New Fiduciary Liabilities for Retirement Plans
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Transcript New Fiduciary Liabilities for Retirement Plans
New Fiduciary Liabilities
for Retirement Plans
March 20, 2013
Heidi A. Lyon & Justin W. Stemple
©2013 Warner Norcross & Judd LLP. All rights reserved.
WNJ.com
OVERVIEW
Legal Background on Being A Fiduciary
Potential Fiduciary Liability
Managing Fiduciary Risk
Concluding Remarks
©2013 Warner Norcross & Judd LLP. All rights reserved.
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EMPLOYER IS AN ERISA FIDUCIARY
Employer/Plan Sponsor meets two ERISA fiduciary
definitions:
Exercises authority or control - disposition of the
plan’s assets
Discretionary authority or responsibility administration of the plan
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ERISA – FIDUCIARY STANDARDS
Solely in Interest/Exclusive Purpose
Prudent Expert – Care, Skill, Prudence and Diligence.
Person familiar with such matters
Per the Documents - Plan, Trust, Agreements
Investments – Diversification, Liquidity, Funding, Risk
Avoidance
Avoid Prohibited Transactions
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FIDUCIARIES FOR ERISA
WELFARE/FRINGE BENEFIT PLANS
ERISA Welfare/Fringe Benefit Plans – medical, health,
disability, life, pre-paid legal, unemployment
Identical Fiduciary Standards & Duties
These plans require the same level of due diligence as
retirement plans particularly if employee contributions are
required IT Corp v General Am Life 1997
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
DOL/EBSA Publication (May, 2004)
Understanding and evaluating plan fees and expenses
associated with investments, investment options, and services is
an important part of a fiduciary’s responsibility.
Establish objective process to evaluate fees, detail specific
services requested, consider level of service provider’s
responsibility, and give identical disclosures to prospective
providers for a meaningful comparison.
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
DOL Field Assistance Bulletin (February 2, 2007).
Employer retains following fiduciary duties as a
prudent expert to select and continue to monitor (as
evidenced by procedural due diligence)
Investment Menu (including, if desired, a qualified default
option)
Investment Advisers
Qualified Fiduciary Adviser
Reasonableness of Fees Charged
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
Preamble to 2010 Service Provider Fee Disclosure
Rules
Selection Process – key to fulfilling fiduciary duty and
managing risk
DOL assumes RFPs are conducted every 3 years
DOL auditors accessing communications with counsel for
plan sponsor and plan auditor papers
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
DOL/EBSA Compliance Guide (February 2012)
Use formal review process at reasonable intervals to
decide whether to continue or use providers
When monitoring service providers, actions to ensure
they are performing the agreed-upon services include:
Evaluating any notices about possible changes
Reviewing performance
Reading any reports provided
Checking actual fees charged
Asking about policies and practices (such as trading, investment
turnover, and proxy voting)
Following up on participant complaints
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NEW LIABILITY #2 -RECENT
LITIGATION EMPHASIZING PROCESS
George v. Kraft Foods
Highlights importance of RFP process
Lawsuit against plan sponsor
Reliance on consultants with no recent RFP may be
breach of fiduciary duty
Plaintiffs allege RFP should be conducted every three
years
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NEW LIABILITY #3 – LITIGATION
EMPHASIZING FEES
Cases highlight importance of attention to fees charged
by providers
Interested Parties
Participants
Plan sponsor/Employer
Service Providers
DOL
Each group impacted differently
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NEW LIABILITY #3 - FEE LITIGATION
Cases favoring plan sponsors:
Hecker v Deere – No requirement to disclose revenue
sharing, 404(c) disclosure and compliance offers defense
Loomis v. Exelon – Offering retail shares not a breach of
fiduciary duty
Taylor v United Technologies – Proper monitoring, objective
selection of mutual funds, recordkeeping fees reasonable
against market
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NEW LIABILITY #3 - FEE LITIGATION
Cases Adverse to Plan Sponsors:
Tibble v. Edison
›
›
Offering retail funds without good reason, breach of fiduciary duty of
prudence
Waiver of institutional share requirement available, but never
requested
Braden v Wal-Mart
›
›
Retail funds, possible evidence of flawed process
Settlement for $13.5 million, with plan’s service provider paying $10
million
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NEW LIABILITY # 3 - FEE LITIGATION
Mixed litigation trends create risk
Sixth Circuit – few cases so far
Best way to manage risk is prudent process and
regularly evaluating each service provided to plan
(including reasonableness of fees for service)
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NEW LIABILITY # 4 – SERVICE
PROVIDER FEE DISCLOSURES
408(b)(2) service provider disclosures
Required to obtain and evaluate annually
Must act if unreasonable
Must have reasonable agreement with provider
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NEW LIABILITY # 5 – PARTICIPANT
FEE DISCLOSURES
404(a)(5) participant disclosures
Must distribute to participants in compliance with extensive
rules
Audits will confirm compliance and they could prompt or be
used in litigation against fiduciaries
DOL indicates they will apply in the future to health and
welfare plans
Concerns with plan brokerage windows
Highlights concern over payment of reasonable and
necessary expenses with plan assets
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MANAGING FIDUCIARY RISK
No retirement plan is perfect!
“It’s what you don’t know you don’t know that can hurt
you.” source unknown
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WHERE IS THIS HEADED?
What the fiduciary world looks like now
The RFP Process
The Ideal Provider Model
Rewards
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INVESTMENT ADVISOR MODELS
What the retirement plan fiduciary world looks like right
now
Investment consultants come in three basic varieties when it
comes to acknowledging their fiduciary responsibilities
›
Those who don’t acknowledge any fiduciary responsibility at all;
›
Those who acknowledge fiduciary responsibility under ERISA 3(21)(A)
- offers advice for a fee; and
›
Those who acknowledge fiduciary responsibility under ERISA 3(38) complete discretion over selection of assets.
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NON-FIDUCIARY ADVISORS
No written acknowledgment of fiduciary status
Brokers/Insurance Agents not regulated due to lack of
enforcement resources (suitability standard)
No established standards of care (“best interests” vagary)
Focus on individual not retirement plan advice
Mandatory FINRA Arbitration (no expertise, panels
stacked against investors)
No plan remedies (only cease and desist and fines to
SEC)
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ERISA 3(21) FIDUCIARY
Acknowledge fiduciary status and give advice that can
be relied on
Plan sponsor remains responsible for selecting
investments
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BE CAREFUL . . .
ERISA 3(21)(A) fiduciaries
Contracts sometimes include language that virtually “guts”
significant ERISA 3(21)(A) fiduciary duties
› hold harmless
› gross negligence or willful misconduct standard of conduct
› one-sided indemnification
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BE CAREFUL . . .
Plan fiduciaries in either of those situations have the
worst of both worlds
The illusion of fiduciary advice
But no legal protection
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ERISA 3(38) FIDUCIARY
Acknowledge in the contract status as an ERISA 3(38)
“investment manager” and ERISA 405(d)(1) defined
“independent fiduciary”
ERISA 3(38) fiduciaries accept ERISA “discretion”
over the investment and monitoring of plan assets and
assume full responsibility (and therefore liability) for
those fiduciary functions
Plan sponsor responsible to monitor an ERISA 3(38)
fiduciary
Still must ensure the contract terms are acceptable
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BE CAREFUL . . .
Discretion can include constructing target retirement
date funds and risk-tolerance based managed accounts
and monitoring and replacing the component funds
When plan fiduciaries make this transfer of
responsibility prudently, they escape liability for any
selection and monitoring mistakes made by the
consultant
Such a consultant provides investment advice with
accountability
Must understand what the advisor is doing and why to
satisfy duty to monitor
Must understand the scope of delegation (may not be
3(38)) for all purposes
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THE RFP PROCESS
The Goal
Not the lowest absolute expenses
Spend your participants’ money wisely
That means you have to understand what you’re buying
And you have to understand your options
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OVERVIEW OF RFP PROCESS - STEPS
Formulate list of candidates
Draft proposal requirements and circulate to
candidates
Compare and evaluate responses
Identify and interview finalists
Compare and evaluate finalists
Written agreement with selected providers
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OVERVIEW OF RFP PROCESS CONSIDERATIONS
Provider models (Broker, Investment Manager,
Financial Services Firm/Bank, Insurer, Mutual Funds)
Selection criteria for advisor, recordkeeper, investment
menu/provider, and participant education services
Fiduciary acknowledgment and compliance
Defective agreement can negate an otherwise effective
process
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IDEAL PROVIDER MODEL
Advice – Independent Adviser able to select best
available funds
Fiduciary Status – Acknowledges 3(38) or 3(21)(A)(ii)
ERISA responsibility in the contract
Compensation – Transparent, each element separately
identified
Recordkeeping – Third Party, Appropriate Standard of
Care
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IDEAL PROVIDER MODEL
Investments – Institutional, Low Cost funds, Model
Portfolios from menu, 404(c) compliance (if applicable),
Investment Policy Statement
Education – General or individualized, conforms to
DOL IB 96-1, Individual per 408(g) principles
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WRITTEN AGREEMENT
Fiduciary acknowledgement (where appropriate)
Clear specification of duties and compensation
Acceptance of liability for breaches
ERISA standard of care
No indemnification or mutual indemnification
Dispute Resolution (State Law & Venue)
Matches RFP responses
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AVOID DEFECTIVE AGREEMENTS
Not a fiduciary
Cannot/does not rely on advice
Advice not tailored to plan
Indemnify errors unless negligence, gross negligence,
willful misconduct
FINRA arbitration
Choice of Remote Law and Venue
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REWARD – DIMINISHED RISK
Prudence – clear established processes
Expertise – documented in selection and review
Documents – established (IPS, 404(c), agreements
allocating liability)
Investments – objective process satisfies criteria
Compliance Review
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REWARD – BETTER RESULTS
Lower fees = higher returns
Individualized fiduciary advice to participants = better
asset allocation = higher returns
Individualized fiduciary advice to participants = more
savings = higher returns
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Page 34
CONCLUDING REMARKS
Plan sponsors/employers have important fiduciary
duties
Recent legal developments emphasize importance of
acting in accordance with ERISA fiduciary standards
Protect yourself through steps discussed today,
including RFP process
Best practices minimize risk and maximize plan
benefits
Don’t “set it and forget it”
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OUTSIDE, OBJECTIVE, EXPERT
ASSISTANCE
Thank you!
Heidi A. Lyon
Warner Norcross & Judd LLP
[email protected]
616.752.2496
Justin W. Stemple
Warner Norcross & Judd LLP
[email protected]
616.752.2375
8983598-1
These materials are for educational use only. This is not legal advice and does not create an attorney-client relationship.
©2013 Warner Norcross & Judd LLP. All rights reserved.
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