ERISA Retirement Plans: Fiduciary Compliance
and Risk Management for Investment Fund
Selection and Fee Disclosures
Discharging Fiduciary Duties and Limiting Fiduciary Liability
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THURSDAY, AUGUST 8, 2013
Presenting a live 90-minute webinar with interactive Q&A
Lisa H. Barton, Morgan Lewis & Bockius, Pittsburgh Lindsay B. Jackson, Morgan Lewis & Bockius, Washington, D.C. Michael B. Richman, Of Counsel, Morgan Lewis, Washington, D.C.
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webcast
ERISA Retirement Plans: Fiduciary Compliance
and Risk Management for Investment Fund
Selection and Fee Disclosures
Presenters:
Lisa Barton Lindsay Jackson Michael Richman
Today’s Topics
• Fiduciary Duties for Providers and Sponsors
– ERISA
• Fiduciary Duties – Plan Governance
• Roles and Responsibilities
• Plan Investments
– Target Date Funds and QDIAs
• Developments in Fee Disclosure Rules
• ERISA Section 404(c)
Fiduciary Duties for
Providers and Sponsors
Statutory Framework
•
ERISA
•
Who is a fiduciary?
ERISA and the Code
•
ERISA
– Reason for enactment
– Sets forth a comprehensive scheme to protect employee benefits
– Coverage
Who Is a Fiduciary?
•
Functional test – a person is a fiduciary to the extent he
or she:
– exercises discretionary authority or discretionary control respecting management of the plan
– exercises any authority or control respecting management or disposition of plan assets
– renders investment advice for compensation with respect to plan assets
Who Is a Fiduciary?
(continued)
•
A person becomes a fiduciary by:
– being formally designated as a fiduciary – functioning as a de facto fiduciary
– appointing other fiduciaries
– default: if a plan administrator is not named, the plan sponsor (usually the employer) is considered to be the plan administrator
What Are a Fiduciary’s Duties?
•
The exclusive purpose rule
•
Avoidance of prohibited transactions
•
The prudent investor standard – process is key
•
Diversification
Plan Governance
•
Process, Process, Process
– Clearly defined roles – Qualified people
Plan Governance – Roles and
Responsibilities
•
Nonfiduciary Roles
– Settlor (Plan Sponsor) Functions
• Plan/trust creation, amendment, termination, contributions • May wear “two hats”
– Ministerial Functions
Plan Governance – Roles and
Responsibilities (continued)
•
Designated Fiduciaries
– Plan Administrator (Administrative Fiduciary)
• Designated in the plan document and SPD
• Responsible for discretionary aspects of day-to-day plan
operation (e.g., loans, QDROs)
– Named Fiduciary (Investment Fiduciary)
• Designated in plan document or appointed via procedure in
plan document
• Primarily responsible for selection and monitoring of plan
Plan Governance – Dealing with Plan
Service Providers
•
Fiduciary duties apply to selection, monitoring, and
payment
•
Suggestions for managing risk:
– Initial due diligence
– Proper allocation of responsibilities – Ongoing monitoring
Plan Governance – Communicating
with Participants
•
Plan fiduciaries have duty to:
– Provide certain disclosures under ERISA – Not lie when asked
•
Suggestions for managing risk:
– Establish procedures for participant communications – Include discretion and reservation-of-rights clauses – Maintain records of all participant communications
Plan Governance – Claims Administration
•
Benefit claims present heightened risk
•
Suggestions for managing risk:
– Good plan and SPD language
– Full and fair review of initial decision – Meet all time deadlines
– Draft denial letters carefully
Plan Governance – Investment Process
•
Source of most fiduciary litigation
•
Suggestions for managing risk:
– Seek advice of independent professionals – Adopt and follow investment policy statement – Meet on regular basis
– Document all decisions
Managing Fiduciary Liability
Process
• Use third-party service providers and select them carefully
• Hold regular meetings
• Take appropriate and detailed minutes
• Carefully consider all actions; document thought process details
• Monitor those whom you appoint
• Review all investment reports carefully
• Establish appropriate procedures for communicating with participants
• Engage independent fiduciaries when there are possible conflicts or prohibited transactions
Plan Investments
Plan Investments: Qualified Default
Investment Alternatives
•
Qualified Default Investment Alternatives (QDIAs)
– Protection from liability for investments made in the
absence of participant direction if certain conditions are met
– Can be very helpful for plans with automatic enrollment or in fund mappings
– Does not protect from liability for imprudent selection of the QDIA
Plan Investments: Qualified Default
Investment Alternatives (continued)
•
Primary components of QDIA compliance
– The investment alternative is a QDIA
• Life cycle or target date funds • Balanced funds
• Managed accounts
• Not stable value or money market (subject to some
grandfathering)
– The participant had the opportunity to direct the investment, but did not
© Morgan, Lewis & Bockius LLP
Target Date Funds
•
Department of Labor (“DOL”) Released Target Date
Fund “TIPS” in February 2013
• Outlines process for comparing and selecting funds • Process for periodic review of investments
• Understanding how the investments will change
• “To” or “through” glide path?
• Review fees and expenses
• Inquire about custom or nonproprietary alternatives
Target Date Funds
(continued)
– Develop effective employee communications
• Upcoming DOL Target Date Fund Regulations may change
disclosure requirements
– Take advantage of available sources of information – Document process
Developments in Fee
Disclosure Rules
Participant Disclosures
• Recent 401(k) participant disclosures requirements are held to a fiduciary standard
• Initial disclosures were required by August 30, 2012 • Three categories of disclosures
– General plan information
– Plan administrative expenses – Investment information
• Performance
• Fees and expenses
• Other investment-related disclosures
• Some of the disclosures annually; others quarterly
• Differs from other reporting obligations under ERISA where the consequences for noncompliance are fines, penalties, etc.
Participant Disclosures
(continued)
•
DOL recently clarified timing of “annual” participant
disclosure
– Initial disclosure required by August 2012
– Ongoing disclosures must be delivered “at least once” in each calendar year
Review of Fees and Expenses
•
Monitoring, reviewing, and determining reasonableness
of plan fees and expenses are fiduciary duties
•
Section 408(b)(2) service provider disclosure
requirements reflect DOL focus on fees and expenses
•
Significant area of 401(k) plan litigation
•
Importance of prudent process for fee and expense
review
– Periodic review of service providers – Benchmarking
404(c) Relief – Overview
•
Section 404(c) of ERISA
– A significant fiduciary risk management tool for 401(k) plan fiduciaries
– Protection from liability for investment decisions made by participants if certain conditions are met
– DOL and some courts have taken the position that Section 404(c) does not protect from liability for imprudent
404(c) Relief – Overview
(continued)
•
404(c): “In the case of a pension plan which provides for
individual accounts and permits a participant or
beneficiary to exercise control over the assets in his
account:
. . .
no person who is otherwise a fiduciary shall be liable
under this part for any loss, or by reason of any breach,
which results from such participant’s or beneficiary’s
404(c) Relief – Overview
(continued)
•
Applies to defined contribution plans that permit
participant-directed investment
•
Upon satisfaction of procedural requirements, plan
fiduciaries are relieved of fiduciary duty with respect to
participant investment elections
•
Some uncertainty as to the scope of this fiduciary relief
404(c) Relief – Requirements
• Three Primary Components of Section 404(c) Compliance
– Offer a broad range of investment alternatives
• At least three
• Each must be diversified
• Each must have materially different risk and return characteristics
– Offer each participant a reasonable opportunity to give investment instructions
– Provide each participant with specified information about the
investment alternatives to allow the participant to make informed choices
• Same information as required by the Section 404(a) participant
404(c) Relief – Requirements
(continued)
•
Providing sufficient information includes:
– Description of investment alternatives
– Explanation of investment election process and any restrictions on elections (e.g., day-trading limits, etc.) – Description of fees and expenses
– Fund prospectuses (subject to fee disclosure regulation changes)
404(c) – Safe Harbors
•
404(c) relief generally predicated on participants making
an affirmative election and exerting control over their
accounts
•
404(c) originally did not contemplate “negative” or
“deemed” elections
•
Pension Protection Act of 2006 added two safe harbors
for negative elections – the “Mapping” safe-harbor and
the “QDIA” default safe-harbor
404(c) – Mapping Safe Harbor
•
404(c) relief preserved in situations where a plan is
changing investment funds if:
– Participants are provided notice within the 30-60 day period before the change
– Notice must include information about the funds being added and eliminated
– Notice explains the nature of the negative election
– Replacement fund has investment characteristics that are “reasonably similar” to the investment fund being replaced (investment characteristics include “risk” and “rate of return”)
404(c) – Mapping Safe Harbor
(continued)
•
Facts and circumstances aspect of the
mapping safe-harbor can make 404(c)
relief uncertain
•
In some situations (e.g., phasing out a
particular “sector” fund without a similar
replacement), mapping safe harbor is not
available
404(c) – Mapping Safe Harbor
(continued)
•
Pre-safe harbor mapping legacy may lurk
in plans
•
Special issues when replacing a stock
fund
404(c) – QDIA Safe Harbor
•
404(c) relief preserved in situations where amounts are
defaulted into a “qualified default investment alternative”
(QDIA)
•
This QDIA safe-harbor is available if:
– Participants provided at least 30 days advance notice – Participants provided annual notice thereafter
– Plan provides a broad range of investment alternatives (at least three diversified funds)
404(c) – QDIA Safe Harbor
(continued)
– Participants have opportunity to elect to transfer amounts into and out of QDIA fund at least quarterly
– Any restrictions on transfer rights must be no more onerous than those that apply to individuals who affirmatively elected to invest in the QDIA
– No unusual fees/expenses shall be imposed on such transfers
404(c) – QDIA Safe Harbor
(continued)
– Amounts defaulted into a recognized QDIA (target or life-cycle fund, balanced fund, individually managed fund or, for grandfathered amounts, stable value fund)
•
QDIA safe-harbor is broader and more certain, but
potentially results in more drastic change than mapping
safe-harbor
•
QDIA safe-harbor is more of a challenge for
record-keepers
•
QDIA safe harbor generally includes Target Date Funds
and Balanced Funds
Key Case Law Developments
•
Hecker v. John Deere, Nos. 07-3605, 08-1224, 2009 WL
1797441 (7
thCir. June 24, 2009)
•
Tussey v. ABB, Nos. 06-04305, 06-04305-CV-C-NKL
(United States District Court, W.D. Missouri, Central
Division, November 2, 2012)
•
Tibble v. Edison International, Nos. 10-56406, 10-56415,
2013 WL 1174167, No. 11-56628, 2013 WL 1150788
(9th Cir. Mar. 21, 2013)
Presenters
•
Lisa H. Barton, Partner
– 412.560.3375
• lbarton@morganlewis.com
•
Michael B. Richman
– 202.739.5036
• mrichman@morganlewis.com
•
Lindsay B. Jackson, Associate
– 202.739.5120
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