Fiduciary University - Part 1

Adam Pozek
Adam PozekPartner at DWC ERISA Consultants, LLC
Fiduciary University – Part 1
Setting The Stage
Presented By Adam C. Pozek, QPA, QPFC, ERPA
Vice President, Consulting Services
May 18, 2010
Why Are We Here?
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.
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
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
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%
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%
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%
Fiduciary Defined
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.
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.
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…
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 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.
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)
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
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
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
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
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
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)
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
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)
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)
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)
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)
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
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
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)
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)
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)
Overview of Fiduciary Duties
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
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)
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
Fiduciary Duties & Best Practices
 Investment practices
 Prepare investment policy statement
 Offer diversified investments
 Monitor investments
 Document decisions
Fiduciary Duties & Best Practices
 Participant practices
 Satisfy all disclosure requirements
 Provide supplemental communication
 Consider investment advice
 Avoid misrepresentation
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
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).
1 of 39

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Fiduciary University - Part 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. Why Are We Here?
  • 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. 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. 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. 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. 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. 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%
  • 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. 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. 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. Fiduciary Status & The Cast of Plan Characters
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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)
  • 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. 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. 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. Fiduciary Duties & Best Practices  Investment practices  Prepare investment policy statement  Offer diversified investments  Monitor investments  Document decisions
  • 37. Fiduciary Duties & Best Practices  Participant practices  Satisfy all disclosure requirements  Provide supplemental communication  Consider investment advice  Avoid misrepresentation
  • 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. 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).