Reducing your Fiduciary Exposure

As an employer, you act in a "Fiduciary Capacity" on a number of fronts.

For instance, in the employee benefits area, you have fiduciary responsibility for the design of and investment choices in your company's qualified retirement plan (i.e. 401(k))

Legislation and case law are increasing the stakes on employers.

Pre- Enron, the burden of proof was on the plaintiff to show you were a fiduciary.

Presupposition today is that you are a fiduciary; the burden of proof is on you to demonstrate you are doing your job.

As your consultant, our responsibility is to work with you in reducing the potential impact of these fiduciary risks.

Steps to protect you will include:

1. Identify the legal standards that require fiduciaries to prudently manage investment decisions.

2. Identify and account on the 27 practices that define prudent investment process. This also makes good investment sense by providing the foundation framework for your investment process. A solid framework can help to avoid ad hoc decisions influenced by emotions or market noise.

3. Prepare for complaints and / or lawsuits alleging investment mismanagement that are continually increasing. These can be avoided as long as prudent policies and procedures are followed.

4. Continually evaluate compliance and adjust based on continually changing standards from ERISA, UPIA, and case law.

5. Update your Investment Policy Statement.

6. Develop an adequate due diligence process.

7. Review fees and expenses for appropriateness.

8. Identify potential investment conflicts of interest.

Benefits of following these practices:

" Reduces fiduciary liability by uncovering omissions.

" Provides framework for defining integrity and the inclusion of ethical considerations.

" Provides educational outline.

" Should improve long-term investment performance.

" Enables you, as the fiduciary, to compare practices and procedures.

" Assists in prioritizing projects and establishing benchmarks to measure progress.

Investment Portfolio Maintenance and Due Diligence

"Best efforts" is no longer a substitute for the "Prudent person standard" when maintaining a plan's investment portfolio. Market volatility as well as other market developments have made it critical for retirement plan sponsors to develop and maintain firm due diligence procedures for the maintenance of an appropriate portfolio.

We will utilize the Center for Fiduciary Studies Investment Management Process for your benefit. The process dictates that we:

1. Analyze your current portfolio

2. Diversify choices for portfolio allocation

3. Formalize your investment policy

4. Implement your policy

5. Monitor and Supervise the process

Using your investment policy statement as a guide will enable us to evaluate your current investment offerings. The ability to select from all of the necessary investment categories and measuring them against their peer group benchmarks will ensure adequate performance of your portfolio. The result of our process is the confidence that your portfolio will be well diversified, well managed, and will meet the stated objectives of your investment policy statement.

HRSB provides this comprehensive analysis by utilizing multiple tools, including the Greenrock Report, the Peer Analysis and Review Report, as well as the Zephyr analysis, one of the most comprehensive analytical tools available. Each investment and suggested portfolio is evaluated utilizing analytical measurements including:

" Style Drift - to determine if an investment is following it's investment focus

" Excess Return - to measure the excess return relative to the risk taken

" R-Squared - measures how much of the fluctuation is due to the benchmark index

" Standard Deviation - depicts how widely returns vary over a period of time

" Alpha - measure of a fund's selection risk in relation to the market (value of the manager)

" Beta - reflects the sensitivity of the fund's return to fluctuations in the market

" Sharpe Ratio - represents the reward unit per risk, or risk-adjusted performance

Ongoing review of the plan's portfolio on a regular basis is essential to maintaining the most attractive package available, keeping in compliance with the Department of Labor guidelines and minimizing exposure to fiduciary liability.

Plan Design and Compliance

Designing the plan to meet a client's changing needs takes ongoing review with the plan's decision makers. Although legislation mandates conformity for many benefit plan features, utilization of recent legislation can increase employee participation for key employees while providing incentives and benefits previously lost by plan sponsors. An example of restoring lost benefits includes overturning the reverse discrimination often levied against highly compensated employees in standardized retirement plans. Utilizing aspects of recent legislation can ensure that key employees are able to maximize savings as high as $46,000 annually, regardless of staff participation. Additionally, HRSB continually reviews and updates your plan documents to keep up with the overwhelming volume of legislation that Congress is continually passing

To provide the optimal plan for your company, HRSB will provide an ongoing review of the plan design and operational procedures including:

" Age-Weighted and New Comparability discretionary contribution formulas

" Defined benefit illustrations

" Cost / benefit analysis of Safe Harbor provisions

" Increased employee deferral limits and employee tax credit incentives

" Increased employer plan contribution deduction limits

" Controlled Group plan set up and design alternatives

" Compliance with 404(c) investment guidelines and requirements

" Management of the conversion/ transition process

" Electronic transmittal of payroll, loan and distribution transactions

" On line mid year discrimination testing

" Employee access to account via telephone and Internet

" Optimum frequency and educational content of employee communications

" Paperless, electronic enrollment

" Online loan initiation and tracking

" Online access to account via employer website

" Internet access to account available for Financial Planner