Transcript New Fiduciary Liabilities for Retirement Plans

New Fiduciary Liabilities
for Retirement Plans
March 20, 2013
Heidi A. Lyon & Justin W. Stemple
©2013 Warner Norcross & Judd LLP. All rights reserved.
WNJ.com
OVERVIEW
 Legal Background on Being A Fiduciary
 Potential Fiduciary Liability
 Managing Fiduciary Risk
 Concluding Remarks
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EMPLOYER IS AN ERISA FIDUCIARY
Employer/Plan Sponsor meets two ERISA fiduciary
definitions:
 Exercises authority or control - disposition of the
plan’s assets
 Discretionary authority or responsibility administration of the plan
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ERISA – FIDUCIARY STANDARDS
 Solely in Interest/Exclusive Purpose
 Prudent Expert – Care, Skill, Prudence and Diligence.
Person familiar with such matters
 Per the Documents - Plan, Trust, Agreements
 Investments – Diversification, Liquidity, Funding, Risk
Avoidance
 Avoid Prohibited Transactions
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FIDUCIARIES FOR ERISA
WELFARE/FRINGE BENEFIT PLANS
 ERISA Welfare/Fringe Benefit Plans – medical, health,
disability, life, pre-paid legal, unemployment
 Identical Fiduciary Standards & Duties
 These plans require the same level of due diligence as
retirement plans particularly if employee contributions are
required IT Corp v General Am Life 1997
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
 DOL/EBSA Publication (May, 2004)
 Understanding and evaluating plan fees and expenses
associated with investments, investment options, and services is
an important part of a fiduciary’s responsibility.
 Establish objective process to evaluate fees, detail specific
services requested, consider level of service provider’s
responsibility, and give identical disclosures to prospective
providers for a meaningful comparison.
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
 DOL Field Assistance Bulletin (February 2, 2007).
Employer retains following fiduciary duties as a
prudent expert to select and continue to monitor (as
evidenced by procedural due diligence)
 Investment Menu (including, if desired, a qualified default
option)
 Investment Advisers
 Qualified Fiduciary Adviser
 Reasonableness of Fees Charged
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
 Preamble to 2010 Service Provider Fee Disclosure
Rules
 Selection Process – key to fulfilling fiduciary duty and
managing risk
 DOL assumes RFPs are conducted every 3 years
 DOL auditors accessing communications with counsel for
plan sponsor and plan auditor papers
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NEW LIABILITY #1 – EVOLVING
DOL VIEW ON PROCESS
DOL/EBSA Compliance Guide (February 2012)
 Use formal review process at reasonable intervals to
decide whether to continue or use providers
 When monitoring service providers, actions to ensure
they are performing the agreed-upon services include:
 Evaluating any notices about possible changes
 Reviewing performance
 Reading any reports provided
 Checking actual fees charged
 Asking about policies and practices (such as trading, investment
turnover, and proxy voting)
 Following up on participant complaints
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NEW LIABILITY #2 -RECENT
LITIGATION EMPHASIZING PROCESS
 George v. Kraft Foods
 Highlights importance of RFP process
 Lawsuit against plan sponsor
 Reliance on consultants with no recent RFP may be
breach of fiduciary duty
 Plaintiffs allege RFP should be conducted every three
years
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NEW LIABILITY #3 – LITIGATION
EMPHASIZING FEES
 Cases highlight importance of attention to fees charged
by providers
 Interested Parties
 Participants
 Plan sponsor/Employer
 Service Providers
 DOL
 Each group impacted differently
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NEW LIABILITY #3 - FEE LITIGATION
 Cases favoring plan sponsors:
 Hecker v Deere – No requirement to disclose revenue
sharing, 404(c) disclosure and compliance offers defense
 Loomis v. Exelon – Offering retail shares not a breach of
fiduciary duty
 Taylor v United Technologies – Proper monitoring, objective
selection of mutual funds, recordkeeping fees reasonable
against market
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NEW LIABILITY #3 - FEE LITIGATION
 Cases Adverse to Plan Sponsors:
 Tibble v. Edison
›
›
Offering retail funds without good reason, breach of fiduciary duty of
prudence
Waiver of institutional share requirement available, but never
requested
 Braden v Wal-Mart
›
›
Retail funds, possible evidence of flawed process
Settlement for $13.5 million, with plan’s service provider paying $10
million
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NEW LIABILITY # 3 - FEE LITIGATION
 Mixed litigation trends create risk
 Sixth Circuit – few cases so far
 Best way to manage risk is prudent process and
regularly evaluating each service provided to plan
(including reasonableness of fees for service)
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NEW LIABILITY # 4 – SERVICE
PROVIDER FEE DISCLOSURES
 408(b)(2) service provider disclosures
 Required to obtain and evaluate annually
 Must act if unreasonable
 Must have reasonable agreement with provider
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NEW LIABILITY # 5 – PARTICIPANT
FEE DISCLOSURES
 404(a)(5) participant disclosures
 Must distribute to participants in compliance with extensive
rules
 Audits will confirm compliance and they could prompt or be
used in litigation against fiduciaries
 DOL indicates they will apply in the future to health and
welfare plans
 Concerns with plan brokerage windows
 Highlights concern over payment of reasonable and
necessary expenses with plan assets
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MANAGING FIDUCIARY RISK
 No retirement plan is perfect!
 “It’s what you don’t know you don’t know that can hurt
you.” source unknown
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WHERE IS THIS HEADED?
 What the fiduciary world looks like now
 The RFP Process
 The Ideal Provider Model
 Rewards
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INVESTMENT ADVISOR MODELS
What the retirement plan fiduciary world looks like right
now

Investment consultants come in three basic varieties when it
comes to acknowledging their fiduciary responsibilities
›
Those who don’t acknowledge any fiduciary responsibility at all;
›
Those who acknowledge fiduciary responsibility under ERISA 3(21)(A)
- offers advice for a fee; and
›
Those who acknowledge fiduciary responsibility under ERISA 3(38) complete discretion over selection of assets.
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NON-FIDUCIARY ADVISORS
 No written acknowledgment of fiduciary status
 Brokers/Insurance Agents not regulated due to lack of
enforcement resources (suitability standard)
 No established standards of care (“best interests” vagary)
 Focus on individual not retirement plan advice
 Mandatory FINRA Arbitration (no expertise, panels
stacked against investors)
 No plan remedies (only cease and desist and fines to
SEC)
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ERISA 3(21) FIDUCIARY
 Acknowledge fiduciary status and give advice that can
be relied on
 Plan sponsor remains responsible for selecting
investments
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BE CAREFUL . . .
 ERISA 3(21)(A) fiduciaries
 Contracts sometimes include language that virtually “guts”
significant ERISA 3(21)(A) fiduciary duties
› hold harmless
› gross negligence or willful misconduct standard of conduct
› one-sided indemnification
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BE CAREFUL . . .
Plan fiduciaries in either of those situations have the
worst of both worlds
 The illusion of fiduciary advice
 But no legal protection
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ERISA 3(38) FIDUCIARY
 Acknowledge in the contract status as an ERISA 3(38)
“investment manager” and ERISA 405(d)(1) defined
“independent fiduciary”
 ERISA 3(38) fiduciaries accept ERISA “discretion”
over the investment and monitoring of plan assets and
assume full responsibility (and therefore liability) for
those fiduciary functions
 Plan sponsor responsible to monitor an ERISA 3(38)
fiduciary
 Still must ensure the contract terms are acceptable
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BE CAREFUL . . .
 Discretion can include constructing target retirement
date funds and risk-tolerance based managed accounts
and monitoring and replacing the component funds
 When plan fiduciaries make this transfer of
responsibility prudently, they escape liability for any
selection and monitoring mistakes made by the
consultant
 Such a consultant provides investment advice with
accountability
 Must understand what the advisor is doing and why to
satisfy duty to monitor
 Must understand the scope of delegation (may not be
3(38)) for all purposes
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THE RFP PROCESS
The Goal
 Not the lowest absolute expenses
 Spend your participants’ money wisely
 That means you have to understand what you’re buying
 And you have to understand your options
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OVERVIEW OF RFP PROCESS - STEPS
 Formulate list of candidates
 Draft proposal requirements and circulate to
candidates
 Compare and evaluate responses
 Identify and interview finalists
 Compare and evaluate finalists
 Written agreement with selected providers
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OVERVIEW OF RFP PROCESS CONSIDERATIONS
 Provider models (Broker, Investment Manager,
Financial Services Firm/Bank, Insurer, Mutual Funds)
 Selection criteria for advisor, recordkeeper, investment
menu/provider, and participant education services
 Fiduciary acknowledgment and compliance
 Defective agreement can negate an otherwise effective
process
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IDEAL PROVIDER MODEL
 Advice – Independent Adviser able to select best
available funds
 Fiduciary Status – Acknowledges 3(38) or 3(21)(A)(ii)
ERISA responsibility in the contract
 Compensation – Transparent, each element separately
identified
 Recordkeeping – Third Party, Appropriate Standard of
Care
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IDEAL PROVIDER MODEL
 Investments – Institutional, Low Cost funds, Model
Portfolios from menu, 404(c) compliance (if applicable),
Investment Policy Statement
 Education – General or individualized, conforms to
DOL IB 96-1, Individual per 408(g) principles
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WRITTEN AGREEMENT
 Fiduciary acknowledgement (where appropriate)
 Clear specification of duties and compensation
 Acceptance of liability for breaches
 ERISA standard of care
 No indemnification or mutual indemnification
 Dispute Resolution (State Law & Venue)
 Matches RFP responses
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AVOID DEFECTIVE AGREEMENTS
 Not a fiduciary
 Cannot/does not rely on advice
 Advice not tailored to plan
 Indemnify errors unless negligence, gross negligence,
willful misconduct
 FINRA arbitration
 Choice of Remote Law and Venue
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REWARD – DIMINISHED RISK
 Prudence – clear established processes
 Expertise – documented in selection and review
 Documents – established (IPS, 404(c), agreements
allocating liability)
 Investments – objective process satisfies criteria
 Compliance Review
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REWARD – BETTER RESULTS
 Lower fees = higher returns
 Individualized fiduciary advice to participants = better
asset allocation = higher returns
 Individualized fiduciary advice to participants = more
savings = higher returns
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CONCLUDING REMARKS
 Plan sponsors/employers have important fiduciary
duties
 Recent legal developments emphasize importance of
acting in accordance with ERISA fiduciary standards
 Protect yourself through steps discussed today,
including RFP process
 Best practices minimize risk and maximize plan
benefits
 Don’t “set it and forget it”
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OUTSIDE, OBJECTIVE, EXPERT
ASSISTANCE
Thank you!
Heidi A. Lyon
Warner Norcross & Judd LLP
hlyon@wnj.com
616.752.2496
Justin W. Stemple
Warner Norcross & Judd LLP
jstemple@wnj.com
616.752.2375
8983598-1
These materials are for educational use only. This is not legal advice and does not create an attorney-client relationship.
©2013 Warner Norcross & Judd LLP. All rights reserved.
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