Transcript Document

IRS, DOL Audits, and
Fiduciary Litigation
FRED REISH, ESQ.
November 6, 2014
DOL Investigations
of Plans
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DOL Investigations
The Department of Labor continues to prioritize late
deposits of deferrals, significant losses, and related
party transactions.
However, it is also focusing on other issues . . .
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DOL Investigations: Investment Expenses
In a DOL investigation, an investigator asked:
“Why did the Plan decide to use A shares for
some of its investment funds rather than
shares offered to employer-sponsored plans,
such as R shares?
For the [XYZ mutual fund], why did the Plan
decide to offer Y shares? Could the Plan use
‘I’ shares?”
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DOL Investigations: 408(b)(2)
The DOL has started investigating plans concerning
408(b)(2) disclosures. A recent DOL letter requested:
 Copies of . . . fee disclosures from service
providers.
 All written agreements . . . relating to services
rendered to the Plan by all service providers.
 Minutes of any Board of Directors’ meetings in
which the Plan was discussed as well as the
minutes of any Plan Trust or Plan Committee
meetings.
continued . . .
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DOL Investigations
Continued . . .
 Sch. C - Indirect Compensation from Investment
Vehicles
Documents sufficient to show all compensation (money
and any other thing of value) paid by any fund, account,
or entity in which the Plan invests or charged against
the fund or account and reflected in the value of the
Plan's investment, to any person or entity in connection
with services rendered to the Plan.
continued . . .
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DOL Investigations
Continued . . .
Examples . . . include, but are not limited to: . . .
brokerage commissions and fees charged in connection
with purchases and sales of interest in the fund, subtransfer agency fees, shareholder servicing fees,
account maintenance fees, 12b-l distribution fees, . . .
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DOL Investigations
 Sch. A, Line 2 - Insurance Commissions and Fees
Documents sufficient to show all compensation (money
and any other thing of value) paid by the Plan or on
behalf of the Plan to any person or entity in connection
with services rendered to the Plan, including but not
limited to commissions and consulting fees, and sales
and base commissions . . .
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DOL Investigations
of Service Providers
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Why is the DOL Investigating Service
Providers
The Department of Labor is concerned with:
 prohibited transactions by service providers;
 the significant influence that service providers have
over retirement plan operations; and
 conflicted advice that may adversely impact
participants.
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What is the DOL looking for?
 Whether a service provider is acting as a fiduciary
(acknowledged or functional).
 Whether a service provider can affect its fees.
 Whether fees have been properly disclosed.
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Prohibited Transaction Examples
 If acting as a fiduciary and receive variable
compensation based on fiduciary advice.
 If acting as a fiduciary and recommends an
investment fund managed by an affiliate.
 If, as fiduciary, recommends investments or
investment managers to participants that
provide additional compensation (e.g., asset
allocation models or managed accounts).
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Document Request
 As part of the investigations, the DOL typically
requests a large quantity of documents.
....
8.
Documents constituting or describing an agreement, arrangement or
understanding between the company (or an affiliate) and an employee
benefit plan client (or such client’s sponsor) that either of the following
activities by the company (or an affiliate) would serve as the primary
basis for investment decisions regarding investment of the assets of the
plan:
a.
rendering advice to the plan as to the value of securities or other
property, and/or
b.
making recommendations to the plan as to the advisability of
investing in, purchasing or selling securities or other property.
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Document Request
 DOL requests (cont.):
11. Documents indicating the names, titles and last known business and home
addresses and telephone numbers of the individuals who:
a.
rendered advice to employee benefit plan clients as to the value of
securities or other property,
b.
made recommendations to employee benefit plan clients as to the
advisability of investing in, purchasing or selling securities or other
property and/or,
. . . including identification of the name and EIN and plan number of each such
plan.
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Document Request
 DOL requests (cont.):
12. Documents that describe, list, or schedule any fees charged by the company or
an affiliate to manage the assets of, or provide investment advice or other
services to, employee benefit plan clients.
...
20. Contracts, service agreements and any other documents relating to any
relationships between the company and any mutual fund or mutual fund family
whose products or services the company has identified for, recommended to,
offered to, or utilized in connection with services provided to any ERISA plan
client.
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Document Request
 DOL requests (cont.):
27. Documents sufficient to identify all compensation received, directly or
indirectly, by the company from mutual funds or mutual fund families whose
products or services the company has identified for, recommended to,
offered to, or utilized in connection with services provided to, any ERISA
plan client.
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Actual DOL Investigations
“[Wirehouse] has settled allegations made by the U.S.
Department of Labor that the company and one of its
employees violated [ERISA] by failing to prevent the
fiduciaries of pension plans of two Alabama-based
companies from engaging in prohibited transactions.
The out-of-court settlement requires [Wirehouse] to restore a
total of $170,854 to the plans and provide additional training
to its investment advisers serving as fiduciaries of employee
benefit plans.”
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Actual DOL Investigations
“[BD/RIA] has agreed to pay $633,715.46 to 10 pension
plans . . . . This agreement follows an investigation by the
[DOL] that found the full-service brokerage company violated
federal law when it recommended certain hedge funds of
funds as investments . . . . These recommendations resulted
in the hedge funds of funds paying [BD/RIA] revenue-sharing
and other fees.”
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Actual DOL Investigations
“[RIA] has agreed to pay $1,265,608.70 to 13 pension plans
to resolve alleged violations of ERISA.
An investigation . . . found that the . . . fiduciary investment
adviser made investments in mutual funds on behalf of
ERISA-covered defined benefit plan clients and received
12b-1 fees from those funds . . . . [RIA] failed to fully disclose
the receipt of the 12b-1 fees, and to use those fees for the
benefit of the plans either by directly crediting the amounts to
the plans or by offsetting other fees the plans would be
obligated to pay the company.”
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IRS Audits of
Plans
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Common IRS Audit Issues
 Definition of
compensation
 Plan document
updates$
 Timely deposit of deferrals
 ADP/ACP nondiscrimination
testing
 Vesting
 Employee eligibility
and/or classification
 Minimum required
distributions
 Plan loans$
 Top-heavy and section
410(b) testing
 In-service distribution
issues
 QDRO procedures
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Other Issues of Concern
Large Plan Audits (2,500 employees or more):
 Partial Termination
• Substantial change in year, or over years in
participant count
 Merger and Acquisitions
• Protected optional forms
• Inaccurate participation data
continued . . .
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Other Issues of Concern
Continued . . .
 Distributions and loans
• Spousal consents
 Assets
• Large administrative expenses
• Large category of “other assets”
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Selected Current EPCU Projects
 457(b) Plans of Non-Governmental (Exempt
Organizations)
 Diversification of Investments with Employer
Securities in DC Plans
 Form 5500-EZ Excess Participant Loans Project
 Ineligible Employer – 403(b) Project
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EPCU Letter Regarding Company Stock
This letter is being sent to you because our records
show that the plan referenced above filed a return that
contained information requiring further explanation. This
letter constitutes a compliance check.
Failure to provide this information could result in further
action or examination of your plan.
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EPCU Letter Regarding Company Stock
4. Does the plan document contain the diversification
language required by Internal Revenue Code section
401(a)(35)?
5. Are applicable individuals who have accounts
attributed
to
elective
deferrals,
employee
contributions, or rollover contributions that are
invested in employer securities given the opportunity
to divest the employer securities and reinvest an
equivalent amount in other investment options?
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ERISA Litigation
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Supreme Court of the United States
Fifth Third Bancorp, et al., v. Dudenhoeffer
We hold that no such [Moench] presumption applies.
Instead, ESOP fiduciaries are subject to the same duty
of prudence that applies to ERISA fiduciaries in
general, except that they need not diversify the fund's
assets.
Note: Ruling on plan document language.
134 S. Ct. 2459 (2014).
continued . . .
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Fifth Third Bancorp, et al., v. Dudenhoeffer
Continued . . .
In our view, where a stock is publicly traded, allegations
that a fiduciary should have recognized from publicly
available information alone that the market was over- or
undervaluing the stock are implausible as a general
rule, at least in the absence of special
circumstances. [Emphasis added.]
continued . . .
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Fifth Third Bancorp, et al., v. Dudenhoeffer
Continued . . .
. . . , courts must bear in mind that the duty of
prudence, under ERISA as under the common law of
trusts, does not require a fiduciary to break the law.
Note: Investment policies for company stock.
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ERISA Litigation Risk Management
 Fiduciary Duties Relating to:
• Cost of funds offered
• Fees
• Expense ratios/payment
levels
• In-house funds
• Fiduciary warranty
• Float
• Substituting Funds
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In-House Funds
Krueger v. Ameriprise:
• Ameriprise 401(k) plan offered investment options of funds of its
affiliates.
• The plaintiffs alleged that investments were selected as options
because they generated profits to the sponsor and its affiliates.
• The court denied the defendants’ motion to dismiss and held that the
plaintiffs’ allegations plausibly alleged that affiliated funds were
selected to benefit the defendants at the expense of participants.
• The fact that the defendants included a range of investment options
under the plan did not shield the defendants from liability.
2012 WL 5873825 (D. Minn. Nov. 20, 2012).
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Fiduciary Warranty
Santomenno v. Transamerica Life Ins. Co.:
• The plaintiffs alleged that Transamerica charged excessive fees in
connection with mutual fund investment options.
• Transamerica’s contract included a “warranty” that the plan sponsor
would not be liable for fiduciary breach.
• Transamerica argued that it did not have a fiduciary duty to
participants because fees were negotiated before it became a
fiduciary.
• The court held that Transamerica could not escape fiduciary status –
the fiduciary warranty undermined what might otherwise have been
an arm’s length transaction over fees.
2013 WL 603901 (C.D. Cal. Feb. 19, 2013).
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Quick Hits
 Perez v. Geopharma, No. 8:14-cv-66-T-33TGW, 2014 WL
3721369 (M.D. Fl. July 25, 2014).
Check signing authority results in fiduciary status.
 Tatum v. RJR Nabisco Investment Committee, 761 F.3d
346 (4th Cir. 2014).
Failure to engage in a prudent process results in higher
standard of care (“would” vs. “could”).
 Hi,Lex Controls, Inc. v. Blue Cross Blue Shield of
Michigan, 2014 WL 1910554 (6th Cir. 2014).
Service provider becomes ERISA fiduciary for receipt of
non-disclosed and non-approved compensation.
continued . . .
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Quick Hits
Continued . . .
 Tolbert v. RBC Capital Markets Corporation, 758 F.3d 619
(5th Cir. 2014).
• Issue: Is the non-qualified deferred compensation
plan an ERISA plan?
• Holding: Yes, because the “express terms” of the
plan contemplate employees deferring income “to the
termination of covered employment or beyond.”
• Remanded: Was it a “top hat” plan? (It covered some
administrative assistants.”)
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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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