1. Plan Funding & Fiduciary Responsibilities
January 14, 2014
Stuart Hack, JD, CLU
Sunlin Consulting LLP

2. Funded vs. Unfunded Plans
Assets placed in a trust
To fund retirement plan benefits
Solely for the benefit of plan participants
Unfunded (in general)
Benefits are a bare promise of the employer
Assets may be designated to specifically fund the benefits, but remain subject to creditors of employer

3. Funded Plans All IRS Qualified Plans must be funded. Funding Vehicles
Defined Benefit, 401(k), 403(b), Money Purchase, Profit Sharing, Cash Balance, Target Benefit, ESOP
Funding Vehicles
Trust
Discretionary Trustee – full fiduciary responsibility, including selection and monitoring of plan investments
Directed Trustee – liability limited to specific activities, usually to hold assets, transmit transactions, and maintain record of plan assets
Custodial Account – similar to Directed Trustee
Annuity Contract – insurance contract with underlying assets held by insurance company; insurance company is the custodian of the assets

4. Unfunded Plans Non-qualified Deferred Compensation Plans 457 Plans
Can accumulate assets in a Rabbi Trust to add some protection to covered employees
457 Plans
For certain tax exempt and governmental organizations only
457(b) Plans for both HCE and NHCE
Statutory contribution limits
Statutory distribution requirements

5. Unfunded Plans (continued)
457 (f) Plans for HCE only
Limit is “reasonable” compensation
Must have risk of forfeiture
Statutory distribution requirements
Governmental plans may be funded
Can accumulate assets in a Rabbi Trust

6. Types of Asset Classes Equities Foreign Domestic Large Cap Medium Cap
Small Cap
Value
Growth
Blend
Special asset classes, such as Real Estate

7. Types of Asset Classes (cont.)
Bonds
U.S. Treasury
Other Governmental
Corporate
Foreign
Emerging
Hi Yield
Money Market
Guaranteed / Stable Value

8. Types of Plan Assets Mutual Funds - registered securities
Separately Managed Accounts
Insurance Company Products
Stable Value Funds
Individual securities
“Strange assets”

9. Mutual Funds Registered with the SEC
Various share classes, designed for specific product distribution streams
Registered Investment Advisors
Brokers
Broker dealers
Record keepers

10. Separately Managed Accounts
Not registered with the SEC
Offered by
Bank/Trust Company
Insurance Company
Investment Managers
Pool of assets or individual account managed in specified investment style
Typically institutional / lower cost internal charges

11. Insurance Company Products
Guaranteed Accounts
Insurance company guarantees fixed rate of return and principal
Subject to withdrawal rules similar to Stable Value funds
Annuity wrapped accounts
Insurance company wraps services, annuity rate guarantees and fees/commissions around the mutual fund or separately managed account
Provides a method of flexible compensation for distribution systems

12. Insurance Company Products (cont.)
Fixed Annuities
Insurance company guarantees income stream for specified period, including for life
Variable Annuities – stream of income based on underlying asset performance
Hybrid Annuities – variable returns with guaranteed minimums

13. Stable Value Funds Guaranteed yield, usually annually adjusted
Market value adjustments, usually made if plan terminates the contract and surrenders it
Benefit payments usually exempted from market value adjustments
Participant direction sensitive, i.e., no market value adjustments for participant direction into or out of stable value accounts
Restrictions usually apply to transfers to a “competing” fixed income investment option
Underlying assets include bonds, BICs, GICs, and insurance company general accounts
Similar to mutual funds

14. Internal Fees/Charges/Expenses
Mutual Funds
Disclosed in prospectus
Investment management fee
12b-1 fee
Transfer agency fee
Administration and record keeping fee
Commissions
Contingent deferred sales charges
Undisclosed expenses/costs
Trading expenses
Trading efficiencies/inefficiencies

15. Internal Fees/Charges/Expenses (cont.)
Separately Managed Accounts
Disclosed in contract with plan sponsor
Includes
Investment management fees
Custodian fees
Insurance Company Products
Investment management fee
Annuity/insurance charges
Compensation to distribution channels
Revenue to pay plan expenses

16. Internal Fees/Charges/Expenses (cont.)
Annuity wrapped accounts
Disclosed in contract with plan sponsor
Includes
Expenses charged by underlying mutual funds
Annuity/insurance fees
Commissions
Revenue to pay plan expenses
Stable Value Funds
Provided in Contract or Trust Agreement
Not always disclosed
Investment management fee
Distribution fee/commissions

17. ERISA 404 (a) Prior to ERISA is was like the “wild West”
Imposes a “prudent man standard of care” for qualified plan fiduciaries
For the exclusive purpose of
providing benefits to participants and their beneficiaries; and
defraying reasonable expenses of administering the plan

18. ERISA 404 (a) (continued)
With the care, skill, prudence, and diligence
that a prudent man acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with like aims
By diversifying the investments of the plan
so as to minimize the risk of large losses
unless under the circumstances it is clearly prudent not to do so; and …

19. Plan Fiduciaries Anyone who:
Exercises control or authority over the management of the plan or the plan’s assets;
Provides investment advice for a fee; or
Has discretionary authority over the plan’s administration
Is responsible for actions of the other plan fiduciaries, unless
Fiduciary duties are specified and limited
Reasonably not aware of actions taken by other ficuciaries

20. Most Common Fiduciaries
Plan sponsor
Plan Administrator – named in plan document
Administrative and investment committees named individual members
Named Plan Trustee
Compensation committees and board members on the committees, individually
Members of the Board who appoint committee members
Functional Fiduciaries

21. Other Types of Plan Fiduciaries
Co-fiduciary – accepts limited fiduciary duties
3(21) investment advisor co-fiduciary – helps the plan sponsor decide
3(38) investment manager fiduciary – decides for the plan sponsor

22. Common Fiduciary Liability Lawsuit Allegations
Excessive investment fees
Unreasonable expenses charged to participant accounts
Failure to monitor investments, resulting in lost investment earnings
Failure to document decisions
Improper investments
Failing to include eligible participants

23. How to Manage Exposure (Best Practices)
Allocate plan responsibilities and document accountability
Outsource duties that exceed expertise of committees
Document, Document, Document

24. Specific Investment Fiduciary Responsibilities & Attributes
Defined Benefit Plans
Create asset allocation appropriate for funding guaranteed, pre- determined pension benefits
Maintain appropriate liquidity to pay benefits as they become due
Investment gains/losses
Affect amount of employer contributions
Do not affect amount of benefits to participants
Can put plan/plan sponsor in jeopardy

25. Specific Investment Fiduciary Responsibilities & Attributes (cont.)
Participant-Directed Defined Contribution Plans
Investment fiduciaries responsible for
Providing investment alternatives with sufficient range of risk for participants to create asset allocations responsive to their risk tolerance and length of their accumulation period
Selection and monitoring of investment alternatives provided by the plan
Changing investment managers and investment alternatives, when appropriate to do so
Investment gains/losses
Affect amount of benefit participants have at retirement
Do not affect amount of employer contribution

26. Best Practices to Manage Investment Fiduciary Responsibilities
Written Investment Policy
Documented periodic investment monitoring
Documented investment committee decisions

27. 404(a)(5) Disclosure Requirements
Summary
Disclosure of plan investment-related information
Disclosure of expenses charged to participant-directed accounts
Purpose
To ensure that all participants and beneficiaries
have the information they need to make informed decisions about the management of their individual accounts, and
are aware of what expenses are charged to their accounts and why the expenses are charged to their accounts

28. 404(a)(5) General Requirements
Annual notice in general, once every 12 months
Quarterly notice – via participant statements
Interim information changes
Any change in information, except investment- related information
Provided at least 30 days, but no later than 90 days, prior to date of change
Specific additional information must be provided upon request

29. 404(a)(5) General Requirements (cont.)
Notice content falls into 4 categories
General operational and identification information
Information on administrative expenses
Information on individual expenses
Investment-related information
Identifying information
Performance data
Benchmark information
Fee and expense information
DOL suggests that the bulk of the investment-related information be provided using a “Model Chart.”

30. 404(a)(5) Plan Sponsor Responsibility
Provide all of the 404(a)(5) required information to plan participants
May reasonably rely upon information provided by service providers
Failure to provide all information in timely fashion may result in liability exposure for breach of fiduciary duty

31. 408(b)(2) Disclosure Requirements
Purpose is to require service providers to inform the plan sponsor about:
fees being charged
services provided
potential conflicts of interest
Applies to all types of plans
Must be in writing
Any changes in provisions of service agreements must be provided within 60 days prior to the change

32. 408(b)(2) General Requirements
Responsibility of service provider to disclose to appropriate plan fiduciaries
Expenses charged (direct and indirect)
Revenues received (direct and indirect)
Sub-contractors and relationships
Potential conflicts of interest

33. 408(b)(2) General Requirements (cont.)
Responsibility of plan sponsor to:
Make sure all of required disclosures are received
Evaluate whether disclosures are reasonably accurate
Obtain expert help in understanding disclosures, if needed
Notify DOL if service provider fails to provide timely disclosure
Decide whether fees charged are reasonable for services provided
Determine whether potential exists for service provider conflict of interest
Replace service provider if it refuses to provide required information

34. 408(b)(2)Disclosure Requirements Liability Exposure
No contract between a service provider and a plan sponsor is “reasonable” if the contract fails to meet 408(b)(2) disclosure requirements.
The furnishing of goods, services, or facilities between a plan and a party in interest to the plan generally is prohibited under section 406(a)(1)(C) of ERISA.
This Prohibited Transaction Exemption is lost if requirements of 408(b) are not fulfilled. The contract becomes a Prohibited Transaction.
Each fiduciary is potentially personally liable for any losses caused to plan or participants.
Potential penalties to plan sponsor and service provider for Prohibited Transaction

35. ERISA 404(c)
Provides fiduciary exemption for investment return results experienced by participants due to their asset allocation directions
Does not exempt fiduciary for responsibility to select and monitor investment options
ERISA §404(a)(5) largely replaces 404(c)
However, 404(c) compliance specifically depends upon compliance with 404(a)(5).

36. ERISA 404(c) (cont.)
404(a)(5) compliance does not provide fiduciary liability exemption for the investment results attributable to
Participant’s investment allocation decisions
Plan’s default investment
Blackout period
Qualified change in investment

37. ERISA 404(c) (cont.) To have 404(c) protection, a plan must
Formally provide participants written notice that it elects to be a 404(c) plan
Provide a “broad range” of investment alternatives
Allow participants to have independent control
Fulfill certain requirements for plans that have employer stock as an investment option
Fulfill QDIA selection and notice rules
Prudently select and monitor service providers and plan investment alternatives

38. Employee Plan Compliance Resolution System
Revenue Procedure
Plan Sponsors have the option to correct qualification problems through Employee Plans Compliance Resolution System (EPCRS)
Purpose is to provide incentive for corrections by minimizing cost of compliance

39. Employee Plan Compliance Resolution System (continued)
The components of EPCRS are:
Self-Correction Program (SCP)
Corrective action taken without requesting IRS approval
Voluntary Correction Program (VCP)
Process to request IRS approval of corrective action
Fee to apply
Usually requires employer contributions to the plan to make the corrections
Some correction coasts are very predictable; some have to be negotiated
Alternative of waiting until issues raised on audit can be very expensive

40. Fiduciary Liability Management
Fiduciary failure lawsuits are EXPENSIVE
Legal defense costs
Company resources diverted from production, sales, etc.
Ultimate judgment results
Fiduciary liability insurance only covers defense and settlement
Best insurance is:
documented fiduciary compliance procedures
documented fiduciary decisions and actions
documented allocation of fiduciary responsibilities

41. Typical Corrections Needed
Foot-faults
Discrimination test failures
Failure to include all eligible employees
Failure to follow plan document provisions
Failure to make required document updates by deadlines

42. U.S. Department of Labor (DOL) Correction Programs
Correct fiduciary problems through Employee Benefits Security Administration (EBSA) 
The components are
Delinquent Filer Voluntary Compliance Program (DFVC)
Provides plan administrators with a way to comply with the annual reporting requirements by coming up to date with corrected filings of Forms
Voluntary Fiduciary Correction Program (VFCP)
Gives plan sponsors and service providers the opportunity to self- correct fifteen specific financial transactions that violate ERISA, such as delinquent participant contributions

43. Q & A