404(c) and OTHER ISSUES

Transcription

1 401(k) INVESTMENT ISSUES 404(c) and OTHER ISSUES SUSAN P. SEROTA All rights reserved Pillsbury Winthrop Shaw Pittman LLP New York, New York August, 2008

2 Fiduciary Responsibilities Who is a Fiduciary? A person who exercises discretion or control over management of the plan or plan assets A person who gives investment advice to the plan for a fee A person who has any discretionary authority or responsibility over plan administration 2

3 Automatic Fiduciaries Plan Administrator Investment Manager Named Fiduciary Trustee 3

4 Fiduciary Duties Loyalty Prudence (Procedural and Substantive) Diversification Plan Document Compliance 4

5 Fiduciaries are persons with Discretion or Control over Plan Assets All contributions received by the plan (including participant contributions) Accrued earnings or profits on contributions Plan investments Generally, plan assets will include the plan s investment, but not the underlying assets of the entity the plan invested in. But, if the plan invests in an equity interest of an entity the look-through test determines if plan assets include the assets of the underlying entity. 5

6 Liability for Breach of Fiduciary Duty Personal liability to reimburse plan losses Restore to the plan any profits from use of plan assets Equitable or remedial relief Co-fiduciary liability 6

7 Who Is Responsible for Investment Decisions Made by Plan Participants? ERISA 404(c): Plan fiduciaries are generally not liable for specific investment decisions, made at the direction of the participant 404(c) safe harbor applies if participant has Opportunity to exercise control over assets in his account Opportunity to choose manner in which his assets are invested 7

8 404(c) Failure to comply with 404(c) does not cause a violation of ERISA. Failure to comply may mean that plan fiduciaries continue to be responsible for participant-directed investments. Fiduciaries must act prudently in selecting and retaining designated investment alternatives regardless of whether 404(c) is complied with. 8

9 404(c) Requirements Participants must be able to exercise meaningful and independent control over the assets in their accounts, i.e., they must have the opportunity to: Choose from a broad range of investment alternatives that permit diversification within and among such alternatives; Give investment instructions with a frequency that is appropriate in light of market volatility of the investment alternative; and Obtain sufficient information to make informed investment decisions. 9

10 404(c) Requirements Broad Range of Investment Alternatives Participant must have the opportunity to: Materially affect the potential return on assets over which the participant is permitted to exercise control and the degree of risk to which such assets are subject; Choose from at least three investment alternatives, each of which is diversified and has materially different risk and return characteristics that in the aggregate enable the participant or beneficiary to achieve a portfolio with risk and return characteristics within the range normally appropriate for the participant or beneficiary; and Diversify investments so as to minimize the risk of large losses. 10

11 404(c) Requirements Frequency of Investment Instructions General Volatility Rule -- only reasonable restrictions on the frequency with which participants may give instructions may be imposed that are reasonable in light of market volatility that reasonably may be expected for the investments Three-Month Rule Each core alternative must permit participants to transfer to another core alternative no less frequently than once within any three-month period. Volatile Investment Rule participants must generally have the opportunity to move from a more volatile investment alternative to a less volatile investment which is either a designated core alternative or an interim fund. 11

12 404(c) Requirements Disclosure Participant must have the opportunity to obtain sufficient information to make informed investment decisions. Regulations contain detailed information that must be made available to all participants and other information that must be made available upon request. 12

13 FEE AND EXPENSE DISCLOSURE DOL Proposed Regulations July 2008 Applies to all Individual Account Plans where participants may direct investments 404(c) Current rules do not apply to participant directed plans which are not intended to be covered by New rules will apply regardless of 404(c) status 13

14 FEE AND EXPENSE DISCLOSURE Prop. Reg a-5 Fiduciaries must provide sufficient information regarding the Plan, including Plan Fees and Expenses Investment Alternatives Fees and Expenses Effective for Plan Years beginning on and after January 1,

15 FEE AND EXPENSE DISCLOSURE Disclosure required for Plan Investment Information Prop. Regs provide Model Chart for fiduciary disclosure of comparative fees and expenses Disclosure required to be made on or before date of plan eligibility and at least annually thereafter Material changes to information must be provided within 30 days after date of such changes 15

16 404(c) and Prop. 404a-5 DOL Prop. Regs integrate disclosure requirements under 404(c) Regs with new Prop. Regs under 404a-5.. New uniform disclosure framework for all participant directed individual account plans DOL confirms its position that 404(c) relief does not extend to a fiduciary s duty to prudently select and monitor plan s investment managers and investment alternatives 16

17 GENERAL PLAN INFORMATION How P s and B s may give investment instructions and any limitations, e.g. restrictions on transfers, exercise of voting, tendering rights Specific designated investment alternatives Designated Investment Managers to whom P s and B s may give investment directions 17

18 ADMINISTRATIVE EXPENSE INFORMATION Explanation of any fees and expenses for plan administrative services that may be charged to accounts, e.g. legal, accounting, recordkeeping Basis for allocation, e.g. pro rata, per capita Quarterly statements of dollar amounts actually charged during the preceding quarter with a general description of the services to which they relate 18

19 INDIVIDUAL EXPENSE INFORMATION Expenses charged to individual accounts other than plan wide expenses Examples: QDRO order, Participant loan, investment advice services 19

20 INVESTMENT-RELATED INFORMATION DESIGNATED INVESTMENT ALTERNATIVES Name and category (e.g. money market mutual fund, balanced fund, index fund and whether actively or passively managed) Internet website address for supplemental information Prospectus, information on principal strategies, risks, performance and costs 20

21 INVESTMENT-RELATED INFORMATION Specified performance data for investment alternatives without fixed return Average annual total return (percentage) for 1, 5 and10-years as of end of applicable calendar year Benchmarks -- name and return for same periods Statement that past return is no indication of future performance Fixed rate of return and term of investment for investment alternatives with a fixed return 21

22 INVESTMENT-RELATED INFORMATION Fee and Expense Information Shareholder fees Sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, purchase fees, and mortality and expenses fees Total annual operating expenses of the investment expressed as a percentage, e.g. expense ratio Statement that fees and expenses are only one of several factors that participants should consider when making an investment decision 22

23 INVESTMENT-RELATED INFORMATION Information to be provided in a comparative format Name, address and phone number of fiduciary to contact for further information Statement that more current information may be available on Internet website Post-investment information Voting, tendering and similar rights to extent passed through 23

24 INVESTMENT-RELATED INFORMATION Upon request (or before eligibility and annually): Copies of prospectuses Copies of financial statements or reports to shareholders Statement of value of a share of unit and date of valuation List of assets comprising portfolio which constitute plan assets and value of asset (or proportion of investment that asset comprises 24

25 404(c) Employer Securities 404(c) may apply to participant-directed investment in employer securities if stock is: qualifying employer security stock under ERISA Sec. 407(d),which is either a stock or equity interest in a publicly traded partnership; Publicly traded on a national exchange or other generally recognized market; and Traded with sufficient frequency and in sufficient volume to assure that directions to buy and sell can be implemented promptly and efficiently 25

26 404(c) and Employer Securities Confidentiality Procedures keep participant investment decisions re employer securities confidential designation of plan fiduciary responsible for ensuring confidentiality and monitoring compliance Appointment of an independent fiduciary to carry out any activities that present a potential for undue employer influence on participants or beneficiaries with respect to the exercise of their rights as shareholders. Information Disclosure Prop. Reg a-5(d)(3) & (4) 26

27 404(c) -- PPA 404(c)(1) amended to except from the safe harbor inability of participant to direct investment during a blackout period unless the fiduciary meets requirements as to authorizing and implementing the blackout period. Notice Requirements 30 days in advance in writing 27

28 404(c) -- PPA 404(c)(4) Qualified Change in Investment Options A change in the investment options offered to the participant or beneficiary under terms of plan where: account is reallocated among one or more remaining or new investment alternatives which are offered in lieu of one or more investment alternatives offered immediately prior to change, and stated characteristics of the remaining or new investment alternatives (including risk and rate of return) are immediately after the change, reasonably similar to those of the existing investment alternatives immediately before the change. Not treated as failure to exercise control over assets in account if requirements met 28

29 404(c) --PPA Qualified Change in Investment Options Written notice of change to the participants and beneficiaries at least 30 and no more than 60 days prior to change comparison of existing and new investment alternatives failure to provide affirmative investment instructions will result in mapping Prior to change, participant or beneficiary has not provided affirmative investment instructions, and Prior to change investments were product of participant s or beneficiary s exercise of control over assets in account 29

30 404(c) -- PPA 404(a)(5) -- Default Investment Arrangements In absence of affirmative instruction, treated as exercise of control over assets in account if invested in accordance with DOL regulations Regulations mix of asset classes consistent with capital preservation or long-term appreciation, or a blend of both Notice required before beginning of plan year with explanation of how contributions and earnings will be invested in the absence of affirmative instructions and reasonable period after receipt of notice and before beginning of year to provide instructions 30

31 Procedural Prudence Establish a prudent process for selecting, monitoring, and eliminating investment alternatives 31