In today’s dynamic capital markets, plan sponsors must evaluate more asset classes, review more investment managers, appraise more risks, react more rapidly, comply with more regulations, and bear more scrutiny. Meeting these challenges requires objective and expert advice. Our clients encompass a full range of plan types. These include defined benefit, defined contribution, non-qualified Senior Executive Retirement Plans and foundations.
Our team of professionals includes CERTIFIED FINANCIAL PLANNERS™ (CFP®), Certified Public Accountant (CPA), Certified Private Wealth Advisor℠ (CPWA®), a Personal Financial Specialist (PFS), a Retirement Plans Associate (RPA) and a Qualified 401(k) Plan Administrator (QKA).
3(21) Investment Advisor vs. 3(38) Investment Manager
HM Capital Management is a fee-only investment advisor. As a result, HM Capital Management serves as a plan fiduciary where most others cannot. This fiduciary status is acknowledged in HM Capital Management’s Consulting Services Agreement. HM Capital Management’s fiduciary services include serving as an “Investment Advisor” as defined in Section 3(21) of ERISA or as an “Investment Manager” as defined in Section 3(38) of ERISA.
For the majority of our clients, HM Capital Management is a fiduciary as defined in Section 3(21) of ERISA. As a Section 3(21) fiduciary, HM Capital Management serves as an “Investment Advisor”, which means HM Capital Management does not have the power or authority to manage, acquire, or dispose of any of the Plan’s assets and any and all decisions made with respect to the selection of Plan’s investments will be made after the plan sponsor’s and co-fiduciaries’ own independent consideration.
That being said, as the importance of fiduciary services has gained greater attention over the years, a number of HM Capital Management’s clients have requested a more encompassing layer of fiduciary responsibility. HM Capital Management can and does serve as a fiduciary under the terms of Section 3(38) upon the request of the client. If HM Capital Management is contracted to consult as the Plan’s “Investment Manager” under Section 3(38), HM Capital Management will assume discretionary authority over the Plan’s investment decisions without prior approval from the plan sponsor. HM Capital Management will be responsible for the selection, monitoring, and replacement of the Plan’s investment options. HM Capital Management will not assume discretionary authority over the Plan’s administrative functions, features and provisions, or the hiring of service providers. In this capacity, HM Capital Management will maintain a consulting role in collaboration with the plan sponsor, and the plan sponsor ultimately retains authority over final approval of non-investment related decisions for the Plan. In addition, HM Capital Management feels it is important to note that even under Section 3(38), the plan sponsor retains a residual duty to ensure the Investment Manager is carrying out their appointed duties in a prudent fashion.
HM Capital Management coordinates the design or updates of a written investment policy statement (IPS) on an annual basis. An IPS is a minimum requirement of plan sponsors and spells out the objectives of the plan, responsibilities of contributing parties and ongoing requirements. This document will be reviewed annually for compliance and to ensure updates have been incorporated.
HM Capital Management provides comprehensive plan review and performance reports for the plan and will present our analysis in person at least semi-annually. All reporting is customizable. These reports reflect continuous evaluation of current and potential investment options looking for:
- Performance – several evaluation criteria should be used including peer analysis, index comparisons and risk analysis.
- Fund expenses – one of the biggest detractors from fund performance can be high expenses. It is important the fund expenses be monitored and compared to peers.
- Manager changes – manager changes have become more frequent and often Plan sponsors are not aware of the change or the implications. This is critical to the review and selection process.
- Style drift – making sure a portfolio manager adheres to the stated objective is important. For example, if a large cap manager begins investing in small or mid cap shares, the portfolio may be taking more risk than the investor is aware.
- R-Squared – How much does performance track the index and the possibility of becoming a “closet index fund”.
- Monitoring of industry trends and reporting to the pension committee for potential plan updates. For example, recent legislation has many plan sponsors considering the merits of adding a Roth feature or automatic enrollment for new hires or non- participating employees.
- Evaluation of plan characteristics such as participation rates, loan trends and contribution analysis.
- There are various levels of participant education and we believe we have set the standard given the following:
- HM Capital Management designs and coordinates the education effort by working closely with the plan sponsor and the current plan provider to organize an annual education campaign utilizing the following: personalized and segmented communications, continuous communication vs. one-time or unrelated, recorded webinars, and on-site participant education meetings presented by a dedicated education specialist.
- HM Capital Management tracks the effectiveness of the education campaign. Subsidiaries identified as “hot spots”, or areas of low participation, will be targeted with a concentrated education effort.
- HM Capital Management conducts an annual “Meet and an Investment Advisor Day” with participants for one-on-one, personalized education.
- In addition, HM Capital Management coordinates the participant education associated with future company acquisitions.
The fees charged for employer-sponsored defined contribution plans have come under particular focus as the Department of Labor (DOL) aims to create greater transparency through regulatory disclosure requirements under §408(b)(2) and §404(a) of the Employee Retirement Income Security Act (ERISA).
HM Capital Management has always maintained full fee transparency with its clients. In addition to outlining plan fees in semi-annual review reports, HM Capital Management will provide the Retirement Committee with an ‘All-In’ Fee Analysis at least annually. This analysis compares a Plan’s total cost with peer plans of similar plan size and average participant balances. The peer statistics are obtained from independent sources, such as the “Deloitte 401(k) Benchmarking Survey” and the “401k Averages Book”.
There are three (3) main components to the ‘All-In’ Fee:
- Recordkeeping and Administration Fees (not including participant-initiated transaction fees)
- Investment Management Fees (i.e. mutual fund expense ratios)
- Third-Party Advisor or Consultant Fees
Primary drivers of plan fees include:
- Plan Size
- Average Participant Balance
- Percentage of Plan Assets invested in equity investment options.
- Secondary drivers of plan fees include:
- Participant contribution rates
- Number of investment options available in the Plan
- Use of features such as Automatic Enrollment