ERISA Basics. September 12, Senior Practice Fellow: Lois La Londe, Supervisory Benefits Advisor, US Department of Labor

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1 ERISA Basics September 12, 2018 Senior Practice Fellow: Lois La Londe, Supervisory Benefits Advisor, US Department of Labor Guest Lecturer: Matt Manfredi, Senior Investigator, US Department of Labor

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15 Basic Rules of Fiduciary Responsibility Under ERISA What and Who is a Fiduciary Primary Duties of a Fiduciary Failure to Discharge Duties Selecting Service Providers Making Timely Contributions Avoid Prohibited Transactions Understand Prohibited Transaction Exemptions 15

16 Fiduciary Responsibility What and Who is A Fiduciary Primary Duties of A Fiduciary Avoiding Problems Overview Limits on Fiduciary Duties Failure to Discharge Fiduciary Duties 16

17 What Is A Fiduciary IN GENERAL Position of trust, acting for the benefit of others with a high duty of care and loyalty. ERISA Any person who exercises discretionary authority or control over plan assets or administration or gives investment advice for a fee. 17

18 Fiduciary? Plan Sponsor Investment Manager Trustee Plan Attorney or Accountant Plan Administrator Fiduciary? Insurance Company 18

19 Basic Fiduciary Duties Acting SOLEY in the interests of the participants and their beneficiaries Being Prudent Following the terms of the plan Paying only REASONABLE AND NECESSARY expenses of the plan

20 Solely in the Interest Of means Decisions made exclusively on the basis of what is good for the plan and its participants and beneficiaries 20

21 Solely in the Interest Of Undivided Loyalty and An Eye Single 21

22 Prudence If You Need Help, Get It! Fiduciary must act with the care, skill prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use. 22

23 Reasonable Expenses means EXPENSES are reasonable only if they are necessary for the operation of the plan and are not excessive for the service received. For Example: Don t Pay Twice In-House Recordkeeper & Third Party Recordkeeper 23

24 Following Terms of the Plan means Follow the Terms of the Plan Do not exercise personal discretion when terms of the plan are clear 24

25 Limits on Fiduciary Liability If plan permits, fiduciaries may allocate responsibilities Not all acts relating to a plan are fiduciary acts Limits on Fiduciary Liability 25

26 Allocation to Other Fiduciaries If plan permits, fiduciaries may allocate responsibilities not liable for acts or omissions of other fiduciaries. Appointment of investment manager not liable for acts or omissions of investment manager. Duty to monitor other fiduciaries. 26

27 WHAT IF A FIDUCIARY FAILS TO FULFILL HIS OR HER OBLIGATIONS? 27

28 Pay the Plan Restore losses Give up any profits The Plan 28

29 Pay the Government The DOL & IRS may assess civil penalties & excise taxes. Fiduciary may be removed, barred from being a fiduciary. Government 29

30 Co-Fiduciary Liability A fiduciary will be liable for another fiduciary s violation If the fiduciary: 1 Participates in or acts to conceal a violation 2 Permits the other fiduciary to commit a violation 3 Has knowledge of another fiduciary s violation and fails to take reasonable steps to remedy 30

31 Getting It Right means Avoiding Problems In most instances, a basic understanding of fiduciary responsibility and the exercise of common sense will keep plan sponsors and fiduciaries out of trouble Problems can be costly to correct and result in bad employee and public relations. 31

32 Steps to Avoid Common Problems Understand plan and responsibilities 1 Carefully select service providers 2 Make timely contributions 3 Avoid prohibited transactions

33 Step 1 Understanding Your Plan and Your Responsibilities Know who is responsible for various activities required by plan 33

34 Delegations When assigning responsibility (whether to an internal committee, human resources department or external service provider): Make sure they understand their responsibilities Make sure they have the knowledge and information necessary to carry out their responsibilities Monitor to make sure they carryout their assignments 34

35 Step 2 Carefully Select Service Providers for the Plan When you need help, get help remember the prudent expert rule The selection of service providers is a fiduciary act prudence is a process A fiduciary s success may depend on how well the fiduciary selects the plan s service providers 35

36 Tips for Selecting Service Providers 1 Consider what services you need 2 Obtain information from more than one service provider (services, experience with employee benefit plans, costs) 3 For valid comparison, make sure each provider has same information 4 Consider bundled and unbundled services 36

37 Tips for Selecting Service Providers continued 5 If a license is required (attorney, accountant, etc.), check with state or federal licensing authorities to confirm provider has up-to-date license 6 If handling plan assets, confirm provider is bonded 7 Make sure you understand terms of agreements or contracts 37

38 Tips for Selecting Service Providers continued 8 Document the process you followed in reviewing and selecting service providers 9 Obtain commitment from provider for regular updates on services 10 When renewing contracts with service providers repeat the selection process / confirm that facts on which initial selection was made have not changed 38

39 Monitor Plan Service Providers Plan fiduciaries must prudently select plan service providers and periodically monitor them to make sure the services are being delivered as agreed. Remember the plan fiduciary may be liable if the service provider fails to carry out its responsibilities. 39

40 Fees and Expenses Field Assistance Bulletin 2003 Who can pay plan expenses? How can fees and expenses be allocated among participants? Plan sponsor / participant Pro rata / per capita 40

41 Fees and Expenses continued Fiduciary has a duty to ensure that fees and expenses paid by the plan are reasonable in light of the quality and quantity of services provided. Both costs and quality are important factors. Ask if the provider is receiving fees from third parties, such as 12b-1 fees. 41

42 Fee and Investment Disclosures Disclosure Requirements Field Assistance Bulletin R Participant-Directed Plans Only 42

43 Fee and Investment Disclosures What information must be disclosed? 1 Plan-related information General plan information Administrative expense information Individual expense information 4 How must the information be disclosed? Comparative chart Model provided 2 Investment-related information Performance data Benchmark returns Fee and expenses Internet web site address Glossary 5 6 Any other information? statement of expenses actually deducted Plan-related expenses Administrative expenses Individual expenses When must the information be 3 disclosed? At least quarterly Up front Annually (2-month grace period available) Additional information on request 7 May be included in the individual benefit statement 43

44 For Help see Selecting an Auditor for Your Employee Benefit Plan Understanding Retirement Plan Fees and Expenses Meeting Your Fiduciary Responsibilities 44

45 Step 3 Make Timely Contributions Employer Contributions Contribute per plan documents failure may result in legal action by plan fiduciary Overview Participant Contributions Become plan assets when reasonably segregable from employer s general assets failure may result in violation of trust requirements and prohibited transactions. 45

46 Participant Contributions Amounts withheld from employees wages must be transmitted to plan as soon as they reasonably can be segregated from the company s general assets. the rule A small plan (with fewer than 100 participants) will be deemed to be in compliance if participant contributions are received by the plan within 7 business days. (This is an optional safe harbour for small plans.) 46

47 Participant Contributions tip Delinquent participant contributions can be one of the biggest problems for sponsors of 401(k) plans. Review your payroll system and work with service providers to ensure that participant contributions are forwarded to the plan on the earliest possible date in compliance with the law. 47

48 Step 4 Avoid Prohibited Transactions ERISAspeak A fiduciary of a Plan shall not cause the Plan to engage in a transaction, if he knows or should know that such transaction is either directly or indirectly between the Plan and a party in interest. Translation As a fiduciary, you can t cause the Plan to engage in transactions with people or businesses that have a close relationship to you or the Plan. 48

49 Parties in Interest WHAT Generally, people or entities that are related to a Plan. WHO Fiduciaries Employees of a Plan Sponsoring Employer Service Providers MORE Employees, officers and directors of the sponsoring employer, service providers and 50% or more owner of the employer Relatives (spouses, ancestors, lineal descendants, spouses of lineal descendants) of fiduciaries, service providers, sponsoring employers 49

50 Parties in Interest Example I m related I m related Employer I m related MZQ Plan I m related Accountant I m NOT related Trustee s husband Employer s son Employer s sister 50

51 Prohibited Transactions WHAT AKA What not to do with the Plan s money and / or assets and who not to do it with WHY To protect Plan participants and their beneficiaries by making sure that their retirement Plan benefits are available as promised under their Plan. REMEMBER If you re a decision-maker regarding a Plan, you are responsible to the Plan as a Fiduciary. 51

52 Prohibited Transactions Under ERISA, a fiduciary may not: Cause the Plan to enter into a transaction, if her or she knows or should know that the transaction would be with a party in interest. Engage in any kind of fiduciary self-dealing with the plan s assets. 52

53 Prohibited Transactions As a fiduciary you cannot cause the Plan to buy or sell or lease property from / to a related party. 53

54 Prohibited Transactions Example ABC Inc. 401(k) Plan Owner of Real Estate Plan Attorney Fiduciary negotiates a Lease of Plan property to the Plan s attorney 54

55 Prohibited Transactions As a fiduciary you cannot cause a Plan to receive a loan from or grant a loan to a related party or cause there to be an extensión of credit between the Plan and a related party. 55

56 Prohibited Transactions Example ABC Profit Sharing Plan Loans money to Plan accountant The accountant will pay an above market interest rate what a good deal for the Plan Plan Accountant Plan Sponsor / Fiduciary 56

57 Prohibited Transactions A fiduciary cannot cause a Plan to receive services or goods from a related party. 57

58 Prohibited Transactions Example XYZ Co. Inc. 401(k) Plan XYZ Company, Inc. Plan Fiduciary Plan Custodian 58

59 Prohibited Transactions As a fiduciary cannot use Plan assets to Benefit a party in interest. 59

60 Prohibited Transactions Example The Plan is overfunded this year! Here s some money for your father s surgery. Plan Assets $$$$ Plan Sponsor Employee / Related Party 60

61 Prohibited Transactions In your capacity as a Plan fiduciary, you cannot deal with the Plan s assets for your own Benefit. 61

62 Prohibited Transactions Example Company A Fiduciary/Employer Company B Plan A Fiduciary causes Plan A to loan $$$ to Company B Needs Cash 62

63 Prohibited Transactions In your capacity as a Plan fiduciary, when dealing on behalf of the Plan, you cannot represent or act on behalf of anyone who has adverse intereses to the interests of the Plan. 63

64 Prohibited Transactions Example ABC, Inc. Profit Sharing Plan Sells land If you want to buy that land from the Plan, I ll give you a good deal $$$ Employer/Fiduciary Fiduciary s Brother 64

65 Prohibited Transactions As a Plan fiduciary you cannot get a payment or benefit from anyone in connection with a Plan transaction. 65

66 Prohibited Transactions Example 401(k) Plan Hire me as the plan s record keeper and I ll do your personal taxes for free Employer/ Fiduciary Accountant 66

67 Fiduciary Tips Identify the related parties to the Plan. Do not use the Plan or its assets to benefit the related parties or yourself. Do not cause or allow the Plan to engage in transactions with related parties unless the transaction is exempted. 67

68 Exemptions Some transactions that are prohibited are allowed if they are covered by an exemption. Some exemptions are specified in ERISA. These are called statutory exemptions. 68

69 Example of Statutory Exemption Service Provider Exemption ERISA section 408(b)(2) PT - fiduciary causes a Plan to receive services from a related party. EXEMPTION - permits service contracts with related parties provided that very specific conditions are met. Some exemptions are specified in ERISA. These are called statutory exemptions. 69

70 Service Provider Exemption 408(b)(2): Conditions Reasonable contract (as clarified in DOL final rule) Necessary service Conditions Some exemptions are specified in ERISA. These are called statutory Reasonable exemptions. compensation 70

71 Final Rule for the Service Provider Exemption: Reasonable Contract The final rule relating to the Service Provider Exemption requires that certain service providers disclose specified detailed information to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements. Some exemptions are specified in ERISA. These are called statutory exemptions. 71

72 Covered Plans Defined Contribution individual account Plans Exceptions: SEPS, SIMPLEs, IRAs, Individual Retirement Annuities and Certain ( Frozen ) Pre Contracts or Accounts in 403(b) Plans Defined Some Benefit exemptions Pension Plans are specified in ERISA. These are called statutory exemptions. 72

73 Covered Service Providers Any service provider that enters into a contract or arrangement with a covered plan under which it expects to receive $1000 or more in compensation for: ERISA fiduciary or investment advisory services to either the plan or a plan asset vehicle Recordkeeping or brokerage services to an individual account plan in connection with an investment platform Some exemptions Certain additional are specified in services if it is ERISA. reasonable These are expected that such called person will receive statutory indirect exemptions. compensation for the service 73

74 Disclosures: Relevant Information Plan service providers must furnish specific information to responsible plan fiduciaries concerning: The services to be provided Some exemptions are specified in ERISA. These are If applicable, their status as a fiduciary or a registered investment advisor called statutory exemptions. All compensation, direct, indirect and on termination, to be paid to the service provider, its affiliates and subcontractors 74

75 Example 401(k) Plan I know the Plan custodian is a related party. Can I hire him to provide additional services to the Plan? Plan Sponsor Yes, if: services are necessary compensation is reasonable contract is reasonable Some exemptions are specified in ERISA. These are called statutory exemptions. Plan Custodian Is the custodian a covered service provider? If so, she must give me all of the disclosures required under the regulation. 75

76 Administrative Exemptions ERISA 408(a) Administratively feasible In the interests of the plan and it participants and beneficiaries Some exemptions are specified in ERISA. Protective of These the are rights of participants and called beneficiaries statutory exemptions. 76

77 Individual Exemptions Some exemptions are created just for specific parties to engage in a specific transaction based upon a written application to the DOL. Example: Plan Z owns real estate. Employer Z wants to purchase the real estate. Employer Z can only do this if he applies for an individual exemption and the DOL grants his request. 77

78 Class Exemptions Some exemption apply more broadly to specified transactions or a specified industry. Example: A car dealer owns notes evidencing his customer obligations to pay their car loans. The returns on these loans are higher than many other investments. The dealer wants his Plan to have the investment opportunity and sells the notes to the Plan. There is a class exemption for this type of transaction. If all of the conditions are met, the dealer can sell the notes to the Plan. 78

79 Class Exemptions 77-3 Open-End Mutual Funds In-House Plans 77-4 Open-End Mutual Funds Investment Advisor Insurance Agents Pension Consultants Investment Company Principal Underwriters Qualified Professional Asset Managers (QPAMs) In-House Professional Asset Managers Agency Transactions Executed by Fiduciary Broker- Dealers For a full list see the DOL s web site at: 79

80 Exemptions Keys to using a statutory or class exemption Understand all of the violations involved in the transaction. Make sure there is an exemption that applies to all of the violations involved. Follow all of the conditions explicitly. Individual Exemption Will probably need professional help to submit an application to the Department. 80

81 EBSA Contact Information Contact EBSA electronically at EBSA Regional Offices (866) 444-EBSA (3272) Office of Regulations & Interpretations (202) Office of Exemption Determinations (202) EBSA website: 81

82 Lois La Londe, Supervisory Benefits Advisor, US Department of Labor, Employee Benefits Security Administration Lois La Londe is the Supervisory Benefits Advisor for the U.S. Department of Labor Employee Benefits Security Administration s ( EBSA ) New York Regional Office. She is responsible for managing the Benefits Advisor unit which provides participant and compliance assistance to the public. Ms. La Londe began her career with EBSA as a Benefits Advisor in May 2009 and then became an Investigator in March As an investigator, Ms. La Londe conducted civil investigations of pension plans, health plans and service providers to determine compliance with Title I of ERISA. She was promoted to Senior Investigator in 2016 and recently became the Supervisory Benefits Advisor in January Ms. La Londe has done two details with the Department s National Office as a Special Assistant to the Deputy Assistant Secretary for Program Operations and an Assistant to the Major Case Coordinator in the Office of Enforcement. Prior to coming to EBSA, Ms. La Londe obtained a Juris Doctor degree from Brooklyn Law School. 82

83 Matt Manfredi, Senior Investigator, US Department of Labor, Employee Benefits Security Administration Matt Manfredi began working with EBSA in 2010 as a Benefits Advisor where he provided participant and compliance assistance. In 2012, he transferred to the Enforcement Division as an Investigator where he conducts civil investigations of pension plans, health plans and service providers to determine compliance with Title I of ERISA. In 2016, Mr. Manfredi was promoted to Senior Investigator and is responsible for conducting and coordinating complex major cases for the New York Regional Office. Mr. Manfredi recently completed a detail assignment at Department of Labor s Office of Enforcement in Washington, D.C. working on national health investigations. Prior to joining EBSA, he worked as an Administrative Manager for a Health Institute, a Human Resources Associate for the American Civil Liberties Union and a consultant for the New York City Civil Service Commission. Mr. Manfredi received his J.D. from New York Law School, a Master of Arts in Organizational Psychology from Columbia University and a Bachelor of Arts in Psychology from St. John s University. 83

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