Investment Fiduciary Programs

Provide guidance that maximizes fiduciary protection for clients

Retirement plan fiduciaries are
held to high performance standards and are legally accountable for many aspects of plan oversight. This includes the
time- and resource-intensive endeavor of conducting continual due diligence on the investments offered by a plan.

In the past, this responsibility was shouldered by employers, despite the fact that they were completely unfamiliar with this type of research. This was particularly problematic for small business owners, as many weren’t even aware that they were acting as fiduciaries when it came to selecting and monitoring their plans’ menus.

Today, financial professionals can help employers of all sizes manage their fiduciary exposure by offering investment fiduciary services, either directly or through a third-party vendor.

Providing fiduciary protection can help employers manage risk related to a retirement plan’s investments, and are typically conducted by financial professionals and/or independent investment consulting firms that specialize in manager due diligence and asset allocation.

These individuals and firms assume fiduciary responsibility for identifying and monitoring suitable investment options for retirement plans, taking into account items such as investment performance, organizational changes, style consistency, and expenses.

A program that manages fiduciary risk offers several benefits, including:

• Years of specialized experience—Financial professionals and independent investment consulting firms have insight into areas that are mostly unknown to individuals acting as fiduciaries.
• A degree of safety—Protection may be provided for employers against certain claims and expenses brought about by employee lawsuits.
• Improved investment selection—A formal process for protecting against fiduciary risk helps ensure that employers create an appropriate investment menu through documented procedures. 

Two of the most popular approaches to providing investment fiduciary protection are designated 3(38) and 3(21) fiduciary protection. The primary distinction between the two is discretionary authority over the selection and monitoring of plan investments.

3(38) Fiduciary Protection	3(21) Fiduciary Protection
Level of Protection
A financial professional or consulting firm assumes full fiduciary responsibility and discretion for the plan's investments and acts as an investment manager.	A financial professional or consulting firm shares fiduciary responsibility with an employer for the plan's investments.
Investment Selection
An employer selects the initial investment menu from an approved fund list options. A financial professional or consulting firm manages the menu from there.	An employer creates the investment menu from the approved fund list. A financial professional or consulting firm provides recommendations for how to update it going forward.
Best for
Employers looking to hand over control of ongoing investment decisions in return for complete fiduciary coverage.	Employers who want to stay involved in the investment selection process while reducing fiduciary liability.

With the Department of Labor currently working to re-define what it means to be a fiduciary, there’s a strong possibility that investment fiduciary services will gain greater prominence in the retirement plan landscape. In fact, all asset managers in a Cerulli Associates survey of investment-only managers expect this to be the case.

For retirement plan fiduciaries that are required to always act in the best interests of plan participants, investment fiduciary programs offer reduced risk exposure and a simple way to oversee a plan’s investments. They also provide an added layer of independent protection that allows financial professionals to provide both the guidance their clients depend on and the coverage their clients seek.

1Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.

Open-Architecture Investment Platforms

Offer a diverse range of investments to suit any retirement strategy

In the days of guided architecture (or focused investment platforms), employees often had to choose from an investment menu containing proprietary funds to build their retirement strategies. Investment platforms were limited, and fund lineups were therefore more constrained.

In the 21^st century, open-architecture investment platforms can help employees avoid investment restrictions.

Developed to accommodate a broad range of investment needs, platforms today seek to ensure that financial professionals and employers can construct plan investment menus that are consistent with their Investment Policy Statements.

Industry trends and statistics show that these platforms are now the standard for modern retirement plans, as they have made substantial gains in popularity and usage over the past 10 years.

According to Cerulli Associates, the shift to open-architecture investment platforms is evidenced by the growth of defined contribution investment-only assets and the diminished use of proprietary-only investment products: 75% of 401(k) assets were addressable¹ for investment-only managers in 2011, compared with 50% in 2003.²

Furthermore, Ernst & Young notes that a majority (79%) of wealth management firms plan to add open-architecture investment platforms to their overall client and product strategies within the next two to five years.³

Open-architecture investment platforms are favored because they can support any combination of proprietary and non-proprietary strategies, along with both traditional and non-traditional investment options that include:

• mutual funds
• ETFs
• stable value funds
• collective trust funds
• unitized company stock
• alternative investments

These platforms are also flexible enough to adapt to new developments—such as target date funds and model portfolio solutions—that can address distinctly different employee investment preferences.

A 21^st century retirement plan allows employees to select from a wide range of fund families and investment options in order to choose the best investments for their retirement needs. This makes open-architecture investment platforms an essential retirement plan tool for both financial professionals and employers.

1Addressable assets are defined by Cerulli Associates as those in which the plan is not restricted to using a recordkeeper’s proprietary investment product.

2Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.

3Source: Ernst & Young 2011 US Wealth Management Study: A Focus on Product and Client Trends.

Automatic Enrollment

Put employees on the path to retirement while increasing participation rates

Since the introduction of the employer-sponsored retirement plan, employees have been encouraged to participate in order to prepare for the future.

In the past, advisors and employers relied on enrollment meetings to help employees get involved in their plans. These gatherings could often be tedious, complicated, time-consuming, and expensive.

Unsurprisingly, enrollment meetings didn’t always inspire employees to sign up for their plans, select the proper investments, or choose suitable deferral rates. As a result, they became a decidedly 20^th century concept desperately in need of updating.

Recent times have seen the development of such an update in automatic enrollment.

The benefits of automatic enrollment are many. For employers, it can help with avoiding compliance testing issues in addition to increasing participation. It also allows them to replace meetings about enrollment procedures with sessions that focus on financial and investment education.

For employees, it simplifies the enrollment process and helps them save for a more secure retirement. Employees also incur no additional costs, and they can opt out at any time should their circumstances change. 

Employers can help employees get off to an even better start by setting default deferral percentages at an appropriate rate. In many cases, this means 5% or greater. Recent research has shown that over 80% of employees would contribute 5% of their salary in return for reliable income in retirement.¹

Furthermore, plans that automatically enroll participants at a rate greater than 3% of their salary have a 95% overall participation rate—7% more than those with lower deferral rates.²

Ascensus has found that auto enrollment has proven to be effective, as participation rates among Ascensus plans that adopt our auto enrollment program are almost 10% higher than those in plans that don’t.³

In terms of sparking employee participation, automatic enrollment is a true 21^st century tool that no modern retirement plan should be without.

¹Source: Bank of America Merrill Lynch's 2012 Workplace Benefits Report

²Source: New York Life Retirement Plan Services, June 2012

³As of February 1, 2012.