ERISA FIDUCIARY BASICS AND BEST PRACTICES

Transcription

1 Presents ERISA FIDUCIARY BASICS AND BEST PRACTICES November 5, 2015 Misty A. Leon

2 COMPLIANCE 101 General Roles and Responsibilities Who's Involved? Plan Administrator Responsibilities ERISA Fiduciary Duties Exclusive Purpose Rule Prudence Rule Diversification Rule Plan Document Rule Additional ERISA Obligations Slide No. 2

3 I'M A FIDUCIARY, NOW WHAT? Potential Pitfalls to Avoid Investment Selection Issues ERISA Disclosure Rules Prohibited Transactions Selection and Monitoring Duties Importance of Fiduciary Compliance ERISA Liability Slide No. 3

4 Fiduciaries Those parties with discretionary authority, control, or responsibility over the management, investment or administration of a Plan Plan Sponsor Plan Administrator Trustee Investment Manager Other parties granted discretionary authority PLAN GENERAL ROLES AND RESPONSIBILITIES PLAN SPONSOR Board of Directors/Compensation Committee Establishes and maintains the general oversight of the Plan and Trust. Approves Plan and Trust Appoints Plan Administrator Appoints Trustee/Investment Manager, as applicable Oversees Plan and Trust as a fiduciary Agents/Service Providers Those parties who assist the fiduciaries in a nondiscretionary capacity with the operation of the Plan and/or Trust Legal Counsel Accountants Recordkeepers Custodian Advisors Auditors TRUST Plan Administrator A Person or Committee charged with administering the Plan as a fiduciary May utilize committee(s) or persons to assist with duties May utilize agents to handle administrative duties (generally in a nonfiduciary capacity) Administrative responsibilities include: 1. Written Plan and Trust, Administrative Policies 2. Employee Participation, Communications and Materials 3. Participant Recordkeeping and Statements 4. Establish Funding and/or Investment Policy 5. Government Reporting (IRS, DOL, PBGC) 6. Process Benefit Payments, Claims, and Loans 7. Audit Plan Operation and Ensure Records Retention 8. Bonding Trustee, Investment Manager, and/or Custodian A Person or Committee may serve in all three capacities or otherwise as appointed Trustee and Investment Manager usually are fiduciaries, the Custodian usually is not A separate Investment Manager(s) may be appointed by the Plan Sponsor, Plan Administrator or Trustee Custodian safekeeps assets and prepares asset reporting Certain insurance products do not require a trustee Slide No. 4

5 WHO'S INVOLVED? Plan Sponsor Plan Administrator (e.g., Director of HR, Plan Administrative Committee) Plan Responsible for the general administration of the plan Identifies: Plan administrator Plan administrator duties Party (e.g., plan sponsor) with authority to amend the plan Appointed agents may include trustee, recordkeeper/tpa, investment advisor, consultants Slide No. 5

6 GENERAL PLAN ADMINISTRATOR RESPONSIBILITIES General responsibilities include: Complying with applicable law and plan documents Employing or appointing agents Adopting claims review procedures Communicating with and directing plan trustees Governmental reporting and disclosure (e.g., Form 5500, Summary Annual Report, Summary Plan Description) Slide No. 6

7 GENERAL PLAN ADMINISTRATOR RESPONSIBILITIES (cont'd) Establishing, monitoring, and revising administrative policies, such as: A funding policy and investment policy A QDRO policy A loan policy Establishing enrollment procedures for the plan Maintaining the records of the plan Slide No. 7

8 TYPICAL PLAN ADMINISTRATOR RESPONSIBILITIES Administer the plan on a day-to-day basis Review benefit claims and appeals Select investment funds Direct the plan s trustee and appoint investment managers Adopt and enforce procedures necessary for the administration of the plan (e.g., enrollment, benefit distributions, etc.) Make employee eligibility determinations Create and maintain records and forms for administration of the Plan and comply with all applicable reporting and disclosure rules Direct the trustee as to distribution of benefits Engage the service of counsel, actuaries, accountants, and other consultants or agents Slide No. 8

9 IDENTIFYING ERISA FIDUCIARIES A "fiduciary" is anyone who has or exercises discretionary authority, control or responsibility over the management, investment, or administration of the plan. Includes: Plan administrator (e.g., members of benefits committee) Staff, to the extent staff members make initial decisions regarding eligibility to participate in the plan, claims or other discretionary determinations Excludes: Day to day, nondiscretionary ministerial duties carried out by employer personnel Does the action involve strict application of plan terms? Slide No. 9

10 POTENTIAL REVISIONS TO FIDUCIARY STANDARD Department of Labor proposed rules would potentially broaden the definition of who is a "fiduciary" In particular, the new rules may cause certain service providers to become treated as fiduciaries based on the advice they provide to ERISA plans New rules are facing opposition from the financial services industry Plan sponsors will likely still be able to provide general educational information to participants without being treated as fiduciaries Stay tuned for more information Slide No. 10

11 BASIC ERISA FIDUCIARY DUTIES: EXCLUSIVE PURPOSE RULE Fiduciaries must discharge their duties for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan "Two hats" concept Incidental corporate benefit permissible Fiduciaries must be sensitive to and acknowledge this conflict May require a benefits committee member to abstain from voting Slide No. 11

12 BASIC ERISA FIDUCIARY DUTIES: PRUDENCE RULE Plan administrators (including committee members) must discharge their duties with the care, skill, prudence, and diligence that a prudent man would use under similar circumstances ERISA prudence is largely procedural: Did the right questions get asked? Was expert assistance sought? Was the Committee diligent in making inquiries? The Committee need not be "right," but must be diligent Slide No. 12

13 BASIC ERISA FIDUCIARY DUTIES: DIVERSIFICATION RULE The Committee must diversify the Plan investments to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so Diversification is essential for ERISA 404(c) protection Diversification is measured against the Plan's entire portfolio Slide No. 13

14 BASIC ERISA FIDUCIARY DUTIES: PLAN DOCUMENT RULE Follow the terms of the Plan to the extent they are consistent with ERISA Slide No. 14

15 OTHER ERISA REQUIREMENTS Written plan document Bonding of each person who handles plan funds Internal claims review procedure that complies with ERISA Disclosure requirements (e.g., SPDs) Annual reporting and audit requirements Slide No. 15

16 DOCUMENT RETENTION REQUIREMENTS ERISA requires documents to be retained for a minimum of six years Need to maintain records of all plan administrative matters to verify, explain, or clarify past actions and to permit checks for accuracy and completeness Records that would be needed to support benefits calculations and eligibility should be retained indefinitely The IRS expects plan administrators to retain such records regardless of age Important to obtain data in a readable format upon termination of service provider contracts Slide No. 16

17 SETTLOR vs. FIDUCIARY FUNCTIONS Plan activities are generally distinguished between "settlor" functions and fiduciary functions Settlor functions are typically considered business functions or decisions, such as establishing a plan, deciding who will be covered, determining what benefits are to be provided, and amending or terminating a plan Activities relating to ongoing discretionary control or authority over administration or management of a plan are generally fiduciary functions Only expenses that are fiduciary in nature (and that meet the other requirements) may be paid by a plan Slide No. 17

18 SETTLOR vs. FIDUCIARY FUNCTIONS (cont'd) Settlor function: Amending a plan Fiduciary function: Implementation of a plan amendment or other settlor decision, if it involves the exercise of discretion in plan administration When the same party is both settlor and fiduciary, courts will closely scrutinize the action being taken for whether it is fiduciary in nature Slide No. 18

19 PAYMENT OF PLAN EXPENSES Does the plan address payment of expenses? Is the expense a fiduciary or a settlor expense? Plan assets may only be used to pay reasonable and necessary administrative expenses relating to the operation of the plan The evaluation of fees and service providers is a prudence issue Payment of legal fees from plan assets creates privilege issues Generally, fiduciary actions and communications made on behalf of plan participants and beneficiaries are discoverable Slide No. 19

20 ALLOCATION OF PLAN EXPENSES TO PARTICIPANTS DOL rules restrict allocation of expenses to plan participants Expenses must be allocated on a rational basis (e.g., assetbased fees should not be allocated on a per capita basis) Adequate disclosures required in SPD and under DOL plan-level disclosures that must be provided to individual account plan participants Slide No. 20

21 POTENTIAL PITFALLS TO AVOID Investment Selection Issues ERISA Disclosure Rules SPDs New DOL Disclosure Requirements Prohibited Transactions Selection and Monitoring Duties Slide No. 21

22 ERISA SECTION 404(c) Compliance with ERISA section 404(c) generally shifts investment liability to plan participants when participants have the ability to exercise control over their own investment elections Extensive requirements to gain protection include: Plan must offer a broad range of (and at least three) diversified investment alternatives Participants cannot be locked into investments for extended periods of time Participants must be provided with sufficient information to make informed investment decisions and information regarding any applicable investment restrictions Participants must be informed of the plan s section 404(c) status and its impact on fiduciary liability with respect to plan investments Duty of prudence will still apply to selection and monitoring of plan investment options Slide No. 22

23 SPECIAL 404(c) SITUATIONS Investment "mapping" "Control" requirement met for a "qualified change in investment options" Replacement investments must be "reasonably similar" and notice requirements must be satisfied Qualified default investment alternative or "QDIA" Default funds must still be prudently selected and monitored Provide initial notice at least 30 days in advance of (i) plan eligibility or (ii) first QDIA investment Annual notices at least 30 days prior to beginning of new plan year Avoid communications containing "puffery" about security of investments or ease of use Slide No. 23

24 INVESTMENT POLICIES Tussey v. ABB, Inc., 2012 WL (W.D. Mo. March 31, 2012) Revenue sharing lawsuit Plan investment policy required revenue sharing amounts to be used as an offset against plan administration costs The court considered the policy statement to be a "governing plan document" for purposes of the ERISA plan document rule Illustrates that failure to follow the terms of a plan s detailed investment policy could result in a fiduciary breach claim Slide No. 24

25 ERISA DISCLOSURE RULES: SPDs and SMMs ERISA requires that an SPD be provided to an individual: No more than 90 days after he becomes a participant No more than 90 days after he begins receiving benefits (for beneficiaries) The SPD must be updated every five years Material interim amendments can be described in a Summary of Material Modifications ("SMM") Provide no later than 210 days after the end of the plan year in which the material modification is adopted More frequent updates may be advisable Distribute in a manner designed to ensure "actual receipt" Slide No. 25

26 FEE DISCLOSURE REQUIREMENTS: SERVICE PROVIDERS Form 5500, Schedule C requirements revised to enhance disclosures Providers that act as a fiduciary, broker, or recordkeeper, or that receive "indirect compensation" from a third party, must furnish detailed disclosures regarding the fees and compensation that they receive Plan fiduciaries have a duty to ensure that an ERISA plan has received the required disclosures Disclosures must be used to determine whether compensation being charged to the plan is "reasonable" in light of the services provided Failure to collect required disclosures from a service provider could result in a violation of ERISA fiduciary duties and a potential "prohibited transaction" under ERISA Slide No. 26

27 PARTICIPANT-LEVEL DISCLOSURE REQUIREMENTS Must provide detailed information regarding plan expenses to each employee who is eligible to participate and to beneficiaries who have the right to direct plan investments Initial disclosures must be provided on or before the date the participant becomes eligible to direct investments to a plan, and annually thereafter Quarterly disclosure of any fees that have actually been charged to the participant s account DOL safe harbor applies to electronic disclosures days advance notice of certain changes Failure to comply may be treated as a violation of ERISA or permit a participant or the DOL to bring litigation Slide No. 27

28 PROHIBITED TRANSACTIONS ("PTs") A plan cannot generally engage in a transaction with a "party in interest" ("PII") Plan sponsor and its officers and employees Any Plan fiduciary (e.g., trustee or investment manager) Plan service providers Union Certain affiliates and relatives of employer or other PIIs PT can involve a conflict of interest or fiduciary self-dealing Exceptions apply under statutory or "class" exemptions adopted by the DOL More exemptions for "technical PTs" than fiduciary self-dealing Slide No. 28

29 CONFLICTS OF INTEREST Direct or indirect transactions between a Plan and a PII involving: Sales, exchanges, or leasing of any property Lending of money or other extensions of credit Furnishing goods, services, or facilities Transfers to, or use by or for the benefit of, a PII of Plan assets Acquisitions on behalf of the Plan of any employer security or employer real property that does not meet specific requirements Examples: Purchase of an plan sponsor-owned building by a Plan Hiring an affiliate of the Plan's recordkeeper to perform services for the Plan Slide No. 29

30 Occur when a fiduciary: SELF DEALING PTs Deals with assets of the plan in his own interest or for his own account Acts in a transaction involving the plan on behalf of an adverse party Receives consideration for his own personal account from an adverse party in a transaction involving assets of the plan Examples: Committee member appoints himself (or votes to appoint himself) to act as a paid service provider to the plan Use of plan assets to send the plan committee members and spouses to Hawaii Slide No. 30

31 OTHER PT BASICS Exemption for provision of goods and services Plans are allowed to contract with or make reasonable arrangements with a service provider as necessary for the establishment or operation of a plan It does not matter if the transaction was "fair," a good (or better) deal, or whether it was entered into in good faith if it is a PT If no exemption applies, the transaction will have to be reversed with the plan "made whole" Excise tax of 15% per year applies to a PT until corrected Slide No. 31

32 AVOIDING PROBLEMS: SELECTION AND MONITORING DUTIES The selection of service providers is a fiduciary act Uniform RFP requests Periodic reevaluation of providers Factors to consider include: Information about the firm itself Financial condition and experience Information about the quality of the firm s services A description of business practices Slide No. 32

33 DUTY TO MONITOR The plan administrator must monitor persons or entities appointed or hired to carry out plan-related duties Includes: Internal company personnel (e.g., HR or benefits staff) Outside service providers (e.g., the recordkeeper, trustee, investment provider) Plan Sponsor (i.e., the Board of Directors) has same duty to monitor with respect to its appointment of the plan administrator Slide No. 33

34 HOW TO MONITOR Review service provider performance Review service provider reports Verify fees charged are accurate and reasonable Ask about policies and practices (e.g., float, trading, turnover, proxy voting, stale checks) Follow up on participant complaints Document the monitoring process Slide No. 34

35 DOL COMPLIANCE Regulates fiduciary compliance under ERISA: May assess penalties, initiate lawsuits, and make settlement agreements May grant exemptions to PTs DOL penalties include: Personal liability Making affected Plan whole Penalties Civil (e.g., 20% excise tax for fiduciary breach, $1,100/day penalty for failure to file Form 5500, $110/day penalty for failure to provide certain required materials to participants) Criminal rare Slide No. 35

36 OTHER REASONS FIDUCIARY COMPLIANCE IS IMPORTANT IRS Compliance Employee Relations Slide No. 36

37 ERISA LIABILITY Whether and to what extent the Committee is liable under ERISA will depend on: Conduct under the circumstances Whether such conduct satisfied the ERISA fiduciary standards of conduct outlined above What loss or other harm has occurred as a result of any breach of those fiduciary duties Slide No. 37

38 ERISA FIDUCIARY LIABILITY Breach of direct fiduciary responsibility, either by act or omission Co-fiduciary liability can also be applied based on knowing participation in a breach by another fiduciary, enabling a breach to occur, or failing to take reasonable steps to remedy a breach May apply to the Board of Directors or other entity who appointed a fiduciary Creates important monitoring obligations Personal liability in either case may include: Restoring any plan losses Remitting any profits earned 20% excise tax Other equitable or remedial relief (e.g., participant or DOL lawsuit) Slide No. 38

39 CO-FIDUCIARY RESPONSIBLITY Knowing participation in or concealment of a breach of a co-fiduciary Enabling a co-fiduciary to commit a breach Failing to take reasonable steps to remedy a breach by a cofiduciary Same personal liability as for direct fiduciary breach may be imposed The Board of Directors should be apprised of plan issues on a regular basis, to avoid potential co-fiduciary liability issues Slide No. 39

40 LIABILITY REGARDING NONFIDUCIARY ACTS Service providers typically are nonfiduciaries with respect to the plan and generally not liable under ERISA for fiduciary breaches The plan administrator remains liable as a fiduciary for delegated responsibilities Monitor and evaluate performance of nonfiduciaries to make sure that their conduct does not give rise to a breach of fiduciary duty by the plan administrator Same personal liability as for direct fiduciary breach may be imposed Slide No. 40

41 PRECAUTIONS PROTECTING THE PLAN ADMINISTRATOR Fiduciary liability often arises when: Fiduciary is not aware of its duties Fiduciary does not attend meetings and carry out duties Fiduciaries do not obtain needed expert advice Fiduciary ignores responsibilities Fiduciary does not follow prudent practices Slide No. 41

42 WAYS TO LIMIT FIDUCIARY LIABILITY Be informed Read the plan documents Familiarize yourself with ERISA's fiduciary requirements Stay apprised of administrative actions for the Plan by employer personnel and service providers Have committee members meet as needed Slide No. 42

43 WAYS TO LIMIT FIDUCIARY LIABILITY (cont'd) Document fiduciary actions Keep records of meetings Develop written policies Document selection process used to hire service providers Document review of service providers and company personnel administrative activities Consider hiring third party service providers to handle certain fiduciary functions (e.g., discretionary trustee or investment manager) Hire experts when necessary Slide No. 43

44 WAYS TO PROTECT FIDUCIARIES Plan may not contain exculpatory provisions that relieve the Committee from fiduciary responsibility or liability May purchase fiduciary insurance or provide indemnification for losses/actions not due to gross negligence or willful misconduct Individually purchased protection is a reasonable alternative Plan sponsor may purchase fiduciary insurance or errors and omissions insurance to cover acts of the Committee Plan sponsor may indemnify actions taken by the Committee Slide No. 44

45 Slide No. 45 QUESTIONS?