CREATING A CULTURE OF FIDUCIARY RESPONSIBILITY

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1 CREATING A CULTURE OF FIDUCIARY RESPONSIBILITY Presented by: Mark Hogan Regional Director Pentegra Retirement Services July 2016 Our Difference. Your Advantage.

2 IN THE NEWS How Lawsuits Are Reshaping 401(k) Plans Is Your Company s Retirement Plan Fine or About To Be Fined? Plan Fiduciaries Sued for Failing to Remove Fund Another Small 401(k) Plan Excessive Fee Lawsuit Filed DC Plans Barraged by DOL Audits DOL Bumps Up Civil Monetary Penalties Recordkeeping Recommendations a Fiduciary Act

3 TERMS Plan Sponsor Named Fiduciary 3(38)/Discretionary Trustee 3(16) Plan Administrator Peeling Back the Fiduciary Layers and Unscrambling the Fiduciary Confusion, by Craig Freedman and Jeffrey Zimon

4 WHO S A FIDUCIARY? The Bank Management Committee Board Your Recordkeeper, Third Party Administrator, Advisor???

5 FIDUCIARIES SHOULD BE EXPERTS Under ERISA, a plan fiduciary has an obligation to act with the care, skill, loyalty and diligence that a reasonably prudent person would act in similar circumstances Retirement plans must be administered for the exclusive benefit of the participants and beneficiaries There are no licensing or educational requirements for retirement plan fiduciaries

6 KEY FIDUCIARY DUTIES Administering the plan by following the plan s governing documents Diversifying the plan's investments Selecting and monitoring the services for the plan Paying only reasonable plan expenses

7 WHAT CONSCIENTIOUS FIDUCIARIES SPEND TIME ON Boning up on the rules Creating or learning processes and checklists Investment analysis and reports Document delivery Reading the audit report Reading the SPD, SMMs, and SAR Reading amendments and restatements Approving distributions, loans QDROs Hardship distributions New hire process

8 FIDUCIARY TRAPS You can t outsource fiduciary responsibility and liability, the plan sponsor is ultimately always liable You can outsource all of your fiduciary responsibility We serve as a co-fiduciary We ll help you fulfill your responsibility under ERISA 404(c) We hired a good Third Party Administrator/Record keeper/advisor, and they re responsible We don t pay anything for our plan

9 FUN FACTS 10,002 Forms 5500 audited 5,973 VCP agreements 3,472 DOL civil investigations closed 75% resulted in payment Average $397, cases referred for litigation by DOL, 75 convictions 8,860 ERISA lawsuits 1.4% of plans get in some kind of trouble annually; a small percentage but a significant risk over time. Sources: data from IRS, DOL, and federal court system websites

10 THE IRS TOP TEN LIST of Common VCP Submissions 1. Failure to amend for tax law changes 2. Incorrect definition of compensation 3. Failure to include eligible employees or exclude ineligibles 4. Loan errors 5. Impermissible in-service withdrawals 6. Required Minimum Distribution errors 7. Employer eligibility failure 8. ADP/ACP failure not timely corrected 9. Failure to provide minimum top heavy benefit 10. Exceeding maximum contribution limits From the IRS Website at

11 THE NATURE OF FIDUCIARY RISK Administrative Fiduciary Risk Administrative Problems Escalate to Official Corrections IRS EPCRS correction DOL investigation with monetary result DOL litigation referrals, indictments, convictions DOL s DFVCP DOL s VFCP ERISA lawsuits Investment Fiduciary Risk Weaknesses in Process Cause Problems The greatest risks are appropriateness of investment, and expenses Lawsuits are potentially costly, right or wrong Plans of all sizes are becoming targets for investment lawsuits

12 HOW HELPFUL IS INSURANCE? For Administrative Failures How Helpful is Insurance? Problems are relatively frequent Losses are painful but not catastrophic Insurance deductibles are often $10,000+ Insurance is not designed for frequent, non-catastrophic losses The retained risk is substantial For Investment Failures How Helpful is Insurance? Lawsuits are becoming more common When they happen they can be extremely expensive, catastrophic Insurance (less deductible) designed specifically to protect against catastrophic losses like this The retained risk is nominal in global terms but substantial in the event of a lawsuit

13 THE TRUTH ABOUT FIDUCIARY RISK Most Risk You never get it right You sometimes get it right You usually get it right You always get it right Least Risk Getting it right is someone else s problem

14 WHY OUTSOURCE? Retirement plan administration and the oversight of plan assets is complex, and laden with compliance burdens It s an unwelcome burden that distracts from other critical areas of responsibility Quality, not risk

15 TRANSFER OF RESPONSIBILITY The law is clear that nearly every fiduciary duty may be outsourced ERISA 405(c)(1). A plan may provide for procedures (A) for allocating fiduciary responsibilities among named fiduciaries, and (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities. 405(c)(2). If a named fiduciary makes such an allocation or delegation, then such named fiduciary shall not be liable for an act or omission of such person in carrying out such responsibility.

16 WHAT CAN T BE OUTSOURCED Appoint and monitor Collect and remit contributions Provide timely and accurate information

17 KEY BENEFITS ASSOCIATED WITH OUTSOURCING Increased productivity Reduced liability Increased objectivity Fewer conflicts of interest Enhanced services Cost savings More successful outcomes for plan participants and plan sponsors

18 STEP 1: ORGANIZE Identify the players Know the rules: -ERISA -DOL -IRS Define the roles and responsibilities of all parties involved

19 STEP 2: FORMALIZE Establish plan goals and objectives Identify key factors and level of risk Outline everything in writing

20 STEP 3: IMPLEMENT Establish a due diligence process and timeline Evaluate potential options Decide on the appropriate structure for your Bank

21 STEP 4: MONITOR Regular, ongoing monitoring is the most neglected Keep asking yourself: Is this the right thing to do? Document, document, document.

22 CREATING THE CULTURE The steps reviewed establish the building blocks of a fiduciary process Without the right culture, the process can become hollow Asking questions, critical thinking, help cement the culture Embrace responsibilities Understand you will not be judged on getting the lowest cost, nor the highest returns, but on the prudence employed in the structuring and monitoring your plan(s)

23 The DOL made every broker a fiduciary and subjected IRAs to ERISA-like rules Bank employees and the bank itself probably ARE fiduciaries when they refer members to networked broker-dealers or RIAs

24 WHAT THE NEW RULES SAY For IRAs, 401(k)s, and similar retirement accounts, many common forms of compensation are prohibited UNLESS an exemption applies There are a handful of new prohibited transaction exemptions (PTEs) that everyone will need to use The primary exemption is the Best Interest Contract Exemption (BICE or BIC exemption) BIC Light is a less onerous variation you can use if you are a Level Fee Fiduciary

25 WHAT THE NETWORKING EXCEPTION MEANS An affiliate is bound by the full rules A networked partner (broker-dealer, RIA, insurance) is bound by the full rules The bank itself and affected bank employees: ARE fiduciaries ARE subject to the Impartial Conduct Standards and other fiduciary duties ARE NOT subject to the full BIC

26 WHERE TO GO FROM HERE Talk to lawyers Talk to partners Choose a strategic response Make sure your networking partners are aligned with that strategic response