HOW SAFE IS YOUR 401(k)? What Employers Should Be Doing in Response to Financial Industry Crisis

2 Reacting to the Market Meltdown Bear Stearns Fannie and Freddie Lehman Bros. AIG ???

3 Where is the Risk? Banks Mutual Funds Insurance Companies

4 Banks Banks often serve as Plan trustee Plan assets are held in trust, separate from the assets of the bank Individual retirement accounts at banks (IRAs, SEPs, Simples) are FDIC insured up to $250K per depositor

5 Mutual Funds Plan assets are often invested in mutual funds Mutual funds are not FDIC insured, not guaranteed, and may lose value Mutual fund values based upon the underlying investments of the fund Assets up to $500K held in brokerage account are protected by SIPC in case of broker failure

6 Insurance Companies Insurance companies often issue contracts to plans, or funds held by plans (e.g., GICs, and stable value wrappers) State guaranty associations back up the policy obligations of insurance companies Some separate accounts are subject to creditors of insurer

7 What is at Risk? Plan Assets –Market values –Liquidity Individual Account Balances –Availability of distributions –Retirement income Fiduciary Personal Liability

8 Who is at Risk? Plan Participants Plan Fiduciaries

9 Plan Participants Retirement benefits of 401(k) Participants are based on their account balances Participants must invest their accounts in fund options selected by Fiduciaries

10 Plan Fiduciaries Plan Fiduciaries are responsible for the selection and monitoring of investment funds Plan Fiduciaries are personally liable to Participants for losses resulting from breach of duty

11 Am I a Fiduciary? A Fiduciary is anyone who has discretionary authority or control over the management of Plan assets or the administration of the Plan Examples: –Trustee –Investment Manager –Plan Administrator –Retirement Committee

12 What is the duty of a Fiduciary? Act solely in the interest of Participants and Beneficiaries Use “care, skill, prudence and diligence under the circumstances then prevailing” Like a “prudent man” familiar with such matters Diversify investments to minimize the risk of large losses In accordance with Plan documents

13 What Should a Fiduciary Do in Response to Financial Crisis? Be Prudent – Review Funds for Exposure to Financial Sector Risk –Money Market v. Stable Principal –Fixed Income Funds – Issuers in default –Equity Funds – Overweight on Financials –Diversification is Key

14 What Should a Fiduciary Do in Response to Financial Crisis? Use Skill – Make sure you have the financial skill to evaluate the risks or find an expert advisor Be Diligent – Act now; don’t wait until the end of the quarter or year

15 What Should a Fiduciary Do in Response to Financial Crisis? Ask Questions – Contact your fund providers for information about fund assets and investments Communicate with Participants – Tell Participants what you are doing to monitor the situation and what you have learned; make sure prospectus delivery is current

16 What Should a Fiduciary Do in Response to Financial Crisis? Read the Plan – Confirm that investment decisions are made according to the Plan document Keep Records – Document your Due Diligence efforts and communications to Participants

17 Questions?

18 Presenters James E. Daniel Womble Carlyle Sandridge & Rice, PLLC B. Kelly Graves Carroll Financial Associates, Inc