Webinar - ERISA Fiduciary Checkup · 2019. 9. 17. · 1/9/2013 1 WEBINAR On behalf Portfolio Evaluations, Inc., Drinker Biddle & Reath LLP, and WithumSmith+Brown, welcome and thanks

January 9, 2013

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ERISA

CHECKUPFIDUCIARY

1/9/2013

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WEBINAR On behalf Portfolio Evaluations, Inc., Drinker Biddle &

Reath LLP, and WithumSmith+Brown, welcome and thanks for spending your lunch time with us.

Have a question or comment – Please use the chat box. If we don’t get to your question, we will reach out to you at the conclusion of the webinar.

Today is interactive. Your participation in the polling questions is appreciated.

We will begin shortly!

WELCOME TO TODAY’S

The information presented in this webinar represent our perspectives, is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.

Today’s Disclaimer

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Meet Your Presenters

DAVID DACEY, CPA

Partner, Practice Leader, Employee Benefit &Pension Plans Group,WithumSmith+Brown, PC

HOWARD LEVINE Partner, Drinker Biddle & Reath LLP

DAVID HUDAKSenior Consultant, Portfolio Evaluations, Inc.

Legal OverviewCommon Investment

Failures Financial Reporting

ConsiderationsQuestions & AnswersContact

Today’s Discussion Topics

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Howard J. LevineDrinker Biddle & Reath [email protected]

COMMON MISTAKES BY ERISA FIDUCIARIES AND LESSONS

FROM RECENT ERISA FIDUCIARY LITIGATION

District court in Missouri awarded plaintiffs more than $35M in damages against plan fiduciaries

Case involved two 401(k) plans – one union and one non-union

Defendants included ABB and plans’ administrative and investment committees

Plans’ recordkeeper (Fidelity Management Trust)

Plans’ investment adviser (Fidelity Management & Research)

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Tussey v ABB, Inc.

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Initially, recordkeeper paid a per-participant, fixed dollar fee; over time, paid with “revenue sharing”

Fidelity also began providing outsourcing services to ABB on which Fidelity lost money

Court found numerous fiduciary breaches arising from evidence that fiduciaries motivated by desire to increase revenue sharing to subsidize the cost of the outsourcing services provider by Fidelity

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Tussey v ABB, Inc.

Common ERISA Fiduciary Mistake #1

NOT KNOWING WHO YOUR PLAN FIDUCIARIES ARE

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Two categories of fiduciaries Named fiduciaries

Functional fiduciaries

“Named” fiduciaries Either designated in the plan document, or appointed by the

plan sponsor under a procedure established in the plan document

Each plan must have at least one named fiduciary who is designated as the “plan administrator”

Trustees are also automatically named fiduciaries

Who is an ERISA Fiduciary?

A person is a functional fiduciary even though not named in the plan documents to the extent he or she Has or exercises any discretionary authority, control or

responsibility regarding the administration of the plan; or

Exercises any authority or control over the management of the plan or disposition of the plan’s assets

Ensures that persons with no authority to administer the plan but do so anyway will be treated as a fiduciary

Renders investment advice for a fee

Who is an ERISA Fiduciary?

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NOT UNDERSTANDING WHEN YOU ARE ACTING IN A FIDUCIARY

CAPACITY

The same person can exercise both fiduciary and nonfiduciary functions with respect to a plan When the same person has both functions, it is important to

remember which hat he or she is wearing

“Settlor” functions are not subject to fiduciary standards Plan design decisions can be made solely based on

business factors, without regard to fiduciary standards Establishment, termination, or amendment of a plan are

settlor functions Once the design decision is made, implementation and

communication may be subject to fiduciary standards

What Actions Are Subject to ERISA’s Fiduciary Standards?

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In Tussey, company fiduciaries found to be motivated by a desire to benefit ABB at the expense of plan participants Selected funds that provided more revenue-sharing for

Fidelity

Ignored evidence that 401(k) plan fees were subsidizing corporate services

What Actions Are Not Subject to ERISA’s Fiduciary Standards?


FAILING TO MONITOR APPOINTED FIDUCIARIES AND SERVICE

PROVIDERS

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If a person has the authority to appoint and remove/terminate plan fiduciaries, that person is itself a fiduciary

Appointing fiduciary has duty to “monitor” the actions of the appointed fiduciary Duty to monitor does not imply need to second-guess

decisions of appointed fiduciaries

Particularly important concept for boards of directors/compensation committees

The Duty to Monitor


FAILING TO DOCUMENT REASONSBEHIND DECISIONS

MADE/ACTIONS TAKEN

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Difficult to establish that prudent fiduciary process was followed without documentation

Meeting minutes explaining rationale for the decisions, not merely that the decision was made

Reports of investment consultants

Fee disclosures

In the Tussey case, fiduciaries not able to demonstrate that they performed more than a cursory review of investment options before changing them.

Importance of Documenting Decisions


FAILING TO CONDUCT FIDUCIARY TRAINING

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Courts and the DOL have determined that an employer has a responsibility to provide formal fiduciary education to fiduciaries it appoints

Training should include the scope of the fiduciary’s duties, the legal principles involved and procedures that can be used to minimize the risk of liability

Importance of Fiduciary Training


FAILING TO FOLLOW THE TERMS OF A PLAN’S GOVERNING

DOCUMENTS, INCLUDING ITS INVESTMENT POLICY STATEMENT

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ERISA requires that plan fiduciaries discharge their duties in accordance with plan documents to extent not inconsistent with ERISA

Investment policy not required to be adopted, but if one is adopted, it must be followed

The Tussey court noted the fiduciaries did not follow IPS process for “watchlisting” and eliminating underperforming funds, which cast doubt on the prudence of their process. Also ignored language in plan document regarding use of least expensive fund

Follow Your Plan Documents


FAILURE TO FOLLOW ADVICE OF INDEPENDENT ADVISOR

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In the Tussey case, ABB never calculated how much it was paying for recordkeeping services via revenue sharing

This was before the new ERISA 408(b)(2) service provider disclosure regulations became effective

ABB ignored consultant's (Mercer’s) advice that it was paying too much for recordkeeping and that it appeared the 401(k) plans were subsidizing the corporate outsourcing services Fidelity was providing to ABB

ABB never negotiated for rebates

Monitoring Plan Fees

All fees, even if asset-based, must be monitored for reasonableness

Less expensive institutional fund classes should be used unless clear (and documented) reason for not doing so

Monitoring Plan Fees

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FAILING TO MONITOR FEES FOR REASONABLENESS AND

NEGOTIATE FEES WITH SERVICE PROVIDER

David HudakPortfol io Evaluat ions, Inc.

COMMON INVESTMENT FAILURES

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Not Fully Understanding Plan Expenses and Not Benchmarking Appropriately

Lack of Adherence to Investment Policy Statement

Improperly Constructing the Investment Lineup

Overemphasizing Performance in Selecting or Removing a Fund

Common Investment Failures

408(b)(2) fee disclosure became effective July 1, 2012

Plan fiduciaries must ensure that arrangements with their service providers are “reasonable” and that only “reasonable” compensation is paid for services; and the services are necessary for the plan

Affects ERISA-covered plans including Defined benefit plans

Defined contribution plans

ERISA 403(b) arrangements

Not Fully Understanding Plan Expenses & Not Benchmarking Appropriately

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What amount of revenue is required by a provider for the services being offered?

Different providers have different pricing models

Models continue to change

Apples-to-apples comparisons are challenging

Expertise is essential

Not Fully Understanding Plan Expenses & NotBenchmarking Appropriately

Benchmarking Methods – which is more appropriate?

Survey Data

Ample fee surveys available

Shortcoming: Don’t account for all the variables in plan pricing

RFI process

Accounts for all the variables in plan pricing

Real-time results

Specific to your plan

Not Fully Understanding Plan Expenses & NotBenchmarking Appropriately

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The Committee is not following the guidelines outlined in the Policy

The Policy does not provide clear guidance to the Committee

Allowing personal feelings to influence fiduciary decisions

Lack of Adherence to Investment Policy Statements

The Investment Policy should be formally reviewed each year

A well structured Investment Policy should include: Background Section

Purpose Statement

Guidance for Fund Selection and Termination

Monitoring of Investments

Investment Policy Statement Review

Asset Allocation Targets (for trustee-directed portfolios)

Part of this review, should include fiduciary education for the Committee

Investment review process should be linked to the Investment Policy Performance monitoring inconsistent with investment policy benchmarks

Best Practice for Adherence to Investment Policy Statement

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Too many funds• Large number of active fund options and few if any index options

“Fill the Boxes” Approach

Don’t account for the complementary relationships between funds

Failing to distinguish between investment options that have a more positive impact for participants


DOMESTIC EQUITY FUND STYLE

Value Blend Growth

Large Cap Fund Fund Fund

Mid Cap Fund 2 Funds

Small Cap Fund Fund Fund

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OVERLAP CHART


Consideration of the complementary relationship between funds

Tier Structure

One fund solution Beneficial option for many participants

Appropriate diversification within one fund

Passive tier Complements the active tier

Low cost

Provides more defense against possible litigation

Active tier Exposure to alpha-generating strategies

A few funds with broad mandates can provide diversified exposure

Less confusion for participants

Best Practice for Constructing the Investment Lineup

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DOMESTIC EQUITY FUND STYLE

Value Blend Growth

Large Cap Fund Fund

Mid Cap

Small Cap Fund



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Performance Chasing

Making decisions based on the short-term

Not giving a fund’s investment process enough time

Failing to Focus on Broader Criteria Not applying a “Winnowing” Search process


As of 6/30/07 1 year 3 year 5 year 10 year

Fund 21.18 14.08 11.31 9.1

Large Value Peer Group

20.96 13.65 11.48 8.33

Russell 1000 Value Index

21.87 15.93 13.31 9.87

Rank in Peer Group

50 50 60 40


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Select Funds as a Fiduciary

Apply selection criteria outlined in Investment Policy Statement

Not singularly focused on performance

Focus on Broader Criteria Apply a “Winnowing” Search process

Best Practice in Selecting or Removing a Fund

Same fund

Same investment process

More than just performance

Understand how market environments impact a fund

How does it fit in the overall portfolio?

As of 6/30/12 1 year 3 year 5 year 10 year

Fund 9.37 18.61 1.77 6.43

Large Value Peer Group

0.66 13.87 -2.05 4.85

Russell 1000 Value Index

3.01 15.8 -2.19 5.28

Rank in Peer Group

5 5 10 20

Best Practice in Selecting or Removing a Fund

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David Dacey, CPA, PartnerWithumSmith+Brown, [email protected]

LOW HANGING FRUITPLAN FINANCIAL REPORTING

ISSUES

Increased Fiduciary Transparency

INCREASED DOL OVERSIGHT

E-FAST 2

INCREASED LITIGATION

INCREASED FEE AWARENESS

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Both DOL limited scope and full scope audits

Limited scope – extra sentence in calendar 2011 filings

Full scope

Supplemental information derived from records used to prepare financial statements

Expressly stated audit procedures – comparing and reconciling

New for calendar 2012 filings – new auditor report under “clarity standards”

Lack of auditor expertise could raise questions about fiduciary prudence

Low Hanging Fruit Item #1 – Incorrect Auditor’s Report

Changes appearance and presentation of the report

New format with “headings” for each section of the report Introduction paragraph

Management’s responsibility for financial statements paragraph

Auditors’ responsibility paragraph

Opinion paragraph

Changes to 2012 Auditor’s Report

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Investment income presented net of investment expenses (return net of expense ratio)

Reminder that participants are intended users of plan’s financial statements

“If only I had known!”

Low Hanging Fruit Item #2 – Fees Netted With Investment Income

29 CFR 2520.103-8 provides a limited scope exception for the audit of investments in a plan

Approximately 70% of financial statements submitted to the DOL are limited scope

Certification doesn’t apply to contributions or distributions

Certifying these transactions contradicts law and demonstrates a lack of prudence

Low Hanging Fruit Item #3 – Certifying Contributions / Distributions

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Fair value leveling requirement (Level 1, 2 or 3)

Level 1 – quoted market prices in active markets

CCTs and PSAs don’t have quoted market prices in active markets

Improper leveling demonstrates a lack of prudence over investments

Low Hanging Fruit Item #4 – Improper Leveling of CCTs and PSAs

Typically 20% of a terminated workforce triggers a partial termination

Partial terminations can occur over greater than one year

Interpreting ratio of distributions to beginning of year net assets: Greater than 10% - Start thinking about a partial termination

Greater than or equal to 20% - Think about this issue more!

Could create a contribution by the Sponsor

Low Hanging Fruit Item #5 – Beware the Partial Termination

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Typical 401(k) eligibility – 1,000 hours and age 21 or older

403(b) plan – “universal availability”

Could create a QNEC issue for the Sponsor

Low Hanging Fruit Item #6 – 403(b) Plan Eligibility

Many older plans permitted “in service” transfers, referred to as a 90-24 transfer

Typical lack of historical tracking of such transfers, even though assets of the Plan

GAAP requires a departure

DOL permitted relief, but expected GAAP departure

Incorrect opinion could question fiduciary prudence over the Plan

Low Hanging Fruit Item #7 – Old 403(b) Plans With A Clean Opinion

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IRS letters older than 2001

More current IRS letters, but no disclosure of amendment since most recent letter

Lack of letter precludes self-correction

Lack of amendments could be a challenge to Plan’s tax status

Low Hanging Fruit Item #8 – Beware Old IRS Determination, Opinion or Advisory Letters

DOL has no materiality threshold for late contributions

Late contributions are a DOL initiative

Late contributions are best disclosed in supplemental disclosure and notes

Consider ratios of employee contributions to employee contributions receivable

Clear disclosure demonstrates fiduciary prudence

Low Hanging Fruit Item #9 – Late Contributions

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DAVID DACEY, CPAPartner, Practice Leader, Employee Benefit and Pension Plans Group, WithumSmith+Brown, [email protected]

THANK YOU FOR YOUR TIME!Please contact us with any questions.

HOWARD LEVINE Partner, Drinker Biddle & Reath [email protected]

DAVID HUDAKSenior Consultant, Portfolio Evaluations, [email protected]