Protecting Fiduciaries From Madness & Other Liability – In March and All Through the Year March 15, 2012 Brian W. Berglund Sarah Roe Sise

2 Are You in the Game or on the Bench? ERISA fiduciary: a person who –Is formally designated as a fiduciary Every plan must designate at least one “named fiduciary” as having the authority to control and manage the operation and administration of the plan –Exercises discretion with respect to management of the plan –Exercises discretion in the administration of the plan –Exercises discretion with respect to the management or disposition of plan assets –Provides investment advice for a fee

3 Player Activities You are a fiduciary if you engage in the following activities: –Appointing other plan fiduciaries –Selecting and monitoring plan investment vehicles –Selecting and monitoring third party service providers –Interpreting plan provisions –Exercising discretion in denying or approving benefit claims –Being a plan sponsor

4 Bench Activities –Application of rules determining eligibility for participation or benefits –Calculation of service and compensation credits for benefits –Preparation of employee communications materials –Maintenance of participants' service and employment records –Preparation of reports required by government agencies –Orientation of new participants and advising participants of their rights and options under the plan –Collection of contributions and application of contributions as provided in the plan –Preparation of reports concerning participants –Processing of claims –Making of recommendations to others for decisions of plan administration Activities that are purely administrative in nature do not give rise to fiduciary status, such as:

5 Player vs. Bench Functions Business vs. Plan Functions Fiduciary only to the extent you engage in fiduciary activities –You can wear two hats – plan fiduciary and company employee A single party may perform both fiduciary and non-fiduciary functions DOL and Courts recognize the distinction between settlor activities, which are not subject to fiduciary provisions of ERISA, and fiduciary activities Settlor functions include: –establishing the plan –amending or terminating the plan –deciding what benefits to offer

6 What’s on the Line When You’re in the Game? ERISA fiduciaries are subject to heightened standards of conduct because they are acting on behalf of the plan participants and beneficiaries If a fiduciary fails to comply with the applicable standard of conduct, he or she may be held personally liable for, among other things, any plan losses resulting from the breach

7 Getting Out of the Game You are a fiduciary until you appropriately resign or are removed and there is a successor Terminate your fiduciary status by following plan procedures –Must make sure another successor fiduciary is in place

8 Being a Good Team Player ERISA Fiduciary Duties 1.Act prudently 2.Diversify the assets of the plan to minimize the risk of large losses 3.Comply with the provisions of the plan to the extent consistent with ERISA 4.Act solely in the interest of participants and with the exclusive purpose of providing benefits to them (duty of loyalty) 5.Pay only reasonable plan expenses 6.Refrain from engaging in “prohibited transactions”

9 1. Act Prudently Focus is on how you play the game, not the final score Prudent-Man Rule -- discharge duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use in like circumstances A pure heart and empty head are not an acceptable substitute for proper analysis Document process – inquiry, analysis, conclusion and basis for conclusion

10 2. Diversify Assets The team needs more than one “hot shot” scorer. Build a balanced team with depth Refrain from investing disproportionately large amounts in a single security, or in a single type of security or in securities dependent upon the success of one enterprise or upon conditions in one locality Whether a plan is sufficiently diversified is based upon all the assets of the plan and not upon any particular sub-fund

11 3. Follow Plan Document Know the play book and execute accordingly Discharge duties in accordance with the documents and instruments governing the plan

12 4. Act with Loyalty Be a team player. If your job is to set the pick, plant your feet and make it happen Act solely in the interest of the participants and beneficiaries with the exclusive purpose of providing benefits to participants and their beneficiaries and defraying “reasonable” expenses of administering the plan –Misleading participants and/or beneficiaries in communications can violate this duty –Avoid self-dealing or preferring interests of third-parties –Only plan expenses (not settlor expenses) may be paid from the trusts

13 5. Pay Only “Reasonable” Plan Expenses Don’t buy Air Jordan’s if Converse will do the trick Fiduciaries must identify all fees and expenses paid for plan services to ensure they are “reasonable” –New fee disclosure rules effective July 1, 2012 for existing covered service providers –Fees and services must be disclosed in writing before entering into, extending or receiving a contract with a “covered service provider” –Any material changes must be disclosed within 60 days –Service provider must disclose compensation received from parties other than the plan or plan sponsor (to identify possible conflicts of interest) –Fiduciaries have an ongoing duty to monitor fees and expenses for reasonableness

14 Reasonable Plan Expenses cont. DOL plan fee disclosure rules provide relief to fiduciaries: –If, without the fiduciary’s knowledge, the service provider does not comply with disclosure rules, fiduciary is protected from a breach of fiduciary duty claim –Fiduciary must comply with notice rules to receive protection: Request correct disclosure information in writing If the service provider fails/refuses to comply, the fiduciary must notify the DOL Notice to the DOL must include information about the plan, the plan sponsor, the service provider, and the information the service provider failed to disclose Notice to the DOL must be provided no later than 30 days after the earlier of (1) the service provider’s refusal to furnish the information or (2) 90 days after the fiduciary requested the information from the service provider Start identifying and contacting covered service providers NOW

15 6. Avoid Prohibited Transactions Don’t foul out of the game ERISA and the Internal Revenue Code prohibit certain transactions between an employer-sponsored retirement plan and disqualified individuals, called “parties in interest” under ERISA Plan fiduciary is precluded from causing a plan to engage in a transaction which constitutes a direct or indirect: –Sale or exchange, or leasing, of any property between the plan and a party in interest –Lending of money or other extension of credit between a plan and a party in interest –Furnishing of goods, services or facilities between the plan and a party in interest –Transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan, or –Acquisition, on or behalf of the plan, of any employer security or employer real property in violation of ERISA §407(a)

16 Passing the Ball Named fiduciaries may designate persons who are not named fiduciaries to carry out certain fiduciary duties –Plan document must expressly permit the delegation of duties and provide a procedure for it –Named fiduciary must act prudently, and in the interests of plan participants and beneficiaries in selecting a person to perform fiduciary duties Named fiduciary will not be responsible for acts or omissions of the designee unless co- fiduciary liability is applicable –If the delegation is made and the plan does not provide for such delegation, the named fiduciaries are not relieved from the responsibility or liability for the performance of fiduciary responsibilities delegated to the non-fiduciary ERISA § 405(a) imposes joint and several liability on a fiduciary for breaches committed by co-fiduciaries if the fiduciary: –Participates knowingly in, or knowingly undertakes to conceal, an act or omission of another fiduciary, knowing such act or omission is a breach –Fails to comply with his fiduciary duties, which enables another fiduciary to commit a breach, or –Has knowledge of a breach by another fiduciary and fails to make reasonable efforts under the circumstances to remedy the breach

17 What Happens When You Foul Out? The IRS, DOL and affected participants get more than a few free throws ERISA § 409(a) imposes personal liability on a fiduciary to reimburse the plan –For losses resulting from the breach –To restore to the plan any profits made through the use of assets of the plan by the fiduciary –Such other equitable or remedial relief as court deems appropriate –No punitive damages These remedies are available to individuals seeking personal losses in defined contribution (individual account) plans The DOL may assess a civil penalty equal to 20% of the “applicable recovery amount” in the event of a breach of fiduciary duty ERISA § 502(l)(1) penalty will be reduced by the amount of the excise tax paid with respect to a prohibited transaction The IRS may assess a prohibited transaction excise tax on a fiduciary –A first tier penalty of 15% of the amount involved in the prohibited transaction is imposed for each year in which the transaction continues –A second tier penalty of 100% is imposed if the transaction is not corrected within the taxable period

18 The X’s and O’s of a Good Defense Fiduciary Liability Insurance – First Line of Defense –Review policies and exclusions to ensure proper coverage Indemnification Provisions –Plan may allow others (e.g., plan sponsor) to indemnify a fiduciary No Exculpatory Provisions –Plan provisions purporting to relieve fiduciary of liability for violations of its fiduciary responsibility are deemed void as against public policy and of no effect

19 Procedural Prudence For each fiduciary decision, follow the defense –Establish a procedurally prudent decision-making process – inquire, analyze, look at alternatives, get help and advice if needed, and document Hold quarterly or semi-annual meetings –Review information about the operation and investment activities of the plan –Evaluate methods of improvement –Include consultants, providers and other advisors Keep records of what you do –Records and minutes of meetings and information shared at the meetings –Data examined in making all decisions –Expert advice or information on which the fiduciary has relied –Document and retain records

20 Make Sure You Have the Right Players on the Court Hiring and retaining service providers is a fiduciary function –Initial decision -- Carefully evaluate candidates and document selection process –Implement, follow and document a regular, formal monitoring of service providers’ performance, fees/costs Compliance with new fee disclosure rules will assist this process After receipt of the fee information, develop process to benchmark fees and service provider performance Document review process Replace provider if appropriate

21 Monitoring Performance of Investment Funds Periodically review –Fund’s brokerage and trading practices Brokerage costs; verify fee computation Quality of securities transaction executions Portfolio and turnover –Performance Determine compliance with plan’s investment guidelines Portfolio’s rate of return Compare each fund’s results with appropriate benchmarks –Fees Use independent professional to assist with the monitoring process

22 Plan Governance Read the plan documents –Plan, summary plan description, trust agreement and investment policy statement –Understand and follow the terms of the plan documents –Use plan document to support decisions –Periodically review for best practices updates, especially the investment policy statements Operate plan in compliance with 404(c) and QDIA requirements Provide investment education Make plan documents consistent with each other and actual practice Read service provider contracts

23 Administration Maintain historical records of written communications Develop script for oral benefit communications Limit who has authority to communicate re: benefit issues Maintain record of benefit related inquiries or requests for documents Document communications with claimants and their counsel Be sensitive to ERISA’s timing and procedural requirements for responding to benefit related requests and claims

24 Administration cont. Timely provide all required notices and reports Accurately complete and file Form 5500 Conduct plan compliance audits in addition to Form 5500 audit (404(c) compliance, fee disclosure, plan document operational compliance) Address issues – don’t ignore Train fiduciaries periodically

25 IRS Circular 230 Disclosure To ensure compliance with the requirements imposed by the IRS, we inform you that (i) this written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer, (ii) this written advice was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the written advice; and (iii) the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.