Fiduciary Oversight: A Process & Approach to Best Practices Charles A. Bruder, Esq. Scott Rappoport The material provided herein is for informational purposes only and is not intended as legal advice or counsel.

2 Please help yourself to food and drinks Please let us know if the room temperature is too hot or cold Bathrooms are located past the reception desk on the right Please turn OFF your cell phones Please complete and return surveys at the end of the seminar

3 Fiduciary Oversight A Process & Approach to Best Practices Scott Rappoport

4 … Put not your trust in money, but put your money in trust. Oliver Wendell Holmes

5 Session Overview Legislative Review Recently enacted legislation Adopted and proposed regulation The Fiduciary Process Identify Fiduciaries Modular Approach to Safe Harbors Best Practices Fiduciary Oversight Plan Monitoring, Assessment & Reporting

6 Legislation & Regulatory Actions LaRue v. DeWolff (Supreme Court 10/2007) ERISA litigation up 25%/year (past 4 years) Pension Protection Act (2006) DOL disclosure initiatives (2008) Changes to Form 5500

7 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; or Renders investment advice for a fee or compensation with respect to any monies or other property belonging to the plan.

8 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.

9 What Are Fiduciaries’ Exposures Under ERISA? Fiduciary liability is personal, absolute and unlimited. ERISA holds fiduciaries personally liable for their actions.

10 A Common Fiduciary Breach: There is a misconception about the concept of a fiduciary providing individualized advice to a plan. This term does NOT refer to the giving of advice to individual participants. It refers to an advisor that performs services specific to the plan such as: assisting in the selection of investments creation of an Investment Policy Statement monitoring of plan assets

11 Safe Harbors Voluntary May insulate from liability Must demonstrate compliance with requirements: Prudent selection Prudent monitoring Acknowledgement of fiduciary status

12 404(a) Safe Harbor Provisions 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

13 404(c) Safe Harbor Provisions 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.

14 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

15 Fiduciary Advisor Safe Harbor Cont’d Plan sponsor must determine the appropriateness of the advice arrangement Plan sponsor annually audits such arrangements

16 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

17 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

18 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

19 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

20 Monitoring & Reporting Benefit Sources & Solutions Best Practices Watch List Procedures Replacing Funds Communication of Changes

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

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Fiduciary Oversight: A Process & Approach to Best Practices Charles A. Bruder Norris McLaughlin & Marcus, P.A.

24 A client calls you and indicates that he/she may have violated the provisions of a company sponsored retirement plan…what do you do?

25 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

26 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

27 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?

28 Fiduciary Duties and Corrective Action – A Practical Approach Available Corrective Programs 1.Employee Plans Compliance Resolution System (“EPCRS”) 2.Voluntary Fiduciary Correction Program (“VFCP”) 3.Internal Revenue Service (“IRS”) Notice

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

30 Employee Plans Compliance Resolution System 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

31 Employee Plans Compliance Resolution System 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

32 Employee Plans Compliance Resolution System 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

33 Employee Plans Compliance Resolution System 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?

34 Employee Plans Compliance Resolution System 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

35 Employee Plans Compliance Resolution System 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

36 Employee Plans Compliance Resolution System 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

37 Employee Plans Compliance Resolution System 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

38 Employee Plans Compliance Resolution System 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

39 Employee Plans Compliance Resolution System 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

40 Fiduciary Duties and Corrective Action – A Practical Approach 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

41 Fiduciary Duties and Corrective Action – A Practical Approach 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

42 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

43 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

44 Fiduciary Duties and Corrective Action – A Practical Approach 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

45 IRS Notice 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

46 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?

47 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

48 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

49 IRS Notice 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

Questions & Answers Thank you for coming!