bonaventure University. Roland has achieved his Series 7 and 66 securities licenses.

rsalmi@westminster-consulting.com 800.237.0076

Jacob Button Director of Software Development Jacob joined Westminster Consulting in May 2008 and currently works as the Software Project Developer for FCRC Apps, LLC, a Westminster Consulting owned company. Jacob continually works to develop and improve eFiduciary.net, a fiduciary governance tool for consultants and their investment fiduciary clients. Jacob also created the Fiduciary Compliance Resource CenterSM, the software program that Westminster uses to promote procedural prudence, consistent documentation and collaboration among members and professionals.

jbutton@efiduciary.net 800.237.0076

Daniel Ward Operations Manager Dan is currently the operations manager for Westminster Consulting. Dan began his career at Westminster Financial in October 2004 as an administrative assistant. Besides his responsibility as the operations manager, he oversees the firms technology needs as well as managing the college intern program at Westminster. A graduate of SUNY Geneseo, Dan studied Business Management and received his Bachelor of Science in May 2004.

dward@westminster-consulting.com 800.237.0076

Re-engineering Fiduciary | 5

Project Engagements Governance Documents Development

Fiduciary Education and Training

These are the essential road maps that help fiduciaries successfully manage their retirement plan. Westminster Consulting evaluates your Investment Policy Statement, Committee Charter, and Board Resolutions and offers advice on improving and clarifying your objectives.

Westminster Consulting assists Boards, trustees, and committees in understanding and fulfilling their role as fiduciaries. The training provides an in-depth look at fiduciary governance today and in the future. This comprehensive review provides executive-level guidance and solutions for the primary challenges facing investment fiduciaries under applicable law and ERISA.

Fiduciary Review This comprehensive service benchmarks the plan against twenty-two best practices jointly developed by the DOL and Fi360™. The review evaluates how effectively the plan sponsor is operating their plan and informs the committee of shortfalls or omissions when compared with the benchmarks.

Fee and Expense Audit Timely evaluation of plan fees and expenses is a part of a plan fiduciary’s responsibility. Westminster Consulting examines all asset-based fees, common cost drivers, and investment expenses. This evaluation of fees assists fiduciaries with their due diligence to determine if the fees are fair and reasonable and, therefore in compliance with the DOL’s Section 408(b)(2) regulations.

Vendor Benchmarking Benchmarking provides an impartial and objective analysis of plan vendors such as recordkeepers, actuaries, and managers. Westminster Consulting evaluates these vendors’ performances and conducts an analysis of fiduciary compliance for a plan sponsor— all with the goal of improving performance and minimizing expenses. This benchmarking process includes reviewing fees, investment performance, and also evaluating the plan participants’ satisfaction with vendor service levels.

Vendor Search This is intended for plan sponsors that desire an impartial and objective analysis of their plan vendor, are dissatisfied with their current recordkeeper’s service, or have grown in asset size and may require different or additional services. The goal is to document fiduciary due diligence of the plan sponsor, improve all areas of plan performance, and minimize expense. Westminster Consulting provides a comprehensive evaluation of all functional areas of plan servicing, including: • Recordkeeping • Plan sponsor services • Trustee services • Conversion • Communication/participant education • Compliance services • Investment services

Plan Design

Westminster Consulting will adapt your plan design to best fit your company’s unique needs. We guide clients through every step of plan design and administration. We draft and review plan documents, amendments, notices, summary plan descriptions (SPDs) and summaries of material modifications (SMMs). We assist with submitting plans to the Internal Revenue Service (IRS) for favorable determination letters on their tax-qualified status. If problems arise in the administration of plans, we assist with correcting the issue.

DOL Audit Assistance

The primary objective of Department of Labor (DOL) and Internal Revenue Service (IRS) audits are to ensure that plans are following the applicable laws and regulations established for qualified plans. We are here to make sure that your company abides by these laws and regulations and prepare you should your plan be selected for an audit. Our team works as a liaison between your office and the DOL or IRS agent, collecting, reviewing and providing requested information to the agent prior to the audit date. We also are available for all planrelated questions on the day of the audit. Our goal is to ensure a smooth, concise audit process which works well for the client and the agent.

Retirement Readiness Outcome Review

Westminster Consulting works tirelessly to make sure your company retirement plan is preparing participants for a secure retirement. We do this through evaluating how employees are utilizing the plan, how the plan is funded, and if participants as a whole are meeting retirement goals and benchmarks.

Outsourced Chief Investment Officer Search

We provide a range of services to institutions who are evaluating Outsourced CIO (OCIO) options. OCIO managers vary widely in the services and products they offer, and a thorough, planned search effort is important. Westminster Consulting’s OCIO search service can help you: • Assist in the design of your OCIO strategy • Evaluate and select OCIO managers • Monitor and report performance of your OCIO managed investment program

Comprehensive Retainer Services Ongoing Fiduciary Oversight Westminster Consulting provides an integrated and comprehensive program of Ongoing Fiduciary Oversight to plan fiduciaries. Most Westminster Consulting clients utilize this integrated suite of consulting services. Westminster Consulting provides fiduciaries with analysis and insight to effectively evaluate their plans and manage the associated legal responsibilities.

Ongoing Fiduciary Oversight has four distinct components:

1 Performance Overview—Monitoring & Analysis • Review investments and their compliance with IPS guidelines • Provide fiduciary scoring and commentary on investments • Quarterly review of plan demographics and asset distribution • Review peer group and index benchmarks to current investment options • Development and maintenance of a plan investment option “bench-list”

2 Due-Diligence • Review and modify, as necessary, the Investment Policy Statement(s) • Coordinate periodic Investment Manager interviews • Coordinate annual plan review with Committee and plan vendor • Conduct a plan record keeper benchmarking study on a mutually agreed upon frequency

3 Fiduciary Education & Training

each committee meeting will include topics such as: • Basics of fiduciary responsibility • Review legal and regulatory changes and trends • Coordinate outside experts addressing the Committees on fiduciary topics • Modern portfolio theory (MPT) and investment performance • Best practices among retirement plan committees

4 Compliance Using our dedicated Plan Committee website, the Fiduciary Compliance Resource Center® (FCRC), we will coordinate the Committee compliance requirements for documentation, due diligence and plan governance. The FCRC is our firm’s proprietary web application specifically designed for our clients to assist them in the management and execution of their duties and responsibilities as fiduciaries under ERISA. The FCRC was engineered to manage documentation consistently, provide secure collaboration between Committee members, and to provide a robust document library for safe and convenient storage of plan-related documents.

Re-engineering Fiduciary | 7

Assessment of Current Fiduciary Structure Evaluate current committee structure Governance document review Examine current processes & procedures Identify priorities

2 Develop Governance Policies Review delegation documentation Review board resolutions Review committee charter Examine investment policy statement

3 Integrate Decision-Making Processes Vendor and service provider evaluation Investment line-up analysis Assessment of fees and expenses Document due-diligence

4 Document Committee Process Thoughtful agenda creation Consistent memorializing of committee minutes Annual board report requirement

5 Ongoing Fiduciary Education Updates of regulatory environment Annual fiduciary training Train to think and behave like a prudent expert

Our Process

Fiduciary Compliance Resource Center he Fiduciary Compliance Resource CenterSM (FCRC) is a secure web-based fiduciary management platform designed to assist investment fiduciaries in managing their responsibilities by promoting procedural prudence, consistent documentation, collaboration among members and professionals, and an easy-to-access document library. Here at Westminster, we have a Software Project Developer on staff who created FCRC specifically for our clients - to make the fiduciary process simpler.

Through online review and collaboration, the interactions between fiduciaries and vendors are streamlined, thus improving efficiency and plan effectiveness. Access to FCRC enables fiduciaries to efficiently retrieve and review agendas, meeting notes and minutes, recommendations, and committee decisions in a timely and secure manner.

Plan Sponsor Benefits Manage Fiduciary Responsibility • Provides tools for documentation • Promotes committee collaboration and consistency in decision making • Engages plan committee members • Aligns committees with fiduciary excellence

Mitigate Fiduciary Liability • Provides easy access to archived documents • Demonstrates process • Exemplifies due diligence

Key Features Document Library and Workbin

FCRC has two document retention systems— the Workbin and the Document Library. Both serve as a medium for organization and work flow management, and each committee has unlimited file storage. This reduces clutter and provides an easily navigated electronic paper trail than ensures clear documentation and evidence of decision making in the event of a challenge or review.

Workbin

The Workbin provides an online collaboration space for work in progress. Minutes, agendas, annual board reports and other items that a committee must have access to, can be stored here while pending review, edits, and approval. Using the comment tool, committee members can easily comment and collaborate on all work in progress.

Library

The Library is designed for archiving finished plan documents, regulatory reports, vendor materials, performance reports, and other documents the Committee deems important. The Library allows committee members to have easy and secure access to plan documents anywhere they have an internet connection.

Calendar

The calendar reminder system helps users to keep tabs on the status of tasks and deadlines assigned to your committee members and important regulatory filing dates.

Minutes

The minutes template provides a consistent and concise format for recording committee minutes. The template allows for collaboration between the committee secretary and consultant for a more efficient and streamlined workflow. Notifications are sent out when minutes are created, commented on, and published for assignment.

Agenda

The agenda template promotes collaboration and accountability. It features the ability to create assignments, attach supporting documents and make comments. The agenda template provides an easy lookback to open items from previous committee meetings.

Annual Board Report

The annual board report template enables the committee and consultant to create a high-level summary of plan activities that is useful in presenting to executive boards.

Consultant’s Notebook

The Consultant’s Notebook is used by the consultant to create and maintain notes from committee meetings. It is viewable by the committee members and serves as a way for the consultant to share important information and meeting notes.

Re-engineering Fiduciary | 9

Action step checklist for plan sponsors under ERISA section 408(b)(2)

Critical action steps to be executed by plan sponsor: Identify the plan’s covered service providers. Covered providers generally include fiduciary investment managers and advisors, plan recordkeepers, broker/dealers, and providers receiving “indirect” compensation.

Confirm delivery of existing providers’ 408(b)(2) disclosures. Contact each of the plan’s existing covered providers to confirm that the required 408(b)(2) disclosures will be provided.

Confirm annual delivery of disclosures for plan’s investment options.

The plan’s record keeper must deliver updated fee and expense information for each of the plan’s investment options. Confirm updated disclosures will be provided annually.

Review adequacy of providers’ 408(b)(2) disclosures. Confirm the following required elements are described in each provider’s disclosures: • Services • Direct and indirect compensation • Fees upon termination of services • Status as a fiduciary (if applicable) • Compensation for subcontractors (if applicable) • Method of payment

Request missing info from any provider with a disclosure failure. If a provider fails to deliver its closures by the appropriate date, or if the disclosures are inadequate, send a written request to the provider immediately for any missing information.

Report disclosure failure if provider refuses to provide missing info. If the provider refuses or fails to reply to a written request for missing information within 90 days, report the disclosure failure to the DOL with the assistance of counsel.

Consider terminating provider’s services if disclosure failure occurs. Consider the prudence of continuing the provider’s services if a disclosure failure has occurred. If reported to the DOL, terminate the arrangement immediately if it relates to future services.

Obtain and review 408(b)(2) disclosures from any new provider. With respect to any new provider or any existing provider extending its services, review the provider’s 408(b)(2) disclosures reasonably in advance of making any service decisions.

Use a prudent review process or engage an outside expert to evaluate provider’s services and fees. Review all disclosures and evaluate the provider’s services and fees on an ongoing basis in accordance with a prudent review process.

Review any changes and updates to 408(b)(2) disclosures. Take into account any relevant changes made by a provider to its 408(b)(2) disclosures when evaluating the provider’s services and fees. 10

Vendor Benchmarking As fiduciaries, plan sponsors have an obligation to benchmark and evaluate fees and services under ERISA. It is both a fiduciary breach and a prohibited transaction to allow your plan to pay more than reasonable expenses. Now that plan sponsors are receiving disclosure from covered service providers under 408(b)(2), that duty is more explicit. This regulation concerns the disclosures that must be furnished to plan fiduciaries in order for a contract or arrangement for plan services to be “reasonable.” The Department of Labor has stated that it believes that plan fiduciaries need this information, when selecting and monitoring service providers, to satisfy their fiduciary obligations under ERISA 404(a)(1) to act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. At Westminster, we know that even the most diligent sponsor can find the retirement plan benchmarking process overwhelming if undertaken single-handedly. We assist the fiduciaries of qualified plans in a thorough vendor analysis, offering clear recommendations and support throughout the process. Either as a stand-alone service or part of the Ongoing Fiduciary Oversight engagement, vendor benchmarking is a critical element in monitoring and evaluating how effectively plan providers are performing. ERISA requires that benchmarking is done on a consistent and regular basis. Westminster Consulting will evaluate plan vendors by identifying and evaluating 4-6 like market-positioned vendors to your current partner, using the following criteria: Throughout the process, questionnaires are sent to each vendor and then we follow up with an interview with the respondents.

Fees and Expenses

Investment Flexibility Participant Experience

Plan Sponsor Common Needs/Objectives

• Understanding recordkeeping, administration costs and competitiveness of fees. • Fiduciary documentation as part of an annual plan review process. • A means to compare their plan to other plans in their industry. • To guide their participant education and communication efforts.

Fiduciary Benefits

• Clear documentation of an objective fiduciary process. • Lower probability of litigation. • Opportunity for reducing the cost of fiduciary liability coverage (if applicable). • Above and beyond the requirements of 408(b)(2) compliance in obtaining full fee disclosure.

Assists in Plan Management and Oversight

• Supports plan design and benefits decisions by relating your plan to other plans like yours. • Enables you to understand and move the plan toward “best practices.”

Plan Participant Benefits

• Not overpaying for services; helps maintain reasonable plan fees. • Improved plan education and communications programs due to focus on Participant Success Measures. Re-engineering Fiduciary | 11

Confero

Westminster Consulting’s Quarterly Publication

CONFERO CONFERO A quarterly publication of Westminster Consulting

A quarterly publication of Westminster Consulting

www.ConferoMag.com

ISSUE NO. 10

www.ConferoMag.com

ISSUE NO. 8

confero A quarterly publication of Westminster Consulting

www.ConferoMag.com

The Endowment and Foundation Issue

NON-PROFIT

ORGANIZATIONS

CONFERO A quarterly publication of Westminster Consulting

www.ConferoMag.com

ISSUE NO. 9

ISSUE NO. 1

confero A quarterly publication of Westminster Consulting

www.ConferoMag.com

CENTER FOR

RETIREMENT STUDIES

PLAN DESIGN

TO IMPROVE

BENEFITS & PERKS

RETIREMENT

READINESS

TIBBLE v. EDISON WHERE DO WE GO FROM HERE?

ALSO:

Nonprofit Law Compliance

WASHINGTON’S WASHINGTON’S IMPACT IMPACT

ON THE MARKET

An Interview with Terry Knapp Financial Security and Careers in the Nonprofit and Philanthropic Sector

9 1/2 QUESTIONS

ALSO INSIDE ENDOWMENT& FOUNDATION SPENDING GUIDELINES /// DEMONSTRATING GOOD STEWARDSHIP FOR ELEEMOSYNARIES

A Chat with Cindy Rubino from Contractors Register

TALES FROM THE TRENCHES Q&A with William Hughes of Business Allies Group.

RES IPSA LOQUITUR

Will the Dodd-Frank Act of 2010 Bring True Economic Recovery?

Wellness Programs in a Multigenerational Workplace

How to Attract and Retain Employees: A Focus on Non-Monetary Benefits 5 Tips for Creating and Running a Successful Benefits and Perks Program

As part of its unique marketing initiatives, Westminster Consulting publishes a quarterly magazine, Confero: focusing on relevant fiduciary, investment consulting, and compliance issues for plan sponsors. We request articles from prestigious experts in the field, cite reliable industry sources, and write our own material to ultimately create a publication that is timely, useful, interesting and pertinent to our audiences. Not only does Confero help us keep our clients informed regarding major issues (compliance, regulatory, and investment consulting) in the industry, but it also allows us to build consistent relationships with additional, outside experts who, like Westminster Consulting, are focused on assisting plan sponsors meet their fiduciary obligations. Our on-staff actuaries and analysts also write articles and white papers for large publications. Our award-winning articles have been included in the Journal of Compensation and Benefits, PlanSponsor Magazine, and Advisor One. We have also contributed articles to Fiduciary News, Human Resources Online, and Rep Magazine. We encourage you to visit our website http://www.westminster-consulting.com where you will find our original blogs posted weekly, our monthly newsletter, and our quarterly magazine publication, Confero. If you would like to receive Confero directly to your inbox, email info@westminster-consulting.com and let us know!

ISSUE NO. 3

BOSTON COLLEGE:

A FOCUS ON

Stay In The L00p

Weekly Flash Report

The Markets and Economy • • •

The U.S. economy GDP shrank 0.7% in the first-quarter due to trade and inventory data. Durable goods orders were down a seasonally adjusted 0.5% in April from the previous month. The pending home sales index rose 3.4% in April from the previous month.

• • •

New home sales rose a larger-than-expected 6.8% in April. The FIFA scandal is now being turned on the banks that were used to pay $150 million in bribes. Banks involved include: JP Morgan, Citigroup, HSBC, Bank of America, to name a few. Initial unemployment claims rose by 7,000 to 282,000.

Regulatory Chatter and Industry Trends •

The DOL filed a suit against Alfred and Judy Chan the fiduciaries of a pension plan for employees of their medical corporation. The Chans relocated to Taiwan to avoid an indictment for Medicare fraud. The Chans used pension plan assets to pay for personal debts, personal legal fees and other non-plan expenses and investments. Specifically a $200k investment in Facebook.

• •

SEC charges Laurence Gray and Robert C. Hubbard IV of fraud for breaching their fiduciary duty by selling unsuitable investments to Atlanta’s Pension Fund. A group of retired teachers from Wisconsin are suing over illegal post-retirement 403(b) contributions that were subject to taxes because they didn’t follow 403(b) regulations.

Investment Manager News • • •

Abu Dhabi Investment Authority hires John Pandtle as head of U.S. in its internal equities group. PIMCO Australia names David Erdonmez as account manager and head of the firm’s investment due diligence group. SEC brings back former investment management director Andrew J. “Buddy” Donohue as chief of staff.

• •

FINRA CEO Richard Ketchum said the Labor Department’s April proposal would create new legal risks for brokers and reduce the number of investment options offered to clients. Mass Mutual hires Michele Baldasarre as VP of institutional markets for MassMutual Retirement Services, in charge of relationship management for retirement plan clients.

What’s Ahead • • • • •

• • • • •

PMI Services Flash – June 1, 2015 ISM Mfg Index – June 1, 2015 Factory Orders – June 2, 2015 ADP Employment Report – June 3, 2015 EIA Petroleum Report – June 3, 2015

Jobless Claims – June 4, 2015 EIA Natural Gas Report – June 4, 2015 Bloomberg Consumer Comfort Index – June 4, 2015 Employment Situation – June 5, 2015 Consumer Credit – June 5, 2015

Please visit www.westminster-consulting.com for our newsletters, blogs, and other musings.

Every week, we send out a Flash Report to interested individuals. The Flash Report is put together to keep ourselves and our clients informed and updated on timely occurrences in the market/economy, regulatory changes, industry trends and investment manager news. We also help you plan for the future by including a “what’s ahead” section in the report. This Flash Report is just a quick slide sent to our clients via email, taking only a couple moments to read while informing you efficiently about an entire week’s happenings in the industry. Email info@westminster-consulting.com to receive the Weekly Flash Report!

Hard currency: the strong US dollar

Gabriel Potter, AIF Senior Investment Research Associate May 2015

Page 1 of 2

Cause of weakness in corporate earnings

he United States corporate earnings numbers have suffered relative weakness in the 4th quarter of 2014 and the 1st quarter of 2015. Some of the causes of weak earnings are one-time irregular actions, such as the increased corporate pension liabilities stemming from updated actuarial rules of 2014. Beyond these one-shot issues, there are two ongoing factors which appear conducive to economic growth, but have led to recent problems: the price of energy and the strong dollar. We have directly considered the falling price of energy in our blog posts (“The Price Ceiling on Oil” - December 31, 2014) and in our monthly articles (“The Energy Sector” – December 2014). On the other hand, we have only tangentially addressed the implications of a strong US dollar. So, in this paper, we will review the strong US dollar and what it means for investors.

Pros and cons of a strong dollar First, let’s define a strong dollar and then enumerate some of its advantages and disadvantages. Simply put, a strong currency, or a “hard” currency, has a great deal of buying power. A strong currency maintains its buying power over time, so it is strongly associated with an inflation-averse, “tight”, restrictive monetary policy from that government’s central bank. A strong currency is stable and widely used between global trading partners. Conversely, a weak currency, or a “soft” currency, is subject to price swings, instability, and is associated with potential loss in trading value versus other currencies or inflation. A quick review of this definition makes it appear as if there are no disadvantages with a strong dollar. There is, however, a key disadvantage to stronger currency: exporting. If your country derives most of its revenue from international trade, a strong currency gives you the opportunity to buy (or import) goods and services inexpensively. However, a strong currency means that your exporters are at a disadvantage because the goods or services they are trying to sell on the open market are relatively expensive.

A quick review of this definition makes it appear as if there are no disadvantages with a strong dollar. There is, however, a key disadvantage to stronger currency: exporting. If your country derives most of its revenue from international trade, a strong currency gives you the opportunity to buy (or import) goods and services inexpensively. However, a strong currency means that your exporters are at a disadvantage because the goods or services they are trying to sell on the open market are relatively expensive.

Correcting the dollar with trade So, we’ve been talking about the dollar being strong, relative to other currencies, but what determines whether a currency is strong or weak? Like everything else in economics, it is a case of supply and demand. Global investors engage in currency trading for a variety of reasons, including hedging their current exposure, speculating on currency like any other investment, or conducting carry trades. For a greater understanding of this practice, we encourage you to read our March 25th blog post, “The Carry Trade”. Global investors can buy, sell, and trade currencies, just like other goods. Global investors determine a currency’s value by making and accepting trades on a free, open capital market. The relative value of each currency is determined by daily market sentiment, optimism for a country’s growth prospects, analysis of monetary policy and macroeconomics, and a fair dash of random chance. As the supply and demand for various currencies equalize on the open market, the global investment community determines which currencies get stronger and weaker. Imagine, for a moment, you start off the year with a strong currency, wherein your importing power is high and your competitive exporting power is low. This creates a trade deficit, where your country buys more goods and services than it sells to other nations. Economic theory suggests, over time, this trade deficit should increase the supply of your currency (let’s say, dollars) being used across the globe. Again, an increase in supply should thus reduce the currency’s relative value. In other words, a trade deficit – in theory – should be a self-correcting phenomenon as a temporarily strong currency pushes so many dollars into the world.

11 Centre Park, Suite 303 • Rochester, NY 14614-1115 • 585.246.3750 • 800.237.0076 • Fax: 585.246.3759 • www.westminster-consulting.com

Monthly Newsletter On top of the Weekly Flash Report, once a month our research analyst compiles a monthly newsletter. Entitled, Westminster Academy, this newsletter consists of a longer white paper on a relevant topic such as the positioning of U.S. currency, an analysis of alternative energy, and quarterly updates. The Westminster Consulting newsletter keeps you in touch with important issues around finance, the economy, retirement planning, and other relevant world topics. Visit http://westminster-consulting.com/Resources to see an archive of our monthly newsletters. Click on an article to sign up and receive the newsletter directly to your inbox!

Blog We put out a weekly blog post on our company website as well. The post is just a few short paragraphs on a current topic in the industry, and is intended to keep visitors to our site engaged and informed on relevant issues. Visit http://westminster-consulting.com/Blog to view our recent blog posts, written by our senior investment research associate Gabriel Potter

Re-engineering Fiduciary | 13

Why Should You De-Risk Your Pension Plan? By Sean Patton AIF

Partner/Senior consultant at Westminster Consulting

White Paper

Improvements over the last year in defined benefit plan funding status have plan sponsors and their fiduciaries considering whether now is the time to take action to reduce future volatility. For almost the last five years, post the financial crisis, defined benefit plan sponsors have watched as their funding ratios ride a roller coaster in the wake of 2008. Now that many are closing in on a funded status that is closer to being fully funded, they want to ensure that they do not allow that status to fall back into the 70’s and 80’s again. The idea of de-risking, or finding better ways to manage your plan’s pension obligations, should be at the top of most plan sponsor’s priority list. There are many different ways to accomplish this goal. It seems that many plan sponsors are playing a game of chicken, waiting to see what the Fed’s next move holds. This idea of trying to guess interest rate movements is akin to trying to time the equity markets – it is almost impossible to do. Many pension committee’s feel if they move too soon they will leave money on the table. It is critical that plan sponsors address the many choices they have in de-risking their plan. This can be done all at once or little by little to soothe the effects of what you are trying to accomplish. There are several reasons why the most proactive investment committees are moving to take action now. The most obvious is the improvement over the last year in funded status. Equity markets in 2013 were robust and interest rates moved up for the first time in many years. For some plans, the increase in funded status allowed them to remove funding restrictions that limit the ability to settle liabilities by paying out lump sums or buying annuities. If you have implemented a glide path strategy in the past, stay disciplined and do not try and time the market. If your committee has not reviewed your asset allocation, then now is a great time to—this will help to ensure you are removing unnecessary risk from your plan. By implementing some basic diversification strategies on the equity side and examining matching the duration of your liabilities with the duration of your fixed income portfolio, you can have real impact on reducing volatility without getting too sophisticated. The next reason that plan sponsors are being more proactive is that they have some certainty in their plan right now versus the uncertainty that the future holds. Even if you are tempted to wait because you expect interest rates to continue to move higher (therefore lowering your liabilities) know that if you have done any kind of liability matching with your fixed income, higher interest rates will push asset values and liabilities lower so there may not be an advantage to waiting. Mortality table increases that took effect in 2015 have increased the cost of annuities and lump sum cash-outs. If your committee holds a strong view on the direction of interest rates, consider the idea of adding a couple triggers to the glide path implementation—one on funded status and the other on interest rate levels to ease into hedging your portfolio. Lastly, PBGC premiums are increasing again. Sponsors with underfunded plans will pay additional risk premiums of $24 per $1000 of plan underfunding. This is up from $14 in 2014. This will move to $29 in 2016. Risk premiums will decrease as your funded status increases. Committees that proactively review their pension plan and implement strategies to de-risk should receive the benefit of improved funded status which will reduce these premium’s plan over time.

The Biggest Myth for Investment Consultants By Gabriel Potter AIFA

Senior Investment Research Associate at Westminster Consulting

The Bad News Many of our readers are fiduciary trustees for large pools of money: pension funds, charitable foundations, employee welfare & retirement plans, and so on. You, the fiduciaries, should be applauded for adopting this burden, for it is often an under appreciated duty. As fiduciaries, you are responsible for a great deal and the scope of your responsibilities is ever increasing. At Westminster Consulting, we sometimes are bearers of bad news. It would be easier to tell investment committees all the ways that their attention wasn’t required and how much more leisure time everyone gets. In reality, we are obligated to explain where your fiduciary duties lie. Here’s where the bad news come in. We have spoken with trustees working for a retirement plan or charity that have, in an effort to offload fiduciary responsibility, hired a fiduciary consultant to help manage their plan. Herein lays the Myth: The Myth: “Our trustees hired an investment consultant with fiduciary status. Our consultant has no conflict of interest because he is a fiduciary! So, our plan is totally covered and we, the trustees, we are no longer responsible for the plan.” The Facts: This is wrong in two important ways. Once you hire a consultant, even one that adopts a fiduciary standard, plan fiduciaries cannot completely offload their fiduciary responsibility. They may share responsibility with a consultant, but they cannot offload it completely. Most importantly, the plan fiduciaries will always be responsible for overseeing the consultant. Why is this difficult? The sad reality is that some consultants may claim to act as a fiduciary, but still have major conflicts of interest. The Perfect Example of Failure As a reminder, what’s the difference between a broker and a fiduciary? In summary, brokers are salesmen while fiduciaries are legally obliged to act in your interests alone, without conflict of interest or undivided loyalty. Let’s consider the investment landscape for a moment. For decades, investment consultants and brokers working for wirehouses and large brokerage firms were subject to a lesser standard—the suitability standard—but now the fiduciary standard is expanding to become the new legal benchmark of behavior. The salesman can compete by expanding their business to include fiduciary lines of business, but it is not clear when they are acting in their own interest or for their clients. Take a moment and watch this video. It explains the difference between a broker and fiduciary quite well.

White Paper

In the video, brokers are compared to neighborhood butchers selling their wares, whereas fiduciary consultants are compared to dieticians, trying to make the best recommendations for your overall health. There’s nothing wrong with a knowledgeable butcher but—in the end—they are salesman. Your butcher will never recommend going next door to a competing fishmonger, or buying from the fruits and vegetable store instead. So, it’s a simple solution: just hire a fiduciary investment consultant and you are set, right? Not so fast! Business Insider ran an exposé of a fiduciary investment consultant (read the full article here). Business Insider discovered the fiduciary firm had a significant conflict of interest because they were affiliated with a broker-dealer. The firm had financial incentives to sell you their own products. Or, as Business Insider put it, “the dieticians own a butcher shop.” How can fiduciary firms get away with this obvious conflict of interest? The biggest reason is that brokers can dual-register as brokers and fiduciaries. In other words, these fiduciaries can easily revert to act like a salesman, subject only to a suitability standard, when selling their products. In reality, the biggest brokerage firms are filled with so-called fiduciary advisors who wear multiple hats, selling on-platform products with embedded fees whenever possible, despite the best interest of the client. In short, being a fiduciary won’t protect clients from conflicts of interest. Watch For These Red Flags Get explicit documentation on your consultant’s total sources of revenue. This information should be included in the annual 408(b)(2) disclosure. If your consultant accepts anything other than an explicit hard-dollar fee for services, then there may be a conflict of interest. Does your consultant prefer to have custody of assets? Do they use an investment platform with specially vetted mutual funds, separately managed accounts, or alternative investments? These products typically have special revenue and incentive arrangements, and there may be a conflict of interest. Look for a Series 7 License. If your consultant requires a Series 7 license to practice, they may be dual-registered with a broker/dealer and there may be a conflict of interest. How big is the disclosure? How complex? If the disclosure is filled with pages of small print and “Legalese”, it becomes easier for brokers to continue business as usual without taking your best interests in mind.

Re-engineering Fiduciary | 15

Improper Roles for Advisors By Gabriel Potter AIFA

Senior Investment Research Associate at Westminster Consulting

White Paper

“There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know.” US Secretary of Defense, Donald Rumsfield

A Frightening Trend: Improper Duties for Advisors At Westminster Consulting, we typically select topics where we can offer some unique insights while being entertaining or, at least, informative. Still, there are times when our consultants have noticed widespread errors so egregious that we feel compelled to provide a universal warning. It is our hope that employers and institutions recognize and correct these mistakes before lasting damage is done.

A casual and trusting relationship with a client can even result in inappropriate investment advice, subject to fiduciary principles & liabilities, being given by the non-fiduciary advisor with serious consequences for the client and the advisor. The advisor, without malice, continues business as usual. The client thinks: “My advisor has assured me we are following the rules so I’m protected.” In reality, the client is often not protected because neither they, nor their advisor, have fully understood their duties. In other words, “they don’t know what they don’t know.”

The mistake we see far too often is this: employers have tasked non-fiduciary advisors with fiduciary duties and vice-versa.

How This Happens: A Typical Scenario The laws that govern institutional investing are constantly in flux. The Employee Retirement Income Security Act (ERISA), having started in 1974, is relatively mature but the application and expansion of these legal constructs are ongoing. For example, Uniform Prudent Management of Institutional Funds Act (UPMIFA) and the Pension Protection Act (PPA) circulated in a wave of reform in 2006 through 2007. On the other hand, institutional relationships with advisors and brokers may not change for decades. A complacent relationship can easily develop over the years between a plan sponsor and advisor. Over time, an institution’s assets may grow beyond the level of expertise and sophistication of the advisor. Eventually, prices become uncompetitive and, ultimately, abusive to the client’s trust and loyalty. Without pressure, the service level may devolve and the plan’s interest is no longer being served. Such relationships may operate in the advisor’s interest, but not the plan sponsors and their employees. Even the best run relationships, with fair costs and high service standards, should periodically conduct a Request-For-Proposal to ensure that the client’s best interests are being served. The lowest level of this untested relationship occurs when the long established advisor believes that the back office changes in business operations mean that the entirety of the advisor’s actions has therefore conformed to the law. The unsophisticated advisor may observe updates to compliance procedures and suggest to the client that they are conforming to the changes in the law with an incomplete understanding of what the law actually requires.

A Brief Review of Fiduciary vs. Suitability Standards The trustees of any institution – foundation, retirement plan, union pension, and so on – are making decisions for money that does not belong to them. They are entrusted with other people’s money and therefore obligated, legally and ethically, to act with the owner’s best interests as the sole guiding principle. In other words, these trustees are fiduciaries. “A fiduciary must act with care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matter would use in the conduct of an enterprise of a like character and with like aims.”

[ERISA Sec.404 (a)(1)(B)] An advisor who adopts fiduciary status bears a burden similar to the institutional trustee; they must act with undivided loyalty to the interests of the owners and avoid (or disclose) any possible conflicts of interest. This is the fiduciary standard. Conversely, non-fiduciary advisors are subject to a lesser burden: the suitability standard. Legally, this often means that the financial advisor is required to offer an individual investor options which only meet their needs based upon their particular circumstances. Advisors may select products or services that are “suitable” for the client, but not necessarily the best choice. “A fiduciary … may employ one or more persons to render advice with regard to any responsibility such fiduciary has under the plan. [ERISA Sec. 402 (c) (2)]” However, recent court decisions point to a more vigorous monitoring of the choices being offered by these non-fiduciaries. In other words, the investment choices being given should be more suitable for the client(s) and less self-serving to the non-fiduciaries and the companies they serve. Closer scrutiny is being paid to these transactions which both buyers and sellers should start paying closer attention to moving forward.

The car salesman will show you cars that go from point A to point B; he may show you suitable options. However, he has a vested interest in higher commissions, or perhaps moving particular models that aren’t necessarily your ideal selection. From a broader perspective, imagine that this particular used car lot has your dream car with everything you want. The only problem is a competitor’s car lot across the street has the exact same vehicle for $5000 less. A salesman following the suitability standard has no obligation to tell you about the cheaper dream car across the street; his interest is selling the car from his own dealership and certainly your dream car is a suitable choice. Even more insidious, the salesman simply may not know about better options outside of their own car lot; their job is to sell cars, not to know about the entire universe of options.

WHERE IS THE HARM? Now, apply this illustration to the context of investments. Imagine you are an employer – John Doe Computers - with a 401k retirement plan and that you’re working with ABC Mutual Fund Company to run the recordkeeping, participant education, and investment management services. ABC Mutual Funds are the only allowable investments in the retirement plan. So, John Doe Computers only receives recommendations of which ABC Mutual Funds to include in the retirement plan, but with tens of thousands of investment options available, how can the employer know that ABC funds are the best options for their employees? Alternatively, imagine that the ABC investment family of products don’t pass any fiduciary standard (e.g. – they’re more expensive than peers, all of their portfolio managers and analysts were replaced, risk adjusted returns are terrible, etc.). Imagine that ABC is charging too much for recordkeeping, but they won’t bring these issues to John Doe Computers’ attention. The employer might never know about these failings because there is a conflict of interest; ABC simply won’t fire themselves and it falls on the board or a fiduciary advisor to properly vet their advisors.

Example: Buying a Car It might be useful to think of a car salesman as following the suitability standard. Imagine you walk onto a used car lot and talk to the salesman on duty to show you a few cars; the salesman will show cars, but they get to choose how to sell them. Do they show you a selection of sporty cars with high markups? Imagine that this particular salesman is the head of the Model Ts and they are compensated based on the number of Model Ts sold, but not Saturns; might they try and steer you towards a particular brand or model? Is there an unreliable Edsel that the car dealership is trying to get rid of, such that they are willing to give you a bargain?

For non-qualified plans- the harm of operating without fiduciary coverage is more subtle. Certainly, the committee members and other fiduciaries working on behalf of the plan have been entrusted with fiduciary duty, but their advisors are not always required to share this burden. If a committee is made of lawyers and accredited fiduciaries and they have borne the responsibility for governance review, investment manager due diligence, peer review, and so on, they may have sufficient justification for working without a fiduciary advisor. For most committees, however, working with fiduciary advisors is often a best practice, designed to promote conflict-free advice and the best possible outcomes. For retirement plans that fall under the auspices of ERISA, or foundations or endowments which follow UPMIFA, the harm is more obvious: the law is being broken. The fiduciary requirement exists for the ultimate benefit of plan participants. “A fiduciary’s independent investigation of the merits of a particular investment is at the heart of the prudent person standard. [Fink v. National Savings and Trust Company, 772 F.2d 951, 957, 6 E.B.C. 2269(DC Cir. 1985)]”

Re-engineering Fiduciary | 17

The conflict-of-interest inherent in a non-fiduciary advisor conducting fiduciary tasks can easily become the basis of a lawsuit against any decision makers or fiduciaries working for the benefit of the plan.

THE ROLES OF A FIDUCIARY ADVISOR VS. A NON-FIDUCIARY ADVISOR Thus far, we have looked at the relative benefits of working with a fiduciary advisor and the potential hazards of working with a nonfiduciary advisor. This raises the question: is there any advantage of working with a non-fiduciary advisor? The short answer is “yes”. To begin with, a non-fiduciary advisor may be a specialist in their particular field. Returning to the car salesman example, a salesman may know the history and subtleties of every car on their lot and they could provide a lot of useful knowledge about their own products. Similarly, a spokesman for ABC’s Mutual Fund Company may have accumulated a great deal of knowledge and experience about their products and how to integrate their product suite into an effective retirement plan lineup. Fiduciary advisors may take advantage of this expertise by inviting product specialists to discuss their particular suite of products. However, the fiduciary has to look at a broad pool of investment options in order to fulfill the duties set forth under ERISA. Missing options which apply to individual investors is done with a certain amount of risk for fiduciaries and the courts have upheld their liability, especially when they have failed to seek outside professional advice. “A trustee’s lack of familiarity with investments is no excuse: under an objective standard, trustees are to be judged according to the standards of others acting in a like capacity and familiar with such matters. [Marshall v. Glass/Metal Association and Glaziers and Glassworkers Pension Plan, 507 F. Supp. 378, 2 E.B.C. 1006 (D. Hawaii 1980)]” The non-fiduciary, subject to the lesser suitability standard can become a greater expert on certain specific investment options due solely on the fact that they do not have a duty to find the best option and can therefore limit their search. Ironically, the limited search may actually yield the best option for the investor client! For employer retirement plans, like a 401(k), there is another area where the roles of fiduciary and non-fiduciary advisors are distinct: investment advice vs. education. Imagine an employee at John Doe Computers, Bob, wants to know how to invest his 401(k) savings. Specific recommendations given to the employee (i.e. – “Bob, we’ve had a one-on-one discussion and I think you should put 50% of your money in this equity fund, and 50% in this other fixed income fund”) is considered investment advice. Investment advice given to employees (i.e. plan participants) is solely the purview of a fiduciary advisor, and the recommendation a fiduciary advisor provides to employees is subject to fiduciary responsibility and potential liability. A non-fiduciary advisor cannot give specific recommendations to employees. On the other hand, a non-fiduciary advisor can provide education and guidance. So, Bob can call up the investment hotline at ABC Mutual Funds and get investment education. Bob can

receive general information about types of risk (market, inflation), compounding interest, risk tolerance levels & hypothetical asset allocation models, and so on. This general education gives tools to employees to make their own investment decisions, so is not subject to the fiduciary standard. As a result, the liability to the employer is significantly less. Another perceived benefit non-fiduciaries have which fiduciaries do not possess is with regard to the perception of “self-serving” transactions under ERISA and therefore the non-fiduciaries are exposing the employers to less liability than the fiduciaries. “A fiduciary with respect to a plan shall not – Deal with the assets of the plan in his own interest or for his own account; In his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.” [ERISA Sec. 406(b)]” Let’s go back to our car salesman illustration to demonstrate how a “self-serving” transaction might still work in the client’s benefit. Imagine that you are ready to buy your car, but you don’t have enough money to purchase your car outright; you’ll need some short term financing options. A car salesman would be happy to offer you financing, but no fiduciary could ever offer to loan you money to purchase a product. A fiduciary might be able to research different loan offers and recommend a particular deal, but the car dealership could actually provide the financing directly and they may even offer a competitive rate given their desire to sell the car. Let’s apply this illustration back to the world of investing: imagine you run a foundation with a high annual spending requirement to maintain a favorable tax status. Now, imagine it’s 2008 and the stock market just crashed. A non-fiduciary advisor could offer the foundation a loan, collateralized against the remaining assets, which could support ongoing spending requirements, so the foundation wouldn’t have to immediately sell their assets at depressed market prices. A fiduciary advisor could recommend getting a loan, but the non-fiduciary advisor could actually provide it directly.

THE SOLUTION: DIFFERENT ROLES FOR DIFFERENT ADVISORS These revelations may feel new to some institutional fiduciaries and, as we’ve suggested, even some consultants. It is important to understand the different duties, responsibilities and liabilities of both the fiduciary and non-fiduciary plan advisors, and the benefits and the risks to the individual investors and the companies who employ them. Understanding the structure of the decision making and the incentives of the advisors is key to recognizing the limitations of certain types of advisors. If you would like to review your current structure or simply gain some clarity on the rules that govern behavior, please feel free to call our offices anytime and we will be happy to discuss it with you.

Expert Opinions on The Future of Retirement Plans excerpts from “Prescience 2017: Expert Opinions on the Future of Retirement Plans” a study conducted by transamerica

Transamerica Retirement Solutions’ Prescience 2017 is the fifth iteration of a modified Delphi Study conducted in the second quarter of 2013. The study examines trends in retirement plans with $25 million to $1 billion in assets. Fiftyfive retirement plan experts from 45 organizations across the nation answered the 85-question survey. Transamerica Retirement Solutions chose survey participants based on their positions as thought leaders and experienced professionals in the retirement plan business. Because of their involvement with major industry players, members of this panel are well suited to foretell high-level trends that will determine the road ahead for the retirement industry.

• The application of a cluster of innovations enhancing the retirement readiness of American workers will be the trademark of the period 2013 – 2017. Experts surveyed for Prescience 2017 estimate that 59% of plan sponsors will have received a plan-level retirement readiness report. Thirty-nine percent will have changed the design of their plan to enhance the readiness of their participant population, 55% will have implemented automatic enrollment, and 45% of those will have adopted default deferral rates of 6% or higher. Most retirement plan service providers will be showing employees if they are on track to achieve a successful retirement and telling them how much they need to save to be on track. Going beyond accumulation in their quest to help

participants achieve retirement success, one-quarter of plan sponsors will have conducted a search for an in-plan retirement income solution, and 10% will have implemented such a solution. • Evolving attitudes of regulators will do their part to contribute to the move toward an outcome philosophy of retirement benefits: lifting limits to maximum default deferral levels, expanding the scope of IB 96-1 to cover in-plan annuities and other retirement income guarantees, and changing safe harbor employer contribution formulas to models more likely to help workers achieve a successful retirement. Re-engineering Fiduciary | 19

Obama Administration has proposed a lifetime cap on contributions that would be hard to implement. In the end, some other option may win, such as a review of required minimum distribution rules that encourage employees to stay in the workforce past age 70½, regardless of account balance, earnings, or hours worked.

“Retirement readiness will be a very ‘normal’ part of employer-sponsored retirement plans.”

The rise in workforce participation (part-time and fulltime) among those ages 70 and over will increase the ranks of those employed past the age of eligibility for full Social Security benefits by more than 25% and lead many employers to review return-to-work and phased retirement policies.

Frequent retirement readiness alerts, short and to the point, with a specific point-and-click call for action will prove more effective than anything we have seen to date. The period 2013 – 2017 will also see greater use of mobile technology with plan sponsors to facilitate fiduciary process documentation.

The number of home-based and mobile workers will increase by 25%, affecting the way they can be reached: In-person group education meetings will be less relevant than ever before, leading retirement plan providers to develop account management tools designed to help participants achieve successful retirement outcomes. • Equity markets will be up over the period, and sponsors will be looking for fixed income products incorporating a guarantee, seeking protection from a reversal in long-term interest rate trends. The retirement investing industry will develop new QDIAs “There will be a much featuring a retirement income distribution greater emphasis on option, offering ultimate achieving adequate convenience for savings levels among participants throughout their lifecycle. Oneparticipants as a key quarter of plan sponsors measure of plan health will have adopted fee equalization to distribute and success.” the cost of recordkeeping among participants in a fair and equitable manner.

• Fee compression will lead advisor teams to reduce their involvement in less lucrative activities such as vendor due diligence searches and group education meetings to focus on emerging specialties more valuable to plan sponsors, such as searches for retirement transition counseling services and defined benefit plan consulting. • The discussion about retirement will change to a discussion about life choices and options for an individual, of which retirement may be one. The longevity issue will change what ‘retirement’ means.

• The growth in the demand for DB plan administration services occurs at the same time as the sophistication of payroll systems enhances the quality of payroll data, enabling the development of consolidated employment and compensation history databases that make it easier to administer defined benefit plans.

• Mobile technology will also be handy with plan sponsors, facilitating fiduciary documentation, storage “You could see some sort of of meeting handouts, attendance structured solution that addresses records, annotations, and minutes. accumulation with a guaranteed Greater use of mobile technology rate of return (floor benefit may affect plan-level retention + upside) and provides for an for providers, advisors, and annuitization feature at retirement. advisory firms. The nature of It won’t be cheap, but if the industry records that need to be migrated truly believes that savings rate in the event of plan transition and asset allocation are the keys will be affected. to retirement security, then the

“The coming Department of Labor regulations requiring a projection of retirement income based on current account balances will have a significant impact on how advisors and plans interact with participants, as well as on how participants perceive their retirement readiness.”

Today, American workers want their employer to call the default choices likely to bring about success while retaining the option to make alternative choices. Although the emphasis on outcomes is reminiscent of the age of DB plans, it is clear that workers today want a retirement system that calls for individual responsibility.

• Advisors recommend plan designs incorporating automatic enrollment for all employees, an automatic solution has to be a slow and steady contribution level above 6%, a matching contribution approach.” • As practices consolidate and the formula encouraging participants to save more, and frequent number of specialized advisors grows, automatic deferral increases while staying within the budgetary the market share of top advisory firms constraint of the organization. expands, and provider relationships with the right advisors and consultants become key drivers of plan sales for recordkeepers.

By the end of 2017, we believe public attention will be turning to poverty in retirement: the time will be right to discuss serious reform to save the Social Security retirement program and other components of the public safety net.

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Defined Benefit Plans: A Changing Landscape excerpts from

A Transamerica Study

Regardless of strategic intent, it appears plan sponsors equipped with a thoughtful strategy coupled with an efficient operating platform are often in a better position to achieve stated goals: • More confident in the accuracy of transactional processes • More confident that the data management practices minimize business risk • Less concerned about the financial volatility of their plan, and a range of financial issues • Easier access to pertinent data The strategies plan sponsors deploy (freezing the plan, implementing a Currently, more than oneliability-driven investment policy, quarter of DB plan sponsors outsourcing services) to address have already implemented plan shortcomings do not solve the issue of rising premium cost. Total Retirement Outsourcingsm, Concern over premium cost can and an additional 13% are only lead to an increase in the currently implementing it. An number of plan terminations: the additional 17% are considering PBGC seems caught in a vicious the option. cycle.

A majority make information available to participants in electronic form (participant website: 61% and/or electronic benefit statements: 56%), but many don’t provide this level of access, impeding their ability to develop appreciation for the plan.

Over four in ten perform benefit calculations inhouse using a fully automated system, and one-third of those outsource the function using a fully automated system, some use a combination.

Participant websites are designed primarily for functions that complement the principal functions of a contact center, such as: • Answering questions related to plan and benefits (75%) • Providing estimated benefit calculations (70%) • Informing participants about their plan and benefits (66%) In the absence of trained and experienced staff to perform administrative functions, many DB plan sponsors resort to the outside world for assistance. For help, they turn primarily to Investment managers (49%) and pension administrators (43%). Fewer contract plan functions to actuarial consultants (25%), investment consultants (23%), or ERISA attorneys (18%).

Only 3% indicate some level of dissatisfaction with the arrangement.

We believe integrating all employment and compensation data points into a single database benefits most plan sponsors regardless of strategic objective.

Two out of every five DB plan sponsors outsource at least one DB plan function to their DC plan provider. In addition, one in five outsources at least one DB plan function to a strategic partner of their DC plan provider. Our survey found that three-quarters of DB plan sponsors rely on their DC provider – or a service provider that has some relationship with their DC plan provider – to administer a DB plan function as well.

Total Retirement OutsourcingSM (TRO) as the outsourcing of all administrative functions associated with a sponsor’s DB and/ or DC retirement plan(s), including recordkeeping, reporting and compliance, employee communications and education, employee “customer service” via call centers and Internet, and post-retirement administration. Services could be outsourced to one firm or several firms, but the plan sponsor retains none of the work other than the legally required minimum such as signing IRS form 5500. Chief reasons for not using TRO include satisfaction with current vendor (38%), the reluctance to use a single vendor

(27%), level of plan complexity requiring specialized providers (24%) and the difficulty of finding a provider equally proficient in all tasks involved (22%).

We contend implementing a single database is a realistic goal, and will move the defined benefit plan down the chosen path.

Our survey finds 30% of DB plan sponsors are extremely or very concerned with the financial health of their plan. The plan’s impact on the organization’s financial statements, the long-term commitment to the plan, and employees’ appreciation also rank high in the list of concerns.

In Conclusion: To sponsors distraught by defined benefit liabilities that threaten the existence of the organization, survival as an independent organization in some cases could depend on plan termination. The path to termination is long and strewn with obstacles, but it is clear: de-risk, outsource functions to the experts, involve the DC plan provider, develop a database to host all historical employment and install a modern efficient administrative platform, enhance education and communication capabilities with the help of retirement partners, and improve funding to the point termination becomes a possible consideration. Past the point of developing a consolidated database, sponsors who embark on this process find they become less concerned with a host of financial issues. Re-engineering Fiduciary | 23

Reasons

Plan Sponsors Need retirement plan advisors

By Danielle Andrus Executive Managing Editor Investment Advisor Magazine Taken from ThinkAdvisor.com

iduciaries to retirement plans are looking for advisors’ support. There are seven main functions that a retirement plan advisor must perform to satisfy plan sponsors, according to a white paper released by Strategic Benefit Services. SBS is a retirement plan and employee benefit consulting firm.

Assisting and educating on fiduciary responsibilities.

Advisors need to help their sponsor clients meet their fiduciary duties. The paper noted that sponsors’ main motivation in hiring an advisor is to mitigate the risk of legal action being taken against them. “Often, fiduciaries’ main concern and motivation for hiring a Plan Advisor is avoidance of legal action that can be brought against them as individuals,” according to the paper. Educating sponsors on their responsibilities as fiduciaries is an important function for retirement plan advisors, especially regarding defined benefit plans. “Plan Advisors who are hired by defined benefit plans that fall under ERISA serve their clients well by educating them on their fiduciary role and by establishing fully documented procedures to ensure compliance.”

Helping establish a suitable investment policy statement.

Advisors must help sponsors establish investment policies and procedures for sponsor clients. SBS suggested writing these policies in a way that leaves room for fiduciaries to use their best judgment given each case. “Rigid investment policies that are not followed could be used against the fiduciaries in a court of law,” according to the paper. Having a well-written policy isn’t enough, though. Advisors should also review the IPS at least every two years, or any time significant regulatory changes are made.

Managing requests for proposals from service providers.

Selecting an investment manager.

Replacing poorly performing managers.

A third reason sponsors hire a retirement plan advisor is for help with requests for proposals for service providers. An advisor should step in when a sponsor need support from other providers like custodians, the report noted. Advisors’ indepth knowledge of the industry makes them ideal candidates to draft proposals. In addition to identifying qualified firms and analyzing their responses, advisors should also facilitate the transition to the new provider.

Similarly, sponsors seek out advisors to help them with investment manager selection. Using the criteria listed in the IPS, the advisor identifies potential managers and provides a list of finalists. After the sponsor selects a manager, the advisor provides quarterly due diligence.

In the event that a manager fails to live up to the criteria required by the IPS, advisors should determine whether the manager needs to be replaced right away or if there are other reasons for underperformance that don’t justify finding and selecting a new manager. SBS noted that if a manager is placed under review, it should be made clear that it’s a temporary status while the advisor reviews what needs to be done as quickly as possible.

Providing performance reports.

Performance reports should include typical information like market commentary, manager status reports, a summary of investment performance and disclosure of investment fees. Furthermore, the performance report should also include for investments made by the plan participants the dollar amount in each option and the percentage of the entire plan. For fiduciary-directed portfolios, performance reports should include a comparison of the current and target asset allocations and an analysis of which components influenced performance.

Conducting ongoing due diligence.

Finally, these functions need to be performed on an ongoing basis throughout their relationship with the sponsor so that fiduciaries can stay up-to-date on regulatory and market changes. Re-engineering Fiduciary | 25

FIDUCIARY DUE DILIGENCE

START WITH THE BASICS

Address Other Issues

• • • •

COMPARE ALL RE PROPER BENCHMARKS

IPS STATEMENT CHARTER BY LAWS PLAN DOCUMENT

enrollment updates

MAINTAIN AND

ITEMS BESIDES TO MONITOR

client service issues

31 regulatory updates

Let Your IPS BE YOUR GUIDE

Establish quarterly plan committee meetings

Vendor Performance

REASONAB FEE

Are Vendors complying with their written agreements?

Comp indepe bench

BEST PRACTICES

ETURNS TO THEIR NCHMARKS

Identify and Prevent Conflicts of Interest

MINUTES SHOULD INCLUDE:

Attendees

AND MONITOR

INVESTMENTS MONITOR:

BLENESS OF ES

pare to endent hmarks

DOCUMENT EVERYTHING

PLAN DESIGN Make sure plan design meets current needs and remains in compliance

Questions TO ASK: • HOW ARE SERVICE PROVIDERS BEING COMPENSATED? • HOW DO INVESTMENTS COMPARE VS. IPS CRITERIA? • DOES OUR COMMITTEE UNDERSTAND THEIR FIDUCIARY DUTY?

TOPICS COVERED Key Questions or Discussions Decisions Made

Re-engineering Fiduciary | 27

WHY CHOOSE US Weâ&#x20AC;&#x2122;ve given you the facts, the details, the information. But the decision is in your hands. So, Why Choose Westminster Consulting?

Here at Westminster Consulting, you are our top priority. With a specialized team of highly diverse individuals working every day to help our clients, we aim to provide comprehensive fiduciary advice to investment plan sponsors and fiduciaries, giving them the information, tools, and confidence to better navigate and manage the demanding and changing regulatory landscape around qualified plans. Westminster is a fee-only advisor, meaning that we work solely for our clients and are compensated exclusively by a previously agreed upon fee. Therefore, we are completely objective in our evaluation and can recommend a course of action based only on strategic financial considerations. Westminster Consulting has a wide range of clients in multiple industries: retailers, foreign-owned entities, non-profit healthcare providers, and manufacturers to name a few. Our broad experience with a variety of complex issues - including discrimination laws, Department of Labor audits, company stock unitization, and plan harmonization - allows our senior consulting staff to provide insightful and comprehensive advice on a variety of issues. The strength of our firm is our focus on mitigating risk for all fiduciary stakeholders through our intensive fiduciary/investment consulting services that very few firms possess. Westminsterâ&#x20AC;&#x2122;s centralized and expert team provides a boutique atmosphere that allows us to pay extreme attention to detail and have a magnified focus on our clients. We thoroughly understand the needs of our clients by forming personalized relationships with them and building a trust that many advisor-sponsor relationships lack. Overall, Westminsterâ&#x20AC;&#x2122;s diverse staff and expertise in both defined benefit as well as defined contribution plans will ensure that we provide the absolute best advising for you. 28

Thank you for reading.

WESTMINSTER CONSULTING Westminster Consulting, LLC 11 Centre Park - Suite 303, Rochester, NY 14614-1115 800.273.0076 www.westminster-consulting.com