Remaining Compliant in Turbulent Times ICBA Annual Half-Day Conference April 28, 2010 Julie Wray Senior Corporate Counsel Questar Corporation

Employee Retirement Income Security Act of 1974 (ERISA) Employee Retirement Income Security Act of 1974 (ERISA) Plans must provide participants with plan information, i.e. SPD Plans must provide participants with plan information, i.e. SPD Fiduciary responsibilities on those who manage and control plan assets Fiduciary responsibilities on those who manage and control plan assets Claims and appeals process Claims and appeals process Participants right to sue for benefits and breaches of fiduciary duty Participants right to sue for benefits and breaches of fiduciary duty ERISA

Market turmoil = increase in ERISA litigation claiming breach of fiduciary duties Market turmoil = increase in ERISA litigation claiming breach of fiduciary duties 2009 Litigation Study 2009 Litigation Study Pension disputes Pension disputes Medical and disability claims (retiree medical) Medical and disability claims (retiree medical) Health reform?? Health reform?? ERISA Litigation

Named fiduciaries Named fiduciaries Any person with discretionary authority or responsibility over plan administration Any person with discretionary authority or responsibility over plan administration Any person who exercises authority and/or control over plan assets Any person who exercises authority and/or control over plan assets Any person who renders investment advice to the plan for a fee Any person who renders investment advice to the plan for a fee Who is an ERISA fiduciary?

Typical Plan Fiduciaries BOARD OF DIRECTORS Investment or retirement plan committee members Trustee Investment Manager Anyone who makes decisions about the administration of the plan

A person who performs purely “ministerial” functions is not a fiduciary. A person who performs purely “ministerial” functions is not a fiduciary. DOL lists certain activities as being purely “ministerial” functions DOL lists certain activities as being purely “ministerial” functions Calculation of benefits Calculation of benefits Maintain participant service and employment records Maintain participant service and employment records Prepare reports Prepare reports Processing claims Processing claims Who is NOT an ERISA Fiduciary

Plan Sponsors Plan Sponsors Duty to monitor Duty to monitor Third-party service providers Third-party service providers Chicago v. Caremark and Moekel v. Caremark (2007)(pharmacy benefit manager not a fiduciary) Chicago v. Caremark and Moekel v. Caremark (2007)(pharmacy benefit manager not a fiduciary) What contract says does not matter. What contract says does not matter. Hartsfield v. Loomis(2010)(holding TPA who made infertility and mental health claims in excess of applicable caps and lifetime limits under employer group health plan was a fiduciary and breached an ERISA-imposed duty.) Hartsfield v. Loomis(2010)(holding TPA who made infertility and mental health claims in excess of applicable caps and lifetime limits under employer group health plan was a fiduciary and breached an ERISA-imposed duty.) What about the following...

Exclusive Benefit Rule (duty of loyalty) Exclusive Benefit Rule (duty of loyalty) Prudent Person Rule Prudent Person Rule Diversification Diversification Abide by plan document Abide by plan document Four Fiduciary Fundamentals (ERISA Section 404)

Fiduciaries must act “for the exclusive purpose of... providing benefits to participants and their beneficiaries...” 1. Exclusive Benefit Rule

Decisions must be in the best interests of plan participants and their beneficiaries Decisions must be in the best interests of plan participants and their beneficiaries Expenses should be reasonable and disclosed to participants Expenses should be reasonable and disclosed to participants Proper communications (no intentional misleading statements or material omission) Proper communications (no intentional misleading statements or material omission) Key: Avoid prohibited transactions Key: Avoid prohibited transactions AKA Duty of Loyalty

Excessive Fee Cases (401(k) plans) Excessive Fee Cases (401(k) plans) Excessive and/or poorly disclosed fees Revenue sharing not disclosed to participants Revenue sharing not disclosed to participants Heckler v. Deere, 7 th Cir. (No obligation to disclose revenue sharing where fiduciaries disclosed total fees enough.) Heckler v. Deere, 7 th Cir. (No obligation to disclose revenue sharing where fiduciaries disclosed total fees enough.) Tibble v. Edison (could be breach if selected mutual funds under conflict of interest – selected funds based on the amount of revenue sharing paid, rather than overall performance) Tibble v. Edison (could be breach if selected mutual funds under conflict of interest – selected funds based on the amount of revenue sharing paid, rather than overall performance) Braden v Wal-Mart (Feb. 2010) (8 th Circuit remands case to district court to determine breach of fiduciary duty in part for failure to disclose revenue sharing) Braden v Wal-Mart (Feb. 2010) (8 th Circuit remands case to district court to determine breach of fiduciary duty in part for failure to disclose revenue sharing) Reasonable Plan Expenses

Plan Benefits Plan Benefits Varity Corp v. Howe (S. Ct. 1996) Varity Corp v. Howe (S. Ct. 1996) Retiree Medical Benefits Retiree Medical Benefits In re Unisys, 2009 WL (3d Cir. Sep 2, 2009) Breach of fiduciary duty where employees verbally told they would have low-cost medical benefits for life but did not remind them of company’s rights to modify or terminate retiree medical benefits. In re Unisys, 2009 WL (3d Cir. Sep 2, 2009) Breach of fiduciary duty where employees verbally told they would have low-cost medical benefits for life but did not remind them of company’s rights to modify or terminate retiree medical benefits. Misrepresentations

Forbids certain transactions with persons and entities that are closely related to the plan (parties in interest). Forbids certain transactions with persons and entities that are closely related to the plan (parties in interest). No self dealing No self dealing Examples: Examples: Furnishing of goods, services or facilities Furnishing of goods, services or facilities Transfer or use of plan assets Transfer or use of plan assets Loans or other extensions of credi Loans or other extensions of credit Prohibited Transactions

Standard of care that governs all fiduciary decisions Standard of care that governs all fiduciary decisions Prudent expert – need sufficient skills and knowledge – not just of an ordinary person Prudent expert – need sufficient skills and knowledge – not just of an ordinary person “ A full heart and an empty head are not enough.” Procedural Prudence - the right decision- making process (asking the questions and evaluating the impact of each decision) Procedural Prudence - the right decision- making process (asking the questions and evaluating the impact of each decision) 2. Prudent Decisions

“ERISA’s requirements... are satisfied if the fiduciary... has given appropriate consideration to those facts and circumstances that... the fiduciary knows or should know are relevant to the particular investment....” DOL Reg. Section a-1 “ERISA’s requirements... are satisfied if the fiduciary... has given appropriate consideration to those facts and circumstances that... the fiduciary knows or should know are relevant to the particular investment....” DOL Reg. Section a-1 “The prudent person standard is not concerned with results; rather it is a test of how the fiduciary acted viewed from the perspective of the time of the challenged decision rather than from the vantage point of hindsight.” Roth v. Sawyer “The prudent person standard is not concerned with results; rather it is a test of how the fiduciary acted viewed from the perspective of the time of the challenged decision rather than from the vantage point of hindsight.” Roth v. Sawyer Procedural Prudence

If lack the requisite knowledge, experience and expertise to make the necessary decisions, fiduciary obligations require you to hire independent professional advisors If lack the requisite knowledge, experience and expertise to make the necessary decisions, fiduciary obligations require you to hire independent professional advisors Prudently select the advisors Prudently select the advisors Prudently monitor advisors Prudently monitor advisors Prudent Expert

Don’t be concerned about making a wrong fiduciary decision that you end up not making any decision at all Not making a timely decision can actually be a breach of your fiduciary duties Hiding head in sand

Diversify the investment of plan assets to minimize the risk of large losses, unless it is clearly prudent not to do so. Diversify the investment of plan assets to minimize the risk of large losses, unless it is clearly prudent not to do so. Investment Policy Statement Investment Policy Statement Investment selection criteria Investment selection criteria Monitoring criteria Monitoring criteria Periodically review statement Periodically review statement 3 - Diversify Plan Assets

Abide by terms of the written plan documents... unless to do so would cause breach other fiduciary obligations Abide by terms of the written plan documents... unless to do so would cause breach other fiduciary obligations Committee should not make decision without revising the plan provision or trust document (including SPD) Committee should not make decision without revising the plan provision or trust document (including SPD) Stock drop case example Stock drop case example 4 - Abide by Plan Document

ERISA “stock drop” cases ERISA “stock drop” cases Allegations of Fiduciary Breach Allegations of Fiduciary Breach Imprudent to continue to maintain company stock as an investment option Imprudent to continue to maintain company stock as an investment option Material misrepresentation Material misrepresentation Moench presumption Moench presumption Breiger v. Tellabs (2009) Breiger v. Tellabs (2009) Citigroup (Aug 2009) and Lehman Brothers (Feb. 2010) Citigroup (Aug 2009) and Lehman Brothers (Feb. 2010) Stock Drop Litigation

Personal Liability – restore/reimburse losses incurred by the plan Personal Liability – restore/reimburse losses incurred by the plan Criminal penalties – up to $100,000 and 10 years in prison Criminal penalties – up to $100,000 and 10 years in prison Civil actions – by individual participants and the DOL (20% civil penalty for certain breaches) Civil actions – by individual participants and the DOL (20% civil penalty for certain breaches) Co-Fiduciary liability – knowingly participates (or does not take efforts to remedy) or neglect Co-Fiduciary liability – knowingly participates (or does not take efforts to remedy) or neglect Liability for Fiduciary Breaches

Fiduciary Best Practices

Form committee (if have not done so already) Form committee (if have not done so already) Competent members Competent members Committee charter? Committee charter? Meet at least once a year (probably more often) Meet at least once a year (probably more often) Formalize process for different benefits Formalize process for different benefits Retirement benefits - Establish and periodically review Investment Policy; review and monitor investments; review fees and expenses related to investments – Benchmark plan Retirement benefits - Establish and periodically review Investment Policy; review and monitor investments; review fees and expenses related to investments – Benchmark plan Report to Board of Directors annually Report to Board of Directors annually Decision-Making Process

Required written procedures Required written procedures Claims procedures, loans, QDRO procedures, investment policy Claims procedures, loans, QDRO procedures, investment policy Evidence of meeting fiduciary obligations Evidence of meeting fiduciary obligations Litigation, DOL, other fiduciaries Litigation, DOL, other fiduciaries All fiduciary activity should have some form of documentation All fiduciary activity should have some form of documentation Minutes, due diligence files (i.e. plan expense reviews and benchmarking) Minutes, due diligence files (i.e. plan expense reviews and benchmarking) Keep minimum of 6 years Keep minimum of 6 years Document, Document, Document!

Fiduciaries who comply with 404(c) requirements are relieved of liability for losses suffered by participants as a result of directing their own investments Fiduciaries who comply with 404(c) requirements are relieved of liability for losses suffered by participants as a result of directing their own investments Requirements: Requirements: At least three diversified investment options At least three diversified investment options Allowing frequent investment changes Allowing frequent investment changes Appropriate information to participants Appropriate information to participants Don’t forget 404(c) Protection

Does NOT protect: Does NOT protect: Imprudent selection of investment alternatives Imprudent selection of investment alternatives Designating an investment manager Designating an investment manager Additional requirements for employer stock fund Additional requirements for employer stock fund Confidentiality procedures Confidentiality procedures Delivery of Prospectuse Delivery of Prospectuses 404(c) Protection

Identify Fiduciaries Identify Fiduciaries Make sure they are aware of their responsibilities Make sure they are aware of their responsibilities Includes duty to monitor other fiduciaries, third-part service providers and other advisors and consultants. Includes duty to monitor other fiduciaries, third-part service providers and other advisors and consultants. Follow Best Practices Follow Best Practices Act Prudently Act Prudently Follow Plan Follow Plan Conclusion