Revised web presentation 4 21-16 - oea

Overview Of Topics
 FY 2016 National Enforcement Projects
 FY 2016 New York Regional Office Project
On Alternative Investments
 IB 2015-01:Economically Targeted
Investments
 FAB 2014-01:What To Do With Missing
Participants & Their Unclaimed Benefits

National Enforcement Projects
(FY 2016)
 Contributory Plans Criminal Project (CPCP)
 Health Benefits Security Project (HBSP)
 Rapid ERISA Action Team (REACT)
 Employee Stock Ownership Plans (ESOPs)
 Plan Investment Conflicts Project (PIC)
 Pilot Projects
• Prohibited Persons Pilot Project
• Audit Deficiency Pilot Project (ADPP)

(FY 2016)
 Contributory Plans Criminal Project:
In more egregious situations, EBSA will
call upon federal and state prosecutors
to prosecute crimes against contributory
plans (retirement and health plans).

(FY 2016)
• Employers may convert employee payroll
contributions for their own personal use or to
pay business expenses.
• Unscrupulous service providers may target
these plans for their own personal benefit and
profit.
• Employee accounts can be susceptible to theft
by internal employees or third parties who may
steal from these accounts by using identity theft
and tampering with personal records.

(FY 2016)
• Misuse of employee contributions may result in
unpaid health benefits or insurance premiums,
leaving workers without medical coverage.
• When employers or other parties keep employee
payroll contributions intended for 401(k) plans,
they deprive workers of their earned retirement
savings.
• Many of these investigations have led to
successful prosecutions by the Department of
Justice as well as state and local prosecutors.

(FY 2016)
 Health Benefits Security Project:
• Covers group health plans and their service
providers.
• EBSA hopes to obtain monetary recoveries and
global corrections of problematic practices or
plan terms that run afoul of ERISA.
• Investigations are conducted at both the plan
level and service provider level.

(FY 2016)
• Plan-Level Investigations – Group health plans
are reviewed for compliance with all applicable
ERISA provisions unless extenuating
circumstances prevent a full investigation.
• These investigations will include medical benefit
MEWAs and criminal cases involving health fraud.

(FY 2016)
• Service Provider Investigations – these investigations
are focused on specific investigative issues based on
information gathered before the case is opened (i.e.,
specific information suggesting potential for systemic
violations).
• EBSA may pursue ERISA violations to the extent a
service provider, acts as a plan fiduciary by exercising
discretionary authority or control over plan
administration, plan management, or plan assets. This
includes a health insurance issuer that exercises
discretion/control over benefit claim decisions.

(FY 2016)
• Multiple Employer Welfare Arrangements
(MEWAs)– MEWAs will be reviewed for
compliance with all applicable ERISA provisions.
• Regional offices are alert for opportunities to
use the MEWA enforcement provisions in the
Affordable Care Act.
• Cease and desist orders
• Seizure provisions

(FY 2016)
• The goal is to complete substantive reviews.
• Will frequently require on-site investigation, a
review and/or audit of claims procedures, and
interviews on the administration of health plans by
service providers.

Case Examples
 A large self-insured group health plan
had an annual limit on preventive care,
which is not in compliance with PHSA
2711- Annual and Lifetime limit rules
under the Affordable Care Act.

Case Examples
• A large group health plan offered fully-insured and
self-insured benefit packages.
• The plan was not following plan terms for
reimbursement of out-of network providers, which
could cause participants to be over-billed by million
dollars.
• Also, plan had multiple ERISA Part 7 violations,
including an impermissible smoker surcharge that did
not meet the wellness program criteria, which resulted
in participants paying millions of dollars more than
should have.

Case Examples
• A large self-insured group health plan
administered benefit claims in-house and
failed to properly administer and
communicate the Plan’s exclusion of benefits
for illnesses or injuries due to actions of a
third party that may be liable for such
expenses.

Case Examples
• The plan did not comply with the claims
procedure regulations, resulting in disparate
treatment among similarly situated participants,
untimely claims adjudication, and inadequate
notice of claims denials.
• Also, several Part 7 violations, including a pre-
existing condition exclusion, Mental Health Parity
violations, and failure to cover required
preventive services.

Case Examples
• EBSA received complaints from area hospitals
and participants that emergency service claims
were being denied arbitrarily by a third party
administrator to a plan. Also, this third party
administrator charged undisclosed fees to
plans for laboratory services.

Case Examples
•Finally, a large Taft-Hartley plan had as much as 100
million dollars in outstanding claims. The findings
demonstrated claims processing issues. Creditors are
pursuing participants for unpaid claims and providers
are starting to require up-front payments for
services. This resulted in some participants delaying
treatment due to financial hardship.

(FY 2016)
• Transition from small plan-level cases to larger
plans and service provider cases.
• Look at claims administration by large self-
insured plans and service providers to ensure
health benefit claims are being properly paid.

(FY 2016)
•This would include a review of claims data to
determine:
• Compliance with plan terms on cost sharing
and reimbursement rates
• Compliance in the timing of claims adjudication
and appeals requirements.
• Flaws in the claims processing system –
systemic errors
• Compliance with external review requirements

(FY 2016)
•Part 7 compliance with special focus on loss of
grandfather status. If grandfather status is lost, then
review Affordable Care Act requirements that are
applicable to non-grandfathered plans:
• Coverage of all recommended preventive services
without cost sharing.
• Emergency department services
• Choice of primary care physician
• Enhanced claims and appeal requirements
• External review

(FY 2016)
•Review third party administrators (TPAs) that provide
administrative services and claims administration
services to large self-insured plans to determine whether
there are:
• Conflicts of interest – whether the TPA offers other services
to the plan which incentivizes improper claims adjudication
(e.g. stop loss coverage).
• Hidden or undisclosed fees
• Wellness Programs/Case Management Services provided by
the TPA – is there any discrimination based on a health
factor.

(FY 2016)
 Rapid ERISA Action Team (REACT):
• Due to the potential impact on employee benefit
plans, there is a need for early intervention in
companies that have severe financial hardships.
• Evaluate the risks posed to a plan:
• unnecessary delay of plan administration,
• abandonment by responsible plan fiduciaries,
• failure to locate missing participants,
• misuse of plan assets for non-plan expenses.

(FY 2016)
 Employee Stock Ownership Plans (ESOPs):
• Increase focus on ESOP valuation cases.
• Each ESOP investigation with a stock purchase or
sale within the statute will be examined for
valuation issues.
• EBSA has contracted with a valuation expert for
certain ESOP cases.

(FY 2016)
 Employee Stock Ownership Plans (ESOPs):
•Compliance project will continue to evaluate whether
ESOP appraisals have improved as a result of EBSA’s
recent ESOP enforcement actions.
•EBSA will examine ESOPS for any complex issues like
ESOP refinancing, indemnification and diversification.

(FY 2016)
 Plan Investment Conflicts Project (PIC)
• Succeeds Fiduciary Service Provider
Compensation Project by expanding cases to
include the investigation of plan asset vehicles.
• Focus on inherent conflicts in plan asset vehicles
• Allow EBSA to maintain a strong enforcement
presence in the regulated financial community.

(FY 2016)
 Plan Investment Conflicts Project (PIC)-
• Continue with service provider and plan level cases,
looking at 12(b)(1) fee offset failures or revenue sharing,
non-compliance with plan guidelines and prohibited
transactions.
• Alert national office to Breakage Compensation cases to
ensure corrective action is consistent with developing
policies.
• Investigate 408(b)(2) and 404(a)(5) disclosure violations
and seek global correction when applicable.
• Pursue service provider conflicts of interest that lead to
fiduciary service providers setting their own compensation

(FY 2016)
 Prohibited Persons Pilot Project (PPPP) -
• Introduced in FY 2014 as a means of protecting
plans from individuals disqualified to serve as plan
fiduciaries pursuant to ERISA Section 411.
• Section 411 bars individuals convicted of a range
of state and federal crimes from serving in
specified roles in relation to employee benefit plans
for up to 13 years.
• Transitioning from a pilot project to a monitoring
program.

(FY 2016)
 Prohibited Persons Pilot Project (PPPP) -
• Regional office will conduct periodic reviews on
people who are disqualified under Section 411 as a
standard component of field enforcement work.
• Will determine the feasibility of posting information
about disqualified persons on EBSA’s public
website.

(FY 2016)
 Audit Deficiency Pilot Project -
• It seeks to identify a nexus between deficient plan
audits and fiduciary violations.
• Geared to recommend and implement changes in
procedures that increase EBSA identification of
violations through reviews of Form 5500 and
audits.
• Will review due diligence in the hiring and
monitoring of the plan auditor.

Regional Enforcement Project
(FY 2016)
 Alternative Investments/Valuation Project -
• Twofold objective:
• To determine whether plan level fiduciaries and
service providers properly selected and monitored
hard to value alternative investments in the
portfolio.
• To determine whether investment advisors &
managers are properly valuing the plan’s hard to
value assets and, as appropriate, expand the
investigation to obtain global correction for all of a
service provider’s ERISA clients.

(FY 2016)
• Was the alternative investment permitted by
plan documents;
• Was it a prudent investment for the plan;
• Did fiduciaries take into consideration the
qualifications of the alternative investment
manager.

(FY 2016)
• Did fiduciaries take into consideration:
• The liquidity needs of the plan;
• The riskiness of the investment; and
• The effect the investment would have on the
diversity of the Plan’s assets.

(FY 2016)
• Investigation will review whether fiduciaries
determined the current value of the alternative
investments and whether investments were
overvalued, causing the plan to pay higher
than necessary asset management, custody, or
incentive fees.

(FY 2016)
• Investigate fees paid to purchase and maintain
ownership of the alternative investments, the
expenses deducted from the asset value of the
alternative investment, and whether the
investment arrangements meet the disclosure
requirements of ERISA section 408(b)(2).

(FY 2016)
 Alternative Investments/Valuation Project –
• Includes a review for the following:
• Party in interest transactions,
• Self-dealing,
• Fiduciaries acting on behalf of parties with
interests adverse to the plan, and
• Kickbacks.

(FY 2016)
• Ensure alternative investments are titled in the
name of the plan.
• In those instances where an investment
manager or advisor is compensated by the
assets under management (AUM) and internally
values the hard to value investments, the DOL
will determine whether the valuation procedures
are prudent and free of impermissible conflicts
of interest.

(FY 2016)
 Alternative Investments/Valuation Project –
• Ensure valuation procedures are rigorous and free
of undue influence from individuals or entities
whose compensation is based on the amount of
the AUM.
• Asset managers maybe incentivized to overvalue
assets and/or cause plans to pay higher than
necessary fees.

Interpretive Bulletin 2015-1:
Economically Targeted Investments
 Provides guidance on the investment
duties of plan fiduciaries under ERISA
when considering economically
targeted investments (ETIs) and
investment strategies that take into
account environmental, social and
governance (ESG) factors.

 The DOL previously addressed issues
related ETI’s in 1994 (IB 94-1) and in
2008 (IB 2008-1).
 In IB 94-1, the objective was to correct
popular misconception that ETI’s were
incompatible with ERISA’s fiduciary
obligations.

 The requirements of ERISA sections 403
and 404 do not prevent plan fiduciaries
from investing plan assets in ETI’s if:
 The ETI has an expected rate of return that is
commensurate to rates of return of alternative
investments with similar risks characteristics
that are available to the plan, and
 The ETI is otherwise an appropriate
investment for the plan in terms of such
factors as diversification and the investment
policy of the plan (all things being equal).

 The DOL has consistently stated that ERISA plan
trustees or other investing fiduciaries may not use
plan assets to promote social, environmental, or
other public policy causes at the expense of the
financial interests of plan participants and
beneficiaries in receiving their promised benefits.
 A fiduciary may not accept lower expected returns
or take on greater risks in order to secure
collateral benefits.

 In 2008, IB 2008-01 replaced IB 94-1.
 IB 2008-01 did not alter the basic legal principles
set forth in IB 94-1.
 IB 2008-01 stated that its purpose was to clarify
that fiduciary consideration of collateral, non-
economic factors in selecting plan investments
should be rare and, when considered, should be
documented in a manner that demonstrates
compliance with ERISA’s fiduciary standards.

 Since its publication, IB 2008-01 may have unduly
discouraged fiduciaries from considering ETI’s and
environmental, social and governance factors.
 This is even where fiduciaries looked solely at the
economic benefits of ETI’s to identify economically
superior investments which were better than other
types of investments.

 In an effort to correct the misperceptions that
followed the publication of IB 2008-01, the DOL
withdrew IB 2008-01 and replaced it with IB 2015-
01, which reinstated the language of IB 94-01.
 IB 2015-01 does not supersede the “investment
duties” in 29 CFR section 2550.404a-1, nor does it
address any issues that may arise in connection
with the prohibited transaction provisions of ERISA.

 Fiduciaries may invest in ETI’s so long as
the investment is appropriate for the plan
and economically and financially equivalent
to other potential investments with respect
to the plan’s investment objectives, return,
risk, and other financial attributes.

 Acknowledges that ESG factors may have a direct
relationship to the economic and financial value of the
plans’ investment.
 In such instances, the ESG issues may be a component
of the fiduciary’s primary analysis of the economic
merits of competing investment choices.
 When a fiduciary prudently concludes that an
investment is justified based solely on the economic
merits of the investment, there is no need to evaluate
the collateral goals as tie-breakers.

 According to the Interpretive Bulletin, a fiduciary may
address ETI’s or incorporate ESG factors in investment
policy statements, or integrate ESG related tools,
metrics and analysis to evaluate an investment’s risk
or return or choose among otherwise equivalent
investments.
 Fiduciaries may consider whether and how potential
investment managers look at ETIs or use ESG criteria
in their investment practices.

 Nonetheless, fiduciaries must reasonably
conclude that the investment manager’s
practices in selecting investments are
consistent with ERISA and the principles
in IB 2015-01.

 ETI’s are not inherently suspect or in need of special
scrutiny merely because they take into consideration
ESG factors.
 No special documentation is presumptively required
for such investments.
 But, fiduciaries responsible for investing plan assets
should maintain records sufficient to demonstrate
compliance with ERISA’s fiduciary provisions.

FAB 2014-01: Fiduciary Duties & Missing
Participants In Terminated Defined
Contribution Plans
Replaces Field Assistance Bulletin 2004-02
Describes how fiduciaries of terminated
defined contribution plans can fulfill their
obligations under ERISA in,
 Locating missing participants or unresponsive
participants
 Distributing participant’s account balance

FAB 2014-01 Background
Upon termination of a plan, a fiduciary must
notify participants and distribute benefits.
Usually first class mail or electronic notice
compliant with 29 CFR section 2520.104b-1 will
be adequate.
If there is no response from the participant,
the fiduciary must take steps to locate the
participant or beneficiary.

FAB 2014-01
 FAB 2014-01 was created to reflect the
changes that have occurred since FAB 2004-02
(including both the IRS and SSA discontinuing
their letter forwarding programs for locating
missing participants).
 There are now free or low cost Internet search
tools and services that can be used to locate
missing participants and beneficiaries.
 FAB 2014-01 also helps fiduciaries properly
discharge their obligations to these missing
participants.

FAB 2014-01 Required Search Steps
 Plan fiduciaries should take all of the following
steps (not in any order) before abandoning
efforts to find a missing participant or
beneficiary and obtain distribution instructions:
 Use Certified Mail
 Check Related Plan and Employer Records
 Check With Designated Plan Beneficiary
 Use Free Electronic Search Tools

FAB 2014-01 Required Search Steps
 Use Free Electronic Search Tools:
 Plan fiduciaries must make reasonable use of
Internet search tools that do not charge a fee to
search for a missing participant or beneficiary.
 Such online services include the following:
 Internet Search Engines
 Public Record Databases (licenses, mortgages, etc.)
 Obituaries
 Social Media

FAB 2014-01 Additional Search Steps
 If plan administrator follows required search steps
but does not find missing participant or
beneficiary, should consider if additional search
steps are appropriate.
 A plan fiduciary should consider the size of a
participant’s account balance and the cost of
further search efforts in deciding if any additional
search steps are appropriate.
 Specific additional search steps will depend on the
facts and circumstances.

FAB 2014-01 Additional Search Steps
Possible additional search steps include:
 Internet Search Tools
 Commercial Locator Services
 Credit Reporting Agencies
 Information Brokers
 Investigation Databases
 Similar Services That May Involve Charges

Locating Missing Participants Governed
By ERISA Fiduciary Requirements
 Plan fiduciaries must be able to demonstrate
compliance with ERISA’s fiduciary standards
for all decisions made to locate missing
participants and distribute benefits on their
behalf.

Costs Associated With Locating
Missing Participants
 A plan fiduciary may charge missing
participants’ accounts reasonable expenses
for efforts to find them.
 The method of allocating the expense must
be consistent with the terms of the plan and
the plan fiduciary’s duties under ERISA.

Vesting Upon Plan Termination
 IRC 411(d)(3) states that upon
termination or complete discontinuance
of contributions, benefits accrued
become vested to the extent funded on
such date.

Distributions After Plan Termination
 The plan administrator must distribute all
plan assets as soon as administratively
feasible after plan termination.

Distributing the Account
 After a plan fiduciary reasonably determines that
a participant or beneficiary cannot be located, the
fiduciary may distribute the missing participant’s
or beneficiary’s benefits in the manner described
in FAB 2014-01.
 A plan fiduciary’s choice of a distribution option for
a missing participant’s account balance is also a
fiduciary decision subject to the general fiduciary
responsibility provisions of ERISA.

FAB 2014-01 Distribution Options
If after due diligence a participant cannot be
located, plan fiduciaries will have no choice but to
select an appropriate distribution option to complete
the plan’s termination.

To An Individual Retirement Plan
Preferred Distribution Option
ERISA Section 404(a) requires plan fiduciaries to
consider distributing missing participant benefits into
individual retirement plans (i.e., an individual
retirement account or annuity).
An individual retirement plan is more likely to
preserve funds for retirement than any other option.

FAB 2014-01 Eligible
Rollover Distribution
A distribution that qualifies as an eligible rollover
distribution from a qualified plan, which is handled by
a trustee to trustee transfer into an individual
retirement plan, will avoid immediate taxation.
Avoid 20% mandatory withholding.
Avoid any 10% additional tax for early distributions
that might otherwise apply based on the participant’s
age and other related facts.
Plan funds grow tax free and income taxes are paid
only when funds are withdrawn.

FAB 2014-01 Fiduciary Decisions
 Selecting an individual retirement plan
trustee, custodian or issuer to receive the
distribution.
 Choice of an initial investment in the individual
retirement plan.

FAB 2014-01 Distribution Safe
Harbor, 29 C.F.R. §2550.404a-2
In general, the automatic rollover safe
harbor applies to distributions of $5,000 or
less for participants who leave an employer’s
workforce without electing to receive either a
taxable cash distribution or directly rollover
assets into an individual retirement plan or
another qualified plan.

FAB 2014-01 Expanded
Distribution Safe Harbor
In 2006, section 2550.404a-3 was added
clarifying that the regulation covers
distributions from terminated defined
contribution plans on behalf of missing
participants/beneficiaries into an individual
retirement plan or inherited retirement plan.

When a fiduciary complies with the conditions of the safe
harbor, a fiduciary satisfies its ERISA 404(a) duties in:
 The distribution of benefits;
 The selection of an individual retirement plan
provider; and
 The investment of the distributed funds including:
 Must choose appropriate investment products
designed to preserve principal, where fees and
expenses are not excessive when compared to
other individual retirement plans offered by the
provider.

FAB 2014-01 Alternative
Distribution Options
 If an individual retirement plan is unavailable or
imprudent based on the facts and circumstances, the
fiduciary may consider two other options:
 Opening an interest-bearing federally insured bank
account in the name of the missing participant or
beneficiary, or
 Transferring the account balance to a state unclaimed
property fund.

Distribution Caveats
 Before making a decision, the fiduciary must prudently
conclude that such a distribution is appropriate despite
the potential considerable adverse tax consequences to
the plan participant.
 Unlike tax-free rollovers into an IRA account, the funds
transferred to a bank account or state unclaimed property
fund generally are subject to income taxes, mandatory
income tax withholding and a possible additional tax for
premature distributions.
 Consequently, there would be less money for retirement.

Distribution Caveats
 Any interest that accrues after the transfer is
generally taxable upon accrual (unless, the interest
is subject to special favorable taxation rules, such as
rules for interest earned from investment in state
bonds or U.S. savings bonds).
 In most cases, a fiduciary would violate its
obligations of prudence and loyalty by causing such
negative consequences (in the absence of compelling
offsetting considerations) rather than making an
individual retirement plan rollover distribution.

FAB 2014-01
Other Distribution Options
 Federally Insured Bank Accounts:
 Plan fiduciaries may consider establishing an interest
bearing federally insured bank account in the name of
the missing participant, as long as the participant
would have an unconditional right to withdraw funds
from the account.
 In selecting a bank and accepting an initial interest
rate, with or without a guarantee period, a plan
fiduciary must give appropriate consideration to all
available information about the bank and interest rate,
including any bank charges.

FAB 2014-01
 State Unclaimed Property Funds:
 Plan fiduciaries may also consider transferring
/escheating missing participants’ account balances to
state unclaimed property funds in the state of each
participant’s last known residence or work location.
 Usually these state unclaimed property funds pay
minimal interest.
 However, often states provide searchable internet
databases that list the names of property owners.
 Any transfers to state unclaimed property funds must
comply with state law requirements.

FAB 2014-01
 In deciding between distribution into a federally insured
bank account and distribution into a state unclaimed
property fund, the plan fiduciary should consider the
features of each option.
 For a bank account, this includes reviewing any bank
fees, such as charges for establishing and maintaining the
account, along with any interest payable on the account’s
funds.
 For a state unclaimed property fund, a fiduciary should
look at the availability of a searchable database
maintained by the state, which may help participants find
their retirement funds, and any interest payable by the
state.

FAB 2014-01
Unacceptable Distribution Option
100% Income Tax Withholding:
 This would be in effect transferring 100% of a missing
participant’s benefit to the IRS.
 This option is not in the best interest of participants and
beneficiaries and would violate ERISA’s fiduciary
requirements.
 Does not necessarily result in crediting of the withheld
amount against the missing participant’s income tax
liabilities.
 Therefore, participants may not receive the benefit and
this method should not be used.

FAB 2014-01 - Issues with the USA
PATRIOT ACT and Establishment of
Retirement or Bank Accounts
 Perceived conflicts with the customer identification and
verification provisions (CIP) of the USA PATRIOT ACT;
 The CIP provisions establish standards for financial
institutions to verify the identity of customers who open
accounts.
 Federal regulators have issued helpful guidance for
fiduciaries: “FAQS:Final CIP Rule” at www.fincen... and
www.fdic...

FAB 2014-01 Issues With The USA
PATRIOT ACT and CIP
The Federal regulators have told the DOL that
they interpret the Act’s CIP compliance
requirements to apply only at the time a former
participant or beneficiary first contacts the
financial institution to claim ownership or exercise
control over the account.

FAB 2014-01 Miscellaneous Issues
Issues caused by the application of state laws,
including those governing signature
requirements and escheat are beyond DOL’s
jurisdiction.

FAB 2014-01
In Summary
The fiduciary responsibility provisions of ERISA govern actions
taken by plan administrators to implement a plan sponsor’s
decision to terminate a plan.
These actions include the search for missing participants, and if
search efforts fail, the selection of a distribution option for the
benefits of missing participants.
There are certain steps fiduciaries must take to locate missing
participants.
When required steps fail, the fiduciary should consider the size
of the account balance and cost of further search efforts when
determining how to proceed.

Result of Distribution
 Once a plan fiduciary properly distributes the
entire benefit to which a missing participant is
entitled, the distribution ends the individual’s
status as a participant covered under the plan and
the distributed assets are no longer plan assets
under ERISA.
 If the distributed benefit is reduced due to a
fiduciary breach, the individual will still have
standing to file suit against the breaching fiduciary
under section 502(a)(2) of ERISA.

Revised web presentation 4 21-16 - oea

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