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Plan Funding & Fiduciary Responsibilities January 14, 2014 Stuart Hack, JD, CLU Sunlin Consulting LLP 949-770-7322 1.

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Presentation on theme: "Plan Funding & Fiduciary Responsibilities January 14, 2014 Stuart Hack, JD, CLU Sunlin Consulting LLP 949-770-7322 1."— Presentation transcript:

1 Plan Funding & Fiduciary Responsibilities January 14, 2014 Stuart Hack, JD, CLU Sunlin Consulting LLP

2 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 2

3 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 3

4 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 4

5 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 5

6 Types of Asset Classes  Equities  Foreign  Domestic  Large Cap  Medium Cap  Small Cap  Value  Growth  Blend  Special asset classes, such as Real Estate 6

7 Types of Asset Classes (cont.)  Bonds  U.S. Treasury  Other Governmental  Corporate  Foreign  Emerging  Hi Yield  Money Market  Guaranteed / Stable Value 7

8 Types of Plan Assets  Mutual Funds - registered securities  Separately Managed Accounts  Insurance Company Products  Stable Value Funds  Individual securities  “Strange assets” 8

9 Mutual Funds  Registered with the SEC  Various share classes, designed for specific product distribution streams  Registered Investment Advisors  Brokers  Broker dealers  Record keepers 9

10 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 10

11 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 11

12 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 12

13 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 13

14 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 14

15 Internal Fees/Charges/Expenses (cont.) 15  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

16  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 16 Internal Fees/Charges/Expenses (cont.)

17 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 17

18 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 … 18

19 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 19

20 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

21 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 21

22 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 participants 22

23 How to Manage Exposure (Best Practices)  Allocate plan responsibilities and document accountability  Outsource duties that exceed expertise of committees  Document, Document, Document 23

24 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 24

25 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

26 Best Practices to Manage Investment Fiduciary Responsibilities  Written Investment Policy  Documented periodic investment monitoring  Documented investment committee decisions 26

27 404(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 27

28 404(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 28

29 404(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.” 29

30 404(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 30

31 408(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 31

32 408(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 32

33 408(b)(2) General Requirements (cont.) 33  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

34 408(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

35 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). 35

36 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 36

37 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 37

38 Employee Plan Compliance Resolution System  Revenue Procedure  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 38

39 Employee Plan Compliance Resolution 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 39

40 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 40

41 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 41

42 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 42

43 Q & A 43


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