Fiduciary Compliance Checklist

Transcription

1 Fiduciary Compliance Checklist For ERISA and Non-ERISA Code Section 403(b) Plans Anne Tyler Hall i Hall Benefits Law Updated May

2 The primary purposes of this fiduciary checklist ( Checklist ) are: To assist plan sponsors of Internal Revenue Code of 1986 ( Code ) Section 403(b) plans ( 403(b) Plans ) in determining whether their plan is subject to applicable Employee Retirement Income Security Act of 1974 (ERISA) requirements; and To provide guidance to ERISA and non-erisa 403(b) Plan sponsors with respect to the identification of fiduciaries and their responsibilities. Sections 1 through 8 of this Checklist cover the legal requirements applicable to fiduciaries of ERISA 403(b) Plans. Sections 9 through 11 of this Checklist cover non-erisa 403(b) Plans. This Checklist provides general guidance and does not address each plan sponsor s individual facts and circumstances that may impact fiduciary compliance requirements. For purposes of this Checklist, you refers to the 403(b) Plan sponsor (or employer) and defined terms are italicized. 2

3 Table of Contents 403(b) Fiduciary Checklist for ERISA Plans... 7 Section 1: When is a 403(b) Plan an ERISA Plan?... 7 Overview (b) Plan ERISA Status Checklist (b) Plan Investments... 8 Potential Penalty... 9 Section 2: Who is an ERISA 403(b) Plan Fiduciary? Identifying ERISA Fiduciaries Checklist...10 ERISA 3(21) Fiduciaries...10 ERISA 3(16) Plan Administrator Investment Committee Allocating Fiduciary Responsibility and Co-Fiduciary Liability Recommended Ongoing Compliance Measures Section 3: What Are An ERISA 403(b) Plan Fiduciary's Duties? Prudent Man Standard of Care Exclusive Benefit Duty Prudent Expert Duty Diversification Duty Plan Adherence Duty Disclosure Requirements Section 4: Is a 403(b) Plan Fiduciary Personally Liable for a Breach? Overview Limiting Liability Fiduciary Liability Insurance Indemnification Recommended Ongoing Compliance Measures Section 5: What Potential Penalties Apply to a 403(b) Plan Fiduciary? Overview

4 Summary of Applicable Law Prohibited Transaction Liability Prohibited Transactions with Parties in Interest Fiduciary Self-Dealing Prohibited Transactions Party in Interest Penalties Prohibited Transaction Exemptions DOL Civil Penalty Criminal Liability Recommended Ongoing Compliance Measures For a 403(b) Plan sponsor: For a 403(b) Plan Fiduciary: Section 6: Overview of Pitfalls from Fiduciary Breach Cases Summary of Applicable Law Tatum v. RJR Pension Inv. Committee Tussey v. ABB, Inc Recommended Ongoing Compliance Measures Section 7: Distinction Between Settlor (Non-Fiduciary) and Fiduciary Activities Overview Summary of Applicable Law Settlor Functions Ministerial Functions Investment Decisions Fiduciary Functions Recommended Ongoing Compliance Measures Section 8: Best Practices for Avoiding a Fiduciary Breach Section 9: Non-ERISA 403(b) Plans (b) Checklist for Non-ERISA Plans Summary of Applicable Law

5 DOL Safe Harbor Reasonable Choice FAB FAB Recommended Ongoing Compliance Measures Section 10: Updates to 403(b) Plan Requirements for Non-ERISA 403(b) Plans Summary of Applicable Law (b) Regulation Changes Recommended Ongoing Compliance Measures Section 11: Overview of Pitfalls from non-erisa 403(b) Plan Breach Case Summary of Applicable Law Recommended Ongoing Compliance Measures Section 12: 403(b) Plan Sponsor and the New Fiduciary Standard Summary of Applicable Law New Definition of Fiduciary Rollovers to IRAs from Participants Leaving the 403(b) Plan Exceptions Within the Final Rule Investment Education (b) Plan Sponsor Employees Platform Providers Selection and Monitoring Assistance Sales Pitches to 403(b) Plan Fiduciaries with Financial Expertise Best Interest Contract Exemption Adviser Must Be a Fiduciary Impartial Conduct Standards Warranties by the Financial Institution Required Disclosures Financial Institution Cannot Disclaim Fiduciary Responsibility Exclusions

6 Summary of the BICE Timing of Final Rule

7 403(b) Fiduciary Checklist for ERISA Plans Section 1: When is a 403(b) Plan an ERISA Plan? Overview Included in Title I of ERISA are numerous fiduciary requirements that a 403(b) Plan subject to ERISA must follow. 1 Generally, ERISA is a federal law that is designed to protect employees who are enrolled in an employer pension or retirement plan. The fiduciary requirements under ERISA are enforced by the Department of Labor (DOL). ERISA contains numerous wellestablished fiduciary requirements that a 403(b) Plan subject to ERISA must follow. The fiduciary rules are designed to help ensure that employers (and those appointed by the employer) who administer the 403(b) Plan are acting in the best interest of the employees and participants in the plan. Only plans that are subject to ERISA are subject to the ERISA fiduciary rules. Generally, a 403(b) Plan is subject to ERISA if the plan sponsor is not a church or governmental entity, and the sponsor makes employer contributions or otherwise exercises discretion in administering the plan. However, even if a 403(b) Plan is not subject to ERISA, ERISA-like fiduciary rules may apply to the plan. In addition, all 403(b) Plans are subject to requirements under the Code that govern 403(b) Plans (b) Plan ERISA Status Checklist Generally, a 403(b) Plan is subject to ERISA if the plan is "established or maintained" by an employer or employee organization. 3 The main exception to this general rule includes plans that are governmental plans, 4 church plans, 5 and plans established to comply with workers compensation or disability insurance laws. 6 If a 403(b) Plan is established by a church or a governmental entity, it generally is not subject to ERISA. 7 The determination of whether an employer is a church or government, as defined by ERISA, involves a complex analysis. It is 1 See, e.g., ERISA 404(a). 2 Note that certain rules may apply differently to church and governmental 403(b) plans. 3 ERISA 3(2)(A). 4 As defined under ERISA 3(32). 5 As defined under ERISA 3(33). 6 ERISA 4(b). 7 Note that churches can elect ERISA coverage. 7

8 recommended that plan sponsors consult with an ERISA attorney when making such a determination. If a 403(b) Plan sponsor is not a church or government, in order to avoid being subject to ERISA, the plan sponsor (i.e., employer) may not have responsibility for, or make, discretionary determinations in administering the 403(b) Plan. 8 The checklist below incorporates factors outlined by the DOL that determine ERISA status for plans that are not church or governmental. If the answer to any of the following questions is yes, it is an ERISA plan. 9 Yes No Do you authorize plan-to-plan transfers? Do you process distributions? 10 Do you make determinations regarding hardship distributions? Do you make determinations regarding qualified domestic relations orders (QDROs)? Do you determine eligibility for, or enforce plan loans? Does the 403(b) Plan have automatic enrollment provisions, or is enrollment otherwise not completely voluntary? 403(b) Plan Investments 8 29 CFR (f) CFR (f); Field Assistance Bulletins (FABs) and This includes signing off on a third party s distribution paperwork. 8

9 A plan sponsor s involvement with respect to management of 403(b) Plan investments must also be significantly limited to avoid ERISA status. 11 If the answer to any of the following is yes, the plan is subject to ERISA. Yes No Do you negotiate with vendors to change the terms of their products? 12 Do you unilaterally move employee funds from one provider to contracts or accounts of another provider? Do you hire a third party administrator (TPA) to make discretionary determinations on your behalf? Do you limit service providers and investment products available under the 403(b) Plan? 13 As outlined above, even limited employer involvement may implicate ERISA status for a 403(b) Plan. Section 9 of the Checklist provides a comprehensive overview of permissible employer functions for a non-erisa 403(b) Plan. Potential Penalty If a 403(b) Plan is subject to ERISA, one of the most significant non-compliance penalties is the failure to file a Form The penalty is equal to $1,100 a day (no maximum) for a plan administrator that fails to file a complete and accurate Form The IRS may also impose a penalty for failing to timely file a complete annual return equal to $25 for each day a plan 11 For plans that are neither church nor government plans. 12 For example, establishing conditions for hardship withdrawals. 13 Because the new contract exchange rules under the final 403(b) regulations newly restrict participant's ability to move 403(b) investments, FAB noted that nonprofit entities may be required to offer a wider variety of products in order to afford employees a reasonable choice in light of all relevant circumstances for purposes of maintaining non-erisa 403(b) Plan status. 9

10 administrator fails to file a Form 5500 (up to $15,000). 14 In addition, and as described in more detail below in Section 5 of this Checklist, an ERISA 403(b) Plan sponsor may be subject to liability for breach of fiduciary duties. Actions can be brought by the DOL, participants, beneficiaries, or other fiduciaries. Remedies include the potential for substantial monetary damages. In addition, the DOL may assess a civil penalty 15 on a fiduciary for breach of his or her fiduciary duties. Section 2: Who is an ERISA 403(b) Plan Fiduciary? Identifying ERISA Fiduciaries Checklist In order to avoid the potential stringent ERISA penalties associated with breach of fiduciary responsibility (and set forth in Section 1 above), it is important to understand who is included as an ERISA 403(b) Plan fiduciary. Generally, individuals who are employed by the 403(b) Plan sponsor and are involved with day-to-day plan administration are defined as an ERISA Section 3(21) fiduciary. ERISA 3(21) Fiduciaries Individuals involved in 403(b) Plan administration who respond "Yes" to any of the following are included in the ERISA 3(21) definition of a fiduciary with respect to the 403(b) Plan. Yes No Do you exercise any discretionary authority or discretionary control over management of the 403(b) Plan? Do you have any discretionary authority or responsibility with respect to administration of the 403(b) Plan? Do you exercise any authority or control with respect to management or disposition of the 14 Code ERISA 502(l); the civil penalty is equal to 20% of the applicable recovery amount. 10

11 403(b) Plans assets? 16 A 403(b) Plan s fiduciaries will typically include the trustee, investment advisers, and any individual exercising discretion in the administration of the plan. The key to determining whether an individual or entity is a fiduciary is whether he or she is exercising discretion or control over the 403(b) Plan. 17 ERISA 3(16) Plan Administrator An ERISA 3(16) plan administrator is typically given discretionary authority to administer the plan. Consequently, a plan administrator is included as an ERISA 3(21) fiduciary. A plan administrator is defined as: 1. a person specifically named in the 403(b) Plan; or 2. the plan sponsor if a plan administrator is not named. 18 Investment Committee A 403(b) Plan sponsor may designate an investment committee to help select contracts for 403(b) Plan investments. Members of the 403(b) Plan investment committee, including those who select investment committee officials, are plan fiduciaries. Additionally, any third party who renders investment advice for a fee or other direct or indirect compensation is an ERISA 3(21) fiduciary. 19 In the absence of an investment committee, any individual with authority to select 403(b) Plan investments is also considered a 403(b) Plan fiduciary. Allocating Fiduciary Responsibility and Co-Fiduciary Liability A 403(b) Plan may include procedures for allocating administrative and other fiduciary responsibilities among named fiduciaries or other unnamed fiduciaries. 20 However, under ERISA, the act of designating other fiduciaries is itself a fiduciary act for which the appointing 16 ERISA 3(21)(A)(i) and (iii). If a 403(b) Plan has a trust, the trustee is a fiduciary and should be named in the trust and/or plan document. 17 DOL, Employee Benefits Security Administration, Meeting Your Fiduciary Responsibilities, available at (last visited September 10, 2015). 18 ERISA 16(A). 19 ERISA 3(21)(A)(ii). 20 In most 403(b) Plans, the plan administrator is given broad authority to designate responsibilities. 11

12 fiduciary can be held liable. 21 Consequently, if a third party (i.e., investment manager) does not adhere to the prudent man standard of care (as described in Section 3 below), the 403(b) Plan fiduciaries who selected such investment manager may be held liable for the investment manager s acts or omissions. ERISA limits delegating fiduciary liability exposure, except to the extent that such delegating fiduciary: does not adhere to the prudent man standard of care (as described in Section 3 below) with respect to the allocation or designation of the fiduciary responsibility; does not adhere to the prudent man standard of care with respect to the establishment and implementation of 403(b) Plan procedures for delegating fiduciary responsibility; or continues to allocate responsibility to another fiduciary that in any way violates the prudent man standard of care. 22 Additionally, if a fiduciary knowingly participates in another fiduciary s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is also liable. 23 Recommended Ongoing Compliance Measures The criteria set forth above should be closely monitored in order to determine who is a fiduciary for an ERISA 403(b) Plan. Generally, if an individual has discretionary authority over the management, administration, or assets of a 403(b) Plan, he or she is a fiduciary of such plan (even if not named in the 403(b) Plan document). It is recommended that 403(b) Plan sponsors: identify 403(b) Plan fiduciaries at least annually and upon any change in Plan sponsor management structure or staffing; educate 403(b) Plan fiduciaries on their responsibilities (as is described in this checklist) at least annually and upon fiduciary (i.e., staff) changes; establish a 403(b) Plan investment committee that meets at least annually to facilitate a formalized process for evaluating 403(b) Plan vendors and investments; and 21 ERISA 405(c)(2). 22 ERISA 405(c)(2)(A)(i)-(iii). 23 ERISA 405(a)(1). 12

13 ensure 403(b) Plan procedures are expressly stated and followed with respect to allocating fiduciary responsibility. Section 3: What Are An ERISA 403(b) Plan Fiduciary's Duties? Prudent Man Standard of Care ERISA sets forth a general standard of care that fiduciaries must follow in order to avoid liability. Under the prudent man standard of care, a 403(b) Plan fiduciary must act in the best interest of the participants and beneficiaries, and ensure that 403(b) Plan assets are diversified, plan expenses are reasonable, and the terms of the plan and ERISA are followed. The following description of the standard of behavior demanded of fiduciaries has been cited frequently in ERISA fiduciary duty cases: Many forms of conduct permissible in a workaday world for those acting at arm s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior the level of conduct for fiduciaries [is] kept at a level higher than that trodden by the crowd. 24 The following provides an overview of the fiduciary duties inherent in the prudent man standard of care. Exclusive Benefit Duty Generally, a fiduciary must discharge his or her 403(b) Plan duties solely in the interest of the participants and beneficiaries, and for the exclusive purpose of: 1. providing benefits to participants and their beneficiaries; and 24 See, e.g., Edmonds v. Hughes Aircraft Co., 145 F.3d 1324 (4th Cir. 1998) quoting Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928) (Cardozo, J.). 13

14 2. covering reasonable expenses of administering the plan. 25 Pursuant to the exclusive benefit duty, a 403(b) Plan fiduciary should perform the following functions: review proposals from multiple service providers before selecting a 403(b) Plan vendor; benchmark (or compare), at least annually, 403(b) Plan fees to ensure amounts paid are reasonable; and replace service providers whose fees are excessive, or document other bona fide business reasons for retaining such service providers. Prudent Expert Duty Under the prudent expert requirement, a 403(b) Plan fiduciary must operate the plan in accordance with the care, skill, prudence, and diligence that a prudent man acting in a like capacity and familiar with such matters would use. 26 Of special concern is the prudent expert requirement that a 403(b) Plan fiduciary act as someone, familiar with such matters. 27 This means that lack of expertise in a particular area is not a valid defense for a 403(b) Plan fiduciary. To avoid non-compliance with the prudent expert requirement, a 403(b) Plan fiduciary should adhere to the following guidelines: hire a third party with the professional knowledge to carry out investment and other functions if the 403(b) Plan fiduciary lacks expertise in a particular area; implement guidelines and procedures for 403(b) Plan fiduciary decision-making; document the basis for each 403(b) Plan fiduciary decision; ensure proper oversight of third parties who are delegated certain 403(b) Plan administrative duties (i.e., processing contributions and distributions, ensuring timely remission of participant contributions, calculating eligibility, and vesting); and carefully review all 403(b) Plan service provider contracts to ensure you understand what services the vendor is, and is not, providing. 25 ERISA 404(a)(1)(A)(i)&(ii). 26 ERISA 404(a)(1)(B). 27 Id. 14

15 Diversification Duty Under the plan investment diversification requirement, a 403(b) Plan fiduciary must diversify investments with the aim of minimizing the risk of large losses. 28 Generally, a 403(b) Plan s fiduciary prudence, with respect to diversification of plan investments, is evaluated at the time of purchase, rather than in hindsight. 29 Under the plan diversification requirement, a 403(b) Plan fiduciary should adhere to the following guidelines: consider each plan investment in the context of the 403(b) Plan s total investment portfolio; scrutinize each investment alternative in comparison with other available alternatives; consider whether the rate of return on an investment is commensurate with the prevailing rate, and whether the investment permits sufficient liquidity for the 403(b) Plan to discharge its current financial obligations; and document, at least annually, investment evaluation and decision-making factors. Plan Adherence Duty The plan adherence duty requires a 403(b) Plan fiduciary to discharge his or her duties in accordance with all documents and instruments governing the plan, unless 403(b) Plan terms are inconsistent with ERISA. Under the plan adherence duty, a 403(b) Plan fiduciary should perform the following functions: decline a participant s request to take a withdrawal (i.e., loan or hardship) if the 403(b) Plan does not permit it; and review the 403(b) Plan document, at least annually, to ensure it remains up-to-date with current changes in the law. Disclosure Requirements ERISA requires the 403(b) Plan administrator to furnish plan information to participants and beneficiaries and submit reports to government agencies. Accordingly, the following documents 28 ERISA 404(a)(1)(C). 29 Tittle v. Enron Corp., 284 F.Supp.2d 511 (S.D. Tex. 2003). 15

16 must be furnished to participants and beneficiaries: a summary plan description within 90 days of the date an individual becomes a 403(b) Plan participant and then every five years after; 30 a summary of material modifications if the 403(b) Plan is amended within 210 days after the end of the plan year in which the change is adopted; 31 a Summary Annual Report, which must be provided annually; 32 a quarterly statement that shows actual dollar amounts of fees and expenses charged to the participant's accounts if the 403(b) Plan allows participants to direct the assets in their accounts; and participant notices, including automatic enrollment and Qualified Default Investment Alternatives (QDIAs). ERISA requires the 403(b) Plan administrator to submit the following report to the DOL: Form 5500 Annual Report, filed within 210 days after the end of the 403(b) Plan year. A large 403(b) Plan (generally a plan with 100 participants or more) is required to have an independent qualified public accountant prepare an audit of the plan's assets as a part of the annual filing. 33 Section 4: Is a 403(b) Plan Fiduciary Personally Liable for a Breach? Overview Generally, fiduciary liability is personal, absolute, and unlimited. 34 A 403(b) Plan fiduciary who breaches any of his or her ERISA responsibilities, obligations, or duties is personally liable to restore any losses resulting from such breach. A 403(b) Plan fiduciary who breaches his or her responsibilities under ERISA may also be subject to such other relief as a court may deem 30 ERISA 104(b)(1) 31 Id CFR b ERISA 103(a). See 29 CFR (d) for certain limited exceptions to the 100 participant large plan threshold. 34 ERISA 409(a). 16

17 appropriate, including removal of such fiduciary. For example, if an investment is not adequately diversified, and a 403(b) Plan fiduciary responsible for selecting the provider is found to have made imprudent investment choices, such fiduciary may be held personally liable for the losses to the participants and beneficiaries. A 403(b) Plan fiduciary s personal assets may be used to restore plan losses resulting from such breach. 35 Limiting Liability Although a 403(b) Plan fiduciary may be held personally liable for plan losses, such liability can be limited in certain situations. A 403(b) Plan can be designed to allow participants control over their account investments and thereby limit a fiduciary s liability for the investment decisions made by the participants, or ERISA 404(c) Safe Harbor. 36 Generally, the ERISA 404(c) Safe Harbor requires: a 403(b) Plan investment menu that includes diversified funds from equity, fixed income and capital preservation asset classes; investments under the 403(b) Plan that allow participants to control both the potential returns and the degree of risk; and three core options under the 403(b) Plan that are diversified and have materially different risk and return characteristics. 37 If a 403(b) Plan satisfies the ERISA 404(c) Safe Harbor, fiduciaries will not be liable for losses that are the direct result of a participant s exercise of control over the investment, or his or her plan account. Fiduciary Liability Insurance Another alternative for a 403(b) Plan fiduciary to limit personal exposure to a fiduciary breach is fiduciary liability insurance. Generally, any provision in an agreement that implies relief from fiduciary responsibility or liability for any fiduciary responsibility, obligation, or duty, is invalid under ERISA. 38 Nothing, however, precludes: a 403(b) Plan from purchasing insurance for its fiduciaries or for itself to cover liability or 35 Id. 36 ERISA 404(c). 37 DOL, Employee Benefits Security Administration, Meeting Your Fiduciary Responsibilities, available at (last visited September 10, 2015). 38 ERISA 410(a). 17

18 losses occurring by reason of the act or omission of a fiduciary, as long as such insurance permits recourse by the insurer against the fiduciary; a fiduciary from purchasing insurance to cover liability for his or her own account; or an employer or employee organization from purchasing insurance to cover liability of one or more persons who serve in a fiduciary capacity with regard to an employee benefit plan. Indemnification A 403(b) Plan sponsor may elect to include language in the 403(b) Plan document 39 indemnifying fiduciaries for any negligence in the performance of their duties. However, indemnification typically covers only a 403(b) Plan fiduciary s negligence, or failure to take proper care in his or her acts. Gross negligence, or recklessness (acts done with complete disregard of the outcome) by a 403(b) Plan fiduciary are typically not indemnified. Recommended Ongoing Compliance Measures To limit exposure to 403(b) Plan fiduciary liability, the following actions are recommended. For a 403(b) Plan sponsor: consider a 403(b) Plan design that allows participants control over their investments (and thereby limits the liability of fiduciaries with respect to participant investment losses); and if the 403(b) Plan includes indemnification language, consider purchasing fiduciary liability insurance to cover losses with respect to any fiduciary breach claim. For a 403(b) Plan Fiduciary: consider purchasing fiduciary liability insurance to avoid personal asset losses; and document decision-making processes and procedures to avoid fiduciary breach claims of gross negligence or recklessness. Section 5: What Potential Penalties Apply to a 403(b) Plan Fiduciary? 39 Indemnification language could also be found in a separate agreement with the fiduciary, a plan amendment, etc. 18

19 Overview Many 403(b) Plan fiduciaries are unaware that they can be subject to excise taxes, penalties, and a potential lawsuit as a result of engaging in certain prohibited transactions. A key to avoiding such liability is understanding the categories of prohibited transactions, along with the individuals who are included as a party in interest. In addition to potential prohibited transaction liability, a 403(b) Plan fiduciary may also be subject to a DOL civil penalty in the event of a fiduciary breach, and is described in more detail below. Summary of Applicable Law Prohibited Transaction Liability In addition to any excise tax penalty that may be imposed by the DOL or IRS for a prohibited transaction, ERISA specifically grants the right to sue a fiduciary that causes a plan to enter into a prohibited transaction with a party in interest. 40 ERISA also authorizes the right to sue nonfiduciary parties in interest. 41 Both ERISA and the Code prohibit certain listed transactions, 42 unless a statutory or administrative exemption applies to permit the transaction. There are generally two categories of prohibited transactions. One category focuses on transactions with parties in interest, or various persons or entitles that are related to an ERISA plan. The other focuses on actions by plan fiduciaries. The prohibitions apply even if a transaction is fair or beneficial to the 403(b) Plan, and regardless of whether the plan suffers a loss. Prohibited Transactions with Parties in Interest The first prohibited transaction category covers transactions between a plan and a party in interest. Specifically, ERISA prohibits a fiduciary from causing a 403(b) Plan to engage in a transaction if the fiduciary knows or should know the transaction constitutes a direct or indirect: sale, exchange, or leasing of any property between the plan and party in interest; lending of money or other extensions of credit between the plan and a party in interest; furnishing of goods, services, or facilities between the plan and a party in interest; transfer to, or use by or for the benefit of, a party in interest of any assets of the plan; or acquisition on behalf of a plan, of any employer security, or real property in violation of 40 ERISA 502(a)(3). 41 Harris Tr. & Sav. Bank v. Soloman Smith Barney, Inc., 530 U.S. 238 (2000). 42 ERISA 406; Code

20 ERISA. 43 Fiduciary Self-Dealing Prohibited Transactions The second prohibited transaction category focuses on actions taken by a 403(b) Plan fiduciary with an improper motivation. The fiduciary self-dealing prohibited transaction prohibits a 403(b) Plan fiduciary from: dealing with plan assets in the fiduciary s own interest or account (the self-dealing provision); acting in any plan transaction involving the plan on behalf of a party whose interests are adverse to those of the plan or the interests of its participants or beneficiaries (the conflict-ofinterest provision); and receiving any consideration for the fiduciary s personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan (the anti-kickback provision). 44 Party in Interest A party in interest is defined to include not only entities that have a direct relationship to the 403(b) Plan (i.e., administrators, trustees, custodians, and plan counsel), but also indirect parties in interest, or entities that have no direct relationship to the plan, but are related to direct parties in interest. ERISA defines a party in interest to include: plan fiduciaries; plan service providers; the employer sponsoring the plan; an employee organization whose members are covered under the plan; employees, officers, directors, or 10%-or-more owners of the employer sponsoring the plan; and relatives or 10%-or-more owners of any other party in interest ERISA 406(a)(1). 44 ERISA 406(b). 45 ERISA 3(14). 20

21 Penalties ERISA authorizes the DOL to assess a civil penalty against any party in interest who engages in a prohibited transaction. 46 Prohibited transactions may trigger civil monetary penalties which provide the DOL authority to assess a penalty against a party in interest of up to five percent of the amount involved for each year or part thereof during which a prohibited transaction continues. This penalty, however, does not apply to any 403(b) Plan subject to an excise tax under the Code, which imposes a 15 percent excise tax against disqualified persons who engage in prohibited transactions with tax-qualified retirement plan assets. 47 This is substantially similar to the ERISA definition of parties in interest. A second level tax of 100 percent of the amount involved is imposed if the transaction is not corrected in a timely fashion. Even though a 403(b) Plan fiduciary can correct a fiduciary violation under the Voluntary Fiduciary Correction (VFC) Program, participation in the program does not eliminate the possibility of an excise tax under the Code. Moreover, when a plan participates in the VFC Program, the DOL is obligated under ERISA 48 to refer any non-exempt prohibited transactions to the IRS, thereby increasing the likelihood that the IRS would impose the excise tax on those responsible for the transaction. 49 However, under the DOL s prohibited transaction class exemption, the IRS will not impose excise taxes under the Code with respect to any correction covered by the exemption, provided all the exemption s requirements are satisfied. 50 Prohibited Transaction Exemptions Certain party in interest transactions may be exempt from prohibited transaction rules, either because they are permitted by a statutory exemption in ERISA, covered under a class exemption issued by the DOL, or the DOL has granted an individual exemption. Generally, ERISA gives the DOL access to grant individual or class exemptions from the prohibited transaction rules where an exemption is: 1. administratively feasible; 2. in the interests of the plan, plan participants, and plan beneficiaries; and 46 ERISA 502(i). 47 Code 4975(a). 48 ERISA 3003(c). 49 VFC Program, 71 Fed. Reg , 2(c)(6)(ii). 50 PTE , I. 21

22 3. protective of the rights of plan participants and beneficiaries. 51 DOL Civil Penalty In addition to potential liability for engaging in a prohibited transaction, a 403(b) Plan fiduciary may also be liable for a DOL civil penalty. In the case of any breach of duty by a 403(b) Plan fiduciary, or any knowing participation in such breach by any other person, the DOL is required to assess a civil penalty. 52 The penalty may be assessed against the fiduciary, or any other person, in an amount equal to 20 percent of the amount recovered by the DOL in a settlement or adverse court decision. This civil penalty can be avoided in certain specified circumstances by participating in the VFC Program. 53 Criminal Liability A 403(b) Plan fiduciary with control over plan assets may also be criminally liable. Embezzlement, conversion, or stealing of any money, funds, or any other employee pension benefit plan assets are all criminal offenses. 54 The government will pursue a 403(b) Plan fiduciary for egregious violations of their fiduciary duties under federal criminal laws. 55 Recommended Ongoing Compliance Measures To avoid prohibited transaction liability and DOL civil penalties, the following actions are recommended. For a 403(b) Plan sponsor: educate 403(b) Plan fiduciaries on parties in interest so that they have a general understanding of the entities that are included under such definition; educate 403(b) Plan fiduciaries on the different categories of prohibited transactions (i.e., prohibited transactions with parties in interest and fiduciary self-dealing prohibited transactions); and Submit a self-correction application under the VFC Program if a prohibited transaction is discovered. 51 ERISA 408(a). 52 ERISA 502(l). 53 VFC Program, 71 Fed. Reg (Apr. 19, 2006) U.S.C. 664, 1027 and See, e.g., United States v. Whiting, 471 F.3d 792 (7th Cir. 2006). 22

23 For a 403(b) Plan Fiduciary: review and ensure that such activity is not included as a prohibited transaction category prior to engaging in any 403(b) Plan fiduciary activity; verify that no parties in interest are involved, or that an exemption applies to the activity if an activity does involve a prohibited transaction category; and carefully document that each decision regarding 403(b) Plan assets is made for the exclusive benefit of participants and beneficiaries. To avoid claims of self-dealing, make sure that no personal benefit will accrue on your behalf as a result of such decision. Section 6: Overview of Pitfalls from Fiduciary Breach Cases Summary of Applicable Law Two recent fiduciary breach cases highlight the importance of understanding and adhering to the fiduciary duty requirements when making 403(b) Plan fiduciary decisions. Tatum v. RJR Pension Inv. Committee In Tatum v. RJR Pension Inv. Committee, 56 an employee who participated in the parent company s defined contribution plan brought a class action against the employer, benefits committee that served as plan administrator, and investment committee that managed plan assets. The plaintiff in Tatum alleged breach of fiduciary duty under ERISA with regard to an amendment to an employer retirement plan. Such amendment resulted in the liquidation of two funds held by the plan, which caused substantial loss to the plan. In March 1999, fourteen years after a merger of Nabisco and R.J. Reynolds Tobacco into RJR Nabisco, Inc., the merged company decided to separate its food business, Nabisco, from its tobacco business, R.J. Reynolds. Prior to the spinoff, RJR Nabisco sponsored a 401(k) Plan (the Plan), which offered its participants the option to invest their contributions in the Nabisco Common Stock Fund and the RJR Nabisco Common Stock Fund (the Nabisco Funds ). The Plan at issue in the case (the Post-Spinoff Plan ) was created on June 14, 1999, the date of the spinoff, by amendment to the existing RJR Nabisco Plan (the Pre-Spinoff Plan ). The Plan F.3d 346 (4th Cir. 2014). 23

24 expressly provided for the retention of the Nabisco Funds as frozen funds in the Plan. 57 Notwithstanding the requirement in the governing Pre-Spinoff Plan document that the Nabisco Funds remain frozen in the Plan, RJR determined to eliminate them from the Plan. RJR was further determined to sell the Nabisco Funds approximately six months after the spinoff. These decisions were made in March 1999 by a working group, which had no authority or responsibility to implement any decision with respect to the Pre-Spinoff Plan, nor was it later given authority to make or enforce decisions in the Post-Spinoff Plan. 58 According to testimony from members of the working group, the group spent only 30 to 60 minutes considering what to do with the Nabisco Funds in the Pre-Spinoff Plan. The working group agreed that the Nabisco Funds should be frozen at the time of the spinoff and eventually eliminated from the Post-Spinoff Plan. In terms of the timing of the divestment, there was no documentation as to why six months was determined to be an appropriate time frame. 59 The members of the Benefits Committee agreed with the working group s recommendation. However, the district court found that there was no evidence that the Benefits Committee met, discussed, or voted on the issue of eliminating the Nabisco Funds or otherwise signed a required consent in lieu of a meeting authorizing an amendment that would do so. 60 In the months immediately following the June 1999 spinoff, the Nabisco Funds declined precipitously in value. In early October 1999, various RJR human resources managers, corporate executives, and in-house legal staff met to discuss possible reconsideration of the decision made by the working group in March to sell the Nabisco Funds. 61 They decided against changing course, however, largely because they feared doing so would expose RJR to liability from employees who had already sold their shares of the Nabisco Funds in reliance on RJR's prior communications. In October 1999, RJR sent a letter to Plan participants, informing them that it would eliminate the Nabisco Funds from the Plan as of January 31, The letter erroneously informed participants that the law did not permit the Plan to maintain the Nabisco Funds. No lawyer F.3d 346 at Tatum v. R.J. Reynolds Tobacco Co., 926 F.Supp. 2d 648, (M.D.N.C. 2013). 59 Id. at Id. at Id. at Id.at

25 reviewed the letter before it was sent to participants. As the district court found, the statement, was never corrected, even after responsible RJR officials were informed that it was wrong. 63 Instead, a second letter, sent in January 2000, repeated the incorrect statement. By that time, the district court found, RJR had become aware that the statement was false, but nevertheless permitted the communication to be sent to participants. 64 Within a year after the Nabisco Funds were liquidated from the Post-Spinoff Plan, they experienced a significant increase in value. The district court ruled in favor of RJR. However, the Fourth Circuit Court of Appeals vacated the district court s decision in favor of RJR, and held that RJR breached its duty of procedural prudence. The Appellate Court for the Fourth Circuit ordered that the case be remanded to the district court to determine whether RJR s divestment caused substantial losses to the Plan. The Fourth Circuit Court of Appeals implemented a more stringent standard of proof, requiring that RJR must prove by a preponderance of evidence that a procedurally prudent fiduciary would have made the same decisions. 65 Tussey v. ABB, Inc. In Tussey v. ABB, Inc., 66 ABB, Inc. ( ABB ) sponsored two defined contribution plans. Fidelity was the record keeper for both plans. Initially, Fidelity was paid a flat fee for each plan participant. However, beginning in 2000, Fidelity was paid through revenue sharing for one of the plans. An outside consulting firm (Mercer) advised ABB that it was overpaying for record keeping services, and cautioned that the revenue sharing Fidelity received under one of the plans may have been subsidizing other corporate services Fidelity provided to ABB. However, ABB did not act upon this information. 67 The investment policy statement (IPS) for the plan at issue in Tussey required: 1. rebates (i.e., revenue sharing) to be used to offset administrative costs; 2. use of least expensive share classes; and 63 Id. 64 Id F.3d 346 at F.3d 327 (8th Cir. 2014). 67 Id. at

26 3. negotiation of the most favorable rates based on plan size and bargaining power. In 2006, the plaintiff plan participants sued ABB fiduciaries and Fidelity, alleging various fiduciary breaches, including: 68 failure to monitor recordkeeping costs; failure to negotiate rebates to offset administrative expenses; selection of more expensive share classes when less expensive share classes were available; and; payment to Fidelity in an amount that exceeded market costs for plan services. 69 Against the ABB fiduciaries, the district court awarded $13.4 million for failure to monitor and control record keeping costs, and $21.8 million for losses the district court believe the plan suffered as a result of improper fund selection and replacement. 70 The district court also held ABB fiduciaries and Fidelity jointly and severally liable for more than $13.4 million in attorney fees and costs. 71 The Eighth Circuit Court of Appeals upheld the failure to monitor the award, but vacated and remanded the award for losses the plan suffered as a result of improper fund selection and replacement. 72 Recommended Ongoing Compliance Measures To avoid fiduciary breach pitfalls highlighted in Tatum, the following is recommended: ensure that final 403(b) Plan decision-making is performed only by those individuals with authority and responsibility to implement such decisions; review the terms of the plan document to ensure that decisions do not conflict with specific 68 This Checklist includes some, but not all, of the alleged fiduciary breaches alleged by the plaintiffs in Tussey F.3d 327 at WL (W.D. MO 2012). 71 Id F.3d 327 at 338. On remand, the district court held that the ABB defendants breached their fiduciary duties. Ultimately, however, the district court found in favor of the ABB defendants because the plaintiffs failed to present the damages calculation as required by the Eighth Circuit Court of Appeals, Tussey v. ABB, Inc., No. 2:06-cv NKL (July 9, 2015). Plaintiffs are permitted to appeal the district court s recent decision and the Eighth Circuit Court of Appeals is required to hear such appeal. 26

27 plan terms; engage ERISA counsel to review all participant communications prior to disbursement; and document comprehensive processes and procedures for all 403(b) Plan fiduciary decisionmaking. To avoid fiduciary breach pitfalls highlighted in Tussey, the following is recommended: annually review the 403(b) Plan IPS to ensure that the 403(b) Plan is being administered and decisions are implemented in accordance with (and not in contradiction of) the IPS; annually benchmark service provider costs to ensure that the plan is not paying abovemarket costs for service providers; and implement processes and procedures for monitoring recordkeeping costs. When possible, negotiate lower fees. Section 7: Distinction Between Settlor (Non-Fiduciary) and Fiduciary Activities Overview Whether a decision should be considered fiduciary or non-fiduciary is not always clear. Generally, the process of designing and adopting a 403(b) Plan is considered a settlor function, and is not subject to the fiduciary duty requirements that could otherwise require a 403(b) Plan sponsor to act solely in the interests of participants and beneficiaries. Decisions to amend and terminate a 403(b) Plan are also settlor functions. 73 Once a 403(b) Plan is adopted, however, implementation and management of the plan often involves fiduciary conduct. Summary of Applicable Law The following provides an overview of some common settlor and fiduciary functions. Settlor Functions The adoption, amendment or termination of a 403(b) Plan is considered a business activity, and is sometimes referred to as the business decision exception to ERISA s fiduciary rules DOL Advisory Opinion A (Mar. 26, 2003); DOL Advisory Opinion A (Jan. 18, 2001). 74 See King v. Nat l Human Res.Comm., Inc.,218 F.3d 719 (7th Cir.2000). 27

28 Additionally, the following activities are settlor functions: whether to establish a 403(b) Plan (i.e., an employer s review of the feasibility of a 403(b) Plan); whether to include certain 403(b) Plan features (i.e., whether to include both matching and profit-sharing contributions); whether to amend the 403(b) Plan (i.e., the decision to amend your 403(b) Plan to provide only for elective deferrals because you can no longer afford to provide matching contributions); and whether to terminate the 403(b) Plan. Settlor activities are not considered reasonable plan expenses, and therefore should not be paid out of 403(b) Plan assets. Ministerial Functions Generally, a person who performs purely ministerial functions within a framework of policies, interpretations, rules, practices, and procedures made by other persons is not a fiduciary. 75 For example, clerical functions that do not require the exercise of discretion are settlor functions. A person performing purely ministerial functions: 1. will not have the necessary discretionary authority or control respecting management of the 403(b) Plan; 2. will not exercise any authority or control respecting management or disposition of 403(b) Plan assets; 3. will not consider investment advice with respect to any plan funds or other property; and 75 See, e.g., Tucker v. Kraft Foods N.A., Inc. Ret. Plan, 2012 WL (2 nd Cir. 2012) (concluding that a manager, who was two steps below the VP of HR, did not have unfettered discretion to bind the company and the administrative committee; rather, the manager s actions were taken at the behest of senior management). 28

29 4. will not have any authority or responsibility to do so. 76 The following types of ministerial and administrative functions do not fall within the ERISA fiduciary definition: applying rules to determine eligibility for participation or benefits; calculating service or compensation credit for benefits; preparing employee communication materials; maintaining participant service records; preparing government agency reports; calculating benefits; orienting new participants and advising participants of their rights and options; collecting and transmitting contributions as provided under the 403(b) Plan; and making recommendations to others for decisions about plan administration. 77 Generally, attorneys, accountants, actuaries, or consultants who render legal, accounting, brokerage, actuarial, or consulting services to a plan (other than investment advisory services) will not be considered fiduciaries solely by performing their usual professional functions. 78 The power to act for the plan is essential for fiduciary status. Providing professional services does not give professionals any decision-making authority over the 403(b) Plan or its assets. Investment Decisions An investment decision may be fiduciary or non-fiduciary, depending upon how it is handled. For example, the decision to have participant-directed investments is generally considered an exercise of discretion relating to plan formation that is non-fiduciary. However, if the 403(b) Plan document allows a plan fiduciary to permit participant direction, the exercise of that discretion may be characterized as a fiduciary act CFR , Q/A D CFR ,Q/A D CFR , Q/A D ERISA 3(21). 29

30 Fiduciary Functions Decisions and actions required to adopt, amend, or terminate a 403(b) Plan are generally not fiduciary functions and cannot be challenged by employees or plan participants on fiduciary grounds. Although, other theories of liability such as breach of contract and estoppel may be available. However, implementation of these decisions usually involves fiduciary functions, such as: communicating with participants; hiring 403(b) Plan service providers; obtaining a favorable IRS determination letter for a 403(b) Plan; 80 limiting or designating investment options; and deciding whether to pay expenses out of plan assets. Fiduciary functions, including activities related to the implementation of settlor functions, constitute reasonable 403(b) plan expenses, and may be paid from plan assets. Recommended Ongoing Compliance Measures Any 403(b) Plan committee should maintain a written record of its meetings, actions, and decisions. The written record should separately record the following: settlor functions including, for example, plan studies and other processes relating to plan design; and fiduciary functions, including benefit claim denials and other fiduciary decisions. Additionally, a 403(b) Plan sponsor should: analyze and document borderline decisions as if they are subject to ERISA s fiduciary obligations; and Ensure that the 403(b) Plan document does not create discretion where none was necessary or intended if a decision is intended to have settlor function status. 80 DOL Advisory Opinion A (Jan. 18, 2001). 30

31 Section 8: Best Practices for Avoiding a Fiduciary Breach The following fiduciary checklist is based upon guidance provided at the September 2014 Southern Employee Benefits Conference by Counsel for ERISA and Employee Benefits at U.S. Department of Labor: Yes No Have you identified your plan fiduciaries and are they clear about the extent of their fiduciary duties? If participants make their own investment decisions, have you provided the plan with the investment-related information participants need to make informed decisions about the management of their account? Have you provided sufficient information for them to exercise control in making investment decisions? If you hire third party service providers, have you reviewed a number of service providers, given each potential provider the same information, and considered whether the fees are reasonable for the services provided? Have you implemented processes and procedures for continually monitoring your plan s service provider? Have you reviewed your plan document in light of current plan operations and made necessary updates? After amending your plan, have you provided participants with an updated SPD or SMM? Have you ensured that those individuals handling plan 31