Transcript Document

Fiduciary
Education
FRED REISH, ESQ.
November 6, 2014
Fiduciary Training
 Why?
• Understanding of duties.
• DOL investigations.
 What?
• Basics.
• Annual update.
Fiduciary Education ● November 6, 2014
1
DOL Litigation Settlement Agreement
“The Investment Committee Defendants shall
be required to attend a 15-hour program and
the Administration Committee Defendants
and the Inside Director Defendants shall be
required to attend an 8-hour program.”
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Basic Fiduciary
Training
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When Is a Person Acting as a Fiduciary?
A person is a fiduciary under ERISA to the extent he or
she:
 Exercises discretionary authority or control over
plan management.
 Exercises authority or control over management or
disposition of plan assets.
 Has discretionary authority or responsibility over
plan administration.
 Provides investment advice for compensation
(service providers).
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When Is a Person Not Acting as a Fiduciary?
On the other hand, a person is not a fiduciary with
respect to performing “settlor” functions, which are those
that relate to plan: establishment; design; and
termination.
Note: The “two hats” doctrine.
Note: Service providers are not fiduciaries when performing
“ministerial” functions.
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Five Basic Fiduciary Responsibilities
 Act solely in
beneficiaries.
interests
of
participants
and
 Act for exclusive purpose of providing benefits and
defraying reasonable expenses.
 Act in accordance with plan documents (if consistent
with ERISA).
 Act with care, skill, prudence and diligence of a
prudent person acting in same capacity and with
knowledge.
 Diversify investments to minimize risk of large losses.
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What is Expected of Fiduciaries?
A fiduciary’s performance is not judged with “20/20
hindsight.” Rather, fiduciaries are judged on the
prudence of the process when making decisions.
 Take steps to gather “relevant information (and
may consult with third party experts).
 Analyze the information (and should consider
using experts).
 Make a reasoned decision.
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Expectations of Fiduciaries
 Cannot rely “blindly” on experts.
 Should evaluate conflicts of interest
(see, e.g., the 408(b)(2) disclosures).
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Co-Fiduciary Liability
Co-fiduciary liability can arise where a fiduciary:
 Knowingly participates in (or helps conceal) a
breach by another fiduciary.
 Knows of a breach by another fiduciary, but does
not take reasonable steps to remedy it.
 Enables another fiduciary to commit a breach, by
breaching the fiduciary’s own responsibilities.
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Potential Consequences of Breaching
Fiduciary Responsibilities
 Personal liability for losses.
 Restoration of lost profits to plan.
 Additional equitable or remedial relief.
 Becoming barred from future fiduciary service.
 Possible 20% penalty under ERISA Section 502(l).
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Committee Process—Before Meetings
 Schedule regular Committee meetings (and special
meetings where necessary).
 Make sure that members are able to (and intend to)
attend the meeting.
 Circulate agenda, discussion materials and reports
from service providers.
continued . . .
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Committee Process—During Meetings
Continued . . .
 Pertinent reports from service providers should be
discussed, and questions asked.
 Documents such as investment policy statements
should be referred to as necessary.
continued . . .
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Committee Process—During Meetings
Continued . . .
 Matters such as retaining/replacing funds should be
deliberated upon, and formal votes taken.
 Minutes should be prepared of the Committee’s
deliberations, and any decisions reached.
 Settlor decisions should be made at separate
meeting and not included in Committee minutes.
continued . . .
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Committee Process—After Meetings
Continued . . .
Minutes of the Committee’s proceedings:
 The minutes should describe the prudent and
deliberative process of the Committee.
 The emphasis should be on the decisions reached
and the key reasons for each decision.
 Advice and reports from experts, such as the plan’s
investment adviser, should be noted.
 Details and individual statements should be omitted.
continued . . .
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Committee Process—After Meetings
Continued . . .
 All matters decided by the Committee should be
implemented as scheduled or as soon as reasonably
possible.
• Action items versus information items.
 Minutes may be used as the basis for “summary”
reports to the Board of Directors.
 Maintain materials referenced at meeting and
Committee minutes to demonstrate fiduciary
compliance.
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Evaluating Provider Relationships
Fiduciaries are responsible for ensuring that any service
arrangement with a provider must be “reasonable” under
ERISA Section 408(b)(2).
The failure of a “covered service provider” to deliver
408(b)(2) disclosures is a prohibited transaction by the
service provider.
The failure of a plan to receive disclosures is a prohibited
transaction by the fiduciaries (e.g., the committee).
(Consider PT exemption process.)
continued . . .
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Evaluating Provider Relationships
Continued . . .
All service providers are subject to the 408(b)(2) statute,
but only “covered” service providers are subject to the
regulation.
What does it mean for the service arrangement and
compensation to be “reasonable?”
continued . . .
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Evaluating Provider Relationships
Continued . . .
 Services are helpful and appropriate for the plan’s
purposes.
 The arrangement can be terminated on reasonably
short notice with no penalty to the plan.
 Compensation must be “reasonable” in light of the
(i) quantity, (ii) type, and (iii) quality, of services
provided.
continued . . .
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Evaluating Provider Relationships
Continued . . .
How can the Committee confirm that
compensation is commercially reasonable?
provider
 A benchmarking service. Make sure to compare
your plan with others of similar size, type, etc.
 RFPs can also be considered, although they are
more expensive and burdensome
 Understand and evaluate all sources of provider
compensation (i.e., indirect compensation).
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404(c) Protection
ERISA section 404(c) provides “safe harbor” protection
against liability for participants’ investment decisions if certain
requirements are satisfied. Confirm that:
 Required participant disclosures are
furnished to participants and beneficiaries.
being
 Participants and beneficiaries are provided with a
“broad range” of diversified investment options.
 Participants and beneficiaries are informed that the
plan is intended to satisfy 404(c) and fiduciaries
may be relieved of liability for participant decisions.
continued . . .
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404(c) Protection
Continued . . .
 Company stock confidentiality procedures are
implemented.
 “Default” funds should satisfy QDIA requirements
 Limitations on 404(c) protection: Per the majority
of courts (and the DOL), 404(c) is not a defense to
imprudent fund selection.
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Plan Expenses – Who Pays?
 Employer must pay “settlor” expenses.
 Plan can
expenses.
pay
reasonable
“administrative”
 No compensation from plan to fiduciary already
receiving full time pay from employer.
 No payments to plan sponsor (with limited
exception).
 DOL expects fiduciary oversight and approval.
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Annual
Update
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Annual Updates
Focus on:
 DOL Regulatory Agenda.
 DOL investigation and IRS audit “hot buttons.”
 Recent court decisions.
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DOL Regulatory Agenda
Pension Benefit Statements
“As part of this initiative, the Department will explore
whether, and how, an individual benefit statement
should and could present a participant's accrued
benefits in a defined contribution plan (i.e., the
individual's account balance) as a lifetime income
stream of payments, in addition to presenting the
benefits as an account balance.”
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Recent Developments
Most recent 401(k) litigation relates to allegedly
excessive fees:
 Monitor reasonableness of total compensation paid to
recordkeepers and other providers, whether direct or
indirect.
 Negotiate rebates, credits, etc. where advisable.
 Determine appropriate mutual fund share class.
• No requirement to use cheapest available share
class, but determine if more expensive class has
advantages that justify higher expense ratios).
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Recent Developments
Make sure the Committee process (e.g., for “watchlisting” and replacing funds) is consistent with the
Investment Policy Statement (“IPS”):
 The issue of whether an IPS is a governing plan
document that must be adhered to is not wellresolved by the courts.
 An IPS can be very helpful, but to avoid problems it
needs to balance meaningful guidelines with
flexibility.
 Amend IPS as necessary.
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Recent Developments
Brokerage/Mutual Fund Windows:
 No duty to monitor investing options.
 It appears that the services and fees of the window
provider, however, must be.
 Query whether participants using the window are
paying their “fair share” of plan.
 DOL RFI—request for information.
continued . . .
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Recent Developments
Continued . . .
 Regulatory scrutiny of “capturing” rollovers by plan
vendors.
 Re-enrollment.
 Allocation of revenue sharing.
 Allocation of costs.
 Company stock.
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Questions?
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FRED REISH, ESQ.
1800 Century Park East, Suite 1500
Los Angeles, CA 90067
(310) 203-4047
(310) 229-1285 [fax]
[email protected]
www.linkedin.com/in/fredreish
www.drinkerbiddle.com
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