FIDUCIARY ISSUES AND HOW TO AVOID BEING A DEFENDANT Mid-Sized Retirement and Healthcare Plan Management Conference September 12, 2012 Sherwin Kaplan
AGENDA Who is an ERISA Fiduciary? What are an ERISA Fiduciary s duties? How do you meet them? What do you do if something goes wrong? 2
WHO IS AN ERISA FIDUCIARY? Named Fiduciary Plan Administrator Trustee Investment Manager/Advisor De Facto Fiduciary Decision maker 3
DOL S PROPOSED (AND WITHDRAWN) NEW DEFINITION Would broaden the scope of the investment advisor for a fee part of the definition Eliminate 5 part test Would cover brokers, appraisers and other financial advisors Withdrawn in the face of industry criticism DOL promises to reintroduce it But, probably, after the election 4
FIDUCIARY DUTIES Exclusive Purpose Rule Prudence Diversification of Assets (unless prudent not to do so) Following the terms of the Plan (unless it would violate ERISA to do so) Avoidance of Prohibited Transactions 5
EXCLUSIVE PURPOSE RULE Solely in the Interest of Plan Participants and their beneficiaries Plan assets can only be used to pay benefits and defray reasonable costs of Plan Administration The but for test 6
PRUDENCE a fiduciary shall discharge his duties with respect to a plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims 7
PRUDENCE STANDARD Prudent Expert Standard May require the retention of experts if you lack the expertise Oriented to process, not results Dependent on best practices in the industry 8
DIVERSIFICATION Modern Portfolio Theory (designed to provide a reasonable return while minimizing risk of large losses) Does not apply to Employee Stock Ownership Plans 404(c) plans must provide an array of at least 3 asset classes 9
PLAN DOCUMENTS A Plan Document is any document pursuant to which the Plan is governed Plan document and Trust Agreement (dominant) Summary Plan Description (subordinate) Establishment of committee structures and divisions of authority Investment Policy Should provide guidance, but not be a straight jacket Cannot override the dictates of ERISA Equitable remedies are available for failing to follow plan documents 10
PROHIBITED TRANSACTIONS Virtually all transactions with relatives, related entities and service providers including: Loans and other extensions of credit Sale, exchange or leasing Furnishing of goods, services or facilities Transfer of Plan assets Self-dealing and conflicts of interests 11
EXEMPTIONS Statutory [ERISA section 408(b), 29 U.S.C. section 1108(b)] Class Individual 12
WHY PROHIBIT EVERYTHING AND THEN ALLOW IT? Shifts the burden of Proof All a plaintiff has to show is that the transaction occurred The fiduciary then has to show it meets the terms of the exemption Requires a good process Requires Documentation Requires Monitoring 13
Penalties Personal Liability Restore Plan loses Make Participants whole Disgorge Unjust Enrichment Civil penalties and excise taxes Injunctive Relief Criminal Sanctions 14
How to protect Yourself (and be a Good Fiduciary) Process Documentation Monitoring Retention of experts when appropriate Avoidance of non-exempt Prohibited Transactions 15
Process A systematic series of actions directed to achieve a goal Commensurate with the decision being made Determine need, obtain information (including from experts), analyze options, make a decision Cost is a factor, but value is what matters Document the process as well as the decision 16
Documentation Bidding process Reports from consultants and advisors Minutes of Meetings Internal Memoranda Service Provider Contracts Correspondence and Participant Communication 17
Monitoring Periodic schedule for reviewing all plan expenditures, investments, contracts, reporting, disclosure and educational activities What has changed and does the change affect performance and/or cost? Make sure your monitoring activities are documented 18
Avoidance of Non-Exempt Prohibited Transactions Transactions between the Plan and related parties Fiduciaries Plan Sponsor Union Service providers Relatives Conflict of Interest, self-dealing and personal enrichment If you would be embarrassed to read it in your local paper, don t do it 19
Retention of Experts When Appropriate Purpose is to provide the expertise you may lack internally May be paid for from plan assets if Service is necessary Cost is reasonable (but not necessarily the cheapest) Contract terminable on reasonably short notice 20
FIDUCIARY ISSUES Investments Fees and expenses Reporting Disclosure Claims processing Participant dissatisfaction 21
FEES AND EXPENSES PAID FROM PLAN ASSETS Insurance commissions Regardless of who pays them Finders fees Revenue sharing Service Provider fees Administrative fees Committee expenses 22
REPORTING Forms 5500 Schedule C now requires reporting of direct and indirect service provider fees (including revenue sharing) Must be timely and complete Accountant s opinion All necessary schedules Plan Administrator has responsibility Criminal penalties for willful violations 23
DISCLOSURE Summary Plan Description Summary Annual Report Participant education Anything which might lead to a loss of benefits Schedule of Benefits Reason(s) for claim denials 24
CLAIMS PROCESSING Mistaken decision on a claim is not a fiduciary breach, but a defective process for deciding claims may be The purpose of an appropriate claims procedure is to maximize the odds of getting the right decision An appropriate, conflict-free procedure will give the decisionmaker deference is the claim ever gets to Court Even if your vendor handles the process, you still retain some responsibility 25
Participant Dissatisfaction This is the main reason people file lawsuits There is probably not a single employer in this country without at least one disgruntled current or former employee That person will be the lead plaintiff in a class action lawsuit if the lawyer believes there is enough money at stake to make a suit worthwhile 26
Difference Between a Benefit Claim and a Fiduciary Breach Claim Benefit Claim Payment is from the Plan Plan documents govern Deference to the Plan Fiduciary deciding the claim Fiduciary Breach Claim Personal Liability, make whole and equitable relief De novo judicial review 27
COMMON FIDUCIARY MISTAKES Failure to read and follow plan documents Failure to document the decision making process Failure to monitor Service providers Fees and commissions Revenue sharing 28
COMMON FIDUCIARY MISTAKES Reliance on service providers to do your job for you Failure to provider participants with necessary information Regarding fees Loss of benefits Claims procedure 29
THE MOST COMMON FIDUCIARY MISTAKE Failure to devote enough time to do the job right Being a fiduciary is not secondary to your other job duties Being a fiduciary is often not appreciated by management Difficulty of scheduling committee meetings Misplaced tendency to rely on service providers Serving as a fiduciary is not an honorary position 30
HOW TO PROTECT YOURSELF Process, document & monitor Fiduciary liability insurance Indemnification agreements Service provider contracts Fiduciary education Retention of advisors when necessary 31
RESPONDING TO PROBLEMS Letters from the government (DOL or IRS) or a private attorney Respond properly to document requests When to notify your insurance carrier Determine if a problem exists and fix it before you are forced to 32
CONCLUSION Being a good fiduciary involves: Doing your homework Process, documentation and monitoring Getting assistance when you need it Taking the time to do the job right 33
QUESTIONS? Sherwin Kaplan Counsel Nixon Peabody LLP 401 9 th Street NW Washington, DC 20004-2128 (202) 585-8224 skaplan@nixonpeabody.com 34