Fiduciary University – Part 1
Setting The Stage
Presented By Adam C. Pozek, QPA, QPFC, ERPA
Vice President, Consulting Ser...
Why Are We Here?
This Date In History – May 18
 History
 1804 – The French Senate proclaimed Napoleon
Bonaparte emperor.
 1860 – Abraham...
Why Are We Here?
“The time has come to move the focus of pension plan
governance out of the human resources department and...
EBSA Enforcement
 Statistics for FYE September 2009
 Total monetary results of $1.36 billion
 Closed 3,669 civil invest...
ERISA Litigation
Percentage of Cases By Type

0%

Source: ERISA Litigation Study (www.pensionlitigationdata.com)

Standard...
Disposition In District Court
1st

66%

2nd

34%

70%

3rd

30%
82%

4th

18%

70%

5th

30%

77%

6th

23%

65%

7th

35%...
Disposition In Appeals Court
1st

43%

2nd

57%
54%

3rd

46%

44%

56%

4th

48%

52%

5th

47%

53%

6th

39%

61%

7th
...
Fiduciary Defined
Fiduciary Defined
 According to Black’s Law Dictionary, a fiduciary is…
 A person holding the character of a trustee…in ...
Fiduciary Defined
 According to ERISA §3(21)A, a fiduciary is anyone
who…
 Exercises any discretionary authority or cont...
Fiduciary Standard of Care
 According to ERISA §404(a), fiduciaries must act…
 solely in the interest of the participant...
Fiduciary Status & The
Cast of Plan Characters
This Date In History – May 18
 Sports & Entertainment
 1957 – After 4 Kentucky Derby wins, Jockey Eddie Arcaro
won the P...
Co-Fiduciary Liability
 Fiduciary is liable for breach of another fiduciary in
the following circumstances:
 Participate...
Ministerial Functions
 Non-fiduciary functions
 Application of rules determining eligibility
 Calculation of services a...
Plan Management Functions
 Selection, monitoring, evaluation and retention of…
 Plan trustee
 Service providers carryin...
Trustees – Yes
 Named fiduciary
 Hold “exclusive authority and discretion to manage
and control the assets of the plan”
...
Directed Trustees –
Sort Of, But Not Really
 Limited responsibility to act on directions made in
accordance with the term...
Plan Administrators
 Named fiduciary and party designated to be
responsible for the operation and administration of
the p...
Directors & Officers
 Yes
 Officer decision not to deposit was exercising control over plan
assets
 LoPresti v. Terwill...
Other Employer Representatives
 Payroll, HR and/or Benefits staff
 Facts and circumstances determination
 Duty to discl...
Third Party Administrators –
Usually, No
 Employer failed to timely remit 401(k) contributions
 TPA set forth conditions...
Third Party Administrators –
Sometimes, Yes
 Insolvent sponsor of self-insured health fund
 Participants left with unpai...
Accountants – Usually, No
 Alleged embezzlement by administrator via
excessive and fraudulent fees
 Price Waterhouse eng...
Accountants – Sometimes, Yes
 Deposited contributions for client plan into
operating account and forwarded to plan
 Inve...
Brokers
 Generally cannot be plan fiduciaries due to
method of compensation
 Variable compensation based on investments
...
Investment Advisors –
Usually, Yes
 Providing investment advice for a fee
 ERISA §3(21)A

 Individual financial consult...
Investment Advisors –
Sometimes, No
 Promo materials indicated three levels of service
from reporting to advice
 Consult...
Actuaries
 Funding shortfall resulting from failure to consider
increases in early retirement benefits
 No liability und...
Attorneys
 Negligence in rendering legal advice
 Made non-binding investment recommendations
to trustees
 Court ruled a...
Overview of Fiduciary Duties
This Date In History – May 18
 Birthdays
 1872 – Bertrand Russell
 1897 – Frank Capra
 1912 – Perry Como
 1946 – Regg...
The Prudent Process
 ERISA measures the process, not necessarily the
result
 Claim of fiduciary breach
 Allegations inc...
Fiduciary Duties & Best Practices
 Operational practices
 Identify all plan fiduciaries
 Establish written procedures
...
Fiduciary Duties & Best Practices
 Investment practices
 Prepare investment policy statement
 Offer diversified investm...
Fiduciary Duties & Best Practices
 Participant practices
 Satisfy all disclosure requirements
 Provide supplemental com...
This Date In History – May 18
 Number 1 Hits
 1946 – All Through The Day by Perry Como
 1954 – Wanted by Perry Como
 1...
Questions
Adam C. Pozek, QPA, QPFC, ERPA
Vice President, Consulting Services
781.914.1296

www.linkedin.com/in/adampozek

...
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Fiduciary University - Part 1

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There is a lot of talk in the financial press about fiduciary responsibility. But before you can talk about those duties, it is important to first know who the fiduciaries are that are subject to those responsibilities. Part 1 of the Fiduciary University series examines the various roles in plan management and which ones are likely to lead to fiduciary status.

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Fiduciary University - Part 1

  1. 1. Fiduciary University – Part 1 Setting The Stage Presented By Adam C. Pozek, QPA, QPFC, ERPA Vice President, Consulting Services May 18, 2010
  2. 2. Why Are We Here?
  3. 3. This Date In History – May 18  History  1804 – The French Senate proclaimed Napoleon Bonaparte emperor.  1860 – Abraham Lincoln received the Republic Presidential nomination.  1896 – The Supreme Court upheld “separate but equal” in it’s Plessy v. Ferguson opinion.  1980 – After lying dormant for 93 years, Mt. St. Helens erupted.
  4. 4. Why Are We Here? “The time has come to move the focus of pension plan governance out of the human resources department and beyond compliance with tax laws. The executive suite needs to focus on pension plan governance itself, especially the responsibility and liability of pension plan fiduciaries. “Pension plan governance has long been a creature of the human resources department and tax accountants. However, its connection to the executive suite became starkly clear after the collapse of Enron, a financial meltdown that devastated the retirement savings of thousands of employees.” --Elaine Chao, Former U.S. Secretary of Labor
  5. 5. EBSA Enforcement  Statistics for FYE September 2009  Total monetary results of $1.36 billion  Closed 3,669 civil investigations  204 referred for litigation  Closed 287 criminal investigations  115 indictments  Received 365,457 complaints  $124.5 million in benefit recoveries  970 investigations opened Source: www.dol.gov/ebsa/newsroom/fsFYagencyresults.html
  6. 6. ERISA Litigation Percentage of Cases By Type 0% Source: ERISA Litigation Study (www.pensionlitigationdata.com) Standard of Review 25% Remedies 50% Prudent Man Standard 75% Loyalty Interference with Benefits Exclusive Purpose Contributions Breach of Fiduciary Duty Adherence to Plan Documents 100%
  7. 7. Disposition In District Court 1st 66% 2nd 34% 70% 3rd 30% 82% 4th 18% 70% 5th 30% 77% 6th 23% 65% 7th 35% 68% 8th 32% 56% 44% 9th 74% 26% 10th 74% 26% 11th 80% 0% 20% 20% 40% Plaintiff 60% Defendant Source: ERISA Litigation Study (www.pensionlitigationdata.com) 80% 100%
  8. 8. Disposition In Appeals Court 1st 43% 2nd 57% 54% 3rd 46% 44% 56% 4th 48% 52% 5th 47% 53% 6th 39% 61% 7th 40% 60% 8th 45% 55% 9th 63% 10th 37% 54% 11th 46% 86% 0% 20% 14% 40% Plaintiff 60% Defendant Source: ERISA Litigation Study (www.pensionlitigationdata.com) 80% 100%
  9. 9. Fiduciary Defined
  10. 10. Fiduciary Defined  According to Black’s Law Dictionary, a fiduciary is…  A person holding the character of a trustee…in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires;  A person having duties involving good faith, trust, special confidence and candor towards another;  A person or institution who manages money or property for another and who must exercise a standard of care…imposed by law or contract.
  11. 11. Fiduciary Defined  According to ERISA §3(21)A, a fiduciary is anyone who…  Exercises any discretionary authority or control over the management of a plan, or over the management or disposition of plan assets;  Renders investment advice for a fee or other compensation, direct or indirect, over the disposition of plan assets, or has any authority or responsibility to do so; or  Has any discretionary authority or discretionary responsibility in the administration of such plan.
  12. 12. Fiduciary Standard of Care  According to ERISA §404(a), fiduciaries must act…  solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying the reasonable expenses of administering the plan…  …with the care, skill, prudence and diligence…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…
  13. 13. Fiduciary Status & The Cast of Plan Characters
  14. 14. This Date In History – May 18  Sports & Entertainment  1957 – After 4 Kentucky Derby wins, Jockey Eddie Arcaro won the Preakness Stakes.  1968 – Tiny Tim’s Tiptoe Through The Tulips was released.  1992 – The final episode of Murphy Brown aired prompting public criticism from Vice President Dan Quayle.  2004 – Randy Johnson became the oldest pitcher to throw a perfect game.
  15. 15. Co-Fiduciary Liability  Fiduciary is liable for breach of another fiduciary in the following circumstances:  Participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;  Enables another fiduciary to commit a breach by failing to comply with his/her duties; or  Has knowledge of breach by such other fiduciary without making reasonable efforts to remedy the breach. Source: ERISA §405(a)
  16. 16. Ministerial Functions  Non-fiduciary functions  Application of rules determining eligibility  Calculation of services and compensation credits  Preparation of employee communications material  Maintenance of participant records  Preparation of reports  Calculation of benefits  Advising participants of rights and options under plan  Collection/allocation of contributions  Processing of claims  Making recommendations to others for decisions with respect to plan administration Source: DOL Interpretive Bulletin 75-8, D-2
  17. 17. Plan Management Functions  Selection, monitoring, evaluation and retention of…  Plan trustee  Service providers carrying out ministerial functions  Investment manager  Document provider  Investment options/menu  Investment advisor  Fees Source: DOL Interpretive Bulletin 75-8, D-4
  18. 18. Trustees – Yes  Named fiduciary  Hold “exclusive authority and discretion to manage and control the assets of the plan”  ERISA §403(a)  Title is not always determinative  Donovan v. Mercer, 747 F.2d 304 (5th Cir. 1984)  Individual did not hold title but acted in trustee capacity
  19. 19. Directed Trustees – Sort Of, But Not Really  Limited responsibility to act on directions made in accordance with the terms of the plan and not contrary to ERISA  No obligation to “second-guess” or determine the prudence of every transaction  No duty to question market transactions based on public information  Duty to raise questions based on non-public information Source: DOL Field Assistance Bulletin 2004-3
  20. 20. Plan Administrators  Named fiduciary and party designated to be responsible for the operation and administration of the plan  ERISA §3(16)(A)(i)  Internal Revenue Code §414(g)(1)  See Basic Plan Document Section 7.02
  21. 21. Directors & Officers  Yes  Officer decision not to deposit was exercising control over plan assets  LoPresti v. Terwilliger, 126 F.3d 34 (2nd Cir. 1997)  No  Shield from liability when acting solely on behalf of corporation  Confer v. Custom Engineering Co., 952 F.2d 34 (3rd Cir. 1991)  Maybe  Considers “the extent of responsibility and control exercised by the individual with respect to the [p]lan”  Tittle v. Enron, 284 F.Supp.2d 511 (31 EBC 2281) (S.D.Tex. 2003)
  22. 22. Other Employer Representatives  Payroll, HR and/or Benefits staff  Facts and circumstances determination  Duty to disclose  Employees  Usually not fiduciaries  Consider impact of adding employees to plan committee
  23. 23. Third Party Administrators – Usually, No  Employer failed to timely remit 401(k) contributions  TPA set forth conditions necessary to continue engagement  Remit outstanding deferrals within X days  TPA resigned when conditions not satisfied  Participants sued TPA alleging fiduciary breach  TPA exercised discretion over engagement, not the plan Source: CSA 401(k) Plan v Pension Professionals, Inc., 1999 US App Lexis 30404 (9th Cir 1999)
  24. 24. Third Party Administrators – Sometimes, Yes  Insolvent sponsor of self-insured health fund  Participants left with unpaid medical bills  TPA had “ASO” contract  TPA deducted fee from plan prior to disbursing remaining funds  Sufficient to establish fiduciary status Source: Briscoe v. Fine, 2006 U.S. App. LEXIS 9208 (6th Cir. 2006)
  25. 25. Accountants – Usually, No  Alleged embezzlement by administrator via excessive and fraudulent fees  Price Waterhouse engaged to audit plan and did not question fees  Fund alleged PW was fiduciary Source: Painters of Philadelphia District Council No. 21 Welfare Fund v Price Waterhouse, 879 F 2d 1146 (3rd Cir 1989)
  26. 26. Accountants – Sometimes, Yes  Deposited contributions for client plan into operating account and forwarded to plan  Invested contributions and wrote plan checks at direction of investment advisor  No authorization from plan sponsor Source: David P. Coldesina, D.D.S., P.C., Employee Profit Sharing Plan and Trust v, Estate of Greg P. Simper, 34 EBC 2633 (10th Cir. May 19, 2005)
  27. 27. Brokers  Generally cannot be plan fiduciaries due to method of compensation  Variable compensation based on investments selected  Broker, as fiduciary, controls investment selection  Inherent conflict-of-interest
  28. 28. Investment Advisors – Usually, Yes  Providing investment advice for a fee  ERISA §3(21)A  Individual financial consultant advising on plan assets  DOL Advisory Opinion 2005-23A
  29. 29. Investment Advisors – Sometimes, No  Promo materials indicated three levels of service from reporting to advice  Consultant engaged to prepare quarterly investment performance reports  Contract excluded analysis of private placement investments  Private placement investments lost more than $70 million  Plan sued advisor for fiduciary breach Source: Stahly v. Salomon Smith Barney, Inc., 9th Cir., No.06-35041, March 18, 2009 (unpublished opinion)
  30. 30. Actuaries  Funding shortfall resulting from failure to consider increases in early retirement benefits  No liability under ERISA for non-fiduciary provision of services Source: Mertens v. Hewitt Associates, 508 U.S. 248 (113 S.Ct. 2063) (1993)
  31. 31. Attorneys  Negligence in rendering legal advice  Made non-binding investment recommendations to trustees  Court ruled attorney did not become fiduciary Source: Custer v. Sweeney, 89 F.3d 1156 (4th Cir. 1996)
  32. 32. Overview of Fiduciary Duties
  33. 33. This Date In History – May 18  Birthdays  1872 – Bertrand Russell  1897 – Frank Capra  1912 – Perry Como  1946 – Reggie Jackson  1970 – Tina Fey  1975 – Jack Johnson
  34. 34. The Prudent Process  ERISA measures the process, not necessarily the result  Claim of fiduciary breach  Allegations included failing to monitor providers and paying excessive fees  Court granted motion to dismiss  Undisputed facts showed committee followed a reasoned process to select and monitor providers Source: George v. Kraft Foods Global, Inc. (S.D. Ill. Jan 27, 2010)
  35. 35. Fiduciary Duties & Best Practices  Operational practices  Identify all plan fiduciaries  Establish written procedures  Document decisions  Deposit contributions timely  Collect amounts owed to the plan  Follow the terms of the plan  Conduct regular self-audits  Satisfy testing requirements
  36. 36. Fiduciary Duties & Best Practices  Investment practices  Prepare investment policy statement  Offer diversified investments  Monitor investments  Document decisions
  37. 37. Fiduciary Duties & Best Practices  Participant practices  Satisfy all disclosure requirements  Provide supplemental communication  Consider investment advice  Avoid misrepresentation
  38. 38. This Date In History – May 18  Number 1 Hits  1946 – All Through The Day by Perry Como  1954 – Wanted by Perry Como  1962 – Soldier Boy by The Shirelles  1970 – American Woman by The Guess Who  1978 – It’s All Wrong But It’s All Right by Dolly Parton  1986 – Why Can’t This Be Love by Van Halen
  39. 39. Questions Adam C. Pozek, QPA, QPFC, ERPA Vice President, Consulting Services 781.914.1296 www.linkedin.com/in/adampozek Adam.Pozek@SentinelGroup.com twitter.com/PozekOnPension blog.SentinelGroup.com www.PozekOnPension.com Adam is the vice president of consulting services for Sentinel Benefits & Financial Group in Reading, Massachusetts. He specializes in working with business owners, executives and their other professional advisors on plan design and compliance issues related to qualified plans. Adam assists companies in assessing benefit programs as part of business transactions, and he works with clients to address plan errors under the IRS and Department of Labor correction programs. Adam holds the professional credentials of Qualified 401(k) Administrator (QKA), Qualified Pension Administrator (QPA) and Qualified Plan Financial Consultant (QPFC) from ASPPA as well as Registered Health Underwriter (RHU) and Registered Employee Benefits Consultant (REBC) from the American College. He is also an Enrolled Retirement Plan Agent (ERPA).

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