WORKSHOP 9: What s the Hype on 3(16) and 3(38) Fiduciaries?

WORKSHOP 9: What s the Hype on 3(16) and 3(38) Fiduciaries? FRED REISH, ESQ. January 22, 2014 Fiduciary Mumbo Jumbo The 401(k) industry has an unlimited number of labels for ERISA fiduciaries--some accurate and somenot...... 3(21), 3(38), 3(16), full scope, limited scope, investment adviser, investment manager, RPF, and on and on. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 1 1

Fiduciary Mumbo Jumbo However, ERISA has only three types of fiduciaries... ERISAsection3(21)(A)definesallthree...a person is a fiduciary with respect to a plan to the extent... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 2 Fiduciary Mumbo Jumbo (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 3 2

Third Party Administrators This part of the program explores whether TPAs should consider providing administrative fiduciary services and, if so, to what extent. Let s start with the law. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 4 Administrative Fiduciary Services ERISA 3(21)(A)... a person is a fiduciary with respect to a plan to the extent... (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 5 3

Administrative Fiduciary Services ERISA 3(16)(A) The term administrator means (i) the person specifically so designated by the terms of the instrument under which the plan is operated; (ii) If an administrator is not so designated, the plan sponsor;... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 6 Delegation of Responsibility ERISA 405(c)(1): (1) The instrument under which a plan is maintained may expressly provide for procedures... (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities..... (2)... [if] pursuant to such procedure any fiduciary responsibility of a named fiduciary is allocated to any person... then such named fiduciary shall not be liable for an act or omission of such person [if prudently selected and monitored]... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 7 4

DOL Interpretive Bulletin 75-8 D-1 Q: Is an attorney, accountant, actuary or consultant who renders legal, accounting, actuarial or consulting services to an employee benefit plan (other than an investment adviser to the plan) a fiduciary to the plan solely by virtue of the rendering of such services,..? A.No... continued... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 8 DOL Interpretive Bulletin 75-8 Continued......However,whileattorneys,accountants, actuaries and consultants performing their usual professional functions will ordinarily not be considered fiduciaries, if the factual situation in a particular case falls within one of the categories described in [ERISA section 3(21)(A)], such persons would be considered to be fiduciaries... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 9 5

DOL Interpretive Bulletin 75-8 D-2 Q: Are persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures, but who perform the following administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, fiduciaries with respect to the plan: (1) Application of rules determining eligibility for participation or benefits; (2) Calculation of services and compensation credits for benefits; continued... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 10 DOL Interpretive Bulletin 75-8 Continued... (3) Preparation of employee communications material; (4) Maintenance of participants' service and employment records; (5) Preparation of reports required by government agencies; (6) Calculation of benefits; continued... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 11 6

DOL Interpretive Bulletin 75-8 Continued... A: No. Only persons who perform one or more of the functions described in section 3(21)(A) of the Act with respect to an employee benefit plan are fiduciaries. Therefore, a person who performs purely ministerial functions such as the types described above for an employee benefit plan within a framework of policies, interpretations, rules, practices and procedures made by other persons is not a fiduciary... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 12 Standard of Care Non-fiduciary services: ordinary negligence: reasonable care. contractual obligations: breach Fiduciary services: prudent man rule: prudent process. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 13 7

Fiduciary Duties 404(a)(1): Prudent Man Standard of Care.... a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and--... (B) 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;... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 14 Internal Revenue Code The Internal Revenue Code does not impose duties directly on fiduciary plan administrators. Instead, it s provisions refer to employers or plans as being responsible for the required activities. However, the IRC does treat fiduciary plan administrators as fiduciaries for purposes of the prohibited transaction rules in section 4975. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 15 8

Examples of Administrator Duties ERISA sections that specifically assign duties to the ERISA plan administrator: 101(i)(1): furnishing blackout notices. 103(a)(3)(A): engage qualified public accountant. 104(a)(1): file Form 5500 (Query regarding preparation PTs and defaulted loans). 104(b): furnish SPDs and SMMs. 105(a)(1)(A): furnish pension benefit statements. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 16 Some TPA 3(16) Duties Determining eligibility Approving participant loans Approving hardship withdrawals Approving distributions severance death retirement disability Approving QDROs Interpret plan provisions Furnish 404a-5 participant disclosures Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 17 9

Other Administrator Fiduciary Duties The selection, monitoring and possible removal and replacement of the: Recordkeeper Advisor TPA Note: Evaluation of 408(b)(2) disclosures. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 18 Court Cases In the case of Healthcare Strategies, Inc. v. ING Life Insurance and Annuity Company, the court considered whether the contractual right to substitute investment options in a plan menu caused a recordkeeper to have fiduciary status under subsection (A)(iii), even though it had not exercised that right. Healthcare Strategies Inc., v. ING Life Insurance and Annuity Co., No. 11-00282-WGY (D. Conn. August 5, 2013). Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 19 10

Court Cases The district court concluded that: Because subsection [(A)(iii)] endows fiduciary status on anyone who possesses discretionary authority in a plan s administration, regardless of whether that authority is exercised, ILIAC s fiduciary role is not necessarily limited to the two instances in which it substituted mutual fund out of 401(k) plans. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 20 Court Cases In a second case to consider the question, Golden Star, Inc. v. Mass Mutual Life Insurance Co., the court noted that the eligibility of service providers for fiduciary status under subsection (iii) is an undeveloped area of the law. Golden Star, Inc. v. Mass Mutual Life Ins. Co., CIV. 3:11-30235-PBS, 2014 WL 2117511 (D. Mass. May 20, 2014). Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 21 11

Administrative Fiduciary Services Fiduciary Issues 3(16) lite or heavy Considerations Checklists Data Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 22 The Big Question So, why should a TPA consider becoming a fiduciary plan administrator? Client satisfaction. Competitive pressures. Fees. Other? Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 23 12

Other Issues Agreement and extent of fiduciary duties. Policies and procedures. Compensation for fiduciary services. Insurance: errors and omissions, and fiduciary insurance. Bonding. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 24 Discretionary Investment Managers The discretionary management of investments is generally considered to be defined in ERISA section 3(21)( A). A person is a fiduciary to the extent: (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 25 13

Why Use 3(38) Managers? 405(d)(1): Investment Managers. If an investment manager or managers have been appointed..., then... no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under any obligation to invest or otherwise manage any asset of the plan which is subject to the management of such investment manager. Note: Trustee also means the company s investment fiduciaries, e.g., a plan committee. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 26 Fiduciary Alphabet Soup 3(38): The term investment manager means any fiduciary (other than a trustee or named fiduciary, as defined in section 402(a)(2))-- (A) who has the power to manage, acquire, or dispose of any asset of a plan; continued... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 27 14

Fiduciary Alphabet Soup Continued... (B) who (i) is registered as an investment adviser under the Investment Advisers Act of 1940; (ii)...isregisteredasaninvestmentadviser under the laws of [a] State... (iii) is a bank,.. ; or (iv) is an insurance company.. ; and... (C) has acknowledged in writing that he is a fiduciary with respect to the plan. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 28 3(38) Investment Managers Safe Harbor Plan-level services Participant services Note: Fiduciaries must prudently select and monitor. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 29 15

Selection and Monitoring Criteria: Experience Licensing Fees Similar plans or circumstances Performance Participant complaints References Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 30 The Big Question So, why should an investment adviser (RIA) consider becoming a 3(38) investment manager? Client protection. Real risk? Competitive pressures. Fees. Other? Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 31 16

Other Issues Agreement and extent of fiduciary duties. e.g., revenue sharing. Policies and procedures. Compensation for fiduciary services. Fiduciary insurance. Bonding. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 32 Liability for Breach by Co-Fiduciary 405(a): Circumstances Giving Rise to Liability.--... a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances: (1) if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach; continued... Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 33 17

Liability for Breach by Co-Fiduciary Continued... (2) if, by his failure to comply with section 404(a)(1) in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or (3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach. Workshop 9: What's the Hype on 3(16) and 3(38) Fiduciaries? - January 22, 2014 34 FRED REISH, ESQ. 1800 Century Park East, Suite 1500 Los Angeles, CA 90067 (310) 203-4047 (310) 229-1285 [fax] Fred.Reish@DBR.com www.linkedin.com/in/fredreish www.drinkerbiddle.com FOLLOW FRED ON TWITTER @FREDREISH CALIFORNIA DELAWARE ILLINOIS NEW JERSEY NEW YORK PENNSYLVANIA WASHINGTON DC WISCONSIN 2008 Drinker Biddle & Reath LLP All rights reserved. A Delaware limited liability partnership 18