1. COLLECTIVE INVESTMENT FUNDS AND ERISA Marcia S. Wagner, Esq.

2. 2 1. CIFs and ERISA 2. DOL Tips for Selecting TDFs 3. CIF Advantages

3. What Is A Collective Investment Fund (“CIF”) Created by declaration of trust. Corporate trustee (bank or trust company). “Maintained” by the bank trustee. ◦ Adviser can partner with bank to create customized investment vehicles. ◦ Bank must be in overall control. Limited to holding assets of tax-qualified plan. ◦ Trust exempt from entity level taxation. ◦ Trust instrument restricts use of assets to exclusive benefit of plan participants. 3

4. Application of ERISA to CIF’s ERISA look-through rule means plan assets include interest in every underlying CIF asset. CIF trustee and investment adviser treated as ERISA fiduciaries. CIF subject to ERISA reporting and disclosure (e.g., Form 5500). CIF transactions subject to ERISA prohibited transaction rules unless exemption applies. ◦ Investing in proprietary products could be prohibited. ◦ Investing in securities of plan sponsor could be prohibited. 4

5. Prohibited Transaction Exemptions ERISA Section 408(b)(8) exempts a plan’s purchase of a CIF interest from the bank. ◦ Allows trustee to charge additional fees for asset management with no offset. ◦ Exemption conditioned on approval of affiliated fiduciary or approval written into plan documents. ◦ Favorable result compared to mutual funds. 5

6. ERISA Fiduciary Responsibility and Protection from Liability for Investment Losses CIFs same as any other investment with respect to qualifying for ERISA 404(c) protection. ◦ Conditioned on plan qualifying as 404(c) plan. ◦ Protection is against liability for losses due to participant’s selection of CIF from plan menu. Plan sponsor responsible for selecting CIF as plan investment alternative. CIF investment adviser responsible for prudently investing CIF assets. Bank trustee has co-fiduciary responsibility with plan sponsor and adviser. 6

7. Example of How Fiduciary Responsibility Allocated Plan sponsor adds 3 risk-based CIFs to plan menu: aggressive, moderate, conservative. ◦ Participant alone responsible for picking appropriate fund based on participant’s risk profile. ◦ No fiduciary liability if risk averse participant picks aggressive CIF. CIF adviser liable for imprudent investment of CIF’s underlying assets. Bank also liable for CIF adviser’s imprudent investment decisions. Plan sponsor only responsible if failed to prudently monitor CIF. 7

8. Participant-Level Disclosures for CIFs Each CIF treated as designated investment alternative. ◦ Each CIF to be included on comparative chart furnished to participants. ◦ Standardized performance information for each CIF required, including benchmarking. ◦ Total annual operating expenses (including investment fees) to be disclosed. ◦ CIF’s investment strategy would need to be discussed in required website posting. 8

9. Participant-Level Disclosures for CIFs (cont’d) Bank trustees have recordkeeping and disclosure systems comparable to mutual funds. CIF providers can reduce disclosure compliance burden. ◦ Performance calculations. ◦ Unitized accounting. 9

10. Qualification of CIFs as QDIA QDIA rules provide relief from liability when participant defaults into investment. Product investment strategy must be either: ◦ Target date, or ◦ Balanced. CIF fiduciary must have discretion over CIF’s underlying assets under QDIA rules. 10

11. 11 1. CIFs and ERISA 2. DOL Tips for Selecting TDFs 3. CIF Advantages

12. DOL’s Tips for Choosing TDFs - Background TDFs often used as QDIA, relieving plan fiduciaries of liability for default investment losses. ERISA prudence requires objective process. CIFs with TDF strategy can also qualify as QDIA. ◦ Obtain information about TDF. ◦ Use information to evaluate TDF. ◦ Periodically review decision. ◦ Document how decision made. Proposed TDF regulations focusing on disclosure issued November 2010. DOL tips on choosing TDFs issued February 28, 2013. 12

13. Comparison, Evaluation & Review of TDFs Get information from prospectus: ◦ investment performance ◦ fees and expenses ◦ target date ◦ glidepath ◦ landing point. Obtain additional information (e.g., salary levels, turnover). Ensure TDF characteristics match needs of participants. 13

14. Comparison, Evaluation & Review of TDFs (cont’d) Glidepath considerations. ◦ Landing point may be reached at or after target date. Periodically review TDF characteristics and plan objectives for changes. ◦ TDF management team or strategy. ◦ Plan demographics. 14

15. Role of TDF’s Underlying Investments Understand TDFs underlying investments. Determine appropriate glidepath construction for plan. ◦ “To” retirement. ◦ “Through” retirement. Measure TDF fees and expenses against investment performance and service. ◦ Determine expense ratios of underlying funds. ◦ Consider relevant services:  Special asset allocation.  Access to special investments. 15

16. Employee Communications Regarding TDFs Information DOL thinks should be provided to participants: ◦ General information regarding TDFs (e.g., explanation of nature of glidepath). ◦ Info about plan’s specific TDFs (e.g., actual glidepath, historical performance and fees). DOL tips include its proposed regulatory disclosures. ◦ TDF not guaranteed. ◦ Participant may lose money before, at and after target date. 16

17. Use of Consultants in Evaluating TDFs DOL recognizes plan fiduciaries’ lack of expertise to evaluate TDFs which are a new and complex product. DOL endorses use of “commercially available sources for information and services”. ◦ DOL presumably means to include advisers with expertise to evaluate TDFs. Unquestioning reliance on consultant’s recommendations not viewed as prudent. 17

18. 18 1. CIFs and ERISA 2. DOL Tips for Selecting TDFs 3. CIF Advantages

19. Mutual Fund TDFs vs. CIF TDFs Mutual Fund TDFs typically invest in affiliated funds. Conflicts within Mutual Fund TDFs may hurt performance and increase fees. DOL recommends inquiring about customized TDFs consisting of plan’s core funds. ◦ CIF’s underlying investments would be unaffiliated, resulting in greater diversification. ◦ Potential disadvantage is higher cost and administrative complexity. ◦ Better fiduciary result. 19

20. Summing Up CIF Advantages from ERISA Perspective More flexibility than mutual funds. 404(c) Protection for CIF advisers. CIF qualification as QDIA. Responds to DOL suggestion to consider customized target date funds. 20

21. 21 COLLECTIVE INVESTMENT FUNDS AND ERISA Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0095235