1.
Fiduciary University – Part 2
It‟s Not Just About Investments
Presented By Adam C. Pozek, QPA, QPFC, ERPA
Vice President, Consulting Services

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.
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.
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.
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.
Duty of
Loyalty

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.
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.
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.
Interpreting Plan
Provisions

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.
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.
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.
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.
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.
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.
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)
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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)
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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)
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20.
Collecting Amounts
Owed To The Plan

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
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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.
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
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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
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4

25.
Selecting & Monitoring
Service-Providers

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)
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6

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)
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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.
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)
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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
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31.
Potential Service Providers
 Providers needed to operate the plan
 Third party administrator
 Recordkeeper
 Custodian
 Broker
 Investment advisor
 Actuary
 Auditor
 Attorney
 Plan document provider
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32.
Factors to Consider
 Credentials
 Years in business
 Licenses
 Expertise
 Education/certification of employees
 References
 Financial stability
 E&O insurance
 Past transgressions
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2

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.
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)
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4

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.
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.
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.
Miscellaneous

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.
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
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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).