Retirement Plans: Challenges, Litigation and Trends

Transcription

1 Public Retirement Plans: Challenges, Litigation and Trends Jon Willhite, CIMA Senior Institutional Consultant Senior Retirement Plan Consultant UBS Institutional Consulting Group Woodloch Forest Drive, Suite 100 The Woodlands, Texas (281) September 21, 2015

2 Section 1 Challenges

3 Challenges plan sponsors face 78 Million Baby Boomers retiring 56.7% Historical revenue share is no longer a best practice Of workers considered a DB plan to be their primary source of funds in retirement in By 2015 that number had fallen to: 27% Gen X is now turning Widely used target date funds now a fiduciary target 50 Retiree medical coverage dropped by approximately 40% from 1997 to 2011 Source: Employee Benefit Research Institute, 2015 Retirement Confidence Survey 3

4 What are your duties as an ERISA fiduciary? Five principle ERISA rules governing fiduciary actions and conduct Duty of Loyalty Exclusive Benefit Rule Duty of Care and Prudence Duty of Diversification Duty to Act in Accordance with Plan Documents It is important that you Understand what is expected of you Know how to fulfill those expectations Consult with professionals who can help you with your ERISA responsibilities 4

5 Liabilities for breaches of fiduciary duty Failure to comply with ERISA s fiduciary standards may subject the fiduciary to personal liability, both civil and criminal. A fiduciary that breaches <<Text>> his or her duties to a Plan may be required to: Reimburse the Plan for losses resulting from breach Restore to the Plan any profits made by the fiduciary through use of Plan assets Step down as a fiduciary Provide other relief deemed appropriate by a court Pay a 20% penalty to the DOL on any amount due Serve a prison term of up to 10 years and pay a fine of up to $100,000 5

6 Department of Labor regulatory history Since 1974, ERISA has grown from 200 pages of legislation and legislative history to 700 pages of legislation, 3600 pages of regulations and countless pages of cases and commentary Past Regulation ERISA established in 1974 Legislation was fairly simple Plans were established with a set it and forget it approach Employees would save and be ready for their golden years Current Regulation Today legislation is much more comprehensive, placing additional responsibilities on the employer Plan sponsors are now being asked to eslablish and document policies, pocedures and best practices Since 2009 the DOL has hired over 1000 new auditors and levyed over $1 billion in new fines Future Regulation We would expect ERISA legislation to become more complex Stay informed on pending legislation Stay informed on current litigation Sirkin, Michael S. (2012) "The 20 Year History of ERISA," St. John's Law Review: Vol. 68: Iss. 2, Article 3. 6

7 Snapshot of the Department of Labor in 2014 The Department of Labor's Employee Benefits Security Administration says it restored over $599.7 million in 2014 Despite a small uptick in the total number of investigations in 2014, the total of nearly $600 million collected was much smaller than the $1.7 billion in plan reimbursements and fines paid in 2013 to settle EBSA criminal cases and civil violations. $205 mm Plan assets restored/participant benefits recovered $20 mm $18 mm $356 mm Voluntary fiduciary correction program Abandoned plan program Recoveries from informal complaint resolution Source: 7

8 Section 2 Litigation

9 Question? QWhat do Lockheed Martin, General Dynamics, United Technologies, Bechtel, Caterpillar, International Paper, Unisys, John Deere, Cigna and Northrop Grumman have in common? Each company has been the subject of 401(k) litigation A 9

10 Tussey V. ABB, Inc. On March 31, 2012, the U.S. District Court for the Western District of Missouri ordered ABB Inc. and its Service Provider to pay a combined $36.9 million in damages for breaching their fiduciary duties The bulk of the damages, $35.2 million, was assessed against ABB In November 2013, the court ordered ABB and its service provider to pay $13.4 million in legal fees and other costs On March 19, 2014, the Eighth Circuit Court of Appeals affirmed the $13.4 million award for excessive recordkeeping fees against ABB but vacated a $21.8 million award regarding investment selection and mapping and remanded the issue to the District Court The appellate court also vacated all attorney fee awards

11 Tibble v. Edison International On March 21, 2013, the Ninth Circuit Court affirmed the District Court s decision where participants alleged that 401(k) plan fiduciaries breached their duties of loyalty and prudence Damages of $370,000 Although the damages were relatively nominal, this case is important because of the court findings On October 2, 2014 it was announced the Supreme Court has agreed to review the case. On May 18, 2015 the Supreme Court issued an unanimous decision that the six-year statue of limitation period does not bar an alleged breach for failure to monitor plan investments.

12 Nolte v. Cigna Corporation On June 21, 2013, the parties filed papers indicating they had settled their lawsuit and were seeking approval of the District Court In total, the company agreed to pay $35 million and submit to extensive affirmative relief

13 Beesley v. International Paper On January 31, 2014, the District Court approved a settlement in which the company agreed to: Pay $30 million and Submit to extensive affirmative relief

14 What were the participant's allegations? Excessive Recordkeeping Cost Use of "Retail" or Expensive Share Classes Failure to Follow the Plan's IPS when Selecting or Removing Investments Alleged Improper Investments

15 Excessive recordkeeping cost In both the ABB and Edison cases, the court held that plan sponsors decisions to implement a revenue sharing model did not breach their fiduciary responsibilities In the ABB case, the court even acknowledged that revenue sharing arrangements were common and that the work done by record keepers reduces the accounting work that normally would have to be done by investment managers While revenue sharing is a legitimate practice used to pay recordkeeping fees, plan sponsors must still ensure that their fees are reasonable In the ABB case, the court ruled that the company did not understand the amounts of revenue sharing being paid, never benchmarked their plan s fees, never attempted to negotiate lower fees, and allowed fees that were excessive relative to what similar size plans were paying In 2008 after its lawsuit was filed, International Paper negotiated a lower fee of $52 per participant, reduced from $112 per participant. As a result of the settlement, the plan will be put out to bid In the CIGNA settlement, the company agreed to engage independent consultants to evaluate and make recommendations regarding certain aspects of the plan's administration

16 Understand how fees are derived It s not enough to look at total plan costs many factors influence plan fees Recordkeeping/ administration Advisors/ consultants Investment management Plan fees and expenses Education and communications Plan complexity Trustee services

17 Action plan for plan sponsors Review the Following and establish a process to ensure the best interests of the participants are being tended to Fees Revenue Sharing Investment Policy Statement Company Stock Target Date Funds Plan Consultant/Advisor

18 Fees The law states that plan sponsors are not required to pay the lowest fees possible, but rather, pay reasonable fees for the services rendered Plan sponsors should understand, and document, how much is being paid, the parties being paid and the services being provided Benchmarking may be a helpful exercise to determine how your plan compares to similar size plans or similar companies within your industry Many industry experts suggest a RFI or RFP every three to five years If you determine that your plan fees are relatively high, you should ask your service providers to explain their pricing. In some cases, you may be able to negotiate lower fees and/or additional services

19 Revenue sharing or Fee Equalization Revenue sharing is a common and acceptable practice, however, plan sponsors should review and rationalize their approach At issue is whether it is fair for participants who select funds that pay revenue sharing (typically actively managed funds) to subsidize the recordkeeping costs for the participants who choose funds that pay no revenue sharing (typically passively managed, money market and company stock funds) Some plan sponsors have decided to credit all revenue sharing back to the participants who paid them, or use investments that pay no revenue sharing, and allocate the same fee across all participants as a flat-dollar or percentage

20 Investment policy statement A well-written IPS should: 1. Describe the purpose and general investment objectives. 2. Identify and allocate responsibilities among the fiduciaries and other responsible parties. 3. Describe the asset classes of investment options to be offered and criteria for selecting investment options. 4. If employer stock is offered as an investment option, describe any limits or standards for its inclusion. 5. Describe standards for investment performance and criteria for measuring performance.

21 Investment policy statement 6. If the plan permits participants to direct investments and intends to comply with Section 404(c): State that the plan intends to comply. List the number of investment options offered under the plan and the asset classes for each option. Describe the methods and criteria for selecting options, including fees, and for monitoring and replacing funds, if necessary. Describe investment education and other information offered to participants in connection with investment options. Describe any restrictions on particular options. Describe the process and standards for selecting a qualified default investment arrangement. 7. Describe the methods and criteria for selecting, monitoring, and if necessary, replacing plan investment service providers. 8. Describe standards for accounting for and managing investment expenses. 9. Describe how often investment performance will be reviewed and the review process (including the use of outside investment consultants).

22 Company stock The Pension Protection Act of 2006 requires immediate diversification rights for employee contributions upon completion of three years of service for matching and other employer contributions Companies may elect to institute a more liberalized diversification policy In 2014, the Supreme Court of the United States is scheduled to rule on Dudenhoeffer v. Fifth Third Bancorp where the plan participants sued the fiduciaries after the stock declined 74% following the financial crises Sponsors who offer stock as an investment option should carefully monitor this case, and discuss its implications with legal counsel

23 Target date funds According to the 2013 PLANSPONSOR/Janus survey of approximately 5,400 sponsors, over 50% of respondents report that a target-date fund is the best Qualified Default Investment Alternative (QDIA) for their employees In February 2013, the Department of Labor released its Tips for Plan Fiduciaries for the selection and monitoring of target-date funds Several recommendations were offered including the suggestion to inquire about whether a non-proprietary target-date fund would be a better fit for your plan

24 Plan advisors These cases illustrate not only the importance of engaging a competent plan advisor, but also carefully considering their recommendations In the ABB case, the company turned a blind eye to its consultant s conclusion that it appeared the defined contribution plan expenses were subsidizing other corporate benefit expenses In the Edison case, the court ruled that fiduciaries should make an honest, objective effort to grapple with the advice given, and if need be, question the methods and assumptions that do not make sense In the CIGNA settlement, the company agreed to engage an independent, objective consultant

25 Trends

26 Current statistic By 2020, it is estimated that 35% of men and 28% of women between the ages of 65 and 74 will be in the workforce, compared with 21% and 13%, respectively, in 1990.* An estimated 2 million Americans ages 60 and older are in debt from unpaid student loans, either from long-ago loans for their own educations or more recent borrowing to pay for college degrees for family members. This is nearly 3x the 700,000 who carried such debt in 2005.** * Stanford Center of Longevity estimates based on U.S. Bureau of Labor statistics data, July 2013 ** Federal Reserve Banks "Household Debt and Credit Report" 2014

27 Fiduciary responsibilities under ERISA Establish prudent processes for selecting investment alternatives Establish prudent processes for the selection of Plan service providers, ensuring that the contract or arrangement between the Plan and a service provider clearly outlines the services to be provided and that such services are necessary for the establishment or operation of the Plan Select investment alternatives that are prudent and adequately diversified Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices Ensure compensation (both direct and indirect) paid to service providers and other Plan expenses are reasonable in light of the level and quality of services provided Avoid conflicts of interest by and among fiduciaries, other parties in interest, vendors and other service providers and the Plan itself Fulfill Department of Labor (DOL) requirements on reporting and disclosures related to the Plan

28 5 steps plan sponsors can take to help improve plan outcomes Making enhancements to plan features and investments can help put plan participants on the right path to retirement security 1. Institute as many automatic features as possible 2. Include target date funds in the lineup 3. Conduct a re-enrollment 4. Reduce traditional core menu options and add asset allocation strategies 5. Optimize the employer match Target Date Funds: Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.

29 Important information It is important that you understand the ways in which we conduct business and the applicable laws and regulations that govern us. As a firm providing wealth management services to clients in the U.S., we are registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Though there are similarities among these services, the investment advisory programs and brokerage accounts we offer are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that you carefully read the agreements and disclosures that we provide to you about the products or services we offer. While we strive to ensure the nature of our services is clear in the materials we publish, if at any time you seek clarification on the nature of your accounts or the services you receive, please speak with your Financial Advisor. For more information, please visit our website at ubs.com/workingwithus This presentation and any documentation delivered to you in connection with this presentation are not intended as, and do not constitute, legal advice. The purpose is to provide a general description of the rules applicable to a fiduciary under the Employee Retirement Income Security Act (ERISA); fiduciaries should seek the advice of their attorneys as to their precise duties, responsibilities and liabilities in specific situations. Neither UBS Financial Services Inc. nor any of its employees provide legal or tax advice. You should consult with your legal or tax advisor regarding your circumstances.

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