Brian M. Pinheiro, Esq.

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Brian M. Pinheiro, Esq.

  1. 1. Fiduciary Issues for 2006 and Beyond Brian M. Pinheiro, Esq. PEBA Presentation November 10, 2005
  2. 2. Fiduciary Topics <ul><li>Who is a fiduciary? </li></ul><ul><li>What are the fiduciary duties? </li></ul><ul><li>What are the consequences of a breach of fiduciary duties? </li></ul><ul><li>Can fiduciary responsibility be delegated? </li></ul><ul><li>What is ERISA 404(c)? </li></ul><ul><li>Can I fix a fiduciary breach? </li></ul><ul><li>Specific fiduciary issues </li></ul>
  3. 3. In 2005, did your company . . . <ul><li>Ignore investment options in a 401(k) plan </li></ul><ul><ul><li>Especially employer stock investments </li></ul></ul><ul><li>Tell little white lies to “avoid confusion” </li></ul><ul><li>Pay plan expenses out of plan assets </li></ul><ul><li>Assume that your third-party administrator is the responsible fiduciary </li></ul><ul><li>Have regular investment / benefits administration committee meetings </li></ul><ul><li>Review your fiduciary insurance policy </li></ul>
  4. 4. Who is a fiduciary? <ul><li>Any person who – </li></ul><ul><ul><li>Exercises discretionar y management or control over plan administration. </li></ul></ul><ul><ul><li>Exercises any authority or control over plan assets. </li></ul></ul><ul><ul><li>Renders investment advice with respect to plan assets for a fee. </li></ul></ul>
  5. 5. Who is a fiduciary? <ul><li>Individual </li></ul><ul><li>Committee </li></ul><ul><li>Committee Members / Corporate Officers </li></ul><ul><ul><li>Confer v. Custom Engineering Co. </li></ul></ul><ul><li>Plan Sponsor/Company </li></ul><ul><li>Third-Party Administrator </li></ul><ul><li>Investment Manager/Investment Advisor </li></ul><ul><li>Trustee </li></ul>
  6. 6. Who is a fiduciary? <ul><li>Vice President of Human Resources </li></ul><ul><li>Vice President of Compensation and Benefits </li></ul><ul><li>Benefits Manager </li></ul><ul><li>401(k) Administrative Committee </li></ul><ul><li>Compensation Committee of the Board of Directors </li></ul>
  7. 7. What are the ERISA Fiduciary Duties? <ul><li>A fiduciary must exercise his duties with respect to a Plan </li></ul><ul><li>Solely in the interest of Plan beneficiaries; </li></ul><ul><li>For the exclusive purpose of paying benefits and reasonable administrative expenses; </li></ul><ul><li>In a prudent manner; </li></ul><ul><li>By diversifying Plan investments; and </li></ul><ul><li>In accordance with Plan documents (to the extent consistent with ERISA). </li></ul>
  8. 8. Consequences of a Breach of Fiduciary Duty <ul><li>A fiduciary is personally liable to restore losses to the Plan and to restore to the Plan any profits he earns by subjecting Plan assets to non-Plan use. </li></ul><ul><li>Prohibited transactions must be reversed; subject to an excise tax. </li></ul><ul><li>Civil and criminal penalties may apply. </li></ul>
  9. 9. Consequences of a Breach of Fiduciary Duty <ul><li>Fiduciaries may be sued by the DOL, Plan participants, and other fiduciaries to: </li></ul><ul><ul><li>Enforce the provisions of the Plan and ERISA; </li></ul></ul><ul><ul><li>Enjoin any act or practice that violates ERISA or the terms of the Plan; or </li></ul></ul><ul><ul><li>Obtain other appropriate equitable relief. </li></ul></ul>
  10. 10. Voluntary Fiduciary Correction Program <ul><li>DOL voluntary program to encourage fiduciaries to self-correct certain fiduciary violations. </li></ul><ul><ul><li>Relief from certain penalties and DOL enforcement </li></ul></ul><ul><li>New DOL guidance on the VFC Program published in 2005. </li></ul><ul><ul><li>Expands covered transactions list </li></ul></ul><ul><ul><li>Clarifies relief from excise taxes </li></ul></ul><ul><ul><li>Reduces documentation required to be submitted to DOL </li></ul></ul>
  11. 11. Voluntary Fiduciary Correction Program <ul><li>Common fiduciary breach transactions that are covered under the VFCP – </li></ul><ul><ul><li>Delinquent participant contributions </li></ul></ul><ul><ul><li>Improper use of Plan assets to pay expenses </li></ul></ul><ul><ul><li>Correction of participant loan failures </li></ul></ul><ul><ul><li>Prohibited purchases, sales and exchanges of Plan assets </li></ul></ul><ul><li>VFCP correction does not bar other enforcement actions (e.g., participant lawsuits). </li></ul>
  12. 12. Consequences of a Breach of Fiduciary Duty <ul><li>Related Issues – </li></ul><ul><ul><li>Corporate indemnification of fiduciaries </li></ul></ul><ul><ul><li>Fiduciary insurance </li></ul></ul><ul><ul><li>Bonding </li></ul></ul><ul><ul><li>Covenants in credit agreements and sale & purchase agreements </li></ul></ul>
  13. 13. Delegating Fiduciary Responsibility <ul><li>Fiduciaries can delegate certain fiduciary functions to other parties. </li></ul><ul><ul><li>Investment Committee can delegate investment responsibility to a professional investment manager. </li></ul></ul><ul><ul><li>Benefits Administration Committee can delegate claims administration to a third-party administrator. </li></ul></ul>
  14. 14. Delegating Fiduciary Responsibility <ul><li>Delegating fiduciary retains the duty to – </li></ul><ul><ul><li>Prudently select the responsible fiduciary </li></ul></ul><ul><ul><li>Monitor the fiduciary’s conduct and take action to replace the fiduciary if necessary </li></ul></ul><ul><li>Co-fiduciary liability </li></ul>
  15. 15. ERISA 404(c) <ul><li>When a participant directs the investment of his 401(k)/403(b) account, a Plan fiduciary is not liable for losses resulting from the participant’s investment decision. </li></ul><ul><ul><li>But only if the requirements of Section 404(c) of ERISA are satisfied. </li></ul></ul>
  16. 16. ERISA 404(c) <ul><li>Requirements relating to the types of investments available under a Plan. </li></ul><ul><ul><li>Plan must provide a broad range of investment alternatives, including at least 3 diversified alternatives. </li></ul></ul><ul><ul><li>Participant should be able to reach any point on a normal risk/return curve. </li></ul></ul>
  17. 17. ERISA 404(c) <ul><li>Requirements relating to the participant’s control over his or her account. </li></ul><ul><ul><li>Participants must have a reasonable opportunity to give instructions that will be followed, and must be able to change investments at least quarterly. </li></ul></ul><ul><ul><li>Default investments not protected. </li></ul></ul>
  18. 18. ERISA 404(c) <ul><li>Information that must be provided to all participants. </li></ul><ul><ul><li>Statement that the plan is intended to be an ERISA Section 404(c) plan, and fiduciaries may be relieved from losses resulting from participant investment instructions. </li></ul></ul><ul><ul><li>General description of investment alternatives (objectives, risk and return characteristics, types of assets). </li></ul></ul><ul><ul><li>Names of any investment managers. </li></ul></ul><ul><ul><li>Explanation of procedures regarding investment instructions. </li></ul></ul>
  19. 19. ERISA 404(c) <ul><ul><li>Description of transaction fees and expenses. </li></ul></ul><ul><ul><li>Prospectus </li></ul></ul><ul><ul><li>Information on pass-through voting rights. </li></ul></ul><ul><ul><li>“ Sufficient information to make informed investment decisions.” </li></ul></ul><ul><ul><ul><li>Role of investment education </li></ul></ul></ul>
  20. 20. Investing in Employer Stock <ul><li>Heavily litigated area in the past 5 years. </li></ul><ul><li>Employers face tough decisions when stock declines in value. </li></ul><ul><ul><li>When do you shut off new investments? </li></ul></ul><ul><ul><li>When do you eliminate the stock fund as an investment? </li></ul></ul><ul><ul><li>When do you disclose material, non-public information about the employer stock? </li></ul></ul><ul><ul><li>How do you objectively evaluate the prudence of an employer stock fund? </li></ul></ul>
  21. 21. Investing in Employer Stock <ul><li>Employers are taking action to limit employer stock investments; reduce exposure to class action litigation. </li></ul><ul><ul><li>No longer a mandatory investment. </li></ul></ul><ul><ul><li>Percentage limits on investments. </li></ul></ul><ul><ul><li>Offering employer stock only through brokerage windows. </li></ul></ul><ul><ul><li>Independent fiduciaries handle decisions on the employer stock fund. </li></ul></ul>
  22. 22. Fiduciary Misrepresentations <ul><li>Duty not to lie to participants </li></ul><ul><ul><li>Accounting irregularities </li></ul></ul><ul><ul><li>Varity case </li></ul></ul><ul><ul><li>Misrepresentations in communications </li></ul></ul>
  23. 23. Payment of Plan Expenses <ul><li>Plan assets may be used to pay “reasonable” plan administrative expenses. </li></ul><ul><ul><li>Using Plan assets to pay other expenses is a breach of fiduciary duty. </li></ul></ul><ul><li>Plan administrative expenses are those that relate to the management or administration of the plan. </li></ul><ul><ul><li>E.g., Form 5500 preparation, nondiscrimination testing, actuarial valuations, investment fees. </li></ul></ul><ul><li>Expenses must be reasonable </li></ul><ul><ul><li>Determined by a Plan fiduciary. </li></ul></ul>
  24. 24. Payment of Plan Expenses <ul><li>May allocate plan expenses among plan participants in a defined contribution plan. </li></ul><ul><ul><li>Pro Rata vs. Per Capita. </li></ul></ul><ul><ul><li>Allocating expenses to individual participants. </li></ul></ul><ul><ul><ul><li>Hardship withdrawals </li></ul></ul></ul><ul><ul><ul><li>Calculation of benefits under different distribution options </li></ul></ul></ul><ul><ul><ul><li>Distribution costs (e.g., check writing fees) </li></ul></ul></ul><ul><ul><ul><li>Terminated vested account administration </li></ul></ul></ul><ul><ul><ul><li>QDROs </li></ul></ul></ul>
  25. 25. 2006 New Years’ Resolutions <ul><li>Identify the fiduciaries </li></ul><ul><li>Draft charters for your plan investment committee and your benefits administration committee </li></ul><ul><ul><li>Outline responsibilities, how actions are taken, etc. </li></ul></ul><ul><li>Draft an investment policy statement </li></ul><ul><ul><li>Creates boundaries and benchmarks for plan investment decisions </li></ul></ul><ul><li>Fiduciary training </li></ul>
  26. 26. 2006 New Years’ Resolutions <ul><li>Review your Plan investment options quarterly </li></ul><ul><li>If you pay expenses out of Plan assets, consider how expenses are approved </li></ul><ul><li>Review your fiduciary insurance policies </li></ul>
  27. 27. 2006 New Years’ Resolutions <ul><li>THINK </li></ul><ul><ul><li>Good fiduciary practice is based on sound preliminary investigation and procedure </li></ul></ul><ul><ul><li>Don’t have to be able to tell the future </li></ul></ul>

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