Your ERISA Attorney Isn t Going Anywhere Soon

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• Jeremy P. Blumenfeld, Partner, Morgan Lewis & Bockius

• John E. Schadl, Principal and Head of ERISA and Fiduciary Services, Vanguard • Marcia Wagner, Principal, The Wagner Law Group



Marcia Wagner


The Wagner Law Group


Washington D.C. Update

• Accelerating Pace of Regulatory Change

• Pending Regulatory Changes

• DOL Fiduciary Proposal

• Rollovers

• Retirement Savings Initiatives

• Lifetime Income


DOL Fiduciary Proposal

• Broadening of Fiduciary Definition

• Currently, registered investment advisers (RIAs) typically acknowledge fiduciary status but broker-dealers do not • As proposed, brokers would become fiduciary advisors

• Proposed Exemption for Variable Compensation

• Routine brokerage transactions (generating commissions or 12b-1 fees) would be prohibited transactions under ERISA


BIC Exemption (Proposed)

• Contract Requirements

• Must be executed before broker makes recommendations • Fiduciary standard and conflicts must be incorporated

• Firm must warrant that policies mitigate conflicts

• Mandatory Disclosures

• Upfront Disclosure: projected cost chart with performance • Annual Disclosures: fee activity statement


Outlook for DOL Proposal

• Timing of New Fiduciary Rule

• Final rule may be published as early as April 2016

• Requirements will not be enforced for 8-month grace period (December 2016 or January 2017?)

• Next Steps for Advisors and Plan Sponsors

• Stay abreast of rulemaking process

• Advisors may wish to re-examine services and documentation • Plan sponsors may wish to confirm fiduciary status of advisors



Current Rollover Rules: DOL Adv. Op. 2005-23A

• Fiduciary advisors (RIAs) are subject to ERISA’s severe restrictions on capturing rollovers

• Nonfiduciary advisors (brokers) may freely capture rollovers

Impact of DOL’s New Fiduciary Rule

• Both types of advisors would need BIC Exemption to earn higher levels of compensation on captured rollover assets

• Plan sponsors and advisors should pay close attention to new rollover rules and BIC Exemption


Obama’s 2017 Budget Proposal

• Initiatives for Small Employers

• Multiple employer plans (MEPs) – No Form 5500 filing or audit required for small employers

• Small business tax credit for new plan increased to $1,500 (and $500 credit for adding auto-enrollment to existing plan)

• Retirement Mandates

• P/T employees (working 500+ hours annually for 3 years) would no longer be freely excludable from plan


State Retirement Initiatives

• Four Basic Approaches

• Automatic IRAs (California, Illinois, Oregon)

• Prototype Plans Administered by State (Massachusetts) • MEPs (Maryland)

• Marketplace (Washington)

• New DOL Guidance (November 2015)

• Proposed reg. would expand “safe harbor” exclusion from

ERISA for employers that are required to offer Automatic IRAs • DOL Bulletin confirms ERISA treatment of other approaches


Annuities and DC Plans

• Longevity Annuities

• Payments commence at advanced age, such as age 80 • Cost-effective solution for participants with longevity risk

• Requirement Minimum Distribution (RMD) Rules

• RMD must commence at later of age 70-1/2 or retirement • Exception for Qualifying Longevity Annuity Contract (QLAC) • Investment in QLAC capped at $125,000 or 25% of account • QLAC payments must commence no later than age 85


DOL Guidance on Distribution Annuities

• DOL’s 2008 Safe Harbor

• Requires objective and analytical search for annuity provider • Provider’s ability to make future payments and annuity cost

must be considered and then periodically reviewed

• New DOL Guidance (Field Assist. Bulletin 2015-02)

• DOL clarifies that periodic reviews are not required each time a participant elects an annuity as distribution option

• Monitoring duty ends when provider’s annuities cease to be available under the plan


Government’s Policy Goals

• Overarching Themes

• Uniform fiduciary standard for retirement advisors

• Improving access to workplace retirement arrangements - Small businesses

- Part-time workers

• Promoting lifetime income solutions



John E. Schadl,

Principal and Head of ERISA and Fiduciary Services Vanguard


Evolving importance of fiduciary

due diligence

• Procedural prudence

• Deliberative decision-making process

• Authorized individuals

• Thoughtful but thorough documentation of



Organizing a fiduciary committee

• Well-defined appointment process

• Effective organization

• Regular meetings

• Qualifications and training

• Clear documentation


Investment selection and monitoring

• Define purpose, objectives, and measures of success

• Create considered investment strategy

• Disciplined process for selection and monitoring

• Implement default, preferably qualified default


Plan costs

• Ensure plan is charged only reasonable fees

• Review service provider fee disclosures

• Inquire about availability of/eligibility for lower fees

• Evaluate cost and quality of services

• Benchmark

• Document process, including decisions to maintain

status quo


Additional fiduciary considerations

• Plan administration

- Notices and disclosures

- Timely remittance of participant contributions

- Claims appeal process

• Participant education and advice

• Company stock

• Brokerage accounts



Jeremy P. Blumenfeld


Morgan Lewis & Bockius


Stock Drop Cases

Revival of the ERISA Stock Drop Case – Fifth Third Bancorp v. Dudenhoeffer,

134 S. Ct. 2450 (June 25, 2014)

• U.S. Supreme Court rejected the Moench Presumption that an ESOP fiduciary who invests in employer stock is entitled to a presumption that it acted

consistently with ERISA unless a plaintiff establishes the fiduciary abused its discretion by investing in employer securities.

• The Court concluded that "the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP's holdings." Id. at 2467.

• Public Information Claims • Market Price

• Non-Public Information Claims • Insider trading


Stock Drop Cases (Cont.)

Two frequent fact patterns: 1. Short-Term Market Events

• News affecting share price

• Long term viability of the company is not in question


Fee, Expense, and Fund Performance

• Investment Options • Mutual Fund Fees

• Plan offered more expensive share class of a specific mutual fund (e.g., investor, not institutional).

• Mutual Funds / Separately Managed Accounts (SMA) /

Commingled Investment Funds (CIF)

• Fiduciaries should have offered separate accounts or comingled funds instead of mutual funds

• Same performance

• Same investment managers • Lower fees


Fee, Expense, and Fund Performance (Cont.)

• Propriety Funds • The new wave

• Company allegedly offered its own proprietary investment fund as an retirement investment option despite the fact that its fees were 10-20 times greater than the comparable funds from other providers

• Prohibited transaction claims • Duty of loyalty claims:

• Fiduciary decision-making was influenced by corporate self-interest


• Actively versus Passively Managed Funds

• Plan allegedly offered high-cost actively managed funds that were not reasonably expected to outperform low-cost passive index funds. • Recordkeeping Fees

• Hard dollar charges versus revenue sharing • How much is reasonable?

• How do you know? • Consultants • RFPs

• Rebates?

• ERISA accounts?

• Offsets to other expenses?


Stable Value

• Stable value versus money market funds • Synthetic GICs

• Too much risk, causing underperformance (but no participant losses)

• Too little risk, causing underperformance (but no participant losses)

• Traditional GICs


Stable Value (Cont.)

• Synthetic GICs

• Plaintiffs challenge investment management and fund performance, alleging investments were too risky or not risky enough:

• SVF heavily invested in short-term money market investment with low-rate of return and did “not beat inflation by a sufficient margin to provide a meaningful retirement asset.” (Abbot v. Lockheed Martin) • SVF invested in “overly risky” asset classes, including non-agency

mortgages, private mortgages, TBA agency mortgages, and

mortgage derivatives (IOs/POs). (In re J.P. Morgan Stable Value






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