plan funding & fiduciary responsibilities january 14, 2014 stuart hack, jd, clu sunlin...
TRANSCRIPT
Plan Funding&
Fiduciary Responsibilities
January 14, 2014
Stuart Hack, JD, CLUSunlin Consulting LLP
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Funded vs. Unfunded Plans Funded
Assets placed in a trust To fund retirement plan benefits Solely for the benefit of plan participants
Unfunded (in general) Benefits are a bare promise of the employer Assets may be designated to specifically fund the benefits, but
remain subject to creditors of employer
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Funded Plans All IRS Qualified Plans must be funded.
Defined Benefit, 401(k), 403(b), Money Purchase, Profit Sharing, Cash Balance, Target Benefit, ESOP
Funding Vehicles Trust
Discretionary Trustee – full fiduciary responsibility, including selection and monitoring of plan investments
Directed Trustee – liability limited to specific activities, usually to hold assets, transmit transactions, and maintain record of plan assets
Custodial Account – similar to Directed Trustee Annuity Contract – insurance contract with underlying assets
held by insurance company; insurance company is the custodian of the assets
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Unfunded Plans
Non-qualified Deferred Compensation Plans Can accumulate assets in a Rabbi Trust to add some protection to
covered employees
457 Plans For certain tax exempt and governmental organizations only 457(b) Plans for both HCE and NHCE
Statutory contribution limits Statutory distribution requirements
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Unfunded Plans (continued)
457 Plans (continued)457 (f) Plans for HCE only
Limit is “reasonable” compensation Must have risk of forfeiture Statutory distribution requirements
Governmental plans may be funded Can accumulate assets in a Rabbi Trust
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Types of Asset Classes
Equities Foreign Domestic Large Cap Medium Cap Small Cap Value Growth Blend Special asset classes, such as Real Estate
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Types of Asset Classes (cont.)
Bonds U.S. Treasury Other Governmental Corporate Foreign Emerging Hi Yield
Money Market Guaranteed / Stable Value
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Types of Plan Assets Mutual Funds - registered securities
Separately Managed Accounts
Insurance Company Products
Stable Value Funds
Individual securities
“Strange assets”
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Mutual Funds
Registered with the SEC Various share classes, designed for specific product
distribution streams Registered Investment Advisors Brokers Broker dealers Record keepers
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Separately Managed Accounts
Not registered with the SEC Offered by
Bank/Trust Company Insurance Company Investment Managers
Pool of assets or individual account managed in specified investment style
Typically institutional / lower cost internal charges
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Insurance Company Products
Guaranteed Accounts Insurance company guarantees fixed rate of return and principal Subject to withdrawal rules similar to Stable Value funds
Annuity wrapped accounts Insurance company wraps services, annuity rate guarantees and
fees/commissions around the mutual fund or separately managed account
Provides a method of flexible compensation for distribution systems
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Insurance Company Products (cont.) Fixed Annuities
Insurance company guarantees income stream for specified period, including for life
Variable Annuities – stream of income based on underlying asset performance
Hybrid Annuities – variable returns with guaranteed minimums
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Stable Value Funds Guaranteed yield, usually annually adjusted Market value adjustments, usually made if plan terminates the
contract and surrenders it Benefit payments usually exempted from market value adjustments Participant direction sensitive, i.e., no market value adjustments for
participant direction into or out of stable value accounts Restrictions usually apply to transfers to a “competing” fixed income
investment option Underlying assets include bonds, BICs, GICs, and insurance company
general accounts Similar to mutual funds
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Internal Fees/Charges/Expenses
Mutual Funds Disclosed in prospectus
Investment management fee 12b-1 fee Transfer agency fee Administration and record keeping fee Commissions Contingent deferred sales charges
Undisclosed expenses/costs Trading expenses Trading efficiencies/inefficiencies
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Internal Fees/Charges/Expenses (cont.)
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Separately Managed Accounts Disclosed in contract with plan sponsor Includes
Investment management fees Custodian fees
Insurance Company Products Disclosed in contract with plan sponsor Includes
Investment management fee Annuity/insurance charges Compensation to distribution channels Revenue to pay plan expenses
Annuity wrapped accounts Disclosed in contract with plan sponsor Includes
Expenses charged by underlying mutual funds Annuity/insurance fees Commissions Revenue to pay plan expenses
Stable Value Funds Provided in Contract or Trust Agreement Not always disclosed Investment management fee Distribution fee/commissions
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Internal Fees/Charges/Expenses (cont.)
ERISA 404 (a) Prior to ERISA is was like the “wild West”
Imposes a “prudent man standard of care” for qualified plan fiduciaries
For the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan
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ERISA 404 (a) (continued)
With the care, skill, prudence, and diligence that a prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and
with like aims By diversifying the investments of the plan
so as to minimize the risk of large losses unless under the circumstances it is clearly prudent not to do so;
and …
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Plan Fiduciaries
Anyone who: Exercises control or authority over the management of the plan or the
plan’s assets; Provides investment advice for a fee; or Has discretionary authority over the plan’s administration
Is responsible for actions of the other plan fiduciaries, unless Fiduciary duties are specified and limited Reasonably not aware of actions taken by other ficuciaries
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Most Common Fiduciaries Plan sponsor
Plan Administrator – named in plan document
Administrative and investment committees named individual members
Named Plan Trustee
Compensation committees and board members on the committees, individually
Members of the Board who appoint committee members
Functional Fiduciaries 20
Other Types of Plan Fiduciaries Co-fiduciary – accepts limited fiduciary duties
3(21) investment advisor co-fiduciary – helps the plan sponsor decide
3(38) investment manager fiduciary – decides for the plan sponsor
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Common Fiduciary Liability Lawsuit Allegations
Excessive investment fees
Unreasonable expenses charged to participant accounts
Failure to monitor investments, resulting in lost investment earnings
Failure to document decisions
Improper investments
Failing to include eligible participants22
How to Manage Exposure(Best Practices)
Allocate plan responsibilities and document accountability
Outsource duties that exceed expertise of committees
Document, Document, Document
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Specific Investment Fiduciary Responsibilities & Attributes
Defined Benefit Plans Create asset allocation appropriate for funding guaranteed, pre-
determined pension benefits Maintain appropriate liquidity to pay benefits as they become due Investment gains/losses
Affect amount of employer contributions Do not affect amount of benefits to participants Can put plan/plan sponsor in jeopardy
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Specific Investment Fiduciary Responsibilities & Attributes (cont.) Participant-Directed Defined Contribution Plans
Investment fiduciaries responsible for Providing investment alternatives with sufficient range of risk for
participants to create asset allocations responsive to their risk tolerance and length of their accumulation period
Selection and monitoring of investment alternatives provided by the plan
Changing investment managers and investment alternatives, when appropriate to do so
Investment gains/losses Affect amount of benefit participants have at retirement Do not affect amount of employer contribution 25
Best Practices to Manage Investment Fiduciary Responsibilities
Written Investment Policy Documented periodic investment monitoring Documented investment committee decisions
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404(a)(5) Disclosure Requirements
Summary Disclosure of plan investment-related information Disclosure of expenses charged to participant-directed accounts
Purpose To ensure that all participants and beneficiaries
have the information they need to make informed decisions about the management of their individual accounts, and
are aware of what expenses are charged to their accounts and why the expenses are charged to their accounts
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404(a)(5) General Requirements
Annual notice in general, once every 12 months Quarterly notice – via participant statements Interim information changes
Any change in information, except investment- related information
Provided at least 30 days, but no later than 90 days, prior to date of change
Specific additional information must be provided upon request
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404(a)(5) General Requirements (cont.)
Notice content falls into 4 categories General operational and identification information Information on administrative expenses Information on individual expenses Investment-related information
Identifying information Performance data Benchmark information Fee and expense information
DOL suggests that the bulk of the investment-related information be provided using a “Model Chart.”
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404(a)(5) Plan Sponsor Responsibility Provide all of the 404(a)(5) required information to plan participants
May reasonably rely upon information provided by service providers
Failure to provide all information in timely fashion may result in liability exposure for breach of fiduciary duty
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408(b)(2) Disclosure Requirements
Purpose is to require service providers to inform the plan sponsor about: fees being charged services provided potential conflicts of interest
Applies to all types of plans Must be in writing Any changes in provisions of service agreements must be
provided within 60 days prior to the change
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408(b)(2) General Requirements
Responsibility of service provider to disclose to appropriate plan fiduciaries Expenses charged (direct and indirect) Revenues received (direct and indirect) Sub-contractors and relationships Potential conflicts of interest
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408(b)(2) General Requirements (cont.)
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Responsibility of plan sponsor to: Make sure all of required disclosures are received Evaluate whether disclosures are reasonably accurate Obtain expert help in understanding disclosures, if needed Notify DOL if service provider fails to provide timely disclosure Decide whether fees charged are reasonable for services
provided Determine whether potential exists for service provider conflict
of interest Replace service provider if it refuses to provide required
information
408(b)(2)Disclosure Requirements Liability Exposure
No contract between a service provider and a plan sponsor is “reasonable” if the contract fails to meet 408(b)(2) disclosure requirements.
The furnishing of goods, services, or facilities between a plan and a party in interest to the plan generally is prohibited under section 406(a)(1)(C) of ERISA.
This Prohibited Transaction Exemption is lost if requirements of 408(b) are not fulfilled. The contract becomes a Prohibited Transaction.
Each fiduciary is potentially personally liable for any losses caused to plan or participants.
Potential penalties to plan sponsor and service provider for Prohibited Transaction 34
ERISA 404(c) Provides fiduciary exemption for investment return results
experienced by participants due to their asset allocation directions
Does not exempt fiduciary for responsibility to select and monitor investment options
ERISA §404(a)(5) largely replaces 404(c)
However, 404(c) compliance specifically depends upon compliance with 404(a)(5).
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ERISA 404(c) (cont.) 404(a)(5) compliance does not provide fiduciary liability
exemption for the investment results attributable to Participant’s investment allocation decisions Plan’s default investment Blackout period Qualified change in investment
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ERISA 404(c) (cont.)
To have 404(c) protection, a plan must Formally provide participants written notice that it elects to be a
404(c) plan Provide a “broad range” of investment alternatives Allow participants to have independent control Fulfill certain requirements for plans that have employer stock as
an investment option Fulfill QDIA selection and notice rules Prudently select and monitor service providers and plan
investment alternatives
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Employee Plan ComplianceResolution System
Revenue Procedure 2008-50 Plan Sponsors have the option to correct qualification
problems through Employee Plans Compliance Resolution System (EPCRS)
Purpose is to provide incentive for corrections by minimizing cost of compliance
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Employee Plan ComplianceResolution System (continued) The components of EPCRS are:
Self-Correction Program (SCP) Corrective action taken without requesting IRS approval
Voluntary Correction Program (VCP) Process to request IRS approval of corrective action Fee to apply Usually requires employer contributions to the plan to make the
corrections Some correction coasts are very predictable; some have to be
negotiated
Alternative of waiting until issues raised on audit can be very expensive
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Fiduciary Liability Management Fiduciary failure lawsuits are EXPENSIVE
Legal defense costs Company resources diverted from production, sales, etc. Ultimate judgment results
Fiduciary liability insurance only covers defense and settlement
Best insurance is: documented fiduciary compliance procedures documented fiduciary decisions and actions documented allocation of fiduciary responsibilities
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Typical Corrections Needed
Foot-faults
Discrimination test failures
Failure to include all eligible employees
Failure to follow plan document provisions
Failure to make required document updates by deadlines
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U.S. Department of Labor (DOL)Correction Programs
Correct fiduciary problems through Employee Benefits Security Administration (EBSA)
The components are Delinquent Filer Voluntary Compliance Program (DFVC)
Provides plan administrators with a way to comply with the annual reporting requirements by coming up to date with corrected filings of 5500 Forms
Voluntary Fiduciary Correction Program (VFCP) Gives plan sponsors and service providers the opportunity to self-
correct fifteen specific financial transactions that violate ERISA, such as delinquent participant contributions
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Q & A43