Know and Control Your Risk with Retirement Plans PHILLIP LONG, VP EMPLOYEE BENEFIT LEGAL SERVICES BB&T RETIREMENT AND INSTITUTIONAL SERVICES 1 Today s Agenda Understand where ERISA applies to retirement plans Understand your fiduciary responsibilities and duties under ERISA Learn what happens if you fall short of your duties Build a framework of actions to help protect yourself from liability Create a vision of plan success 2 Consequences of Fiduciary Breach Personal Liability from Lawsuits DOL and IRS Penalties Co fiduciary Liability Possible Disqualification of the Plan 3 1
Thoughts From the DOL Indeed, the need for education of ERISA fiduciaries is pronounced. Plan sponsors and fiduciaries have a solemn responsibility to protect the interests of workers and retirees in their benefit plans. 4 Enhance Your Awareness Who is a Fiduciary? Types of Fiduciaries Fundamental Fiduciary Duties under ERISA Consequences of Fiduciary Breach 5 What Does Fiduciary Mean? The word fiduciary stems from the Latin fiducia meaning trust and is closely related to the words faith and fidelity. These roots reflect proper fiduciary conduct in a retirement plan. 6 2
Who is a Fiduciary? ERISA says a person is a fiduciary with respect to a plan to the extent that he/she: (i) exercises or has any discretionary authority or control respecting management or disposition of its assets (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the plan, or has any authority or responsibility to do so 7 Types of Fiduciaries Anyone who exercises discretion or control with regard to the plan may be a fiduciary: Plan sponsors Each plan must have a named fiduciary identified in the plan document Investment committees Investment managers, if they have the control over the management and disposition of the assets Investment consultants, if they render investment advice 8 What Escapes ERISA s Coverage? Settlor Functions Administrative Tasks Limited ERISA Application: Executive Compensation Plans Non ERISA Retirement Plans Government Retirement Plans Church Retirement Plans 9 3
Fundamental Fiduciary Duties under ERISA Act in the best interest of participants and beneficiaries For the exclusive benefit of those who are covered by it Recognize the impact of your decisions on participants benefits Act with care, skill, prudence and diligence Of a person who is familiar with such matters Measured by the standard of an experienced person Diversify the plan s investment options To minimize risk of large losses Detail the process of selecting and monitoring investments 10 Fundamental Fiduciary Duties under ERISA, continued Adhere to the plan document and other governing instruments Operate the plan as it is written Understand terms and definitions Pay reasonable plan expenses for the services provided Includes recordkeeping, administration, investment fees and advisory fees Collect and review fee disclosure statements Keep records on plan matters 5500 reports, compliance testing Plan documents, amendments, policies Minutes from committee meetings Investment reviews and decisions 11 Avoid Prohibited Transactions You must refrain from entering transactions with a party in interest such as any plan fiduciary or any person providing services to the plan You can t deal with the assets of the plan for your own account or receive compensation from any party dealing with the plan in a transaction involving plan assets 12 4
Breaches in ERISA Fiduciary Responsibility Examples of fiduciary breach include: Failure to offer diverse investment choices Failure to deposit participant deferrals and loan repayments timely Failure to monitor the plan s investment options and, if necessary, replace them Failure to strictly follow the terms of the official plan document Co fiduciaries may be held responsible for the actions of one another if you knowingly participate in or conceal any fiduciary misconduct and fail to take steps to correct it. 13 How Can You Protect Yourself? ERISA requires that every fiduciary and person who handles funds of an employee benefit plan be bonded A fidelity bond provides insurance protection against the possibility of fraud or embezzlement by a fiduciary The fiduciary bond is limited to 10% of the plan assets up to $500,000 Liability for losses not covered by the bond Consider having additional fiduciary liability insurance Comply with section 404(c) of ERISA 14 Establish a Foundation of Governance Adopt a charter for retirement plan committees Identify all plan fiduciaries Document your decision making process Maintain records and meeting minutes 15 5
Adopt a Committee Charter Identify the members of committees Affirm authority and specific responsibilities Describe how members are appointed/replaced Establish meeting frequency Follow Charter guidelines 16 Document Your Decision Making Process Be prepared to demonstrate that the decision was: Informed at the time it was made Reasonable based on all the information obtained Documented with minutes and records, justifying your decisions 17 Learn Key Administrative Functions Choosing and Monitoring Service Providers Recordkeeping and Administration Duties Common IRS Administration Errors Participant Communications 18 6
Choosing and Monitoring Service Providers Fiduciaries commonly outsource to expert providers for recordkeeping, plan administration, actuarial services, investment advisory services and participant services Ensure that providers have the experience, technology, staff and financial resources to meet the needs of the plan and participants Understand the level of fiduciary liability and services they provide as stated in their respective service agreements Conduct an annual review to monitor service providers and operating costs 19 Recordkeeping and Administration Duties The plan must be administered according to the terms of the plan document and its policies Review plan documents and plan administration procedures to help ensure compliance Review the data you provide to your service providers Be aware of due dates, filings, required notices, payroll submissions and compliance testing 20 Common IRS Administrative Errors Unchecked data, reports or processes can lead to costly errors found during audits such as: Not complying with or updating plan documents to reflect the plan s operations Not depositing deferrals on a timely basis No consistent definition of compensation Failure to make matching contributions Failure to apply ACP nondiscrimination test results to HCE s contributions Non compliant hardship withdrawals and loans Exclusion of eligible participants Improper limiting of deferral amounts 21 7
Participant Communications Are Required To protect and inform participants and beneficiaries, fiduciaries have an obligation to: Provide sufficient information to make informed investment decisions Distribute SPDs, SMMs, Summary Annual Reports and Participant Fee Disclosures Provide timely notices on Automatic Contribution Arrangements, QDIA funds, Safe Harbor plans, fund changes and blackout notices Provide enrollment information, beneficiary forms and other requests for information 22 Monitor and Oversee Investments and Expenses Primary Duties of an Investment Fiduciary The Investment Policy Statement Engaging Investment Fiduciary Partners as Prudent Experts 23 Primary Duties of an Investment Fiduciary Draft and follow an Investment Policy Statement (IPS) Select and monitor investment options, including a qualified default fund Benchmark fees, expenses and fund performance regularly Complete the steps for 404(c) protection Keep a written record of your decisions and due diligence 24 8
The Investment Policy Statement What it does and why it s important: Outlines the issues and criteria used in creating a prudent investment philosophy Documents the guidelines and standards used to choose and modify the plan s investments Provides objective criteria for removing a fund, which takes the emotion out of the decision Should not be too general to be meaningless and not so detailed that it is impossible to follow 25 Engaging Investment Fiduciary Partners as Prudent Experts ERISA permits a plan sponsor to use professional advisers and encourages the retention of experts to implement an investment strategy Fiduciaries must act at the level of a knowledgeable investor when selecting 401(k) plan investments A 3(38) investment manager assumes discretionary fiduciary risk in selecting, monitoring and replacing investment options based on the terms of the IPS A 3(21) investment advisor shares investment fiduciary risk and makes investment recommendations following the IPS and plan committee approval 26 Conclusions and Questions 27 9
Disclosures BB&T and its representatives do not offer tax or legal advice. Consult your individual tax or legal professional concerning your personal situation. This presentation is not investment advice. 28 10