ERISA's Higher Calling How to Train Your Fiduciary and Other Elements of Sound Plan Governance Presented by James C. Paul, Esq. Workshop 21 - October 24, 2016 1
Overview Talking to Clients About Fiduciary Issues Breaking it Down Overview THE Most Important Thing to Remember About ERISA Fiduciary Duties 2
Overview Lawyers are NEVER Fiduciaries! Overview Who Are The Plan s Fiduciaries? What Duties are Imposed on Fiduciaries? Roles and Allocating and Delegating Fiduciary Duties Prudence and Process Approaches for Training Current Court Cases, Etc. 3
Who Are The Plan s Fiduciaries? ERISA 3(21) Has Discretionary Authority or Responsibility for Administering the Plan Exercises Discretionary Authority or Control Respecting Plan Management Exercises Authority or Control Concerning Management or Disposition of Plan Assets Renders Investment Advice for a Fee Who Are The Plan s Fiduciaries? Renders Investment Advice Current DOL Regulation Advice to the plan as to value of securities/property or recommendations to buy or sell; and Has discretionary authority or control; or Renders advice on a regular basis pursuant to mutual agreement that such advice Serve as primary basis for investment decisions Individualized, based on needs of plan 4
Who Are The Plan s Fiduciaries? Renders Investment Advice New DOL Regulation (April 10, 2017) Advice to plan, fiduciary, participant or beneficiary for direct or indirect fee/compensation Buy, sell, hold, distribute, roll over, etc. Recommendation RE management of investments (investment policy or strategy; portfolio composition, etc.) Who Are The Plan s Fiduciaries? Renders Investment Advice New DOL Regulation (April 10, 2017) Recommendation made directly or indirectly By person who acknowledges Fiduciary status; Pursuant to written or verbal agreement that advice is based on investment needs of recipient; or Recommendation is directed to specific recipient(s) RE particular investment decision 5
What Duties Are Imposed On Fiduciaries? Fiduciary Must Discharge Duties Solely in the Interest of Participants and Beneficiaries For the exclusive purpose of Providing benefits; and Paying reasonable expenses of administering the plan What Duties Are Imposed On Fiduciaries? Fiduciary Must Discharge Duties Solely in the Interest of Participants and Beneficiaries With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in that capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims 6
What Duties Are Imposed On Fiduciaries? Fiduciary Must Discharge Duties Solely in the Interest of Participants and Beneficiaries By diversifying plan investments to minimize the risk of large losses, unless it is clearly prudent not to do so What Duties Are Imposed On Fiduciaries? Fiduciary Must Discharge Duties Solely in the Interest of Participants and Beneficiaries In accordance with the written plan documents, so far as consistent with ERISA 7
What Duties Are Imposed On Fiduciaries? No Prohibited Transactions With Related Parties Sale, exchange or leasing of property; Lending money or extension of credit; Furnishing goods, services or facilities; Transfer or use of plan assets; Acquiring employer stock or employer real property in violation of ERISA 407(a) What Duties Are Imposed On Fiduciaries? No Self-Dealing A Fiduciary Shall Not: Deal with plan assets in his/her own interest or for his/her own account; Act in his/her individual capacity or represent adverse interests in any transaction involving the plan; or Receive consideration for his/her personal account from any party in a transaction involving plan assets. 8
What Duties Are Imposed On Fiduciaries? Prohibited Transaction or Self-Dealing Correct or unwind the transaction; make the plan whole Excise tax = 15% of amount involved for each year Possible other consequences for Fiduciary What Duties Are Imposed On Fiduciaries? Duties and That Do Not Result in Fiduciary Status Ministerial vs. Discretionary Acts Examples (DOL Regs. 2509.75-8, D-2): Applying rules to determine eligibility for participation or benefits; Calculating service and compensation; Preparing employee communications 9
What Duties Are Imposed On Fiduciaries? Duties and That Do Not Result in Fiduciary Status Examples (Cont.): Maintaining service and employment records; Preparing required government reports; Calculation of benefits; Participant orientation and advising RE plan rights and options; What Duties Are Imposed On Fiduciaries? Duties and That Do Not Result in Fiduciary Status Examples (Cont.): Collection of contributions and application in accordance with plan; Preparation of benefit statements and reports; Processing benefit claims; and Making recommendations to others for decision on plan administration matters. 10
What Duties Are Imposed On Fiduciaries? Settlor vs. Fiduciary Decisions Overview Named Fiduciary (ERISA 402) Trustee (ERISA 403) Plan Administrator (ERISA 3(16)) Investment Manager (ERISA 3(38)) Other Fiduciary (ERISA 3(21)) 11
Named Fiduciary (ERISA 402) Every plan must identify at least one Control and manage plan operation and administration Trustee (ERISA 403) Must be named in plan or trust Exclusive authority and discretion to manage and control plan assets, except Subject to direction by Named Fiduciary Authority delegated to Investment Manager 12
Plan Administrator (ERISA 3(16)) Person(s) designated in plan documents If no designation, the employer is administrator Investment Manager (ERISA 3(38)) Power to manage, acquire or dispose of plan assets Must be a Registered Investment Adviser, Bank or Insurance Company Must acknowledge Fiduciary status in writing 13
Other Fiduciary (ERISA 3(21)) Investment adviser (Co-Fiduciary) Other delegated duties Effect of Allocation/Delegation Named Fiduciary not liable for responsibilities allocated/delegated to others, except Imprudent appointment; or Failure to monitor 14
Effect of Allocation/Delegation Trustee is not liable if Following directions of Named Fiduciary Duties/responsibilities allocated to another Trustee Investment manager appointed Despite Proper Allocation/Delegation of Duties, Named Fiduciary is Liable if He/She Knowingly participates in or knowingly acts to conceal a co-fiduciary s act or omission; Enables a breach by failing to comply with the general fiduciary rules (e.g., the exclusive benefit or prudent man rules); or Has knowledge of a breach and takes no action to remedy 15
Relief From Fiduciary Duties Where Investments are Selected by Participants ERISA 404(c) Trustee/Named Fiduciary retains responsibility Prudent selection and monitoring of investment options Mapping Default investment Information and disclosures ERISA 404(c) Relief Opportunity to exercise control Broad range of investment options 16
ERISA 404(c) Relief Opportunity to exercise control Reasonable opportunity to give directions to Fiduciary who is obligated to follow Provided with or given opportunity to obtain information [laundry list] ERISA 404(c) Relief Opportunity to exercise control Plan can impose charges for reasonable expenses Plan can impose reasonable restrictions on trading frequency 17
ERISA 404(c) Relief Broad range of investment options Reasonable opportunity To affect potential risk/return Choose from at least three options» Each of which is diversified» Different risk/return characteristics» Allow diversification appropriate for participant Diversify to avoid risk of large losses In Practice, Fiduciary Duties Can Be Sliced and Diced Many Different Ways 18
Named Fiduciary Appoint other Fiduciaries Appoint Investment Manager or Investment Adviser Select plan service providers Determine whether fees are reasonable Monitor ongoing performance Plan Administrator General Select TPA, record-keeper Engage auditor Authorize payments to service providers 19
Plan Administrator Payroll Oversee timing and proper allocation of contributions, deferrals, and loan payments Enroll or auto-enroll participants Maintain participant elections Authorize corrective refunds, distributions, or plan amendments Plan Administrator Distributions Authorize distributions, hardships, loans, RMDs Review benefit claims Set interest rates and terms for participant loans Review and approve QDROs and distributions to Alternate Payees 20
Plan Administrator Reporting and Disclosure Review and sign Form 5500s Review/accept audit report Provide statements and annual notices Provide required participant disclosures Comply with rules for delivery of required notices Provide SPD and respond to requests for plan documents Plan Administrator Maintaining Records and Compliance Maintain plan records and plan/trust documents Maintain beneficiary designations Obtain/maintain fidelity bond 21
Investment Manager Select investments or menu Monitor investment performance Compliance with ERISA 404(c) Review investment fees (reasonable?) Create/review/adopt investment policy Allocating Fiduciary Employer/Sponsor Acts through Board, Partners, LLC Manager, Sole Proprietorship Appoints: Named Fiduciary Trustee May Appoint Fiduciary Plan Administrator Investment Manager 22
Allocating Fiduciary Board Limit responsibility/exposure? Quarterly or annual review and monitoring? Personal liability Outside directors? Trustee Allocating Fiduciary Discretionary or Directed/Custodian? Power to appoint Investment Manager? Limit investments or authority to manage assets? 23
Allocating Fiduciary Plan Administrator Employer or Committee? 3(16) Fiduciary Plan Administrator? Limited scope? Split duties? Practical Who will have authority to approve loans and distributions, etc.? Allocating Fiduciary Investment Manager Complete discretion? Limit investment types or asset classes? Impose investment policy? Power to delegate to others? 24
Allocating Fiduciary Put allocation/delegation of Fiduciary responsibilities in writing Follow the written documents in practice Make a chart Prudence Prudence and Process This is all about the decision making process Not judged on results How does a prudent expert make decisions Gather information Compare products/providers Analyze pros, cons, options, and costs 25
Prudence and Process Prudence If you are not an expert, get help Watch out for bias or conflict Ask questions Why are we buying R3 shares (or CIT investment or ETFs)? Are we getting the best terms and price? Process Prudence and Process Fiduciaries acknowledge status Meet regularly Document Information received Decisions made Reasons supporting decision 26
Approaches For Training You can lead a horse to water REALISTICALLY, how much time is your Client willing to spend? Will you have all parties involved? The whole Board Staff Tailor Training As Appropriate Approaches For Training Start With the Plan s Organizational Chart Named Fiduciary Trustee Plan Administrator Who is responsible for investments? 27
Approaches For Training Is the Plan Operating in Accordance with the Current Allocations/Delegations? Change operation? Change allocations/delegations? Approaches For Training Recommended Changes in Structure/Operation Reasons for change Proper oversight and expertise Limiting liability 28
Approaches For Training Plan Documents BPD Trust Agreement Other agreements Focus on Fiduciary Duties/ for People in the Room Approaches For Training Investments Who selects the menu? Who is responsible for monitoring performance? Allocation models Discretionary investments Who is responsible for making sure fees are reasonable? 29
Approaches For Training General Duties Under ERISA Act for sole/exclusive benefit of participants Prudent expert standard Hire experts when needed Reasonable fees Recognize When You Are Wearing Your Fiduciary Hat Approaches For Training DO NOT Engage In Prohibited transactions Self-Dealing 30
Approaches For Training Imagine a DOL Interview 1. Name, address, education Approaches For Training Imagine a DOL Interview 2. Who are the Plan s Fiduciaries? 3. Are YOU a Plan Fiduciary? a) What experience or training do you have to be a Fiduciary? b) What have you done to gain knowledge or educate yourself regarding your Fiduciary duties? 31
Approaches For Training DOL Interview (cont.) 4. What is your understanding of your Fiduciary duties? 5. What are the Fiduciary duties of Your Board of Directors? Record-keeper/Insurance Company? Trustee/Custodian? Investment Adviser? Approaches For Training DOL Interview (cont.) 6. What was your process for selecting Record-keeper/Insurance Company? Trustee/Custodian? Investment Adviser? Investment platform? Individual investment options? 32
Approaches For Training DOL Interview (cont.) 7. What fees are paid from Plan assets? 8. Who determined that those fees are reasonable? 9. What process was followed to review/evaluate the Plan fees? Current Court Cases and other things to keep you awake at night 33
QUESTIONS? Thanks For Coming! James C. Paul Paul Benefits Law Corp. 2356 Gold Meadow Way, Suite 240 Gold River, CA 95670 (916) 403-7242 jim@paulbenefitslaw.com 34