Integrating ERISA Into Your Compliance Systems Marcia Wagner Managing Director The Wagner Law Group Paul J. Tolley Chief Compliance Officer Commonwealth Financial Network® Leo Karwejna Managing Director, Chief Compliance Officer Public Financial Management, Inc.

Agenda 1. Know the Applicable Rules (ERISA) 2. Basic Roles of Providers 3. Types of Advisors 4. Types of Compensation 5. Firm Infrastructure to Support Business 6. ERISA Policies, Procedures and Controls 7. Does ERISA Apply to Your Firm?

Fiduciary Responsibilities Employee Retirement Income Security Act of 1974, as amended (ERISA) Plan fiduciaries have a “great responsibility.” Personal liability for fiduciary breaches. Penalties can also apply to non-fiduciary parties.

Overview of Fiduciary Rules ERISA plan must have at least one fiduciary. Plans may also have multiple fiduciaries. Responsibility and potential liability for co-fiduciary’s actions. Person is not a fiduciary if only performing ministerial functions.

Who Is a Fiduciary? Named Fiduciary Functional Fiduciary Fiduciary named in plan document with principal responsibility over plan. Typically, the plan sponsor. Functional Fiduciary Person with discretionary authority over plan management; Person with authority over disposition of plan assets; Advisor who provides investment advice for a fee; or Person with discretionary authority over plan administration.

Fiduciary Standards Fiduciary standard of care under ERISA. Must act solely in interest of plan participants. Exclusive purpose of providing benefits to plan participants. Carrying out duties prudently. Following terms of plan document unless inconsistent with ERISA. Diversifying plan investments. Paying only reasonable expenses of plan.

Focusing on Specific Duties Carry out duties prudently Must manage plan assets with care, skill, prudenCE and diligence… …that a prudent person acting in a similar situation… …and familiar with such matters would exercise. Duty of prudence focuses on process. Paying only reasonable plan expenses Must ensure fees paid to plan’s providers are reasonable. ERISA 408(b)(2) regulations will require providers to deliver fee disclosures to plan sponsors (Jul. 1, 2012).

Prohibited Transactions ERISA Section 406(a) prohibits transactions between plan and any Party in Interest. Party in Interest includes plan sponsor and providers. Net Result: Exemption needed for even routine plan transactions. ERISA Section 406(b) prohibits self-dealing by any plan fiduciary. Mere disclosure will never cure a PT.

Fiduciary Liabilities and Penalties ERISA allows civil actions to be brought against any fiduciary in breach of duties. Fiduciary is personally liable for plan losses caused by breach. Other equitable relief may be awarded by court. DOL Penalty Civil penalty equal to 20% of amount recovered by DOL on behalf of plan. DOL may waive civil penalty in its discretion. Additional penalties for prohibited transactions, including IRS excise taxes.

Co-Fiduciary Liability ERISA Section 405(a) imposes potential liability on a co-fiduciary: If he participates knowingly in the other fiduciary’s breach; If his failure enables the other fiduciary’s breach; or If he knows of the other fiduciary’s breach and does not make reasonable efforts to remedy the breach.

ERISA Bonding Requirement ERISA Section 412 requires bonding for fiduciaries who “handle” plan funds. Bond must protect plan against loss due to fraud or dishonesty. Non-discretionary advisor not subject to ERISA bond requirement. Amount of ERISA Bond 10% of plan assets (Minimum of $1,000). Maximum of $500,000 ($M for plan holding employer securities). Broker-Dealer exempt from ERISA if meets SRO’s fidelity bond requirement.

Agenda 1. Know the Applicable Rules (ERISA) 2. Basic Roles of Providers 3. Types of Advisors 4. Types of Compensation 5. Firm Infrastructure to Support Business 6. ERISA Policies, Procedures and Controls 7. Does ERISA Apply to Your Firm?

Basic Roles – Role of Platforms Three Key Players Role of Recordkeeping Platforms Provide recordkeeping services and also serve as platform for investments. May include: - Fund Platforms - Insurance Platforms - Third Party Recordkeeping Platforms - Payroll Platforms May rely on 401(k) trading / settlement platforms

Third Party Administrators Role of Third Party Administrators (TPAs) Provide administrative services (e.g., plan document, IRS testing, compliance). Work closely with recordkeeping platforms. TPAs should not be confused with recordkeepers. TPA services may be “bundled” with recordkeeping services.

Advisors Role of Advisors Provide investment services to plan sponsor. Assist in selection of recordkeeping platform. Provide other consulting services. May assist participants through model portfolios, education or advice.

Agenda 1. Know the Applicable Rules (ERISA) 2. Basic Roles of Providers 3. Types of Advisors 4. Types of Compensation 5. Firm Infrastructure to Support Business 6. ERISA Policies, Procedures and Controls 7. Does ERISA Apply to Your Firm?

Definition of “Investment Advice” Fiduciary Person provides “investment advice” if has discretionary control or provides: Advice on value or advisability of investments… …is provided to plan on regular basis… …under mutual understanding that advice will be… …primary basis for investment decisions… …and based on particular needs of plan. Investment “education” is not fiduciary advice.

Non-Fiduciary Advisors Brokers typically do not want to be plan fiduciaries. But is broker-dealer providing investment advice? If so, firm is a functional fiduciary. Ellis v. Rycenga Homes, Inc. (2007) Producing TPAs may be closely tied to non-fiduciary advisors.

Types of Fiduciary Advisors Provides non-discretionary advice. 3(38) Fiduciary Qualifies as “Investment Manager” with discretion over assets. Must also be a RIA, bank or insurance co. Must acknowledge fiduciary status in writing. Sponsor responsible for appointment, but not acts of 3(38) fiduciary.

Agenda 1. Know the Applicable Rules (ERISA) 2. Basic Roles of Providers 3. Types of Advisors 4. Types of Compensation 5. Firm Infrastructure to Support Business 6. ERISA Policies, Procedures and Controls 7. Does ERISA Apply to Your Firm?

Compensation for Recordkeeping Platforms and TPAs Platform compensation “Direct” compensation includes invoiced fees. “Indirect” compensation includes product-based compensation. TPA compensation Typically direct compensation, but may include indirect compensation.

Compensation Payable to Advisors Non-fiduciary Broker-Dealers Receive indirect compensation only. Mutual funds pay 12b-1 fees and revenue sharing. Group annuities pay commissions and revenue sharing. RIAs and Dual Registrants Direct compensation is typically asset-based fee. May be offset for any indirect compensation received.

ERISA Restrictions on Variable Compensation Fiduciary advisor may not engage in self-dealing. Variable compensation created incentive to steer clients. Mere existence of variable compensation triggers violation. Group annuities pay commissions and revenue sharing. Non-fiduciary Broker-Dealers Must ensure no “investment advice” is provided. RIA receiving level compensation may provide fiduciary advice.

408(b)(2) Regulations Final 408(b)(2) rules become effective, July 1, 2012. Covers platforms, TPAs, advisors and others. If applicable, must state services are fiduciary in nature. Must describe services. Must disclose amount/formula of direct and indirect compensation. Advisors should confirm fee arrangements comply with ERISA

Agenda 1. Know the Applicable Rules (ERISA) 2. Basic Roles of Providers 3. Types of Advisors 4. Types of Compensation 5. Firm Infrastructure to Support Business 6. ERISA Policies, Procedures and Controls 7. Does ERISA Apply to Your Firm?

Firm Infrastructure to Support Business Interaction of Firm Functions Compliance Product Development Operations Putting appropriate checks and balances in place Does independent monitoring occur? Policies and procedures relevant to activity Escalation

Firm Infrastructure to Support Business Support for Retirement Business (Advisors) Template IPS and RFP Proposal Tools Investment Analytic Tools Access to In-House Retirement Plan Experts Develop Turnkey Marketing Materials Ongoing Training and Education

Agenda 1. Know the Applicable Rules (ERISA) 2. Basic Roles of Providers 3. Types of Advisors 4. Types of Compensation 5. Firm Infrastructure to Support Business 6. ERISA Policies, Procedures and Controls 7. Does ERISA Apply to Your Firm?

Identification of Retirement Accounts Leverage Your Record Keeping Partners and 408(b)(2) Service Providers Processes and Systems New Account Processes Changes or Amendments

Qualifications for FAs Offering Fiduciary Advice Consider policy on whether financial advisors (FAs) can offer fiduciary advice. Consider qualifications for Fas who may serve as plan fiduciaries. ERISA prohibitions against variable compensation. Requires plan client to be charged level fee. FA must be IAR of corporate RIA. Must meet requirements to act as IAR (Series 65 or 7/66).

Suggested Criteria for FAs Offering Fiduciary Advice Minimum for number of plan clients and plan client assets. FAs with only 1 or 2 plans should not serve as plan fiduciaries. Professional Designations Chartered Retirement Plans Specialist (CRPS) Accredited Investment Fiduciary (AIF) PLANSPONSOR Retirement Professional (PRP) Completion of Internal Education and Training

Other Considerations for ERISA Policies and Internal Controls Fee Leveling must be based on generally accepted investment theories that take into account, at a minimum, the historic risks and returns of different asset classes over defined periods of time; must take into account investment management and other fees and expenses attendant to the recommended investments; must take into account, at a minimum, information furnished by a plan, participant or beneficiary relating to age, time horizons (e.g., life expectancy, retirement age), risk tolerance, current investments in designated investment options, other assets or sources of income and investment preferences;

Other Considerations for ERISA Policies and Internal Controls Fee Leveling (continued) The fiduciary adviser providing investment advice cannot receive from any party (including an affiliate of the fiduciary advisor), directly or indirectly, any fees (including any commission or other compensation) that vary depending on the investment option selected by a participant or beneficiary; and No employee, agent or registered representative providing investment advice on behalf of the fiduciary adviser can receive from any party (including an affiliate of the fiduciary adviser), directly or indirectly, any compensation (including salary, bonuses, awards, promotions, commissions or other things of value) that varies depending on the investment option selected by a participant or beneficiary.

Other Considerations for ERISA Policies and Internal Controls New Account Inception 408(b)(2) Fee Disclosures Education and Training Structured Program that Matches Your Model ERISA Plan Fiduciary Training Variable Compensation: Prohibited Transactions Vary Training by Function

Agenda 1. Know the Applicable Rules (ERISA) 2. Basic Roles of Providers 3. Types of Advisors 4. Types of Compensation 5. Firm Infrastructure to Support Business 6. ERISA Policies, Procedures and Controls 7. Does ERISA Apply to Your Firm?

Does ERISA Apply to Your Firm? You Might Be Surprised! 401(k) Plans Maintained At Platforms Brokerage Account Plans IRA / Keogh Plan Accounts Small Profit-Sharing Plans Defined Benefit Plans

Integrating ERISA Into Your Compliance Systems Marcia Wagner Managing Director The Wagner Law Group Paul J. Tolley Chief Compliance Officer Commonwealth Financial Network® Leo Karwejna Managing Director, Chief Compliance Officer Public Financial Management, Inc. A0071798