Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Fiduciary Requirements of ERISA and the Internal Revenue Code funded employee-benefit plan creates fiduciary relationship fiduciary responsibility is broad plan must specify “named fiduciary”

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 Fiduciary Duties act solely in interest of participants and their beneficiaries act for exclusive purpose of providing benefits to participants and beneficiaries; defray reasonable administrative costs act with ‘care, skill, prudence, and diligence’ of ‘prudent man’

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Fiduciary Duties diversify plan investments –BUT are exceptions for holding employer securities and employer real property follow provisions of documents and instruments governing plan unless inconsistent with ERISA

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Delegation of Fiduciary Duties fiduciary duties can be delegated if plan provides definite procedure to do so delegation of fiduciary duties does NOT remove all fiduciary responsibility

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Delegation of Fiduciary Duties fiduciary liable for breech of responsibility IF –knowingly participates in or conceals a breach in fiduciary responsibility –fails to comply with fiduciary duties as administrator thereby enabling another fiduciary to commit a breech –has knowledge of breech by another fiduciary UNLESS makes reasonable effort to remedy breech fiduciary can carry liability insurance

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Prohibited Transactions sale, exchange, or leasing of any property between plan and a party in-interest lending money or other credit extension between plan and a party in-interest furnishing goods, services, or facilities between plan and a party in-interest

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Prohibited Transactions transfer to, or use by or for the benefit of, a party-in-interest of any assets of the plan acquisition, on behalf of the plan, of any employer security or employer real property in excess of prescribed limits

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Prohibited Transactions a ‘party in interest’ (‘disqualified person’ in Internal Revenue Code) is broadly defined as –any fiduciary, counsel, or employee of the plan –a person providing services to the plan –an employer, if any of his or her employees are covered under the plan

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Prohibited Transactions –an employee organization, any of whose members are covered under the plan –an owner, direct or indirect, of a 50% or more interest in an employer or employee organization previously described –various individuals and organizations related to those on the preceding list, under specific Internal Revenue Code and ERISA rules

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 IRS and Labor Department can waive prohibited transaction rules specific statutory exemptions exemptions for transaction or class of transactions

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Directed investments can relieve fiduciary responsibility for participant’s investment choice must have 3 choices of diversified funds Penalties initial penalty 5% additional 100% penalty if timely correction not made

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Unrelated Business Taxable Income [UBTI] income of a tax-exempt organization from a trade or business that is not related to the function that is the basis for the tax exemption Passive investment income not usually UBTI

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Unrelated Business Taxable Income [UBTI] IRC specifies that income from ‘debt-financed property’ is to be treated by a tax-exempt organization as UBTI exception for qualified plans holding highly leveraged real estate investments

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Investment Policy: Investment Vehicles common stocks short-term debt long-term debt real estate equipment leasing other investments investment mix

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Investment Strategy growth-oriented strategies risk

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 Social Effects concern exists that large pension funds could target investments and thereby influence social policy e.g. encourage union organizing existing law does not address social policy fiduciary responsibility focuses on minimizing direct rather than indirect financial losses pension investment community has strongly rejected idea of social investing

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 True or False? 1.When an employer offers employees a funded benefit plan, a fiduciary relationship is created. 2.Fiduciary rules spell out the specific responsibilities of each person involved in the design and maintenance of any benefit plan that an employer has for employees.

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 True or False? 3.The diversification requirement applies to all plan investments, especially plans that hold employer securities or employer real property. 4.The penalty for violating a prohibited transaction rule is always just 5% of the amount involved. 5.Equipment leasing can be an attractive investment to private investors.

Qualified Plan Investments Chapter 11 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 Discussion Question Defined contribution plans participants can often direct all or part of their account investments. As long as the plan structure meets ERISA requirements, plan trustees are relieved of fiduciary responsibility for participant’s choice of investments. In plans like these, what responsibility, if any, do you believe employers should have for providing their employees basic education in investing, including evaluating investment performance, understanding the consequences of their investment choices, and estimating the total amount they will need in their account to fund their retirement goals?