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Fiduciary University – Part 2
It‟s Not Just About Investments
Presented By Adam C. Pozek, QPA, QPFC, ERPA
Vice President, ...
This Date In History – June 22
 Birthdays
 1898 – Erich Maria Remarque (wrote All Quiet on the
Western Front)
 1933 – D...
This Date In History – June 22
 Number 1 Hits
 1949 – Some Enchanted Evening by Perry Como
 1957 – Teddy Bear by Elvis ...
This Date In History – June 22
 Sports & Entertainment
 1938 – Heavyweight Joe Lewis knocked out Max
Schmeling.
 1959 –...
This Date In History – June 22
 History
 1815 – Napoleon Bonaparte abdicated for the second
time.
 1870 – Congress crea...
Duty of
Loyalty
Duty to be Truthful
 Requirement to act in the best interest of plan
participants
 ERISA Section 404(a)(1)(A)

 Duty no...
Serious Consideration
 Fischer vs. Philadelphia Electric Company, 96 F3d
1533, 1539-41 (3d Cir 1996)
 An employer must p...
Variations On The Theme
 Not a bright-line test
 Martinez vs. Schlumberger, Ltd. (5th Cir. 2003)

 Seriously considered...
Interpreting Plan
Provisions
The Gospel According To
The Plan Document
 “…a fiduciary shall discharge his duties…in
accordance with the documents and
...
Words Mean Things
“When I use a word,” Humpty Dumpty said in rather a scornful
tone, “it means just what I choose it to me...
What‟s The Deference?
 Federal judicial standards of review
 De novo
 Deferential

 De novo standard applies…
 “unles...
SPD or Not SPD
 The Case
 Ambiguous terms in the SPD
 Included disclaimer that plan document controlled in the
event of...
SPD or Not SPD
 The Case
 Employer was acquired by AlliedSignal
 Benefit reductions included in SPD
 SPD distributed a...
The Scrivener‟s Error Myth
 “ERISA provides no exception to the plan
administrator‟s duty to act in accordance with
plan ...
Mistake or Ambiguity
 The Case
 Conversion of traditional DB plan to cash balance plan
 “the [opening account balance] ...
However…
 Subsequent class action suit
 Verizon sought reformation based on mutual mistake of
fact
 Argued participants...
The Court Has The Power
 The Case
 Plan restatement in 1996 changed benefit formula from
Step to Integrated
 Benefits c...
Collecting Amounts
Owed To The Plan
Depositing Elective
Deferrals
 Regulation provides safe harbor definition of “plan
assets”
 Small plans
 Safe harbor if...
Collecting Contributions
 “The trustee is thus expected to „use reasonable
diligence to discover trust property and to ta...
Collecting Contributions
 The Case
 Company failed to fund its Money Purchase Pension Plan
 Jackson and Carey were CEO ...
Due & Payable?
 Safe harbor matching contributions
 Due date depends on basis of calculation
 Plan year - last day of t...
Selecting & Monitoring
Service-Providers
The Duty
 “…the failure to exercise due care in selecting and
monitoring a fund‟s service providers constitutes a
breach ...
General Concepts
 Plan assets cannot inure to the benefit of employer.
 ERISA §403(c)

 Fiduciaries are prohibited from...
Parties In Interest
P-I-T
Fiduciary
PLUS

Family

Service
Provider

Controlled
Org

Family

Controlled
Org

Union

Employe...
Example #1
 The Case
 Multiemployer welfare fund owned a hotel that was not
very profitable.
 Trustees hired Dr. Schwar...
Other Examples
 President of company secures more favorable
banking terms by selecting the bank to service the
401(k) pla...
Potential Service Providers
 Providers needed to operate the plan
 Third party administrator
 Recordkeeper
 Custodian
...
Factors to Consider
 Credentials
 Years in business
 Licenses
 Expertise
 Education/certification of employees

 Ref...
Cost vs. Value
“…it is the view of the Department that a plan
fiduciary‟s failure to take quality of services into
account...
The Price Tag Still Matters
 Understand who is getting paid and how much
 The devil is in the details
 Forthcoming regu...
Mutual Fund Fees
 Operating costs listed in the fund‟s prospectus and
annual report
 Reported as a percentage of funds a...
That‟s A Wrap (Fee)
 Annuity products charge a “wrap” fee, which is a fee layered
on top of all the investments in the pl...
Revenue Recapture
 12b-1 Fees and Sub Transfer Agency (Sub-TA) Fees are “recaptured”
and deposited into an account in the...
Miscellaneous
Gifts & Entertainment
 DOL Fiduciary Investigations Program (section 12)
 Written policies on gifts from service-provide...
Plan Administrator Duties
 Determine eligibility/value accounts and vesting
 Adopt rules of procedure
 Construe and enf...
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 2

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Have you noticed that most of the articles about 401(k) fiduciary responsibility seem to focus on the investments? Did you know that fiduciary duties really extend far beyond that point into almost every facet of plan management. In Part 2 of the Fiduciary University series, we review many of the non-investment responsibilities plan fiduciaries must consider.

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Fiduciary University - Part 2

  1. 1. Fiduciary University – Part 2 It‟s Not Just About Investments Presented By Adam C. Pozek, QPA, QPFC, ERPA Vice President, Consulting Services
  2. 2. This Date In History – June 22  Birthdays  1898 – Erich Maria Remarque (wrote All Quiet on the Western Front)  1933 – Diane Feinstein  1936 – Kris Kistofferson  1941 – Ed Bradley  1948 – Pistol Pete Maravich  1948 – Todd Rundgren  1949 – Meryl Streep  1949 – Lyndsay Wagner  1953 – Cyndi Lauper
  3. 3. This Date In History – June 22  Number 1 Hits  1949 – Some Enchanted Evening by Perry Como  1957 – Teddy Bear by Elvis Presley  1965 – For Your Love by The Yardbirds  1973 – My Love by Paul McCartney & Wings  1981 – But You Know I Love You by Dolly Parton  1989 – I’ll Be Loving You by New Kids On The Block
  4. 4. This Date In History – June 22  Sports & Entertainment  1938 – Heavyweight Joe Lewis knocked out Max Schmeling.  1959 – Eddie Lebowski Lubanski rolled 24 consecutive strikes for 2 back-to-back perfect games in a Miami bowling tournament.  1969 – Judy Garland passed away at age 47.  1987 – Fred Astaire passed away at age 88.  1990 – Last place Atlanta Braves fired head coach Russ Nixon and replaced him with Bobby Cox.  2008 – George Carlin passed away at age 71.
  5. 5. This Date In History – June 22  History  1815 – Napoleon Bonaparte abdicated for the second time.  1870 – Congress created the Department of Justice.  1941 – Germany invaded the Soviet Union in WW2.  1970 – President Nixon signed the bill lowering the voting age to 18.
  6. 6. Duty of Loyalty
  7. 7. Duty to be Truthful  Requirement to act in the best interest of plan participants  ERISA Section 404(a)(1)(A)  Duty not to intentionally mislead participants  U.S. Supreme Court Source: Varity vs. Howe, 516 US 489 (1996)
  8. 8. Serious Consideration  Fischer vs. Philadelphia Electric Company, 96 F3d 1533, 1539-41 (3d Cir 1996)  An employer must properly represent proposed plan changes if…  “A specific proposal…  Is being discussed for purposes of implementation…  By senior management with the authority to implement the change.”  Caputo vs. Pfizer, Inc., 2001 U.S. App. LEXIS 21707 (2d Cir. 2001)  Employer must respond truthfully to participant inquiries even if not yet under serious consideration
  9. 9. Variations On The Theme  Not a bright-line test  Martinez vs. Schlumberger, Ltd. (5th Cir. 2003)  Seriously considered enhancement does not have to be finalized  McAuley vs. International Business Machines Corp., 165 F3d 1038 (6th Cir. 1999)  No duty to disclose absent participant inquiry  Pocchia vs. Nynex Corp., 81 F3d 275 (2nd Cir. 1996)  Application to collective bargaining  Wayne vs. Pacific Bell, 189 F3d 982 (9th Cir 1999) See “Legal Developments: „Serious Consideration‟ of the Expanding and Contracting Fiduciary Duty to Disclose” by David R. Levin, Journal of Pension Benefits, Volume 8, Number 2, Winter 2001
  10. 10. Interpreting Plan Provisions
  11. 11. The Gospel According To The Plan Document  “…a fiduciary shall discharge his duties…in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and Title IV” Source: ERISA Section 404(a)(1)(D)
  12. 12. Words Mean Things “When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean–neither more nor less.” “The question is,” said Alice, “whether you CAN make words mean so many different things.” Humpty Dumpty began again. “They‟ve a temper, some of them– particularly verbs, they‟re the proudest–adjectives you can do anything with, but not verbs–however, I can manage the whole lot of them!” Source: Through The Looking Glass, Lewis Carroll
  13. 13. What‟s The Deference?  Federal judicial standards of review  De novo  Deferential  De novo standard applies…  “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.”  Firestone language = deferential review unless decision is “arbitrary, capricious or an abuse of power” Source: Firestone Tire & Rubber Co. vs. Bruch, 489 U.S. 101, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989)
  14. 14. SPD or Not SPD  The Case  Ambiguous terms in the SPD  Included disclaimer that plan document controlled in the event of a conflict  The Decision  Disclaimers not enforceable  Ambiguity resolved in favor of the participant Source: Collinsworth vs. AIG Life Insurance Company, 2005 U.S. Dist. LEXIS 29950 (N.D. Tex. 2005)
  15. 15. SPD or Not SPD  The Case  Employer was acquired by AlliedSignal  Benefit reductions included in SPD  SPD distributed at meetings and mailed to those on leave  Leyda not on leave but missed meeting and SPD  Upon his death, widow sued for higher benefits  The Decision  Method of distributing SPD not “reasonably calculated to ensure actual receipt…by all plan participants”  Awarded higher benefits to widow Source: Leyda vs. Allied Signal, Inc., F. 3d, 2nd Cir. No. 02-7408, February 2003
  16. 16. The Scrivener‟s Error Myth  “ERISA provides no exception to the plan administrator‟s duty to act in accordance with plan documents.”  “ERISA forecloses any justification for enquiries into expressions of intent, in favor of the virtues of adhering to an uncomplicated rule. Less certain rules could force plan administrators to examine numerous external documents…and draw them into litigation like this.” Source: Kennedy vs. Plan Administrator for DuPont Savings & Investment Plan, U.S. Supreme Court, Jan. 2009
  17. 17. Mistake or Ambiguity  The Case  Conversion of traditional DB plan to cash balance plan  “the [opening account balance] is (A) the Participant‟s applicable transition factor…, times (B) the lump-sum cashout value…, multiplied by the applicable transition factor…”  Double application increased benefits by $2.5 billion  Second application of transition factor disregarded as ambiguity  The Decision  Plan provision was unambiguous on its face  Committee abused its discretion  Interpretation and modification are two different things Source: Young vs. Verizon’s Bell Atlantic Cash Balance Plan, 575 F. Supp. 2d 892 (N.D. Ill. 2008) 17
  18. 18. However…  Subsequent class action suit  Verizon sought reformation based on mutual mistake of fact  Argued participants understood single application of transition factor  The Decision  "The phrase calling for a second multiplication was a drafting error. No evidence exists to suggest that any plan participant relied upon the error. In fact, the course of dealing between defendants and the plan participants shows that benefits were consistently calculated by multiplying the transition factor once. To enforce the erroneous plan provision now would result in an enormous windfall to the class participants. Source: Young vs. Verizon’s Bell Atlantic Cash Balance Plan, 575 F. Supp. 2d 892 (N.D. Ill. 2008) 18
  19. 19. The Court Has The Power  The Case  Plan restatement in 1996 changed benefit formula from Step to Integrated  Benefits continued to be calculated using Step formula  Scrivener‟s error identified in 2002 and IRS approval sought to correct by retroactive plan amendment  IRS approved correction in late 2003  Participants sued for benefits under Integrated formula  The Decision  Plan terms were clear and unambiguous  Court has exclusive power to correct scrivener‟s error  Correction requires mutual mistake Source: Cross vs. Bragg, 2009 WL 2196887 (4th Cir. July 24, 2009) 19
  20. 20. Collecting Amounts Owed To The Plan
  21. 21. Depositing Elective Deferrals  Regulation provides safe harbor definition of “plan assets”  Small plans  Safe harbor if deposited within 7 business days  Includes loan payments  Beyond 7 business days, back to general rule  Considered deposited when placed in an account of the plan, not when allocated or invested  Applies only to “small” plans 21
  22. 22. Collecting Contributions  “The trustee is thus expected to „use reasonable diligence to discover trust property and to take control of it without unnecessary delay.‟”  Other named fiduciary responsible if trustee duties are limited in trust agreement  Includes employer contributions  Due “within a reasonable time after the legally enforceable obligation to make the contribution arises” Source: DOL Field Assistance Bulletin 2008-01, citing U.S. Supreme Court 2 2
  23. 23. Collecting Contributions  The Case  Company failed to fund its Money Purchase Pension Plan  Jackson and Carey were CEO and CFO, respectively  Filed Form 5500 indicating contributions were made  The Decision  Unpaid employer contributions are plan assets when they are “due and payable”  18 U.S.C. §664 makes it a crime for any person to mis-use plan assets  Sentenced to 7+ years in federal prison Source: United States vs. Jackson, 4th Cir., No. 01-4103, May 1, 2008 2 3
  24. 24. Due & Payable?  Safe harbor matching contributions  Due date depends on basis of calculation  Plan year - last day of the following plan year  Pay period - last day of the subsequent quarter  Safe harbor nonelective contributions  Last day of the following plan year  Top-heavy minimum contribution  Last day of the following plan year  Profit sharing contribution  Deadline for deductibility purposes 2 4
  25. 25. Selecting & Monitoring Service-Providers
  26. 26. The Duty  “…the failure to exercise due care in selecting and monitoring a fund‟s service providers constitutes a breach of…fiduciary duty.”  Mahoney v. JJ Weiser & Co, Inc., 564 F.Supp.2d 248, 255 (SDNY 2008)  “At the very least, trustees have an obligation to (i) determine the needs of a fund‟s participants, (ii) review the services provided and fees charged by a number of different providers and (iii) select the provider whose service level, quality and fees best matches the funds needs and financial situation.”  Liss v. Smith, 991 F.Supp. 278, 300 (SDNY 1998) 2 6
  27. 27. General Concepts  Plan assets cannot inure to the benefit of employer.  ERISA §403(c)  Fiduciaries are prohibited from engaging in certain transactions with parties-in-interest.  ERISA §406(a)  Fiduciaries are prohibited from dealing with plan assets for their own interests or acting on behalf of an interest adverse to the plan.  ERISA §406(b)  Fiduciaries must…defray the reasonable expenses of administering the plan.  ERISA §404(a) 2 7
  28. 28. Parties In Interest P-I-T Fiduciary PLUS Family Service Provider Controlled Org Family Controlled Org Union Employer Employee/ Officer/ partner Employee Officer/ partner Family Controlled org Employee Officer/ partner 50%+ owner Controlled Org Employee Employee Officer/ partner 50%+ owner Family Controlled Org Officer/ partner Employee Officer/ partner Employee Family Officer/ Partner Controlled Org Employee Employee Officer/ partner Officer/ partner Employee Employee Officer/ partner Officer/ partner 2 8
  29. 29. Example #1  The Case  Multiemployer welfare fund owned a hotel that was not very profitable.  Trustees hired Dr. Schwartz (friend of one trustee and personal physician of another) to conduct feasibility study on most profitable use of hotel.  Dr. Schwartz collected a $250,000 fee in advance.  The Decision  The doctor had no experience, qualifications, etc.  Trustees did not solicit competitive bids to determine reasonableness of fees.  Trustees breached fiduciary responsibility by hiring Dr. Schwartz. Source: Donovan vs. Mazzola, 716 F.2d 1226 (9th Cir. 1983) 2 9
  30. 30. Other Examples  President of company secures more favorable banking terms by selecting the bank to service the 401(k) plan  Financial institution offers plan fiduciary more favorable mortgage on personal residence in exchange for using institution to custody plan assets  Company shareholders hire plan investment advisor in order to receive free personal financial planning services for themselves 3 0
  31. 31. Potential Service Providers  Providers needed to operate the plan  Third party administrator  Recordkeeper  Custodian  Broker  Investment advisor  Actuary  Auditor  Attorney  Plan document provider 31
  32. 32. Factors to Consider  Credentials  Years in business  Licenses  Expertise  Education/certification of employees  References  Financial stability  E&O insurance  Past transgressions 3 2
  33. 33. Cost vs. Value “…it is the view of the Department that a plan fiduciary‟s failure to take quality of services into account in the selection process would constitute a breach of the fiduciary‟s duties under ERISA when…the selection involves the disposition of plan assets.” Source: DOL Advisory Opinion to Diana Orantes Ceresi, SEIU, February 19, 1998 3 3
  34. 34. The Price Tag Still Matters  Understand who is getting paid and how much  The devil is in the details  Forthcoming regulations require ongoing fee disclosure to avoid prohibited transactions  ERISA §408(b)(2) 3 4
  35. 35. Mutual Fund Fees  Operating costs listed in the fund‟s prospectus and annual report  Reported as a percentage of funds assets  Deducted from your fund‟s return, not out of pocket EXPENSE RATIO 1.15% MANAGEMENT FEE “OTHER” FEES 12b-1 FEE SUB-TA FEE Fees paid to investment Advisor for managing + the portfolio Generally custodial, administrative, and legal expenses Fee for distribution, advertising and compensating brokers Paid to the TPA, record keeper or used to offset plan fees 0.50% 0.30% + 0.25% + 0.10%
  36. 36. That‟s A Wrap (Fee)  Annuity products charge a “wrap” fee, which is a fee layered on top of all the investments in the plan  Typically this increases the Broker‟s compensation  Determined at start of contract WRAP FEE Additional contract asset charge + EXPENSE RATIO 0.50% MANAGEMENT FEE 0.50% + “OTHER” FEES 0.30% = 1.65% 1.15% + 12b-1 FEE 0.25% + SUB-TA FEE 0.10%
  37. 37. Revenue Recapture  12b-1 Fees and Sub Transfer Agency (Sub-TA) Fees are “recaptured” and deposited into an account in the name of the plan  Plan sponsor can use the account to pay for ongoing plan expenses  If the amount of recapture money exceeds plan expenses, the account can be allocated to the participants as an investment gain EXPENSE RATIO 0.80%* MANAGEMENT FEE 0.50% 12b-1 FEE + “OTHER” FEES 0.30% - Subtracted from the expense to offset plan expenses 0.25% SUB-TA FEE - Subtracted from the expense to offset plan Expenses 0.10%
  38. 38. Miscellaneous
  39. 39. Gifts & Entertainment  DOL Fiduciary Investigations Program (section 12)  Written policies on gifts from service-providers to plan fiduciaries  Less than $250 acceptable if no plan policy is violated  Annual aggregate value  Includes relatives of plan fiduciaries  Meals, gifts, entertainment  Expenses associated with educational conferences  Educational conferences  Deemed prudent regardless of reimbursement  Reasonable relationship to duties of attendee  Expenses are reasonable and consistent with written policy Source: www.dol.gov/PrinterFriendly/PrinterVersion.aspx?url=http://www.dol.gov/ebsa/oemanual/cha48.html
  40. 40. Plan Administrator Duties  Determine eligibility/value accounts and vesting  Adopt rules of procedure  Construe and enforce the terms of the plan  Review and render claims decisions  Hire service providers  Maintain plan records  File required returns with IRS/DOL  Distribute required notices  Recover overpayments  Make all determinations necessary for plan admin Source: Sentinel Defined Contribution Basic Plan Document Section 7.02 4 0
  41. 41. 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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