Fiduciary Oversight: Timely Topics for Employee Benefit Plan Sponsors

Fiduciary Oversight: Timely Topics for Employee Benefit Plan Sponsors
Charles Bruder Scott Rappoport Kriste Naples-DeAngelo The material provided herein is for informational purposes only and is not intended as legal advice or counsel.

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Fiduciary Oversight Under ERISA Presented By: Scott Rappoport
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Fiduciary Oversight In The Spotlight
ERISA litigation up 25%/year (past 4 years) LaRue v. DeWolff (Supreme Court 10/2007) Financial Market Turmoil Pension Protection Act (2006)/DOL disclosure initiatives (2008) 4

Who is a Fiduciary? Any person who:
Exercises any discretionary authority or discretionary control in managing the plan or who has any authority or control in managing or disposing of its assets; Has any discretionary authority or responsibility in administrating the plan. 5

Responsibilities of a Fiduciary Under ERISA
Fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries. Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters. 6

What are Fiduciaries’ exposures under ERISA?
Fiduciary liability is personal, absolute and unlimited. ERISA holds fiduciaries personally liable for their actions 7

Safe Harbors Voluntary May insulate from liability
Excellent to take advantage of 8

404(a) Safe Harbor Provisions-Delegating to Investment Counsel
Investment decision delegated to “prudent expert” Experts selected by due diligence process Experts exercise discretion over assets Expert acknowledges co-fiduciary status in writing Fiduciary must ensure that experts perform the agreed upon tasks using agreed upon criteria 9

Fiduciary Adviser Safe Harbor Provisions
Select a qualified fiduciary adviser who: Acknowledges fiduciary status in writing Discloses all conflicts of interest Discloses all forms of compensation 10

404(c) Safe Harbor Provisions-Participant Education & Communications
Requires notification in writing of intent to comply with 404(c) safe harbor Three different investment options with differing risk/return profiles Information and education on the different investment options Opportunity to change investments with appropriate frequency 11

Qualified Default Investment Alternative (QDIA)
Plan sponsor can avoid liability for participant investment decisions by offering QDIA Age-based funds or models Risk-based funds or models Age-based managed accounts Money market accounts for days 12

Fiduciary Oversight Benefit Sources & Solutions Best Practices
Creation of the Investment Policy Statement/Governing Body Document Creation of the Investment Committee Designation of qualified professional investment counsel Ongoing monitoring & reporting 13

Monitoring & Reporting Benefit Sources & Solutions Best Practices
Review actual Portfolio for MPT Statistics Appropriate Index Peer group Compare investment expenses for risk & reward Create a quarterly correlation matrix Review operational quality of investment managers Disclose plan expenses and revenue sharing Create “plain English” quarterly “minutes” for plan sponsor tied to an annual IPS review Standards defined in the IPS 14

Monitoring & Reporting
Investment Committee Meeting Minutes Information that is provided must be evaluated and actions that are considered must be documented Watch list procedures must be followed 15

The Profit Sharing/401k Council of America’s First 403(b) Benchmarking Survey
385 Not-for-profit respondents 41% of respondents are making changes due to new Treasury Regulations Benchmarking data is crucial to running your program “ How can you manage what you can’t measure?” 17

Plan Agreement Types 25.2% have an Annuity Group Custodial Agreement (GCA) 19.5% have Non-Annuity GCA Balance have Individual Custodial Agreements The larger the plan, the more like they are to utilize a Non-Annuity Custodial Agreement 18

Employer Contribution
89.4% of employers contribute to the plan 41.1% provide a stated match percentage 13.8% provide a guaranteed percentage of participants’ pay Most common (45.4%) match formula is dollar for dollar On the first 3% of pay 15.3% 19

Other Statistics Average participation rate is 75.8%
participants 81% % 10.9% offer Roth, 8.9% make Roth contributions when offered Average funds offered is 21 46.3% have an investment policy statement, 34.2% unsure if they have 20

How Can Benefit Sources & Solutions Help
Fiduciary Review Checklist Mutual Fund Review Benchmarking Source of technical information 21

2009 UBA Health Plan Survey 22 22

Employees Waiving Medical Coverage and Waiver Bonus
23

Annual Cost Per Employee - Total Cost
24

Changes to Total Premiums
25th Percentile Median 75th Percentile Average 25

Monthly Employee Share - Dollar Amount

$0 Employee Contribution and Percent with Dependent Coverage
27

Basic Plan Design Components
CoPays, Deductibles, Coinsurance and Out-of-Pocket Maximums 28

Median CoPays 29

In-Network Employee Deductibles

Out-of-Network Employee Deductibles

Wellness Programs and Incentives
Incentives Included 32

Wellness Programs & Components
33

HRA And HSA Plans HRAs HSAs 34

Rx Tier Prevalence 35

Median Rx Retail CoPays by Plan Design
1st Tier 2nd Tier 3rd Tier 4th Tier 36

Separate Prescription Drug Deductible
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Plan Sponsor/Management Responsibilities Plan Governance and Fiduciary Monitoring Best Practices and How to Avoid the Most Common Errors in Your Employee Benefit Plan Presented by: Kriste Naples-DeAngelo, CPA, MBA Partner-Pension Service Group

Plan Sponsor/Management Responsibilities
Who is a Plan Fiduciary? Employer/Plan Sponsor is the ultimate plan fiduciary Many fiduciaries are named in the plan or policies of the plan Trustee(s) Investment Managers Plan Administrator – (not TPA) may be an individual, the employer or subsidiary

Who is a Plan Fiduciary (continued)? Corporate Officers – may be fiduciaries by virtue of their office and with respect to decisions surrounding the plan Selection of service providers Design of the plan benefits Hiring of investment managers Selection of funds

Who is a Plan Fiduciary (continued)? Board of Directors – They generally appoint the Retirement/Investment Committee members or corporate officers who are responsible for decisions D-4 “the board of directors may be responsible for selection or retention of plan fiduciaries. If so, they exercise “discretionary authority or discretionary control and are therefore fiduciaries of the plan. However, their responsibility and consequently liability is limited to such. Retirement/Investment Committee – To the extent that they exercise discretion over the plan

Who is NOT a fiduciary? Professional services if they offer: Legal Services Accounting or Auditing Services Recordkeeping, third-party administrators or actuarial services

Fiduciary Duties Exclusive Benefit Rule – to operate the plan for the exclusive benefit of plan participants and their beneficiaries Prudent Man Rule (ERISA 404(a)(1)(B))- with care, skill, prudence and diligence Operate the plan according to the terms of the plan Operating outside the governing terms can result in disqualification of the plan and breech of duty. Diversified and appropriate investments – to manage the risk of loss of the investments Reasonable plan expenses

Plan Governance – What to do?
Fiduciary Standards – Have not changed, they are just more magnified! What to do? Have a Plan Governance Committee Have Committee meetings regularly In light of the economy, have them more regularly Keep written minutes Document EVERYTHING! Establish clear policies and procedures Create and follow the Investment Policy Statement Make sure that it is addressed on a regular basis and documented

Plan Governance – What to do?
Communicate with and educate plan participants Transparency with regard to fees Provide adequate investment information to enable proper decisions by participants Consult experts Due to the prudence requirements, fiduciaries must seek experts with the required knowledge necessary Consider an ERISA attorney relationship The fiduciary has a duty to prudently select and monitor these experts in their process Bottom Line – Critical to have an effective process to identify and manage risk

Plan Sponsor Responsibilities
Fiduciaries that don’t follow basic standards May be personally liable to restore losses to the Plan May be liable to restore any profits made as a result of improper use of Plan assets Responsibilities include Plan administrative functions: Maintaining books and records Filing complete and accurate Form 5500 Establish safeguards to ensure that fiduciary responsibilities are met One way this can be accomplished is by implementing internal controls over financial reporting

Internal Controls Over Financial Reporting
Value of Internal Controls protect your plan in 2 Ways: 1) By minimizing opportunities for unintentional errors or intentional fraud that may harm the plan Preventative Controls help accomplish this objective which are designed to discourage errors or fraud 2) By discovering small errors before they become big problems Detective Controls help accomplish this objective by identifying the error or fraud after it occurs

Your Plan’s policies, procedures and organization design are all part of the internal control process The following are some general characteristics: Procedures that provide for segregation of duties Qualified personnel to perform their assigned duties Sound policies and procedures to be followed by personnel when performing their duties and responsibilities A system that ensures proper authorization and proper recording of financial transactions.

Internal Controls will vary depending on the Plan’s size, type and complexity Use a risk oriented approach Ensure that high risk areas have adequate controls Ensure that low risk areas do not have excessive controls Before making a decision to adopt a control consider the cost Consider the potential benefit the control will provide Consider the possible consequence of not implementing it.

Determine Your Plan’s Control Objectives 1st step is establishing controls over financial reporting to determine the objective or what you want to achieve: reliable financial statements that are prepared in accordance with generally accepted accounting principles. Controls should be designed to address financial statement assertions in the various components of the Plan’s financial statements Assertions can be classified into 5 broad categories: Existence or occurrence, Completeness, Rights and Obligations, Valuation or allocation, Presentation and disclosure

Existence or occurrence – Do assets and liabilities actually exist at a given date? Did recorded transactions occur during the current year or did they take place in the prior year or subsequent year? Completeness - Are all transactions that should be presented in the financial statements actually there? Rights and Obligations - Do the assets and liabilities reported in the financial statements appropriately reflect the rights and obligations of the Plan as of the date of the Statement of Net Assets Available for Benefits? Valuation or allocation - Are assets and liabilities valued properly? Presentation and disclosure - Are transactions recorded in proper accounts and is each component properly classified/disclosed?

Internal Controls Control Objectives related to the Plan’s financial statements assertions should cover each of the following areas: Investments Contributions Benefits (distributions) Participant data Plan obligations Participant loans Administrative Expenses

Monitoring Controls Monitoring your controls is critical!
Monitoring should be designed to identify and correct weaknesses in internal control before they can result in a significant misstatement in your plan’s financial statements You should periodically review the design and operation of your plan’s controls, and make changes where they are not providing the desired result. It is important to keep in mind that your auditor, under professional standards, cannot be part of your plan’s internal control.

Example of Selected Controls Employee Benefit Plans
Contributions Amount of contributions by employers and participants meet authorized or required amounts Contribution requirements or limitations are described in Plan document or collective bargaining agreement Contributions are determined using correct eligibility lists Actuary is used to perform periodic valuation reports Contributions are recorded at the appropriate amount and in the appropriate period on a timely basis Employer payroll records are compared with contribution calculations

(Continued)-Contributions are recorded at the appropriate amount and in the appropriate period on a timely basis Initial controls are established over contribution records for both participant and employer contributions (salary reduction amounts, after tax and rollovers) Clerical accuracy of contribution form is checked Participant Data Participant forms (enrollment, transfers, investment allocations etc.) are controlled and are maintained for future reference The number of plan participants is reconciled using enrollment forms Participant data entries are updated and reconciled to employers personnel and payroll records

(Continued) Participant Data Participant eligibility is determined in accordance with the plan document Access to participant data is controlled to prevent unauthorized changes or additions Investments- Plan Management is held responsible for investment valuations and financial statement disclosures! Even where there are outside investment custodians, asset or fund managers, or other service providers to assist in determining the value of investments on a plan’s financial statements and Form 5500, the DOL holds plan management responsible. This responsibility cannot be outsourced to a 3rd party.

Investments Transactions are recorded in the appropriate periods on a timely basis Control totals per participant records are compared to control totals from the trust statements on a regular basis Purchases and sales (as a result of contributions and distributions) of mutual funds are reviewed to determine that the net asset value agrees to published quotes Purchases and sales are reviewed to determine that the appropriate fair value are utilized Understand valuation methodology and the services that the custodian will provide

Common Errors Noted During A Plan Audit
Improper application of definition of compensation resulting in incorrect deferrals and employer match Improper application of plan’s eligibility provisions Improper use of forfeitures in accordance with the terms of the plan Timeliness of deferrals and lack of reconciliation of deferrals withheld and deposits into the plan Actuarial census errors/outdated information

Best Practices to Avoid Audit Pitfalls
Know who is a fiduciary and what their roles are - DOCUMENT Know your fiduciary responsibilities Know the essential elements of the plan - DOCUMENT Read the plan document at least annually and anytime you are unsure about a provision in the plan document Ensure that the recordkeeper, trust company, and staff working on the plan are all following written plan document Conduct regular compliance reviews or audits of plan policies, procedures and operations Review fidelity bond policy - DOCUMENT

Employee contributions-must be deposited into the plan as soon as can be segregated from the company’s assets but no later than the 15th business day of the following month- This is not a safe harbor! DOCUMENT your policy! When hiring a Service Provider, make sure that they are qualified (financial condition, experience with retirement plans of similar size, how many employee benefit plans) DOCUMENT the hiring process and due diligence Identify parties in interest - DOCUMENT Review Plan for prohibited transactions - DOCUMENT Review Plan Expenses and DOCUMENT

Monitor Service Provider Review service provider performance Read service agreement, if applicable Read any reports that they provide Review fees charged Ask about policies and practices Follow up on participant complaints Review of SAS 70 of recordkeeper and or custodian DOCUMENT Review Plan investments and review investment policy statement and DOCUMENT

Hold regular meetings with the Retirement Plan committee or investment committee or those charged with plan governance and DOCUMENT DOCUMENT, DOCUMENT, DOCUMENT!!!!!!!!

Tools Available to Assist
Employee Benefit Plan Audit Quality Center Website: Includes Plan Advisories for communication and research on plan responsibilities Includes tools for Plan Sponsors Your Third Party Provider Employee Benefits Security Administration Office of the Chief Accountant: EFAST Help Line: Plan Sponsor Magazine Profit Sharing Council of America (IPS)

Fiduciary Oversight: A Process & Approach to Best Practices
_____________________________________________________________________ Presented By: Charles A. Bruder

I may have violated the provisions of a company sponsored retirement plan…what can I do?

Fiduciary Duties and Corrective Action – A Practical Approach
Several available options Do nothing, and hope that the problem is not discovered “Self correct” the potential fiduciary breach Disclose the breach to the appropriate government agency/program The key to addressing a breach of a fiduciary duty is identifying the available correction methods and determining the appropriate course of action

The “Do Nothing” Approach
Pros No action or cost involved Does not require disclosure to any government agency/plan participant May result in cost savings to the plan sponsor Permits the plan sponsor to continue with its current form of plan administration

The “Do Nothing” Approach
Cons The “ticking time bomb” Raises the potential costs associated with corrective action Failure to address a fiduciary breach may be a further breach of fiduciary duty Audit Lottery – Are you feeling lucky?

Available Corrective Programs Employee Plans Compliance Resolution System (“EPCRS”) Voluntary Fiduciary Correction Program (“VFCP”) Internal Revenue Service (“IRS”) Notice

Employee Plans Compliance Resolution System
EPCRS contains three correction programs: Self-Correction Program (SCP) Voluntary Correction Program (VCP) Audit Closing Agreement Program (Audit CAP)

Qualification Failures Plan Document Failure Plan provision (or absence of provision) that violates the Code Operational Failure Plan document complies with the Code but plan doesn’t operate in accordance with its provisions

Principles and Correction Methods Full correction required for all plan years Acceptable correction methods & retroactive plan amendments Expanded definition of “reasonable and appropriate” Model correction methods provided in Appendices A & B of Rev. Proc

SCP – Self Correction Program No disclosure to IRS, no fee, no sanctions Can only correct operational failures Must have a favorable IRS Determination Letter Must have established practices & procedures to assure ongoing compliance Corrective action requires documentation

SCP – Self Correction Program Insignificant vs. significant failures Applicable corrective period – choosing the right one Factors in determining the type of failure which may be self-corrected What if the failure cannot be self-corrected?

VCP – Voluntary Compliance Program Single program and single-admission process Submission procedures Ends with a compliance statement – Don’t need to sign statement Determination Letter/Retroactive Plan Amendment may result in Determination Letter if plan on-cycle

SCP versus VCP Distinction between insignificant and significant errors List of Factors to Consider whether failure occurred during period of exam % of assets/contributions involved # of years involved % of participants affected % of participants who could have been affected correction within reasonable period reason for the failure Uncertainty for plan sponsor

Rev. Proc : New Fee Schedule VCP fee unchanged Compliance fee for §401(a)(9) failures reduced to $500 Fee for failure to amend for EGTRRA good-faith amendments, §401(a)(9) interim amendments, and amendments required to implement optional law changes: flat $375

Audit CAP Higher sanction Factors used in determining sanction: Practices in place to identify and prevent plan failures Steps taken to correct failures Reason for the failures

Audit CAP Length of time that failures occurred Number of NHCEs affected if plan is disqualified Existence of a favorable Determination Letter Whether the error involves a demographic failure Whether the only failure is an employer eligibility failure

EPCRS – What is Not Covered Form 5500 filing delinquencies DFVC Program Prohibited transactions Funding deficiencies Certain limited relief available under the Worker, Retiree and Employer Recovery Act of 2008

Voluntary Fiduciary Corrective Program Corrective program sponsored by the U.S. Department of Labor Certain enumerated transactions which may be corrected Prohibited purchases Sales and exchanges Improper loans Delinquent contributions Improper plan expenditures

Why VFCP? Type of corrective action required Avoidance of civil penalties imposed by the IRS Obtain a DOL “no action” letter Avoidance of the imposition of excise taxes if the class exemption provisions are met Processing/corrective costs Forum shopping

Voluntary Fiduciary Correction Program
VFCP – Class Exemptions Six classes of prohibited transactions covered Failure to transmit contributions/loan payments in a timely manner Loans made to parties in interest Sales of property with parties in interest Sales of real property to a plan with a leaseback to the employer Purchase of an illiquid asset by a plan Certain plan expense issues

EPCRS or VFCP? Which program is appropriate for correction of a fiduciary breach? Type of action (or inaction) which resulted in the breach of fiduciary duty Appropriate correction method Crossover issues Cost/benefit analysis Processing time

Code Section 409A Although not technically a “fiduciary duty,” a potential source of financial woe for an employer Code section has broad application to a variety of arrangements IRS Notice provides a model correction program Expands the program established under IRS Notice

IRS Notice 2008-113 Program scope
No relief for documentary compliance failures Includes required amendments Limited relief available for “insiders” Applicable to “inadvertent and unintentional” errors “Full” correction is required Avoidance of excise taxes

Eligibility Provisions
IRS Notice Eligibility Provisions “Inadvertent and unintentional” operational errors Impermissible payments made to an employee Demonstrable steps must be taken to avoid future errors Recipient’s income tax return for the year in which the error occurred cannot be under IRS audit The error has been fully corrected IRS guidelines for full correction The company cannot be in financial distress Significant risk of non-payment?

Same Year Corrective Method
IRS Notice Same Year Corrective Method Early payments must be returned to the company Late payments must be to the employee Non-insiders may take up to 24 months from income tax return due date to repay Requires immediate and heavy financial need Interest payments may be required Avoidance of Code Section 409A penalties

Post Year Corrective Method
IRS Notice Post Year Corrective Method Non-insiders Corrective methods are similar to the “same year” correction guidelines Employee may be required to make interest payments Avoidance of Code Section 409A penalties

IRS Notice 2008-113 Other Key Features
Correction of impermissible stock right grants “Reset” feature Limited corrective opportunity for other operational errors $16,500 ceiling in 2008 Other corrections permitted but will not avoid the 20% excise tax Employer notice requirements

Code Section 125 New Proposed Treasury Regulations
Effective for plan years commencing on or after January 1, 2009 Apply to all arrangements which qualify for beneficial income tax treatment under Code Section 125 Group Medical Insurance Plans (“Flex Plans”) Premium Only Plans Medical Flexible Spending Accounts Dependant Care Flexible Spending Accounts

Code Section 125 New Proposed Treasury Regulations
Treasury Regulations clarify that Code Section 125 is the exclusive means under which nontaxable group health benefits may be provided to employees If your company plans do not satisfy the provisions of the new proposed Treasury Regulations, benefits paid under these plans will be taxable to the participants.

Code Section 125 Proposed Treasury Regulations - What Has Changed?
Written Plan Requirement Plans must include the following items: Specific details concerning all benefits available under the plan Eligibility provisions for participation (employees only) Rules governing benefits elections, maximum elective contribution limits Rules governing the irrevocability of elections Details concerning employer contributions Definition of plan year Plans must be operated in accordance with stated terms

Code Section 125 Proposed Treasury Regulations - What Has Changed?
Nondiscrimination Testing Required Cafeteria plans cannot discriminate in favor of highly compensated employees Similarly situated employees must have a uniform opportunity to elect to receive benefits Objective nondiscrimination testing formula is provided in the Treasury Regulations “Safe Harbor” for premium-only cafeteria plans

Code Section 125 Proposed Treasury Regulations – What Should Employers Do?
Treasury Regulations apply to plan years commencing on or after January 1, 2009 Need to carefully review plan documents Summary plan descriptions Intranet/employee communications Cafeteria plan forms brochures Amend plan documents currently (if necessary) Create a compliance manual

COBRA Subsidy - Notice Requirements
By April 18, 2009, group health plans subject to COBRA must issue to “assistance eligible individuals” notice of the extended election period of COBRA coverage and the COBRA subsidy provisions. A model notice is to be issued by the Secretary of Labor by March 19, 2009. 60 day election period The notice must include specific information including: The forms necessary to establish eligibility for the premium reduction; Contact information for the plan administrator regarding the premium reduction; A description of the extended election period; A description of the individual’s obligation to notify the plan administrator of eligibility for subsequent group health plan coverage; and A description of the eligible individual’s right to a coverage.

COBRA Subsidy - Notice Requirements
Notices must be provided to assistance eligible individuals who became entitled to elect COBRA continuation coverage during the period September 1, 2008 through December 31, 2009 Notice regarding the special election provisions must be provided to all persons who terminated employment (for reasons other than gross misconduct) from September 1, 2008 through December 31, 2009.

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Fiduciary Oversight: Timely Topics for Employee Benefit Plan Sponsors

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