retirement plan investment changes: meeting strict erisa...

Retirement Plan Investment Changes: Meeting Strict ERISA Requirements Amid Increasing DOL Audits and Lawsuits Complying With Procedural Requirements for Investment Selection, Documentation and Notice

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

THURSDAY, FEBRUARY 19, 2015

Presenting a live 90-minute webinar with interactive Q&A

Mark E. Bokert, Partner, Davis & Gilbert, New York

Jeffrey M. Holdvogt, Partner, McDermott Will & Emery, Chicago

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-258-2056 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can

address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

For CLE purposes, please let us know how many people are listening at your

location by completing each of the following steps:

• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the SEND button beside the box

If you have purchased Strafford CLE processing services, you must confirm your

participation by completing and submitting an Official Record of Attendance (CLE

Form).

You may obtain your CLE form by going to the program page and selecting the

appropriate form in the PROGRAM MATERIALS box at the top right corner.

If you'd like to purchase CLE credit processing, it is available for a fee. For

additional information about CLE credit processing, go to our website or call us at

1-800-926-7926 ext. 35.

FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

[Presentation Title Goes Here – Type it in the Master Slide] 5

Strafford Webinar

RETIREMENT PLAN INVESTMENT CHANGES:

MEETING STRICT ERISA REQUIREMENTS AMID

INCREASING DOL AUDITS AND LAWSUITS

February 19, 2015

Mark E. Bokert

Partner/Chair Benefits & Compensation 212.468.4969 [email protected] © 2015 Davis & Gilbert LLP

Retirement Plan Investment Changes: Meeting Strict ERISA Requirements

Amid Increasing DOL Audits and Lawsuits

6

WHO IS A FIDUCIARY UNDER ERISA

A person is a fiduciary to the extent he or she:

»Exercises discretionary authority or control over

plan management

»Exercises authority or control over management or

disposition of plan assets

»Has discretionary authority or responsibility over

plan administration

»Provides investment advice for a fee


Basically, there are two ways a person becomes a

fiduciary:

»He or she acts as a fiduciary

»He or she is named in the plan document as a

fiduciary



7


A person is not a fiduciary when performing “settlor”

functions, which are activities related to:

»Plan establishment

»Plan design

»Plan termination

A person may wear “two hats”



8

FIDUCIARY LIABILITY

If a fiduciary breaches his or her fiduciary duties,

there are consequences:

»Liability for losses

»Liability to restore lost profits

»Subject to additional equitable or remedial relief

»20% penalty under ERISA Section 502(l)



9

CO-FIDUCIARY LIABILITY

Co-fiduciary liability may occur if a fiduciary:

»Knowingly participates in or helps conceal a

breach by another fiduciary

»Knows of a breach by another fiduciary, but does

not take reasonable steps to remedy

»Enables another fiduciary to commit a breach, by

breaching his or her own fiduciary duties



10

FIDUCIARY DUTIES

There are 5 fiduciary duties:

»Act solely in interest of participants and

beneficiaries

»Act for exclusive purposes of providing benefits

and defraying reasonable expenses

»Act in accordance with Plan documents (if

consistent with ERISA)

»Diversify Plan investments to minimize the risk of

large losses



11

FIDUCIARY DUTIES

The final and central fiduciary duty is the “duty of

prudence”:

»Act with care, skill, prudence and diligence of a

prudent person acting in same capacity and with

knowledge

» This is the so-called “prudent expert” standard



12

DUTY OF PRUDENCE

The duty of prudence requires fiduciaries to engage

in a prudent process when making decisions:

»Gather relevant information

»Undertake an analysis of the information

»Make a well-reasoned decision

»Do not blindly rely on experts

A fiduciary is not expected to have a crystal ball



13

COMMITTEE

STRUCTURE/MEMBERSHIP

Committee structural and membership issues:

»Who should appoint the committee members?

»Who should be on the committee?

»What sort of committees should be established?

»Good governance documents should be created



14

COMMITTEE MEETINGS

Meetings should be scheduled at periodic intervals

(e.g., quarterly) and should include the following:

»Review of fund performances

»Review of fees and expenses

»Review of legal issues

»Review of participant issues (e.g., usage, trends)



15

COMMITTEE MEETINGS

During the meeting,

»Formal reports should be reviewed and discussed

»Members should ask questions

»Formal votes should be taken on certain matters,

such as selecting and/or replacing investment

funds

»Minutes should be taken



16

COMMITTEE MEETINGS

From time to time, Committees will also need to

address more difficult fiduciary issues, such as

selection of service providers, revenue sharing,

brokerage windows, socially responsible funds,

employer stock, and internal controls



17

SELECTION OF SERVICE PROVIDERS

Selecting a service provider (e.g., a third-party

administrator or an investment advisor) is a

fiduciary act that must be done with prudence:

»Consider several candidates

»Evaluate each candidate’s experience, expertise

and fees

»Gather specific information (e.g., references,

insurance coverage, litigation)

»Document selection process



18

REVENUE SHARING

An investment fund offered under a Plan may share

a portion of its revenue with the Plan’s third-party

administrator:

»These revenue sharing payments must be

considered when evaluating whether the TPA’s

fees are reasonable

»Revenue sharing as a method of compensating a

TPA must be evaluated



19

BROKERAGE WINDOWS

Offering a brokerage window (i.e., a self-directed

brokerage account) is a fiduciary decision requiring

prudence:

»Evaluate whether a brokerage window would be

beneficial to Plan participants

»Evaluate and monitor the window provider

»Consider DOL activity surrounding brokerage

windows



20

SOCIALLY RESPONSIBLE FUNDS

A fiduciary is prohibited from subordinating the

interest of participants in their retirement income to

other objectives:

»Socially responsible funds must be evaluated in

the same manner as any other investment fund

»Only if the SRF is judged equal or superior to

alternative investments, may the Plan committee

select the SRF because of its collateral benefits



21

EMPLOYER STOCK

A company stock fund presents unique fiduciary

issues:

»No more “presumption of prudence”

»Should insiders be allowed on the Plan

committee?

»Consider an independent fiduciary



22

INTERNAL CONTROLS

The IRS has said that during audits Plan sponsors

need to explain “internal controls,” including:

»Who verifies participant eligibility

»Who verifies participant compensation

»Who verifies contributions

»Who verifies data for annual testing



23

COMMITTEE MINUTES

Minutes of committee meetings are the very best

evidence of procedural prudence:

»Minutes should describe the information collected,

the analysis undertaken and the basis for the

decision

»However, specific details and statements from

committee members should be omitted

»Minutes may be used as “summary reports” for the

appointing fiduciary



24

MANAGING FIDUCIARY RISK

The risk of liability to committee members for failing

to abide by their fiduciary duties may be mitigated

as follows:

»Plan and/or corporate documents may indemnify

plan fiduciaries (but not for bad acts)

»Insurance policies may offer coverage for fiduciary

activities



25

ERISA SECTION 404(C)

ERISA Section 404(c) protects Plan fiduciaries

against liability for participant investment elections.

In order to obtain 404(c) protection, certain

requirements must be satisfied:

»Plan must provide a “broad range” of investment

choices and state that it is a 404(c) plan

»Participants must receive “sufficient information”

»Participants must make affirmative investment

elections (two exceptions)



26


One exception to the “affirmative election”

requirement relates to the mapping of plan assets

from one investment fund to the other. The

requirements are:

»Replacement fund must be reasonably similar to

the terminating fund

»Participants must receive 30-60 days advance

notice

»Notice must include information on the

replacement fund and terminating fund



27


The other exception to the “affirmative election”

requirement involves “qualified default investment

alternatives”:

»Participants must be given notice of QDIA

»Participants must be given opportunity to make

different choice

»Participants must be able to transfer in/out of QDIA at

least quarterly

»No unusual fees/expenses restrictions on such

transfers



28


Limitation on ERISA Section 404(c) protection for

plan fiduciaries:

»According to the DOL and many courts, ERISA

Section 404(c) is not a defense to imprudent fund

selection

»In other words, Plan committees must continue to

select and monitor funds prudently



29

30 From Arenas to Zooey: Recent Attempts to Expand Right

of Publicity Claims

30 The Basics of Advertising & Marketing Law 30

QUESTIONS?

Mark E. Bokert

Partner/Chair Benefits & Compensation 212.468.4969 [email protected]

www.mwe.com

Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C.

Strategic alliance with MWE China Law Offices (Shanghai) © 2014 McDermott Will & Emery. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.

Retirement Plan Investment Changes:

Meeting Strict ERISA Requirements Amid

Increasing DOL Audits and Lawsuits

Jeffrey Holdvogt

McDermott Will & Emery LLP

312-984-7564

[email protected]

February 19, 2015

mailto:[email protected]

Outline of What’s to Come

Monitoring Investments – Procedural Requirements

Documentation Requirements for Investment Selection and

Monitoring

Participant Notice Requirements

– Blackout Period Rules

– Fee Disclosures

32

Monitoring Investments –

Procedural Requirements

Plan assets must be managed with the care, skill, prudence

and diligence of a prudent person acting in a like capacity and familiar with such matters under the circumstances then prevailing.

Remember your fiduciary duties under ERISA:

– Duty of Loyalty (the “Exclusive Benefit Rule”)

– Duty of Care (the “Prudent Man Rule”)

– Duty to Diversify Plan Investments

– Duty to Follow Plan Documents

– Duty to Avoid Prohibited Transactions

– Duty With Regard to Co-Fiduciaries

33



Best practice is to use a written Investment Policy. The Investment Policy should have sufficient detail so that someone looking back years later (e.g., the DOL or plaintiff's counsel) could understand how a decision was made.

– Include clear standards for how investments are chosen, how they are measured and what will trigger placing an investment or manager on a watch list.

– Roles should be spelled out clearly so that members of the Investment Committee understand what is required of them.

Investment Policy should be reviewed annually and modified as necessary. Common changes might include the addition of an asset class or a change in the appropriate benchmark for a fund or manager.

Minutes should be kept each time Investment Committee conducts review.

34



Utilize an independent third party investment expert, unless the plan sponsor has someone on staff that has the time, the tools and the expertise to perform accurate and independent analysis.

– Avoid reliance on recordkeeper or vendor with inherent conflict of interest because they are reporting on proprietary funds, sub-advised funds and even nonproprietary funds where long-term business relationships and revenue agreements may affect the investment decision process.

Best practice: quarterly reporting and continuous monitoring.

– Quarterly reporting is usually sufficient since retirement plans are long-term investments and the focus should be on trends.

– Continuous monitoring ensures that if something material happens between reporting periods (e.g., a regulatory problem for the manager) that requires immediate attention, the Committee will be apprised of it and can take appropriate action.

35



Reporting should tie directly to your investment policy - not just

provide fund performance information as is so often the case.

– The investment policy is the road map to achieving the objectives of the

plan.

– Ideally every Committee action should directly reference back to the

investment policy and monitoring should tie to specific metrics in the

policy. This will demonstrate a clear and coherent process.

Fiduciaries should review a broad range of quantitative as well as

qualitative measures for each fund or manager. In addition,

fiduciaries should analyze how the complete investment menu fits

together to accomplish the purposes of the plan.

36



Funds that don't meet the monitoring criteria should be replaced.

– The decision of how much time to allow an under-performing fund to improve its performance is not fixed and should take into account a number of factors.

– In extreme case failure to remove underperforming fund may demonstrate the fiduciary's unwillingness to perform the duties imposed by ERISA.

Tibble v. Edison International - 2015 Supreme Court case

– Plan’s investment committee selected a variety of funds for the investment of Plan assets. The funds selected by the investment committee were retail-class funds, which charged higher fees than the comparable institutional-class funds available in the retail market. Plan participants sued, alleging that lower-cost mutual funds were available and should have been selected for the Plan’s investment portfolio.

– ERISA provides a six-year period within which a participant or beneficiary may sue based on allegations of a breach of ERISA fiduciary duties. The district court dismissed the case and the U.S. Court for the Ninth Circuit affirmed the dismissal on the basis that the funds were selected more than six years earlier and were therefore barred by ERISA statute of limitations.

– Plaintiffs asked that the Supreme Court determine whether ERISA’s six-year limitations period begins on the date that the investment committee initially selected the higher-cost mutual fund options for the Plan’s investment portfolio or whether the on-going offering of such funds constituted a “continuing” fiduciary breach, thereby extending the period.

37



Best Practices in Summary:

– Meet regularly

– Keep good meeting minutes

– Consult the Investment Policy and other plan documents

– Stay informed

– Read the committee materials

– Ask questions of your advisors, review advisors regularly

– Understand the plan

– Understand when you must act in best interests of plan participants

– Make consistent decisions

– Follow up on questions, concerns, and proposed actions raised in meetings

38

Documentation Requirements for Investment

Selection and Monitoring

Fiduciary actions should be documented in order to show procedural prudence for investment selection.

– Courts and government agencies will look for documentation to examine whether a breach of fiduciary duty has occurred.

– Documentation provides fiduciary “cover.”

Documentation should make authority to act clear:

– Board delegations

– Committee By-Laws or Charter

– Investment Policy Statement

Documentation should show how decision was made:

– Committee Minutes

– Committee Reports

39

Documentation Requirements – Board

Delegations

Board Delegations delegate power and authority to manage and

control the investment of assets held by the plan to the Investment

Committee or Investment fiduciary.

– Alternative: Plan document may provide that a committee or fiduciary

shall have the power and authority to manage and control the

investment of assets held under the plan.

Delegations establish Investment Committee as named fiduciary

responsible for the management and control of the investments,

appoint members of the Committee, summarize the rights, duties

and obligations of the Committee, and establish rules of procedure

to govern Committee actions.

40

Documentation Requirements – Committee

By-Laws or Charter

Committee By-Laws or Charter

– Reflects delegation of authority from Board resolutions.

– Acts as Committee’s road map.

The purposes of the By-Laws or Charter are:

– Summarize the rights, duties and obligations of the Committee.

– Establish rules of procedure to govern Committee actions.

– Recognize that certain powers and duties may be delegated to others.

Committee typically maintains and amends By-Laws/Charter,

subject to authority from Board resolutions.

41

Documentation Requirements – Investment

Policy Statement

Investment Policy Statement – the formal document for the investment of plan assets. Statement summarizes the underlying philosophy and processes for the selection, monitoring and evaluation of the investment of plan assets.

Investment Policy Statement is used as the basis for future investment performance measurement and evaluation.

Investment Policy Statement should be revised and modified as appropriate on a periodic basis to reflect such factors as changes in the investment environment, manager performance, participant objectives and the Committee’s expectations.

42


Policy Statement (Defined Benefit Plan)

Investment Policy Statement includes a set of investment

objectives, guidelines and performance standards for the

investment of plan assets. For defined benefit plans this includes:

– Explanation of Plan structure and responsibilities involved of all parties.

– Clear understanding for all involved parties of the investment goals and

objectives for the plan assets.

– Guidance and limitations to Investment Managers regarding the

investment of plan assets.

– Provides a basis for evaluating investment results.

– Establishes the relevant investment horizon for which plan assets will be

managed.

43


Policy Statement (Defined Contribution Plan)

Investment Policy Statement includes a set of investment objectives, guidelines and performance standards for the investment of plan assets. For 401(k)/defined contribution plans this includes:

– The types of investment options offered under the plan.

– The choice of specific investment options under the plan.

– The ongoing supervision of plan assets, including the Committee’s responsibility for:

• Review of the investment options and investment characteristics of the investment options offered.

• Monitoring the actual investment options offered, including the fees and expenses incurred in connection with these investment vehicles.

• Decisions regarding the addition, replacement or elimination of the actual investment options offered.

44


Minutes

Committee Minutes - demonstrate that a fiduciary committee has fulfilled its responsibilities under ERISA.

– Helpful for internal audience - Well drafted minutes allow a committee to keep track of what it has done and make it more likely that decisions will be made in a consistent and rational manner.

– Helpful for external audience - Minutes document the process used in making a decision. The fiduciary must be able to demonstrate the process to have a strong defense against a breach of fiduciary duty claim.

– DOL audit investigation likely to include a document request for the minutes of fiduciary committee meetings. The ability to produce well organized minutes sends a message that the employer is compliance-oriented and aware of fiduciary responsibilities.

– Attorneys representing potential plaintiffs may request meeting minutes (and subpoena them if they are not produced voluntarily) and will seek to strengthen their case based on what is and is not in the minutes. If a breach of fiduciary duty claim does arise, the success or failure of a defense against the claim may turn on the availability and quality of meeting minutes.

45


Minutes

Committee Minutes – Best Practices

Typically taken by someone who is reasonably knowledgeable about the topics

that regularly come up at meetings, familiar with the terminology and concepts that

are likely to be used during discussions, will not be called upon to make extensive

presentations at meetings, and can attend meetings regularly.

Examples: senior human resources or finance staff member, a consultant who works

closely with the committee, or legal counsel.

Take minutes (or the notes that will be turned into minutes) contemporaneously, as

the meeting occurs. Minutes prepared long after the meeting and based on

recollections are valid as a record of the proceedings, but may be less accurate,

and less compelling from an evidentiary standpoint.

Avoid statements that could look bad in retrospect (e.g., Committee determined

that investment X was underperforming but decided not to take action for no

reason.)

46


Minutes

Committee Minutes – Best Practices

Create a record, not a transcript. Include enough detail to create a meaningful record without allowing the detail to overwhelm the larger themes discussed and important decisions made at the meeting. Include:

Date, time, and place of the meeting;

Committee members in attendance;

Invited guests, including consultants, legal counsel, and committee staff;

Matters discussed at the meeting; and

Any decisions made or actions taken at the meeting.

Approve and finalize minutes within a reasonable period after the meeting to which the minutes relate. A new meeting may begin with the approval of the minutes of the prior meeting (which should be recorded in the minutes of the current meeting), unless the minutes were approved earlier.

Include as attachments any reports or written materials presented at meeting

Maintain record of committee minutes.

47


Reports

The record of each Committee meeting should also include

any written materials that were distributed or presented to the

committee for discussion at the meeting. These might

include:

– Issue summaries,

– Slide decks,

– Investment performance reports.

Attach copies of reports and maintain with record of minutes.

48

Participant Notice Requirements - Blackout

Period Rules

ERISA requires the administrator of a defined contribution plan to provide participants with at least 30 days’ advance written notice of a blackout period.

– “Blackout period” means a period of three or more consecutive business days during which the normal ability of participants and beneficiaries to direct or diversify assets credited to their accounts, to obtain plan loans, or to obtain distributions from the plan is temporarily suspended or restricted.

– Certain situations are not treated as blackout periods, including:

• suspensions or restrictions that result from the application of federal or state securities laws;

• suspensions or restrictions that apply to particular individuals based on qualified domestic relations orders (QDROs); and

• regularly scheduled suspensions or restrictions that are incorporated into the plan and are disclosed to participants and beneficiaries through the summary plan description, summaries of material modifications, or other documents that describe the plan’s investment alternatives.

49


Period Rules

Blackout Period Notice – Plan administrator must provide affected participants and beneficiaries with a written notice at least 30 days in advance of a blackout period. The blackout notice must include the following:

– the reasons for the blackout period;

– an identification of the rights affected by the blackout period;

– the expected beginning date and length of the blackout period;

– in the case of a blackout period that affects plan investments, a statement that participants and beneficiaries “should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets credited to their accounts during the blackout period;” and

– other information the Secretary of Labor may require by regulation.

The notice must be written in a manner understandable by the average plan participant. If the beginning date or length of the blackout period is changed after the notice is provided, participants and beneficiaries must be notified of the change as soon as reasonably practicable.

50


Period Rules

Exceptions to the minimum 30-day notice requirement available only in limited circumstances, such as determination that providing 30 days’ advance notice would violate ERISA’s fiduciary standards or inability to provide 30 days’ advance notice is due to unforeseeable events or circumstances beyond the plan administrator’s control. In these cases, the plan administrator must provide the blackout notice to participants and beneficiaries as soon as reasonably possible.

The notice may be provided in electronic form if it is reasonably accessible to the recipients in accordance with electronic disclosure rules.

A plan administrator who fails to provide a blackout notice to participants and beneficiaries in accordance with ERISA may be fined up to $100 a day from the date of the plan administrator’s failure or refusal to provide the notice.

Pension Protection Act of 2006 amended ERISA § 404(c) to provide fiduciaries relief from liability during blackout periods if they authorized and implemented the blackout period consistent with the requirements of ERISA.

51

Participant Notice Requirements – Fee

Disclosures

DOL regulations require initial and annual disclosures of information related to investment fees.

– Two major categories of information: “plan-related information” and “investment-related information.”

– Goal is to provide participants with the necessary information to make informed investment decisions.

Plan administrator must provide a participant with both plan-related and investment-related information on or before the date the participant can first direct his investments under the plan.

Thereafter, the plan administrator must provide participants with the required disclosures at least annually.

Any changes to plan-related information must be communicated to participants at least 30 days (but no more than 90 days) before the effective date of the change. If the plan administrator is not aware of the change 30 days before the effective date of the change, the notice must be provided as soon as reasonably practicable.

Most plan administrators rely on their 401(k) vendor to prepare the participant disclosures for them. However, providing the disclosures is the fiduciary responsibility of plan administrators.

52

Summary of What We’ve Covered

Monitoring Investments – Procedural Requirements

Documentation Requirements for Investment Selection and

Monitoring

Participant Notice Requirements

– Blackout Period Rules

– Fee Disclosures

Questions?

53