BUSINESSES

Meeting ERISA Requirements

The Employee Retirement Income Security Act (ERISA) governs the retirement plans of profit-making enterprises in the United States. ERISA devotes thousands of pages of complicated, statutory jargon describing who gets what benefits when. Ironically, it is brilliantly direct about who is responsible for investment management and potential losses.

"ANY PERSON WHO IS A FIDUCIARY WITH RESPECT TO A PLAN WHO BREACHES ANY OF THE RESPONSIBILITIES, OBLIGATIONS, OR DUTIES IMPOSED UPON FIDUCIARIES BY THIS TITLE SHALL BE PERSONALLY LIABLE...." ERISA SEC. 409(A)

ERISA makes Investment Fiduciaries personally liable for investment losses. An Investment Fiduciary is anyone who has control, or provides advice to those who have control, over investment decisions including the selection of investment managers. Investment Fiduciaries are personally responsible for investment losses. ERISA defines a loss as the difference between what an expert would have earned with plan assets, and what was actually earned by those in charge. Losses, therefore, can be relative rather than nominal.

Investment Fiduciaries have three defenses against this liability:

Follow a prudent, documented procedure.
Contract with a Registered Investment Advisor who accepts ERISA responsibility in writing. Of course you must select the advisor using prudent procedures.
Shift responsibility to employees under Sec. 404(c) of ERISA.

Surprisingly, many employers think that they are shielded from this liability by simply giving employees a choice among investment options. Wrong! Plan sponsors and Investment Fiduciaries have the same responsibilities with regard to the selection of investments made available to employees in discretionary plans. In addition, the plan sponsor must inform employees on an ongoing basis about the use and applicability of the investment choices to the employee's situation. The following outline describes the non-technical procedures that are necessary when managing an ERISA plan.

ERISA INVESTMENT GUIDELINES

THE EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) IS THE PRINCIPAL LAW GOVERNING THE RETIREMENT PLANS OF PRIVATE BUSINESS.
FOR SPONSORS AND FIDUCIARIES, COMPLIANCE WITH ERISA IS THE KEY TO PLAN MANAGEMENT AND MINIMAL LIABILITY.
THE FOLLOWING IS A SUMMARY OF ERISA INVESTMENT REQUIREMENTS:

An investment policy statement must be established and should be in writing. ERISA Sec. 402(a)(1), 402(b)1-2, 404(A)(1)(D)

Plan assets must be diversified. ERISA Sec. 404(a)(1)(c)

Investment decisions must be made with the skill and care of a prudent expert. ERISA Sec. 404(a)(1)(B)

Investment performance must be monitored. ERISA Sec. 404(a)

Investment expenses must be controlled. ERISA Sec. 404(a)

Prohibited transactions must be avoided. ERISA Sec. 404(a)

Shifting investment responsibility to participants. ERISA Sec. 404(c)

Benefits of Plan Participation
Investment Planning and Retirement Planning Information
Asset Allocation Models
Interactive Planning Materials

PENALTIES

Many of the terms have meanings that have been determined by court cases or are defined by regulation. We suggest that these issues be fully explored with your legal counsel.

A detailed description of each of these preceding ERISA investment regulations and how Tisch Investment Advisory Incorporated meets or exceeds these regulations follows:

DEVELOP AN INVESTMENT POLICY STATEMENT (IPS)
"Every employee benefit plan shall provide a procedure for establishing and carrying out a funding policy in a method consistent with the objectives of the plan and the requirements of this subchapter." ERISA Sec. 401(b)(1)

TISCH INVESTMENT ADVISORY INCORPORATED CREATES AN INVESTMENT POLICY STATEMENT (IPS) FOR EACH PLAN WE MANAGE. AN IPS:
1. Describes the plan.
2. Values current assets.
3. Defines current and projected liabilities.
4. Projects the stability of earnings and contributions.
5. Defines investment objectives and funding requirements.
6. Sets forth allowable asset classes, estimated returns, and risk tolerance.
7. Sets forth percentage mix of assets.
8. Sets forth how investment decisions will be made.
9. Sets forth performance monitoring procedures.
10. Sets forth IPS review procedures.
DIVERSIFY PLAN ASSETS
"...a fiduciary shall...diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly not prudent to do so." ERISA Sec. 404(a)(1)(c)

OUR PORTFOLIOS ARE TYPICALLY DIVERSIFIED ACROSS:
- 6-10 asset classes
- 2-3 managers per class
- 20-30 money managers overall
- There may be more than 2,000 securities in a portfolio.
- We select managers based on performance and low cost.
- We weight investments in each class based on risk adjusted expected returns and the covariant properties of all investments combined.

HIRE EXPERT MANAGEMENT
"A fiduciary shall discharge his duties...with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." ERISA Sec. 404(A)(1)(b)
Further, if an investment manager(s) has been appointed, then the trustee(s) are not liable for investment results so long as:
1. The money manager is a bank, insurance company, or registered investment advisor. Tisch Investment Advisory Incorporated is a registered investment advisor.
2. The money managers must be "prudently" selected. Our process assures this result and provides proof. We avoid conflicts of interest or proprietary products.
3. The manager must be given the power to manage, acquire, and dispose of plan assets and acknowledge this responsibility in writing. We provide a contract to this effect.
4. The manager's activities and performance must be carefully monitored. We monitor all managers, change them as necessary, and rebalance the portfolio as needed in accordance with the standards outlined in the IPS and in response to economic and performance conditions. We provide monthly performance statements. Also, we are available to discuss the plan anytime.

MONITOR PERFORMANCE
"In addition...a fiduciary...shall be liable for a breach of responsibility of any other fiduciary with respect to the same plan." ERISA Sec. 405(a)
Tisch Investment Advisory Incorporated monitors your plan to:
1. Conform to your IPS.
2. Achieve its expected return and investment objectives.
3. Rotate investment styles (managers) as economic conditions change.
4. Replace managers if their performance warrants, if staff changes occur, or when the economic cycle indicates.

CONTROL INVESTMENT EXPENSE
"...a fiduciary shall discharge his duties in the sole interest of plan participants and beneficiaries...(while) defraying reasonable expenses of administering the plan." ERISA Sec 404(a)(1)

Tisch Investment Advisory Incorporated uses only no-load mutual funds that are screened for low cost as part of our selection process. These funds are held by a custodian at no cost. Transaction fees are virtually zero.
We use money managers whose performance can be attributed to their decisions. We do not pay for management that does not contribute results above those available from unmanaged index funds.

AVOID PROHIBITED TRANSACTIONS
"A fiduciary...shall not engage in a transaction...that constitute a direct or indirect..."
1. sale, lease, or exchange of property with a party in interest.
2. lend money between the plan and a party in interest.
3. furnish goods, services, or facilities.
4. transfer to, or use by or for the benefit of a party in interest.
5. cause the plan to buy employer property or securities in violation of Sec. 407(a).
Tisch Investment Advisory Incorporated does not lend money or otherwise engage in any practice that would constitute a prohibited transaction. We avoid conflicts of interest and we do not accept commissions or income of any kind from money managers or brokers.

SHIFTING SOME INVESTMENT RESPONSIBILITY TO PARTICIPANTS
In participant-directed plans, the plan sponsor can avoid liability for the investment outcome of individual participants by complying with Department of Labor Regulations relating to the provisions of Section 404(c). Section 404(c) requires that plan sponsors comply with ERISA in selecting investments, and providing selections that meet participant needs. Plan sponsors can limit their liability by providing participants with the following types of information:
1. Information about the plan and its advantages.
2. A clear statement notifying participants that they must make their own investment decisions and that the plan intends to shift investment responsibility to participants.
3. A clear statement concerning the cost that participants pay for investment and bookkeeping services.
4. General information about the investments available to employees.
Selection of the investments available to employees must meet normal ERISA selection requirements and meet the additional requirement that the investments being offered meet the diverse needs of plan participants and when different investment options are combined that risk is reduced.

PENALTIES
ERISA provides for the assessment of a 20% penalty against the fiduciary(s) for any amount recovered as a result of an ERISA violation, PLUS THE FOLLOWING:
1. Payment of the difference between actual investment earnings and the returns that could have been earned from reasonably prudent alternatives.
2. Recoupment of investment losses.
3. Discouragement of profits.
4. Preliminary and permanent injunctive relief.
5. Removal of a fiduciary and appointment of a receiver.
6. Disqualification of the tax qualified status of the plan.

TISCH INVESTMENT ADVISORY INCORPORATED PROVIDES SEVERAL WAYS OF MEETING THESE ERISA REQUIREMENTS:

We will accept fiduciary investment liability with regard to selecting the funds being made available to participants.
We will communicate through retirement planning workshops the cost of the plan, its advantages, and information about the investments as well as suggest which investments are suitable for different types of investment goals.
Using our enrollment forms, each participant acknowledges having received that information that 404(c) requires.
We work to educate participating employees through a combination of the following services:

Participant Workshops with Video Presentation
Personal Consultations
Newsletters
Interactive Financial Planning Software
Workbooks
Website (etisch.com)
Participant Satisfaction Survey