Protecting Your Agency from Fiduciary Lawsuits on Retirement Plans CSMFO webinar

Transcription

1 Protecting Your Agency from Fiduciary Lawsuits on Retirement Plans CSMFO webinar 2:00-3:30 p.m., Wednesday, June 14, 2017 If your agency sponsors deferred compensation/defined contribution plans (457b, 401a, or 403b) for your employees, you need to be aware of the important and unavoidable fiduciary duties. Simply selecting plan providers and offering a variety of investment opportunities for your employees is not sufficient and puts your agency at risk. Invite your human resources colleagues to join you for this webinar. Advance registration required for this no-charge webinar: Webinar topics: 1. What are the fiduciary laws governing your agency s deferred compensation/defined contribution plan? 2. What do recent lawsuits show about growing risks associated with lax oversight? 3. What are best practices for the administration and oversight of your agency s plan(s)? Presenters: * Marcus Wu, Partner, Pillsbury Winthrop Shaw Pittman LLP * Bill Tugaw, Managing Director of Governmental Plans, NFP * Jay Castellano, Human Resources Consultant, City of San Mateo Audience: finance and human resources professionals with retirement plan responsibilities Get connected with these steps. 1. Register in advance for the webinar: There is no charge for participating in the webinars, but each requires advance registration. *** Advance registration required for this no-charge webinar: Be sure to "white list" or "allow" s from customercare@gotowebinar.com to receive notices for this webinar. 2. Connect with the webinar and audio: Use your logon information from the confirmation you receive via from GoToWebinar. We recommend the telephone option dial-in number provided by GoToWebinar for sound quality. Depending upon your internet connection, VOIP option for audio (computer speakers) can have delays or sound quality issues. 3. Ask questions:

2 You may submit questions anonymously via to in advance or via the webinar during the panel discussion. As moderator for the session, Don Maruska will pose the questions. 4. Presenters presentation materials: We post these with the agenda at Agendas & Archives tab of The PPT will be available 24 hours before the webinar. After a webinar occurs, a digital recording along with the PowerPoint materials and results of the polling questions will be available after 24 hours at the "Agendas & Archives" tab of CPE Credits: If you are a member of CSMFO and wish to obtain CPE credit, you need to register and attend in your name, respond to at least 75% of the live polling questions, and pay $25 to CSMFO after notice from CSMFO following the webinar. After payment, CSMFO s the CPE certificate as a PDF. Post-Webinar Group Discussions Many agencies are organizing groups to participate in the webinars (live or recorded) and discuss the topics among themselves after the webinars. Some are summarizing their discussions and distributing them to managers throughout their organizations. Use the CSMFO Coaching Program as an effective way to enhance professional development in your agency. Here are some discussion starters for this session: Post-webinar discussion questions: a. What are the potential liabilities related to the plans our agency offers? b. What would we like to apply from the webinar and case study? c. What s our plan going forward? MORE RESOURCES--See the "Coaching Corner" at for valuable resources to boost your career. These include a Financial Management Skills Inventory, Resource Matrix, Coaches Gallery of 24 volunteer CSMFO Coaches willing to help you on a one-to-one basis, and an archive of digital recordings and materials from past webinars at Enjoy the resources to help you succeed in local government finance. Don Maruska, MBA, JD, Master Certified Coach Director, CSMFO Coaching Program; CSMFO@donmaruska.com Author How Great Decisions Get Made and Take Charge of Your Talent

3 Marcus Wu, Partner, Pillsbury Winthrop Shaw Pittman LLP Marcus Wu is the leader of the law firm s Southern California Executive Compensation and Benefits practice. He represents private and public employers on compensation and benefits matters. Marcus has extensive experience designing and implementing retirement and deferred compensation plans, including defined-benefit pension plans, 401(k), 403(b) and 457 plans. Marcus also advises employers on designing and implementing equity compensation programs, including omnibus equity-incentive plans, ESPPs, performance share plans, and others. He advises employers on establishing and administering health plans, section 125 cafeteria plans, and severance plans. Marcus is well versed in the federal and state laws governing employee benefit plans, including ERISA and the Internal Revenue Code. Bill Tugaw, Managing Director of Governmental Plans, NFP Based in El Dorado Hills, CA, Bill Tugaw is the Managing Director, Governmental Plans for NFP. He is a registered Investment Advisor Representative and specializes in public sector 457(b) Deferred Compensation, 403(b), 401(k), 401(a) defined contribution plan consulting and post-employment health plans (VEBA, 115 Integral Part Trusts, Retiree Health Savings Accounts). His primary focus is assisting public sector employers in meeting the fiduciary obligations associated with operating their plans. With over 30 years of diversified financial services experience, Bill brings a wealth of knowledge to the team. He is a faculty instructor for the International Foundation of Employee Benefit Plans (IFEBP) on Public Sector 457(b), 401(k), 403(b) and 401(a) plans. Realizing a need existed for training plan trustees, administrators and committee members on the intricacies of Public Sector defined contribution plans, Bill led the development of 457 University. These comprehensive seminars provide detailed information to public employers/plan sponsors to assure compliance and to develop plans for repositioning the defined contribution benefit in retirement strategies. Bill is frequently invited to lecture on retirement plans, employee benefits, postemployment health plan options, Requests for Disclosure (RFDs) and Request for Proposals (RFPs). Bill earned a Bachelor of Science degree from the W.P. Carey

4 School of Business at Arizona State University and is co-author of two books: Deferred Compensation / Defined Contribution: New Rules / New Game for Public and Private Plans, and Defined Contribution Decisions: The Education Challenge. Jay Castellano, Human Resources Consultant, City of San Mateo Jay Castellano is the former benefits manager for the City of San Jose and for the County of San Mateo at which he managed their respective welfare benefit and defined contribution retirement programs. Each of San Jose and San Mateo offers a full range of employer and voluntary benefits to 13,000-15,000 total lives, and, in total, their deferred compensation plans have grown to over $1.2 billion. In San Jose, Mr. Castellano was also an elected trustee for the deferred compensation plan. Mr. Castellano continues to work with the County of San Mateo on special assignments related to its deferred compensation and labor-management benefits committees. In addition to his work in semi-retirement, Mr. Castellano enjoys volunteering as faculty for the International Foundation of Employee Benefit Plans, as a board member of San Jose s retiree association, as chair of his credit union supervisory committee and as an officer/instructor for an international karate organization.

5 Protecting Your Agency from Fiduciary Lawsuits Coaching Program June 14, 2017

6 Coaching Program: 19 th year as member benefit Career Development Committee 2

7 Overview of Session Topics: 1. What are the fiduciary laws governing your agency s deferred compensation/defined contribution plan? 2. What do recent lawsuits show about growing risks associated with lax oversight? 3. What are best practices for the administration and oversight of your agency s plan(s)? Presenters: Marcus Wu, Partner, Pillsbury Winthrop Shaw Pittman LLP Bill Tugaw, Managing Director of Governmental Plans, NFP Jay Castellano, Human Resources Consultant, City of San Mateo Moderator: * Don Maruska, Director, CSMFO Coaching Program 3

8 Polling Question #1 How many persons are participating at your location? 4

9 Protecting Your Agency s 457(b), 401(a), or 403(b) Retirement Plan from Fiduciary Lawsuits California Society of Municipal Finance Officers Marcus Wu, June 14, 2017 Pillsbury Winthrop Shaw Pittman LLP

10 Overview Defined contribution plans Fiduciary duties Recent lawsuits ERISA 404(c) 6 Storms on the Horizon: Protecting Your Agency s 457(b), 401(a), or 403(b) Retirement Plan from the Coming Fiduciary Lawsuits

11 Defined Contribution Plans

12 Account Balance Plans Defined contribution plans are account balance plans Participant s interest is based exclusively on employer/employee contributions plus forfeitures, adjusted for earnings/loss 8

13 Retirement Plan Types Defined Benefit Plans Pension plans Cash balance plans VS. Defined Contribution Plans 457(b) plans 401(a) plans 403(b) plans 401(k) plans Retiree Health Savings Plans 9

14 Investment Structure of DC Plans Employer-directed Employer selects investments for participant s assets VS. Participant-directed Employer selects funds offered under plan s investment menu, including default fund Menu may include self-directed brokerage account Participants direct the investment of their plan account among funds on the menu If no participant direction, amount is allocated to default fund 10

15 Fiduciary Duties

16 California Constitution ERISA, a federal law governing employee benefit plans, applies to nongovernmental entities but not to public agencies But California law imposes fiduciary standards identical to ERISA under California Constitution, Article 16, Section 17 12

17 Summary of Fiduciary Duties Duty of loyalty California Constitution Article 16, Section 17 (California governmental plans) Duty of prudence Duty of diversification Duty to follow plan documents ERISA (nongovernmental plans) 13

18 Who is a Fiduciary Settlor Functions Benefit design decisions Plan adoption Plan amendments VS. Fiduciary Functions Exercises discretionary authority or control over plan management Exercises discretionary authority or control over plan assets Has discretionary authority or responsibility over plan administration Provides investment advice for compensation 14

19 What is Expected of Fiduciaries? A fiduciary s performance is not judged with 20/20 hindsight. Rather, fiduciaries are judged on the prudence of the process when making decisions. œ Take steps to gather relevant information (and may consult with third party experts) œ Analyze the information (and should consider using experts) œ Make a reasoned decision 15 Storms on the Horizon: Protecting Your Agency s 457(b), 401(a), or 403(b) Retirement Plan from the Coming Fiduciary Lawsuits

20 Potential Consequences of Breaching Fiduciary Responsibilities Range of potential damages under California law Contrast with federal law, which generally limits damages to benefit losses 16

21 Recent Lawsuits

22 Recent Lawsuits Wave of recent litigation involving nongovernmental 401(k) plans The lawsuits have recently seeped over to 403(b) plans: Yale, MIT, NYU, Johns Hopkins, Duke, University of Pennsylvania, Vanderbilt, Emory, and others Allege employers violated fiduciary duties w/r/t œ plan investments œ plan fees 18

23 Common Themes Allegations ABB Edison Lockheed International Paper Excessive recordkeeping costs ˣ ˣ ˣ ˣ Using retail or expensive share classes Failure to follow the plan s IPS when selecting or removing investments Boeing ˣ ˣ ˣ ˣ ˣ ˣ Improper investments ˣ ˣ ˣ Using plan assets to benefit the company Delayed deposits of participant salary deferrals ˣ ˣ ˣ ˣ 19 Storms on the Horizon: Protecting Your Agency s 457(b), 401(a), or 403(b) Retirement Plan from the Coming Fiduciary Lawsuits

24 Recent Settlements Abbott v. Lockheed Martin: $62 million Beesley v. International Paper: $30 million Spano v. The Boeing Company: $57 million 20

25 ERISA 404(c)

26 Government Code (b) Section (b) incorporates ERISA 404(c) rule Compliance with 404(c) shields the agency from liability for participants poor investment decisions 22 Storms on the Horizon: Protecting Your Agency s 457(b), 401(a), or 403(b) Retirement Plan from the Coming Fiduciary Lawsuits

27 Distinguish 404(c) and Fund Selection Employer selects plan s fund menu not protected by 404(c) Participant invests account among funds on menu covered by 404(c) 23

28 Polling Question #2 Which department is responsible for managing your agency s deferred compensation program? 24

29 STORMS ON THE HORIZON BEST PRACTICES Bill Tugaw Managing Director, Governmental Plans NFP

30 Overview Fiduciary Due Diligence Practical Steps Liability Protection Fee Equalization Administrative Expense Reimbursement Allowance

31 Fiduciary Duties Summary of Duties Duty of Loyalty Duty of Prudence Duty of Diversification Duty of Administration in Accordance with Policies

32 Fiduciary Duties - Questions When to keep it? vs. When to appropriately delegate it? Can you delegate it? Delegating task, not responsibility

33 Fiduciary Liability - Practical Steps Comply with Federal / State Laws Current Laws New Legislation Develop Investment Policy Procedure - Select / Remove Vendors / Vendor Representatives Investments

34 Fiduciary Liability - Practical Steps Due Process to Resolve Disputes Require Periodic Audit Independent Financial Audit Compliance Audit of Contractors Establish Performance Monitoring Procedure Benchmark indices Educate / Communicate Plan restrictions Investment options Make Consistent Decisions

35 Fiduciary Liability - Practical Steps Meet Minimum ERISA 404(c) - safe harbor Requirements: Offer Three+ Diverse Investment Options Vary Risk & Return Characteristics Provide Investment Decisions Discretion Allow Periodic Investment Change Communicate Information Monitor Investment Performance

36 Fiduciary Liability Protection Defense of public employees by the public employer Indemnification of public employees by the public employer Potentially no punitive damages Fiduciary Liability Insurance Organizational Options / Considerations Waiver of Recourse Not Paid by Plan Assets

37 Polling Question #3 Which of these practical steps has your agency taken to manage its fiduciary responsibilities? 33

38 Fee Equalization Zero / Low Cost Shares Reimbursement to Participants Disclosure in Quarterly Statements Transparency of fees

39 Administrative Expense Reimbursement Allowance New Responsibilities Additional Cost Financial Status of Public Sector Utilizing Plan Assets Identifying Employer Costs Education / Training External / Neutral Experts Internal Administration

40 Polling Question #4 In which areas might your agency address improvements in fees? 36

41 STORMS ON THE HORIZON CASE STUDY Jay Castellano, City of San Mateo

42 STORMS ON THE HORIZON Case Study: City of San Mateo PURPOSE To provide a case study of the City of San Mateo s deferred compensation plan s transformation so that attendees can see the benefits to the City and get motivated to conduct their own reviews and take action, as appropriate and necessary. PRODUCTS Understanding of San Mateo s starting point Understanding of San Mateo s objectives and strategies Understanding of San Mateo s changes and benefits

43 STORMS ON THE HORIZON Case Study: City of San Mateo 2013 Participants: 497 FT eligible, 309 active participants, #? Retiree participants Six plans: 457(b), OBRA, VEBA, 115 Trust and 401(a) and (h) plans Five plan providers: ICMA-RC, CalPERS 457, Nationwide, MassMutual and an unbundled arrangement involving Schwab and Aspire $67 million assets (b) investment options; 3.5 Morningstar ratings Average administrative fees of 30 basis points (plus investment fees) Inactive Deferred Compensation Committee

44 STORMS ON THE HORIZON Case Study: City of San Mateo OBJECTIVES FOR IMPROVEMENTS Reconstitute and activate Deferred Compensation Committee Develop and implement new administrative policy to subject benefits contracts to recurring competitive processes Conduct Request For Proposals Consolidate providers to take advantage of economies of scale (i.e., reduced fees) Reduce overall administrative fees Update fund options and reduce fund fees Secure resources to provide ongoing governance, administration and participant education

45 2015 STORMS ON THE HORIZON Case Study: City of San Mateo Four plans (soon to be three): 457(b), OBRA, VEBA, and 401(a) and (h) plans Two plan providers (soon to be one): Voya and an unbundled arrangement involving Schwab and Aspire $67 million assets 28 investment options (including TDF); 4.5 Morningstar ratings Administrative fee of 8 basis points (saving $150,000/year) plus lower investment fees New five-person labor-management Deferred Compensation Committee

46 STORMS ON THE HORIZON Case Study: City of San Mateo BETTER POSITIONED FOR FIDUCIARY COMPLIANCE Updated governing documents Summary plan documents Investment policy, education policy New Deferred Compensation Committee Representative of stakeholders Recurring schedule for reviewing and updating governance, compliance New resources for administrative support, web-based and mobile services, communication and education programs

47 STORMS ON THE HORIZON Case Study: City of San Mateo INFRASTRUCTURE FOR FIDUCIARY COMPLIANCE Governing Body (i.e., Deferred Compensation Committee ) Established by agency s governing body (subject to Brown Act compliance) or by agency s chief executive Ensures agency s support and availability of resources Ensure regular reporting to and from committee to maintain connectivity Ensure regular, recurring schedule for monitoring investments, plan performance, provider performance

48 STORMS ON THE HORIZON Case Study: City of San Mateo INFRASTRUCTURE FOR FIDUCIARY COMPLIANCE Governing Documents Establish of Committee Summary Plan Documents Investment Policy Education Policy Committee Resources Plan Provider Plan Consultant Committee Administration

49 STORMS ON THE HORIZON Case Study: City of San Mateo CONSIDERATIONS IN REVISITING STALE PLANS Amongst how many plan providers are assets divided? How many deferred compensation plans does the agency administer? How many investment options are offered to plan participants? What is the quality of the investment options? What is the plan participation rate? Percentage of eligible employees? Average deferral amounts? What is the plan-wide administration fee? What percentage of assets are in stable value investment option?

50 Polling Question #5 Which of San Mateo s objectives appear appropriate for your agency? 46

51 Post-Webinar Discussion Questions a. What are the potential liabilities related to the plans our agency offers? b. What would we like to apply from the webinar and case study? c. What s our plan going forward? 47

52 Contacts for today s webinar Presenters: Marcus Wu, Partner, Pillsbury Winthrop Shaw Pittman LLP marcus.wu@pillsburylaw.com Bill Tugaw, Managing Director of Governmental Plans, NFP bill.tugaw@nfp.com Jay Castellano, Human Resources Consultant, City of San Mateo jay_castellano@hotmail.com Moderator: * Don Maruska, Director, CSMFO Coaching Program CSMFO@donmaruska.com 48

53 Polling Question #6 How was the webinar of value for you and your agency? 49

54 Resources and Feedback A digital audio recording of the session and an Agenda packet with PDF of the PPT with polling results and other materials will become available in ~ 24 hours at the Agendas & Archives tab of Other coaching resources, including volunteer one-to-one coaches are available at Please complete the follow up survey, including suggested topics for future webinars. 50