Webcast

ERISA: What You Don’t Know Can Hurt You

May 16, 2006, 1 pm EDT

This webcast is made possible through the sponsorship of the following companies:

www.directorsandboards.com

How this webcast worksHow this webcast works

Moderated discussion, with PowerPoint slides.Moderated discussion, with PowerPoint slides.

Questions can be asked online, via “chat” at any time during Questions can be asked online, via “chat” at any time during the webcast, or by telephone after the discussion (operator-the webcast, or by telephone after the discussion (operator-moderated). Questions, written or by telephone, will be moderated). Questions, written or by telephone, will be addressed after the discussion.addressed after the discussion.

Polling questions may be asked after certain slides.Polling questions may be asked after certain slides.

Technical Support: If on teleconference, press “0;” if on web Technical Support: If on teleconference, press “0;” if on web audio stream, dial 888-203-7900, prompt #2audio stream, dial 888-203-7900, prompt #2

• Introduction of panel members.Introduction of panel members.

• Executive Summary: Board Oversight of ERISA Executive Summary: Board Oversight of ERISA

retirement plans. What are core issues?retirement plans. What are core issues?

• Critical background information.Critical background information.

• What is the scope of the problem?What is the scope of the problem?

• What can a Board member do to reduce liability What can a Board member do to reduce liability

exposure for himself/herself or the company?exposure for himself/herself or the company?

• Q&AQ&A

Directors & Boards Webcast AgendaDirectors & Boards Webcast Agenda

Panel Experts:Panel Experts:

• Jim Kristie: Editor, Directors & Boards MagazineJim Kristie: Editor, Directors & Boards Magazine

• Jeffrey Mamorsky: Chair, ERISA Dept., Greenberg Traurig, LLPJeffrey Mamorsky: Chair, ERISA Dept., Greenberg Traurig, LLP

• Gerald Czarnecki: Chair, Audit Committee, State Farm Cos.Gerald Czarnecki: Chair, Audit Committee, State Farm Cos.

• Wayne H. Miller: CEO, Denali Fiduciary Mgt. Corp.Wayne H. Miller: CEO, Denali Fiduciary Mgt. Corp.

Directors & Boards WebcastDirectors & Boards Webcast

The ERISA Responsibilities of the Board The ERISA Responsibilities of the Board Executive SummaryExecutive Summary

1.1. The Board of Directors establishes the retirement plan and The Board of Directors establishes the retirement plan and

establishes a Trust on behalf of the Company. establishes a Trust on behalf of the Company.

2.2. The Company is then the Plan Sponsor. It is often the Plan The Company is then the Plan Sponsor. It is often the Plan

Administrator which has consequences in today’s volatile Administrator which has consequences in today’s volatile

environment.environment.

3.3. Those Board members responsible for establishing the Trust Those Board members responsible for establishing the Trust

then appoint individuals who are responsible for exercising then appoint individuals who are responsible for exercising

the fiduciary duties on behalf of the Plan Sponsor.the fiduciary duties on behalf of the Plan Sponsor.

4.4. This makes those Board members Appointing Fiduciaries.This makes those Board members Appointing Fiduciaries.

The ERISA Responsibilities of the BoardThe ERISA Responsibilities of the BoardExecutive SummaryExecutive Summary

5.5. Appointing Fiduciaries have the responsibility to oversee Appointing Fiduciaries have the responsibility to oversee

the activities of those whom they appoint.the activities of those whom they appoint.

6.6. This oversight duty cannot be waived or outsourced and This oversight duty cannot be waived or outsourced and

does not “wear away” with time.does not “wear away” with time.

7.7. For many organizations, the bull market did not promote the For many organizations, the bull market did not promote the

development of a rigorous ERISA fiduciary culture. Over the development of a rigorous ERISA fiduciary culture. Over the

past two decades, Board oversight has been meager. past two decades, Board oversight has been meager.

8.8. Lax standards of fiduciary conduct have become Lax standards of fiduciary conduct have become

“acceptable” Plan Sponsor behavior.“acceptable” Plan Sponsor behavior.

The ERISA Responsibilities of the BoardThe ERISA Responsibilities of the BoardExecutive SummaryExecutive Summary

9.9. For most of the past 30 years, there were no real For most of the past 30 years, there were no real

consequences for lax plan management practices.consequences for lax plan management practices.

10.10. The legal, regulatory and capital market environment have The legal, regulatory and capital market environment have

all dramatically changed. The liability exposure is now real.all dramatically changed. The liability exposure is now real.

11.11. Vendors have not been focused on preparing the Board Vendors have not been focused on preparing the Board

with regards to this oversight duty.with regards to this oversight duty.

12.12. Not paying close attention generates financial liability Not paying close attention generates financial liability

exposure and reputational risk for you, the company and exposure and reputational risk for you, the company and

those you have appointed.those you have appointed.

Critical Background InformationCritical Background Information Board MembersBoard Members andand ERISAERISA

What makes someone an ERISA fiduciary? What makes someone an ERISA fiduciary?

1.1. Exercise authority or discretion over plan administration.Exercise authority or discretion over plan administration.

2.2. Exercise authority or discretion over plan assets.Exercise authority or discretion over plan assets.

3.3. Are paid directly or indirectly to provide investment advice.Are paid directly or indirectly to provide investment advice.

4.4. Catch-all is “functional fiduciary” status i.e., anything that Catch-all is “functional fiduciary” status i.e., anything that

looks, acts or smells like one of the first three (not always looks, acts or smells like one of the first three (not always

obvious).obvious).

Critical Background InformationCritical Background Information Board Members and ERISABoard Members and ERISA

What must the fiduciaries you appoint do? What must the fiduciaries you appoint do?

1.1. Comply with the plan’s governing instruments.Comply with the plan’s governing instruments.

2.2. Maintain the plan’s tax qualification status.Maintain the plan’s tax qualification status.

3.3. Invest assets for the exclusive benefit of plan participant.Invest assets for the exclusive benefit of plan participant.

4.4. Diversify the portfolio to prevent the risk of large losses.Diversify the portfolio to prevent the risk of large losses.

5.5. Monitor for Prohibited Transactions.Monitor for Prohibited Transactions.

6.6. Operate with a Prudent Expert standard of care.Operate with a Prudent Expert standard of care.

7.7. Document their plan management activities. Document their plan management activities.

• Management has been chosen because of their Management has been chosen because of their

capacity to exercise sound capacity to exercise sound businessbusiness judgment. judgment.

• The fulfillment of an ERISA fiduciary’s duty depends The fulfillment of an ERISA fiduciary’s duty depends

on their exercise of sound on their exercise of sound fiduciaryfiduciary judgment. judgment.

• Sound business judgment and sound fiduciary Sound business judgment and sound fiduciary

judgment judgment ARE NOT THE SAMEARE NOT THE SAME..

The Heart of the Problem: PerspectiveThe Heart of the Problem: Perspective

What is the Scope of the Liability ?What is the Scope of the Liability ?

From the Regulatory Environment:From the Regulatory Environment:

SOX: 404, 302 certification penalty provisions, the ERISA SOX: 404, 302 certification penalty provisions, the ERISA

white collar criminal provisions.white collar criminal provisions.

SAS 99: provisions for misrepresentation or fraud.SAS 99: provisions for misrepresentation or fraud.

FASB 132 disclosures on plan liabilities.FASB 132 disclosures on plan liabilities.

IRS, DOL, SEC all have expanded enforcement initiatives.IRS, DOL, SEC all have expanded enforcement initiatives.

The DOL and SEC cooperation agreement.The DOL and SEC cooperation agreement.

Variation in circuit court rulings means playing field varies Variation in circuit court rulings means playing field varies

geographically.geographically.

What is the Scope of the Liability?What is the Scope of the Liability?

Example of Regulatory Environment:Example of Regulatory Environment:

IRS audit initiative examines presence of internal controls and IRS audit initiative examines presence of internal controls and

operational compliance. 11,000+ audits done in 2005.operational compliance. 11,000+ audits done in 2005.

EPTA Audit: Team of 5-8 specialists stay for 18 months. 4700 EPTA Audit: Team of 5-8 specialists stay for 18 months. 4700

largest employers are targeted.largest employers are targeted.

Operational defects can invoke cumulative non-deductible Operational defects can invoke cumulative non-deductible

monetary sanctions equal to 20% or more of plan assets. monetary sanctions equal to 20% or more of plan assets.

SAS 99 implications – material misstatements.SAS 99 implications – material misstatements.

Unless verified: assume 10% - 25% of core HR data is Unless verified: assume 10% - 25% of core HR data is

inaccurate.inaccurate.

What is the Scope of the Liability?What is the Scope of the Liability?

““We need to rebalance our efforts with the goal of establishing a We need to rebalance our efforts with the goal of establishing a prominent IRS enforcement presence in the benefits community. prominent IRS enforcement presence in the benefits community. And we need to do it at once…”And we need to do it at once…”

““The continuing challenge for all of us – for you as individual The continuing challenge for all of us – for you as individual practitioners, and for me as Commissioner of TE/GE – is to practitioners, and for me as Commissioner of TE/GE – is to ensure that those who do not follow reasonable practices are ensure that those who do not follow reasonable practices are identified and appropriately sanctioned.”identified and appropriately sanctioned.”

Steven T. Miller, IRS Tax Exempt and Government Steven T. Miller, IRS Tax Exempt and Government Entities Commissioner before the Los Angeles Entities Commissioner before the Los Angeles Benefits Conference on January 28, 2005Benefits Conference on January 28, 2005

What is the Scope of the Liability?What is the Scope of the Liability?

Investment Portfolios:Investment Portfolios:

Conflict of interest disclosures from managers/service Conflict of interest disclosures from managers/service vendors.vendors.

Consultant conflicts of interest. SEC investigation incomplete.Consultant conflicts of interest. SEC investigation incomplete.

DB: Asset Liability matching focus rather than asset class DB: Asset Liability matching focus rather than asset class return focus.return focus.

DC: Co. stock. Fees and expenses. 404(c) compliance.DC: Co. stock. Fees and expenses. 404(c) compliance.

Investment monitoring: Benchmarking. Active v. Passive. Investment monitoring: Benchmarking. Active v. Passive. Derivative exposures.Derivative exposures.

What is the Scope of the Liability?What is the Scope of the Liability?

<There is> …Civil liability for corporate directors who fail to establish

reporting and information systems “reasonably designed to provide to

senior management and to the board itself timely, accurate

information sufficient to allow management and the board, each within

its scope, to reach informed judgments concerning both the corporations compliance with law and its business performance.”

In re Caremark International Inc. Derivative Litigation, 698 A.2d 969.

What is the Scope of the Liability?What is the Scope of the Liability?

“SAS No. 99: Consideration of Fraud in a Financial Statement Audit” - by AICPA

Requires auditor to obtain reasonable assurance that financial

statements are free of material misstatements whether caused by

error or fraud.

Management along with those who have financial reporting

oversight (e.g., audit committee, board of directors) are

responsible for establishing and monitoring internal controls

consistent with management’s representations in financial report.

What is the Scope of the Liability?What is the Scope of the Liability?

“SAS No. 99 – Consideration of Fraud in a Financial Statement

Audit” - by AICPA

Misrepresenting information in response to audit inquiries may

result in fraudulent financial reporting.

Risk of material misstatement due to fraud involving

development of management estimates such as pension

accrued liabilities and internal control procedures.

May be appropriate to engage a specialist to perform an

independent review for comparison to management’s estimate.

What Can a Board Member Do?What Can a Board Member Do?

IRS and DOL both offer self-audit programs. IRS and DOL both offer self-audit programs.

A Plan Sponsor that engages in self-audit exercise may A Plan Sponsor that engages in self-audit exercise may

avoid imposition of monetary sanctions.avoid imposition of monetary sanctions.

Self audit program allows for entry into Voluntary Self audit program allows for entry into Voluntary

Compliance Resolution (VCR). Fix the problem, have the Compliance Resolution (VCR). Fix the problem, have the

plan blessed and move on.plan blessed and move on.

If the regulators audit your plans first and uncover If the regulators audit your plans first and uncover

operational defects, VCR is no longer available.operational defects, VCR is no longer available.

What Can a Board Member Do?What Can a Board Member Do?

1.1. At a minimum, the Board should receive an annual report At a minimum, the Board should receive an annual report

from the Committee responsible for plan management.from the Committee responsible for plan management.

2.2. The report should assure the Board that all ERISA statutory The report should assure the Board that all ERISA statutory

fiduciary duties have been fulfilled.fiduciary duties have been fulfilled.

3.3. Individual accountability should be assigned. Individual accountability should be assigned.

4.4. If you don’t receive such a report your organization missed If you don’t receive such a report your organization missed

something. WHY?something. WHY?

5.5. Procedural prudence: The holy grail of plan management is Procedural prudence: The holy grail of plan management is

all about the prudence of the process, not the results. all about the prudence of the process, not the results.

What Can a Board Member Do?What Can a Board Member Do?

6.6. Assure that conflict of interest statements have been Assure that conflict of interest statements have been

collected and examined for all plan service vendors.collected and examined for all plan service vendors.

7.7. Ideally, only work with vendors that accept fiduciary Ideally, only work with vendors that accept fiduciary

responsibility. This allows for alignment of purpose.responsibility. This allows for alignment of purpose.

8.8. Promote on-going fiduciary training – especially in Promote on-going fiduciary training – especially in

relevant finance issues.relevant finance issues.

9.9. Be careful of conflicts with internal legal counsel.Be careful of conflicts with internal legal counsel.

10.10. You may want to hire independent ERISA counsel to You may want to hire independent ERISA counsel to

do review for Board.do review for Board.

ERISA Fiduciary GovernanceERISA Fiduciary Governance Our Culture – Our CountryOur Culture – Our Country

• Our financial system is based on trust.Our financial system is based on trust.

• Historically, “gray” behavior has routinely been justified in the Historically, “gray” behavior has routinely been justified in the

name of “good business.”name of “good business.”

• The foundation of the retirement system must be a guardianship The foundation of the retirement system must be a guardianship

standard of care. standard of care. Caveat emptorCaveat emptor is insufficient. is insufficient.

• If we fail to establish integrity in fiduciary governance processes:If we fail to establish integrity in fiduciary governance processes:

• Inappropriate “remedies” will be imposed by regulators.Inappropriate “remedies” will be imposed by regulators.

• Future generations will pay for the consequences of our behavior!Future generations will pay for the consequences of our behavior!

QuestionsQuestions

You may use the “chat” function to ask questions online.You may use the “chat” function to ask questions online.

You may ask questions via the teleconference connection.You may ask questions via the teleconference connection.

You may also send questions after the webcast via email to You may also send questions after the webcast via email to Wayne Miller at wmiller@denalifm.comWayne Miller at wmiller@denalifm.com

Webcast

ERISA: What You Don’t Know Can Hurt You

Thank you!

This webcast was made possible through the sponsorship of the following companies:

www.directorsandboards.com