FOUNDATIONS OF AN EFFEC EFFE TIVE

Transcription

1 FOUNDATIONS OF AN EFFECTIVE 401(K) PLAN May 29, 2012

2 WELCOME TO TODAY S WEBINAR On behalf of Gouldin & McCarthy, Scarinci Hollenbeck and WithumSmith+Brown, welcome and thanks for spending your lunch time with us. Have a question or comment Please use the chat box. If we don t get to your question, we will reach out to you at the conclusion of the webinar Today is interactive. Your participation in the polling questions is appreciated appreciated. We will begin shortly! TODAY S DISCLAIMER The information presented in this webinar represent our perspectives, is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan s individual facts and circumstances. 1

3 MEET YOUR PRESENTERS MICHAEL GOULDIN FIDUCIARY FRAMEWORK CONSIDERATIONS Gouldin & McCarthy MC GARY YOUNG LEGAL ISSUES & FIDUCIARY RESPONSIBILITY Scarinci Hollenbeck DAVID R. DACEY MANAGEMENT FINANCIAL REPORTING WithumSmith+Brown, PC FIDUCIARY FRAMEWORK CONSIDERATIONS Michael Gouldin Gouldin & McCarthy, LLC 180 Mount Airy Road, Suite 203 Basking Ridge, NJ

4 Discussion Topics Retirement Committee Checklist Developing and Following an Investment Policy Statement (IPS) and Understanding Fees and What is Reasonable Educating Your Participants Pop Quiz #1 Employer Report Card Approach 3

5 How Well Are You Fulfilling Your Responsibilities? Part One Please answer Yes, No, or Not Sure for Each 1. Have aeyou reviewed e edhow the recently enacted edppa will affect new initiatives for your plan? 2. Do you have your plan s goals and objectives formally documented? 3. Do you use tools and checklists to help you monitor and manage your fiduciary responsibilities? 4. Do you receive regular retirement industry updates and education on topics beneficial to make you a better fiduciary? 5. Do you know what are considered prohibited practices? What Should a Committee Do Regularly? Examine Plan Statements Monthly Monitor Investments Quarterly Ensure all contributions are deposited properly and invested correctly Quarterly Review fees for reasonableness Annually Review plan performance Annually Review Provider vs. Marketplace Every 3 Years 4

6 Pop Quiz #2 Employer Report Card Approach How Well Are You Fulfilling Your Responsibilities? Part Two Please answer Yes, No, or Not Sure for Each 1. Do you have a formal Investment Policy Statement and is it referenced during plan reviews? 2. Do you formally review your plan investments against appropriate benchmarks at least annually 3. Do you understand how the IPS leads the investment selection and monitoring process? 4. Do you document a review of each IPS annually to ensure committee members and other plan changes are updated? 5. Do you know what your plan s expenses are and how your plan s features and expenses compare to industry averages? 5

7 Monitoring Investments and Complying with Your IPS? Have a prudent process in place to Determine Objectives, Evaluate Investments, Select Investments and Monitor Investments Annually Better not to have an IPS than to have one you don t follow Be sure to comply with Section 404(c) Establish Objective Criteria to Evaluate Investments Besure to use anindependent Program to Evaluate Investments such as Fi360 Monitor Plan/Investment Fees in accordance with 408 (b)2 and 404 (a)5. Fees and the DOL WHAT WAS PLANNED WHAT ACTUALLY HAPPENED First 408(b)(2) First Schedule C, then Question #40 (Good Faith Effort) Then Form 5500 Schedule C Then Quarterly Participant Reporting of Fees 408(b)(2) Planned Rollout Originally Effective July 2011 Deferred to January 1, 2012 Deferred to April 1, (b)(2) Effective July 1, 2012 Final Participant Disclosures First Annual August 30,2012 First Quarter November 14,

8 Pop Quiz #3 Employer Report Card Approach How Well Are You Fulfilling Your Responsibilities? Part Three Please answer Yes, No, or Not Sure for Each 1. Do you feel the participant education program you have in place touches at least 90% of plan participants? at least 90% of plan participants? 2. Do you have a method to monitor the effectiveness of your employee education program (other than by participation rates alone)? 3. Will most participants in your plan be able to retire comfortably at the current level of participation and contribution rates? 4. Have you polled plan participants to see how well they understand the plan features, what information they need to make better investment decisions, and adjusted your education program accordingly? 7

9 Education and Participation? Tailor Education Program to Retirement Readiness Use Automatic ti Enrollment tto Hl Help Employees Save Encourage Employees to Increase Savings Annually Monitor Investment Selection of Employees Educate Employees on Availability of QDIA Self Grading The Test For each of the Quiz Questions Today, Td Give yourself One point for Each Yes answer and Zero points for No or Not Sure. If you scored Points You Get an A If you scored 9 11 Points You Get a B If you scored 5 8 Points You Get a C If you scored 0 4 Points You Get a D 8

10 What Does Your Evaluation Mean? If you scored an A, many of the steps that are critical to managing your responsibilities under ERISA appear to be completed. If you scored a B, several steps toward meeting your responsibilities under ERISA appear complete, but you need to address some issues. If you scored a C, it would be recommended that you need to implement certain ERISA compliance policies. If you scored a D, several serious shortfalls in ERISA compliance appear to exist. You should consider seeking help in addressing these issues. Legal Issues and Fiduciary Responsibility Gary S. Young Part I: In General Part II: 408(b)(2) Final Regulations Plan Service Providers Disclosures Scarinci Hollenbeck 1100 Valley Brook Avenue Lyndhurst, NJ gyoung@scarincihollenbeck.com 9

11 1.1 In General ERISA has come a long way since it was first passed in 1974; Consider the following decisions: Tussey v. ABB Inc. (W.D. Mo. Mar. 31, 2012), Springate v. Weighmasters Murphy, Inc. Money Purchase Pension Plan, 217 F. Supp. 2d 1007 (202) Know the risk so that you can manage the risk. ERISA consists of four titles; 1. Title I: sets out specific protections of employee rights in pensions and welfare benefit plans. 2. Title II: specifies the requirements for plan qualification under the Internal Revenue Code. 3. Title III: assigns responsibilities for administration and enforcement to the Departments of Labor and Treasury. 4. Title IV: of ERISA establishes the Pension Benefit Guaranty Corporation. 1.2 In General Consider the topics that Title I of ERISA covers: TitleI, Part 1 Reporting & Disclosure Requirements Title I, Part 2 Participation and Vesting Title I, Part 3 Funding Title I, Part 4 Fiduciary Responsibility Title I, Part 5 Administration and Enforcement What is a qualified plan and what does it mean to be qualified? A broad review of both who is a fiduciary and what are fiduciary responsibilities is warranted: Who is identified as a fiduciary and is this identification clear? Who exercises fiduciary responsibility for plan assets? How do the fiduciaries carry out their duties? Who appoints the plan fiduciaries? 10

12 1.3 In General This information should be evaluated further by considering such questions as: Is more than one fiduciary charged with the same responsibilities? Do the relevant documents suggest that the board of directors is a fiduciary responsible for functions that are actually carried out by specific committees of directors or employees? Do those who serve as fiduciaries have the appropriate training and qualifications to carry out their responsibilities, do they understand the standards of fiduciary conduct under ERISA, and do they fulfill their fiduciary duties in a prudent manner? Are those who appoint fiduciaries i i aware that t the act of appointing a fiduciary is itself a fiduciary function, and do they exercise appropriate care in selecting and monitoring their appointees? Does the appropriate fiduciary monitor the suitability of Investment choices offered to 401(k) plan participants? Is any fiduciary exposed to possible conflict of interest situations? 1.4 In General Are summary plan descriptions and other participant communications carefully drafted to make clear that plan fiduciaries will not disclose to participants, p or otherwise act upon, information relating to the issuer that has not been publicly disclosed pursuant to the federal securities laws? Is care taken to distinguish actions taken by fiduciaries in a fiduciary capacity, and actions taken by the company in other capacities not subject to ERISA fiduciary standards ( settlor activities)? Examples of the latter include amending or terminating plans and making general statements about the company's financial condition. Are all fiduciaries covered by adequate ERISA fiduciary liability insurance? The world of claims against plan fiduciaries changed significantly with the decision of the U.S. Supreme Court in LaRue v. DeWolff, S. Ct (2008). END OF PART I 11

13 What Can Happen if You Fail to Follow a Prudent Process? December 2011 Wal Mart Wal Mart workers who claim they were charged way too much in fees for their 401(k) plans won a $13.5 million class action lawsuit settlement with the retailer and its plan administrator, Merrill Lynch, a unit of Bank of America One of the most explosive allegations in the Wal Mart 401(k) class action lawsuit was that Merrill Lynch received undisclosed kickback payments from outside mutual fund companies "simply for allowing them to be in the plan," Forbes.com reports. Can a Plan Sponsor Be Sued Over Fees? July 2009 Tibble vs. Edison, International Edison offered retail share classes as investment options, which have higher fees than institutional investments Court found that Edison should have considered offering institutional shares Judgment subject to appeal approximately $300,000 April 2011 George vs. Kraft Foods Not clear whether reliance on a consultant was sufficient to show that the plan committee acted appropriately (e.g. no factors considered in minutes) 12

14 (b)(2) Final Regulations Plan Service Providers Disclosures July 1, 2012, is a significant date for plan sponsors and their plan committees. By that date, they should have received and will need to begin evaluating information from their plan s service providers under a newly effective U.S. Department of Labor (DOL) Final Regulation. The 408(b)(2) Final Regulations require Plan Service Providers to make disclosures among other things, about their services, compensation and fiduciary status to their clients (the responsible plan fiduciary) by the July 1 st deadline. As a result, starting right now, plan sponsors face heightened expectations and legal responsibilities. With regard to Section 408(b)(2) compliance: 1. The first requirement is to identify all Plan Service Providers, 2. The second disclosure requirement is to determine whether your Plan Service Provider is serving as an ERISA fiduciary and/or as a registered investment adviser, 3. The third disclosure is disclosing all compensation being paid to a Plan Service Provider (b)(2) Final Regulations Plan Service Providers Disclosures In addition to the three main categories of services, status and compensation, there are other disclosuresrequired required in certain specialsituations: situations: Record keeper disclosures: Describe all direct and indirect compensation it receives; and If its compensation is offset or rebated, or otherwise adjusted, for any compensation it, or its affiliates or subcontractors, receives, the recordkeeper will need to give you a reasonable estimate of what it would charge your plan without those factors. As a fiduciary, your plan committee must then evaluate the reasonableness of the total charges, credits and compensation for these services. The two primary independent methods for doing that analysis are through an RFP (request for proposal) process or a benchmarking service that identifies an appropriate peer group of plans (based primarily on total assets and number of participants). 13

15 (b)(2) Final Regulations Plan Service Providers Disclosures Plan investments: Special disclosures will be made concerning the plan s investments: Transaction compensation, Operating expenses, Other ongoing expenses. Timing of disclosure: The written disclosures for your current providers must be given by July 1, Additional disclosures: If there is a change to the information that was given to you, the Plan Service Provider should, in almost all cases, notify you in writing within 60 days of learning of the change. Of course, the 408(b)(2) Final Regulations and the disclosures are not the end of the story. When you receive the disclosures, you as the Plan Fiduciaries then have the duty to review and evaluate them (b)(2) Final Regulations Plan Service Providers Disclosures It is the Plan s fiduciary duty to engage in a prudent process to review the information and answer those questions. What happens if the Plan Service Provider fails in its obligation to make the required disclosures? Without these disclosures, the arrangement is a prohibited transaction, which means that it must be corrected and that an excise tax may be imposed under section 4975 of the Internal Revenue Code. As a general proposition, under ERISA, the parties engaging in the prohibited transaction are the Plan Service Provider who failed to make the required disclosures and the Plan Fiduciary that entered into the arrangement without obtaining the disclosures. The Final Regulation contains an exemption for the responsible Plan Fiduciary in this situation. 14

16 (b)(2) Final Regulations Plan Service Providers Disclosures Inorder for the exemption to apply, certain conditions must be satisfied: 1. First, the Plan Fiduciary must not know that the Plan Service Provider failed to make the required disclosures and must reasonably believe that it did disclose the required information. 2. The Plan Fiduciary must request the missing or incomplete information in writing as soon as it discovers the failure. 3. If the Plan Service Provider fails to provide the information within 90 days, the Plan Fiduciary must send a written notice to the DOL. The 408(b)(2) Final Regulations also reminds the Plan Fiduciary that they have one additional obligation: whether to terminate or continue the contract with the Plan Service Provider. Management s Financial Reporting Dave Dacey WithumSmith+Brown, PC One Spring Street New Brunswick, NJ ddacey@withum.com 15

17 Recent Developments Affecting Plans SOC1 reports replace SAS 70 reports Plan sponsor responsibilities under SAS 118 and (b)(2) disclosure requirements New fair value standards SSAE 16 and SOC Reports Three types of reports SOC 1, 2 and 3 SOC 1 similar to SAS 70 SOC 2 controls regarding security, availability, process integrity, confidentiality or privacy [user entities and specified parties] SOC 3 same as SOC 2, except general information for interested parties Management provides an assessment Beware carve outs 16

18 SAS 118 and 119 S l t l information i f ti included i l d d in i SAS 119 Supplemental financial statements SAS 118 Other information Plan sponsor responsibilities articulated in engagement letter letter, auditor report and representation letter New Sentence Insert to Limited Scope Audit Report Opinion Paragraph Th supplemental l t l schedules h d l t d for f the th The are presented purposes of additional analysis and are not a required part of the financial statements but are required by the Department of Labor s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of

19 Example Auditor s Report Language for Financial Statements That Accompany the Form 5500 Filing Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The supplemental schedules of [identify title of schedules and period covered] are presented for the purpose of additional analysis and are not a required part of the financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of Such information is the responsibility of the Plan's management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Addressing 408(b)(2) for Calendar 2011 Client inquiries regarding controls Review of example documentation Subsequent event disclosure 18

20 Recent and Proposed Fair Value Disclosures Let s Go To the Handout! Enjoy the Rest of Your Day! Mike Gouldin; Gouldin & McCarthy; mike@gouldinmccarthy.com Gary Young; Scarinci Hollenbeck gyoung@scarincihollenbeck.com Dave Dacey; WithumSmith+Brown; ddacey@withum.com 19

21 FOUNDATIONS OF AN EFFECTIVE 401(k) PLAN Fair Value Measurement and Disclosure Developments and Observations Dave Dacey, WithumSmith+Brown May 29, 2012 The following serves to summarize new significant developments and observations in the area of fair value measurements and disclosure: Accounting Standard Update Requirement Notes ASU Level 3 Rollforward The roll-forward activity table for level 3 investments Activity Disclosures require separate disclosure about each type of the Issued: 1/2010 Effective: FYB > 12/15/10 IPB > 12/15/10 Apply Prospectively Early Application Permitted following: Purchases Sales Issuances Settlements Note: other aspects of ASU were effective FPE> 12/15/09 ASU Common Fair Value Measurements Between US GAAP and IFRS Issued: 5/2011 Public Entities: Effective: FYB > 12/15/11 IPB > 12/15/11 Apply Prospectively Early Application Not Permitted Non-Public Entities: Effective: FYB > 12/15/11 Apply Prospectively Early Application Permitted but not earlier than IPB > 12/15/11 Both Non-Public Entities and Public Entities: In the absence of a level 1 input, a reporting entity should apply premiums or discounts when market participants would do so. In that regard, o o Premiums or discounts related to the characteristic of the asset or liability itself (such as a control premium) are permitted. Premiums or discounts related to the size of the holding (specifically, a blockage factor) "are not" permitted. Reporting entities are now permitted to measure fair value based on their net asset or net liability position for market risks and for credit risks. If the highest and best use of a non-financial asset differs from its current use, that fact should be disclosed as well is why the asset is being used in that manner. Additional Disclosures for Public Entities: Information about transfers between level 1 and level 2 of the fair value hierarchy. Sensitivity analysis information for level 3 fair value measurements and interrelationships between inputs. Categorization by level for "disclosure only" fair value measurements. FYB >: Fiscal Years Beginning After IPB >: Interim Periods Beginning After FPE>: For Periods Ending After 20

22 FOUNDATIONS OF AN EFFECTIVE 401(k) PLAN Fair Value Measurement and Disclosure Developments and Observations Dave Dacey, WithumSmith+Brown May 29, 2012 Non-Public Entities - To be considered a non-public entity, the entity cannot meet any of the following conditions: a. The entity cannot trade its debt or equity securities in any public market, cannot be a conduit bond obligor for conduit debt securities traded in a public market, cannot file with a regulatory agency in preparation for the sale of its securities in a public market, cannot be required to furnish or file financial statements with the SEC. b. Cannot be controlled by an entity meeting any of the requirements in "a" above. Accounting Standard Update Requirement Notes ASU Disclosure Information regarding Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent) Applies to investments that "do not" have a readily determinable fair value and for which it is industry practice issue financial statements consistent with that of an investment company. For such investments, the following information is required to be disclosed: Issued: 1/2010 o Fair value information by class of Note: This particular aspect of ASU became effective FPE> 12/15/09 Technical Corrections Exposure Draft Issued: 10/14/11 Comments due: 12/13/11 o o o o o o o o security. A description of significant investment strategies in the class of securities. The reported period of time over which the underlying assets are expected to be liquidated. Unfunded commitments related to the investments. A general description regarding conditions for redemption of the investment. Circumstances under which the investment might not be redeemable (such as investment subject to lockup). Significant sales restrictions. Contemplated sales amount and remaining actions to sell (if different from net asset value per share) Plans to sell part of the portfolio and remaining actions required in order to maintain the "practical expedient" qualification. As currently propose, defined benefit pension plans shall be required to disclose net appreciation (depreciation) in fair value for each significant class of investment, segregated between level 1I, 2, and 3 of the fair value hierarchy. (ASC ) As currently propose, health and welfare plans shall be required to disclose net appreciation (depreciation) in fair value for each significant class of investment, segregated between level 1, 2, and 3 of the fair value hierarchy. (ASC ) 21