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Fiduciary Breach


joel

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Have the Trustees of a 457(b) plan breached their fiduciary duties by hiring the same firm to handle three plan functions----Record keeper, Investment Provider and Plan Administrator?

Not if that same firm is truly competent in all three functions, and the trustees are aware of all charges and 'revenue sharing'.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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However, an appointing fiduciary must use procedures to monitor and evaluate the performance of each appointed fiduciary. And if, for any of the subjects, an appointing fiduciary lacks enough knowledge, experience, and expertise to evaluate the appointed fiduciary's performance as a prudent expert would evaluate it, the appointing fiduciary must get enough advice to be able to do its evaluations to that standard of care.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Exactly what fiduciary responsibility laws/standards do you believe are applicable here? Certainly not ERISA.

Common law of trusts (which ERISA fiduciary standards were in 1974 primarily a codification of, and thus there is a great deal of overlap).

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Exactly what fiduciary responsibility laws/standards do you believe are applicable here? Certainly not ERISA.

If a government plan any applicable state law, such as the UPIA.

If its NP plan then the court could fashion a remedy based on the common law since the plan is subject to ERISA and state laws are preempted.

But mere hiring of same party to perform 3 functions is not indicative of any impropriety.

mjb

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About half the States have a statutory law of trusts based on the Uniform Law Commission's Uniform Trust Code (in addition to the common law of trusts).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Before everyone goes on and on about trust/fiduciary law implications, what I was getting at is this. First, this most likely is a governmental plan. If it was a NP plan, it should be a top-hat plan, and therefore (a) ERISA rules of fiduciary responsibility would not apply, and (b) state laws that might otherwise be pertinent to the administration of the plan would be preempted. If this is a NP plan that does not qualify as a top-hat, it (and the employer) have problems that may dwarf any fiduciary issue.

Assuming it is a government plan, then my first inquiry would be whether there are any applicable State laws, regulations or ordinances that control the issue. The common law of trusts would be a distant, secondary inquiry.

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The attachment, New York's rules for a State or local government employer's deferred compensation plan, includes some law on whether a plan's lead fiduciary may select one person as a service provider for more than one of three roles - Administrative Service Agency (recordkeeper and plan administrator), Trustee, and Financial Organization (investment).

Of course, this is merely one example, and another State's law might be meaningfully different.

NYSDCB_Rules.pdf

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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JOEL L. FRANK

PO Box 148

6 Trotter Place

Marlboro, New Jersey 07746-0148

732-536-9472

rollover@optonline.net

OUTCH!---THOSE BASIS POINTS AND OTHER HURTS

March 2010

A basis point is one hundredth of one percent (0.0001). This is how the fees charged by our investment managers are expressed. The lower our basis points the more money in our accounts when we retire. The Federal Thrift Savings Plan charges 2.8 basis points or 0.028 percent to manage the retirement savings of federal employees. This equates to a $0.28 fee for each $1,000.00 of account value.

Do you have any idea how hurtful high fees are to the growth of an investment? Example: For 40 years Bob and Rob contribute to the New Jersey State Employees Deferred Compensation Plan (NJSEDCP). Their first year salary is $30,000 with annual increases of 3 percent. 10 percent of their salary is invested in the Plan each year. They each earn 8 percent on their retirement-investment. At the end of 40 years Bob's account is worth $1.1 million while Rob's account is worth $700,000. Why the difference? Bob invested his money in the 4 State-managed funds at a cost of 8 basis points or $0.80 per $1,000.00 of account value while Rob invested his money with Prudential at a cost of 220 basis points or $22.00 per $1,000.00 of account value.

For the first 25 years of its existence, the New Jersey Deferred Compensation Board got it all right by offering only de minimis cost investment funds. This all changed on January 2, 2006 when each of the 4 State-managed funds was summarily closed to ongoing deposits; replaced with 23, commissioned based, Prudential funds. Additionally, Prudential was hired to handle two key Plan functions: (1) Plan Administration, replacing the Division of Pensions and Benefits which was the Plan’s only Administrator during its first 25 years; (2) Primary Investment Provider, replacing the New Jersey Division of Investment which was the Plan’s sole Investment Provider during the Plan’s first 25 years.

The sole intent of these fundamental changes was to dupe the employee-investor into buying the commissioned based Prudential funds. Recognizing that it is the employee-investor, not the employer, that makes the investment, pays all of the associated costs of acquiring and maintaining the investment and assumes all of the investment risk, it is the height of arrogance for the State of New Jersey, as employer and Plan Sponsor, to sanction commissioned based investment funds. Why, after 25 years of administering a de minimis cost plan, did the State decide to place Prudential’s bottom line ahead of its employees’? Why, after 25 years of administering a de minimis cost plan, did the State decide to give Prudential a living on the back of its employees? It is shocking that at a time when fees paid by the employee-investor are under intense scrutiny, the Deferred Compensation Board would have the temerity to replace the 4 de minimis cost options with 23 commissioned based funds. By so doing, the State Investment Council has breached its fiduciary duties. If your objective was to increase the number of investment funds all additional ones could have been of the de minimis cost variety. No?

See: 1. The Federal Thrift Savings Plan

2. The Investment Plan of the Florida Retirement System

3. The Deferred Compensation Plan of the City of New York

4. The New York State Deferred Compensation Plan

5. State of Connecticut Defined Contribution Plans

6. Commonwealth of Pennsylvania Deferred Compensation Program

===============================================================

RECOMMENDATIONS

1.: All Defined Contribution retirement plans to which employees of state, county and municipal governments, including school districts, invest in should offer only de minimis cost investment options. This includes primary Defined Contribution retirement plans funded by both employer and employee contributions (ABP and the DCRP) as well as supplemental retirement plans funded by only employee contributions

(457(b) and 403(b)).

On the state level the plans are:

a. Supplemental Annuity Collective Trust (SACT)

b. Alternate Benefit Program (ABP)

c. New Jersey State Employees Deferred Compensation Plan (NJSEDCP)

d. Defined Contribution Retirement Program (DCRP)

On the county level there are 21 457(b) plans.

On the municipal level there are 565 457(b) plans.

On the school district level there are 565 457(b) plans and 565 403(b) plans.

2.: Eligibility to participate in the New Jersey State Employees Deferred Compensation Plan should be expanded to include county and municipal government employees, including those of school districts. Just like there is a single State-administered Defined Benefit retirement system for all of the State’s public employees there should be a single State-administered Deferred Compensation 457(b) Plan. It is utter non-sense for 21 counties, 565 municipalities and 565 school districts to administer their own 457(b) plan.

3.: The SACT must adopt, at long last, a diversified investment line-up. Since its inception, in 1963, the SACT has been a plan to avoid.

Having said that, the SACT is the State-administered 403(b) Plan for employees of public higher education institutions and public school districts. The Trust began in 1963 with one investment choice, a common stock fund. After nearly 50 years of continuous operation the Trust still offers only one investment choice, a common stock fund. Such gross negligence represents a severe breach of fiduciary responsibility on the part of the New Jersey State Investment Council and is the sole reason why each of the 565 school districts sponsor their own commissioned based 403(b) plan. While it is utter non-sense for each of the 565 school districts to administer their own 403(b) plan, until and unless the Trustees adopt a diversified investment menu, public school personnel will continue to avoid the SACT. They will, unfortunately, also continue to be victimized and duped by commissioned based 403(b) investments that have been, since 1963, sanctioned by their employing school districts. ==============================================================

OF NOTE

1. This Paper applies, with equal vigor, to the 21 counties, 565 municipalities and 565 school districts that sanction the sale, to their employees, of commissioned based 457(b)/403(b) investments.

2. The employees of public higher education institutions and school districts are allowed to contribute to a 457(b) plan and a 403(b) plan.

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