Fiduciary 3(16) Services: How to Survive in the New Fiduciary World

Transcription

1 Fiduciary 3(16) Services: How to Survive in the New Fiduciary World Jean Ackerman, Department of Labor Heather B. Abrigo, Esq., Drinker Biddle & Reath LLP Russell Hooker, Nova 401(k) Associates

2 Heather B. Abrigo, Esq. Drinker Biddle & Reath LLP Heather B. Abrigo has extensive experience in all aspects of employee benefits and especially with working alongside plan committees to fulfill their fiduciary duties. Her clients come to her for assistance with qualified retirement plans as well as health and welfare issues. Heather works with public sector employers and navigating their retirement plan issues as well as their retiree health plans. She also assists her clients in connection with Department of Labor investigations and Internal Revenue Service audits. Her services include but are not limited to assisting plan sponsors meet their fiduciary responsibilities, reporting and disclosure matters, and drafting qualified, non-qualified and welfare benefit plan documents.

3 Heather B. Abrigo, Esq. Drinker Biddle & Reath LLP Heather has assists various service providers in the financial services sector with their service agreements and complying with disclosure requirements under ERISA and the SEC. Heather coauthored the 14th Edition of "Tools & Techniques of Employee Benefits and Retirement Planning" published by the National Underwriter Company. She is also a regular contributor to the 401(k) Advisor publication. Heather has been a regular contributor to the California HR newsletter and a frequent speaker at California HR audiocasts and webinars. She is also a contributor to the firm's LaborSphere blog, which provides coverage and insights on breaking cases, recently enacted legislation and a broad range of employee benefits and labor issues.

4 Russell Hooker, Nova 401(k) Associates Russell Hooker is the President of Administrative Fiduciary Services, Inc. as well as the Executive Vice President of Nova 401(k) Associates where he oversees sales and marketing for the firms working with TPAs, financial advisors and their clients. Russ originally started in the 401(k) business working for The 401(k) Company in Austin, TX as a participant services rep and operations manager. Russ is also a US Army veteran where he served as a Spanish Linguist. This diverse background has served Russ well in the qualified plan field where the ability to solve problems and communicate clearly are key.

5 Disclaimer The views expressed here are personal and may not be the official views of the Department of Labor.

6 Learning Objectives This session will address What is a 3(16) fiduciary versus 402 named fiduciary? What types of 3(16) fiduciary services are being offered in the marketplace? Why Plan Sponsors may want a 3(16) fiduciary; and What should TPAs be doing/considering before offering to become a 3(16) fiduciary.

7 Introduction Plan Sponsor trends of looking to outsource fiduciary responsibilities Trend of TPA Firms providing 3(16) Administrator Services

8 OUTSOURCING Check the Plan Document Who is authorized to hire others? Is scope of hiring authority limited?

9 Basic Fiduciary Responsibilities ERISA Section 404(a) requires fiduciaries to discharge their duties as follows: Act solely in interests of participants and beneficiaries (duty of loyalty, no conflicts) Act for exclusive purpose of providing benefits and defraying reasonable expenses Act in accordance with plan documents (if consistent with ERISA) Perform all duties with care, skill, prudence and diligence of a prudent person acting in same capacity and with same knowledge Focus is on conduct of fiduciary and procedural prudence Diversify investments to avoid risk of large losses

10 Fiduciary Duties, cont. Prudent Man Rule ERISA 404(a) imposes a high standard on fiduciaries the prudent expert rule: with the care, skill, prudence, and diligence that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims

11 The Law Administrative Fiduciary Services ERISA 3(16)(A) The term administrator means (i) the person specifically so designated by the terms of the instrument under which the plan is operated; (ii) If an administrator is not so designated, the plan sponsor;...

12 The Law Administrative Fiduciary Services Compare with ERISA 3(21)(A)... a person is a fiduciary with respect to a plan to the extent (iii)he has any discretionary authority or discretionary responsibility in the administration of such plan. Compare with ERISA 402(a) named fiduciary: Each plan must have at least one named fiduciary who is designated as the plan administrator Usually named in the Plan document or procedures Employer or an administrative committee ERISA 402(a) Named Fiduciary has discretionary authority for plan sponsor s responsibilities An 3(16) Fiduciary is responsible for all decisions related to the Plan unless otherwise delegated to another fiduciary

13 The Law, cont. Delegation of Responsibility ERISA 405(c)(1): (1) The instrument under which a plan is maintained may expressly provide for procedures... (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities..... (2)... [if] pursuant to such procedure any fiduciary responsibility of a named fiduciary is allocated to any person... then such named fiduciary shall not be liable for an act or omission of such person...

14 The Law, cont. DOL Guidance on who is not a fiduciary Interpretive Bulletin 75-8 D-1 Q: Is an attorney, accountant, actuary or consultant who renders legal, accounting, actuarial or consulting services to an employee benefit plan (other than an investment adviser to the plan) a fiduciary to the plan solely by virtue of the rendering of such services,..? A. No....

15 Types of 3(16) Fiduciary Services Examples of 3(16) Duties ERISA sections that specifically assign duties to the fiduciary plan administrator: 101(i)(1): furnishing blackout notices. 103(a)(3)(A): engage qualified public accountant. 104(a)(1): file Form 5500 (Query regarding preparation PTs and defaulted loans). 104(b): furnish SPDs and SMMs. 105(a)(1)(A): furnish pension benefit statements.

16 Types of 3(16) Fiduciary Services Examples of 3(16) Duties, cont. Determining eligibility Approving participant loans Approving hardship withdrawals Approving distributions severance death retirement disability Approving QDROs Interpret plan provisions Furnish 404a-5 participant disclosures

17 Incentives for Plan Sponsors in hiring 3(16) Fiduciary Reduced responsibilities in administering the Plan Note: Plan Sponsor is always the fiduciary with respect to the selection and monitoring of the 3(16) fiduciary

18 How to pick a 3(16) fiduciary Considerations for evaluating and selecting a 3(16) fiduciary: Evaluate Request for proposals Benchmarking Evidence Consider nature, quality and quantity of services Reasonableness of fee

19 TPA considerations Liability for Breach Personal Liability under ERISA 409 Co-Fiduciary liability 405(a): Circumstances Giving Rise to Liability.... a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances: (3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach. Example: Failure to deposit deferrals

20 TPA considerations, cont. Liability for Breach, Cont. Personal Liability for fiduciary breaches and losses stemming from breaches Obligation to restore profits Other equitable and remedial relief (e.g., removal from fiduciary position) Additional Penalties Monetary penalties of 20% of recovery amount Criminal penalties for willful violations of reporting requirements or fraud

21 TPA considerations, cont. TPAs are now subject to Fiduciary Prohibited Transactions Rules ERISA 406(b): 406(b)(1) prohibits a fiduciary from dealing with the assets of the plan in his own interest or for his own account. 406(b)(3) prohibits a fiduciary from receiving any consideration for his account from any party dealing with the plan in connection with a transaction involving assets of the plan.

22 TPA Considerations, cont. Service Agreement Minimize risk of 406(b) transaction by: Limiting fiduciary services to the types of 3(16) services; and Expressly stating that they do not provide investment advice! Segregate Fiduciary and Non-Fiduciary duties Compensation for Fiduciary Services Bonding Insurance Errors and Omissions Insurance Fiduciary Insurance

23 Tips for Functional Test Fiduciary Function Exercises discretion Establishes policies & procedures Interprets plan provisions Makes decisions on plan administration Ministerial Function Little to no discretion Follows policies & procedures Applies plan provisions Makes recommendations about plan administration

24 QUESTIONS?