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Webcast ERISA: What You Dont Know Can Hurt You May 16, 2006, 1 pm EDT This webcast is made possible through the sponsorship of the following companies:

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Presentation on theme: "Webcast ERISA: What You Dont Know Can Hurt You May 16, 2006, 1 pm EDT This webcast is made possible through the sponsorship of the following companies:"— Presentation transcript:

1 Webcast ERISA: What You Dont 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

2 How this webcast works Moderated discussion, with PowerPoint slides. Moderated discussion, with PowerPoint slides. Questions can be asked online, via chat at any time during the webcast, or by telephone after the discussion (operator- moderated). Questions, written or by telephone, will be addressed after the discussion. Questions can be asked online, via chat at any time during the webcast, or by telephone after the discussion (operator- moderated). Questions, written or by telephone, will be 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 audio stream, dial 888-203-7900, prompt #2 Technical Support: If on teleconference, press 0; if on web audio stream, dial 888-203-7900, prompt #2

3 Introduction of panel members. Introduction of panel members. Executive Summary: Board Oversight of ERISA retirement plans. What are core issues? Executive Summary: Board Oversight of ERISA 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 exposure for himself/herself or the company? What can a Board member do to reduce liability exposure for himself/herself or the company? Q&A Q&A Directors & Boards Webcast Agenda

4 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 Webcast

5 The ERISA Responsibilities of the Board Executive Summary 1. The Board of Directors establishes the retirement plan and establishes a Trust on behalf of the Company. 2. The Company is then the Plan Sponsor. It is often the Plan Administrator which has consequences in todays volatile environment. 3. Those Board members responsible for establishing the Trust then appoint individuals who are responsible for exercising the fiduciary duties on behalf of the Plan Sponsor. 4. This makes those Board members Appointing Fiduciaries.

6 The ERISA Responsibilities of the Board Executive Summary 5. Appointing Fiduciaries have the responsibility to oversee the activities of those whom they appoint. 6. This oversight duty cannot be waived or outsourced and does not wear away with time. 7. For many organizations, the bull market did not promote the development of a rigorous ERISA fiduciary culture. Over the past two decades, Board oversight has been meager. 8. Lax standards of fiduciary conduct have become acceptable Plan Sponsor behavior.

7 The ERISA Responsibilities of the Board Executive Summary 9. For most of the past 30 years, there were no real consequences for lax plan management practices. 10. The legal, regulatory and capital market environment have all dramatically changed. The liability exposure is now real. 11. Vendors have not been focused on preparing the Board with regards to this oversight duty. 12. Not paying close attention generates financial liability exposure and reputational risk for you, the company and those you have appointed.

8 Critical Background Information Board Members and ERISA What makes someone an ERISA fiduciary? 1. Exercise authority or discretion over plan administration. 2. Exercise authority or discretion over plan assets. 3. Are paid directly or indirectly to provide investment advice. 4. Catch-all is functional fiduciary status i.e., anything that looks, acts or smells like one of the first three (not always obvious).

9 Critical Background Information Board Members and ERISA What must the fiduciaries you appoint do? 1. Comply with the plans governing instruments. 2. Maintain the plans tax qualification status. 3. Invest assets for the exclusive benefit of plan participant. 4. Diversify the portfolio to prevent the risk of large losses. 5. Monitor for Prohibited Transactions. 6. Operate with a Prudent Expert standard of care. 7. Document their plan management activities.

10 Management has been chosen because of their capacity to exercise sound business judgment. Management has been chosen because of their capacity to exercise sound business judgment. The fulfillment of an ERISA fiduciarys duty depends on their exercise of sound fiduciary judgment. The fulfillment of an ERISA fiduciarys duty depends on their exercise of sound fiduciary judgment. Sound business judgment and sound fiduciary judgment ARE NOT THE SAME. Sound business judgment and sound fiduciary judgment ARE NOT THE SAME. The Heart of the Problem: Perspective

11 What is the Scope of the Liability ? From the Regulatory Environment: SOX: 404, 302 certification penalty provisions, the ERISA white collar criminal provisions. SOX: 404, 302 certification penalty provisions, the ERISA 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 geographically. Variation in circuit court rulings means playing field varies geographically.

12 What is the Scope of the Liability? Example of Regulatory Environment: IRS audit initiative examines presence of internal controls and operational compliance. 11,000+ audits done in 2005. IRS audit initiative examines presence of internal controls and operational compliance. 11,000+ audits done in 2005. EPTA Audit: Team of 5-8 specialists stay for 18 months. 4700 largest employers are targeted. EPTA Audit: Team of 5-8 specialists stay for 18 months. 4700 largest employers are targeted. Operational defects can invoke cumulative non-deductible monetary sanctions equal to 20% or more of plan assets. Operational defects can invoke cumulative non-deductible 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 inaccurate. Unless verified: assume 10% - 25% of core HR data is inaccurate.

13 What is the Scope of the Liability? We need to rebalance our efforts with the goal of establishing a prominent IRS enforcement presence in the benefits community. And we need to do it at once… The continuing challenge for all of us – for you as individual practitioners, and for me as Commissioner of TE/GE – is to ensure that those who do not follow reasonable practices are identified and appropriately sanctioned. Steven T. Miller, IRS Tax Exempt and Government Entities Commissioner before the Los Angeles Benefits Conference on January 28, 2005

14 What is the Scope of the Liability? Investment Portfolios: Conflict of interest disclosures from managers/service vendors. Conflict of interest disclosures from managers/service vendors. Consultant conflicts of interest. SEC investigation incomplete. Consultant conflicts of interest. SEC investigation incomplete. DB: Asset Liability matching focus rather than asset class return focus. DB: Asset Liability matching focus rather than asset class 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. Derivative exposures. Investment monitoring: Benchmarking. Active v. Passive. Derivative exposures.

15 What is the Scope of the Liability? …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.

16 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 managements representations in financial report.

17 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 managements estimate.

18 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 avoid imposition of monetary sanctions. A Plan Sponsor that engages in self-audit exercise may avoid imposition of monetary sanctions. Self audit program allows for entry into Voluntary Compliance Resolution (VCR). Fix the problem, have the plan blessed and move on. Self audit program allows for entry into Voluntary Compliance Resolution (VCR). Fix the problem, have the plan blessed and move on. If the regulators audit your plans first and uncover operational defects, VCR is no longer available. If the regulators audit your plans first and uncover operational defects, VCR is no longer available.

19 What Can a Board Member Do? 1. At a minimum, the Board should receive an annual report from the Committee responsible for plan management. 2. The report should assure the Board that all ERISA statutory fiduciary duties have been fulfilled. 3. Individual accountability should be assigned. 4. If you dont receive such a report your organization missed something. WHY? 5. Procedural prudence: The holy grail of plan management is all about the prudence of the process, not the results.

20 What Can a Board Member Do? 6. Assure that conflict of interest statements have been collected and examined for all plan service vendors. 7. Ideally, only work with vendors that accept fiduciary responsibility. This allows for alignment of purpose. 8. Promote on-going fiduciary training – especially in relevant finance issues. 9. Be careful of conflicts with internal legal counsel. 10. You may want to hire independent ERISA counsel to do review for Board.

21 ERISA Fiduciary Governance Our 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 name of good business.Historically, gray behavior has routinely been justified in the name of good business. The foundation of the retirement system must be a guardianship standard of care. Caveat emptor is insufficient.The foundation of the retirement system must be a guardianship standard of care. Caveat emptor 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!

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

23 Webcast ERISA: What You Dont Know Can Hurt You Thank you! This webcast was made possible through the sponsorship of the following companies: www.directorsandboards.com


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