1. Marcia S. Wagner, Esq. The Do’s, Don’ts and Best Practices for 3(16), 3(21) and 3(38) Fiduciaries

2. 2 Introduction Traditional Arrangement for Plans ◦ Plan sponsor has primary fiduciary responsibility ◦ Recordkeeper and TPA are non-fiduciary service providers ◦ Financial advisor is broker (non-fiduciary) Providers of Fiduciary Services ◦ TPAs may serve as 3(16) Fiduciaries ◦ Advisors may serve as 3(21) or 3(38) Fiduciaries ◦ Providers may strategically adjust service models

3. 3 Employer’s Traditional Role as Named Fiduciary Definition of “Named Fiduciary” ◦ Named in plan document ◦ Employer traditionally serves in this role Powers of Named Fiduciary ◦ Managing investment menu ◦ Administration of plan ◦ Engaging service providers

4. 4 Employer’s Traditional Role as 3(16) Fiduciary Definition of 3(16) Fiduciary ◦ Also known as “Administrator” under ERISA ◦ Plan document must identify its 3(16) Fiduciary Role of 3(16) Fiduciary ◦ Has ERISA reporting and disclosure duties ◦ Does not refer to traditional TPA firms providing non- fiduciary services

5. 5 Engaging Fiduciary Service Providers Selection of 3(16) Fiduciary ◦ Plan document may appoint TPA to serve as plan’s Named Fiduciary and Administrator ◦ Service agreement would be required for TPA firm ◦ Employer may also serve as Named Fiduciary Selection of 3(21) or 3(38) Fiduciary ◦ Named Fiduciary may appoint investment fiduciaries

6. 6 Core Responsibilities of 3(16) Fiduciary Disclosure Duties of Administrator ◦ Provide SPDs ◦ Provide benefit statements ◦ Provide 404a-5 participant disclosures ◦ Provide plan document (upon request) Reporting Duties of Administrator ◦ Sign and file Form 5500 ◦ Arrange for plan’s financial audit (as necessary)

7. 7 3(16) Fiduciary’s Oversight Role Oversight of Other Providers ◦ 3(16) Fiduciary may hire other providers to assist with participant disclosures and Form 5500 ◦ 3(16) Fiduciary remains responsible and must oversee providers Flexibility for TPA Firms ◦ TPA firm may provide all related services as 3(16) Fiduciary, or hire and oversee other providers

8. 8 Special Liability and Penalty Rules for 3(16) Fiduciaries No Delegation of Administrator’s Duties ◦ Administrator cannot delegate responsibility for its reporting and disclosure obligations ◦ 3(16) Fiduciary subject to potential liability, even if error caused by non-fiduciary service provider Special Penalties ◦ Form 5500 Failure - $1,100 per day ◦ Disclosure Failure - $110 per day

9. 9 Transferring Reporting and Disclosure Duties to TPA Plan Document Names TPA as Administrator ◦ TPA becomes responsible for participant disclosures and Form 5500 ◦ Employer would not have ultimate responsibility ◦ TPA potentially liable for penalties as Administrator

10. 10 Core Duties of 3(21) Fiduciaries Named Fiduciary May Appoint 3(21) Fiduciary ◦ Named Fiduciary has power to hire other fiduciaries ◦ Plan sponsor may hire financial advisor to provide “investment advice” under ERISA Section 3(21) ◦ Advice needed for selection and monitoring of plan’s menu options Reliance on 3(21) Fiduciary’s Advice ◦ Named Fiduciary must not blindly follow advice ◦ Plan sponsor retains duty: (1) To investigate qualifications (2) To provide complete and accurate info (3) To ensure reliance is reasonably justified

11. 11 Overview of 3(38) Fiduciaries Definition of “3(38) Fiduciary” ◦ Also known as “investment manager” under ERISA Section 3(38) Legal Requirements for 3(38) Fiduciary ◦ Must have discretionary authority ◦ Must be RIA, bank or insurance company ◦ Must acknowledge fiduciary status in writing

12. 12 Core Duties of 3(38) Fiduciaries Investment Control Over Plan Menu ◦ 3(38) Fiduciary must have authority to unilaterally add or remove investment options ◦ Plan sponsor must give up control over menu Liability Protection for Plan Sponsor ◦ Plan Sponsor is not responsible for individual acts of 3(38) Fiduciary ◦ Named Fiduciary merely responsible for prudently selecting and monitoring 3(38) Fiduciary

13. 13 3(38) Fiduciary vs. 3(21) Fiduciary When Plan Sponsor Relies on 3(21) Fiduciary ◦ Both sponsor and 3(21) fiduciary are jointly responsible for plan’s investment decisions ◦ Both can be held liable for imprudent decisions When Plan Sponsor Relies on 3(38) Fiduciary ◦ No fiduciary liability for Plan Sponsor if it prudently appoints 3(38) Fiduciary

14. 14 Fiduciary Liability and Penalties Civil Actions Under ERISA ◦ May be brought by DOL, participants or co-fiduciaries ◦ Fiduciary is personally liable for losses caused by breach DOL Civil Penalty ◦ Penalty amount is 20% of applicable recovery amount Excise Taxes Potential Co-Fiduciary Liability

15. 15 Considerations for 3(16) Fiduciary Service Models

16. 16 Administrator vs. Named Fiduciary Serving as Administrator and Named Fiduciary ◦ 3(16) Fiduciary may limit responsibility to Administrator’s reporting and disclosure duties ◦ Many firms also assume discretionary authority over management of plan as Named Fiduciary ◦ Scope of responsibility determined by service agreement and plan document

17. 17 Scope of 3(16) Fiduciary’s Services Determining TPA’s Fiduciary Services ◦ May accept responsibility for 5500 reporting and disclosures as plan’s Administrator ◦ May also accept comprehensive management responsibilities as plan’s Named Fiduciary ◦ Illustration: TPA agrees to adjudicate benefit claims Consider TPA’s Expertise and Procedures ◦ Prudent process must be established for each fiduciary service ◦ Illustration: Benchmarking review conducted to satisfy TPA’s duty to evaluate reasonableness of fees

18. 18 TPAs and Bundled Providers Ability of TPAs to Offer 3(16) Services ◦ TPAs are traditionally involved in plan administration ◦ Can modify non-fiduciary service model by adding 3(16) Fiduciary services Bundled Providers ◦ Recordkeepers with TPA acting as its subcontractor may offer 3(16) Fiduciary services ◦ TPA with recordkeeper acting as its subcontractor may also offer 3(16) Fiduciary services

19. 19 Oversight of Plan’s Recordkeeper Importance of Recordkeeper’s Role ◦ Recordkeeper is typically responsible for generating participant 404a-5 disclosures and statements ◦ Also provides website and system for processing participant transactions ◦ 3(16) Fiduciary is responsible for disclosures and may also be responsible for plan administration When Plan Sponsor Hires Recordkeeper ◦ 3(16) Fiduciary should require use of approved recordkeeper to ensure plan runs properly

20. 20 3(16) Fiduciary’s Non-Fiduciary Services Types of Non-Fiduciary Services ◦ 3(16) Fiduciary may offer bundled recordkeeping and TPA services ◦ May also offer TPA services only When Offering TPA Services ◦ 3(16) Fiduciary must coordinate its TPA services with recordkeeper’s administrative services ◦ Areas of potential overlap include preparation and delivery of disclosures, loans and withdrawals

21. 21 When 3(16) Fiduciary Hires Non-Fiduciary Providers Relationship with Other Service Providers ◦ 3(16) Fiduciary’s ERISA reporting duties include hiring accounting firm for audit as necessary ◦ Additional duties may including hiring non-fiduciary service providers (e.g., recordkeeper) Accountability of 3(16) Fiduciary ◦ 3(16) Fiduciary has duty to prudently select and monitor provider on ongoing basis ◦ Not accountable for individual errors of provider, but responsible for prudent selection and monitoring

22. 22 Responsibilities Retained by Plan Sponsor Coordination of Fiduciary Responsibilities ◦ Any responsibilities not accepted by 3(16) Fiduciary remain with Plan Sponsor ◦ 3(16) Fiduciary’s agreement and plan document should be reviewed to confirm responsibilities Duties Relating to 3(16) Fiduciary ◦ Plan Sponsor is responsible for prudently selecting and monitoring 3(16) Fiduciary ◦ DOL requires consideration of (1) Qualifications of 3(16) Fiduciary (2) Quality of services (3) Reasonableness of fees

23. 23 408(b)(2) Fee Disclosures Fee Disclosure Requirements ◦ 3(16) Fiduciary must describe services and fees ◦ Must also identify any subcontractors and disclose their compensation When 3(16) Fiduciary Hires Recordkeeper ◦ Recordkeeper must provide 408(b)(2) fee disclosures to 3(16) Fiduciary ◦ Plan Sponsor should consider requiring 3(16) Fiduciary to disclose recordkeeper’s fees ◦ Should also confirm 3(16) Fiduciary is not hiring affiliated recordkeeper or receiving “kickbacks”

24. 24 Suggested Best Practices: Scope of Fiduciary Services Level of 3(16) Fiduciary Responsibility ◦ Offer fiduciary service only if prudent process can be established and followed ◦ Document selection and monitoring criteria when hiring other providers ◦ Prepare regular reports of other providers’ services Advisability of Different Service Levels ◦ Simpler and easier to provide uniform level of fiduciary oversight across all plan clients

25. 25 Suggested Best Practices: 3(16) Contractual Considerations Service Agreement for 3(16) Fiduciary ◦ Should state which responsibilities will shift to TPA ◦ Should confirm that Plan Sponsor remains responsible for hiring 3(16) Fiduciary ◦ Plan Sponsor should remain responsible for providing complete and accurate information Coordination with Plan Document ◦ Confirm Administrator and Named Fiduciary provisions are consistent with agreement ◦ Plan document may provide that both TPA and Plan Sponsor will serve as Named Fiduciaries

26. 26 Suggested Best Practices: Monitoring Support for Plan Sponsor Employer’s Duty to Monitor 3(16) Fiduciary ◦ Must monitor 3(16) Fiduciary’s performance at reasonable intervals ◦ Plan Sponsor should ask for regular updates Illustration ◦ 3(16) Fiduciary provides updates on annual basis ◦ Updates include summary information of: (1) number of benefit claims adjudicated (2) exception reports identifying potential issues (3) performance assessment of other providers (4) benchmarking analysis

27. 27 Considerations for 3(21) and 3(38) Fiduciary Service Models

28. 28 Fiduciary Service Models for Financial Advisors Legal Requirements for Fiduciary Advisors ◦ ERISA requires advisor to receive levelized compensation to serve as plan fiduciary ◦ Advisers Act requires registration as RIA before offering advice for level, fee-based compensation Spectrum of Possible Service Models ◦ Helpful to focus on 3 basic approaches: - Core 3(21) Fiduciary - Hybrid 3(38) Fiduciary - Full 3(38) Fiduciary

29. 29 Core 3(21) Fiduciary Service Model Core Service Provided by 3(21) Fiduciary ◦ Assisting Plan Sponsor in selection and monitoring of Plan’s investment menu options ◦ Advice is non-discretionary (i.e., recommendations) Related Services ◦ Assisting with IPS document where Plan Sponsor is responsible for reviewing and adopting IPS ◦ Providing quarterly reports and meeting with Plan Sponsor annually ◦ May also offer non-fiduciary services

30. 30 Full 3(38) Fiduciary Service Model Full Investment Control by 3(38) Fiduciary ◦ 3(38) Fiduciary has authority to unilaterally change plan’s investment menu ◦ Also has authority to make unilateral changes to IPS ◦ Provides quarterly reports to Plan Sponsor, but only meets as needed ◦ May also offer non-fiduciary services Liability Protection for Plan Sponsor ◦ Plan Sponsor only remains responsible for prudently appointing and monitoring 3(38) Fiduciary ◦ Service model preferred by Plan Sponsors that want minimal involvement in plan investments

31. 31 Hybrid 3(38) Fiduciary Service Model Advantages of Hybrid Model ◦ Plan Sponsor is insulated from liability for mistakes concerning plan’s investment menu ◦ Also retains indirect control over investment menu ◦ 3(38) Fiduciary has discretion over menu but discusses proposed changes with Plan Sponsor Plan Sponsor’s Authority ◦ Plan Sponsor may terminate 3(38) Fiduciary before any proposed change is implemented ◦ Control over IPS gives Plan Sponsor ability to impose specific investment guidelines on 3(38) Fiduciary

32. 32 Considerations for Determining Service Model Advisability of Different Service Choices ◦ Advisor may choose to offer Core 3(21) services only ◦ May also offer plan clients choice of 3(21) or 3(38) services ◦ Offering different choices may allow advisor to serve greater range of plan clients Comparing Fiduciary Service Models ◦ Same level of accountability for any bad advice (discretionary or non-discretionary) under ERISA ◦ Hybrid 3(38) model requires more coordination with Plan Sponsor and less scalable than Full 3(38) model

33. 33 Services for Participants Non-Fiduciary Investment Education ◦ Asset allocation models that use plan’s investment options may be provided if disclaimers are included Non-Discretionary Investment Advice ◦ Individualized advice should be provided on one-on- one basis and written records should be maintained Discretionary Investment Advice ◦ Advice may be provided in form of risk-based model portfolios ◦ Model portfolios may also be used as plan’s QDIA

34. 34 Fiduciary Benefits of 404(c) Compliance Liability Protection Under ERISA 404(c) ◦ Plan fiduciaries are not liable for losses resulting from participant’s investment control ◦ Participants must have “opportunity to exercise control” for 404(c) purposes ◦ Plan menu must have broad range of investment alternatives Ensuring 404(c) Compliance ◦ Advisor can ensure plan menu requirement is met, but not other 404(c) requirements ◦ Ask Plan Sponsor to represent that other 404(c) requirements will be met in agreement with advisor

35. 35 Suggested Best Practices: Contractual Considerations Investment Menu Responsibilities ◦ Should define scope of advisor’s fiduciary services ◦ Should specify investment areas in which advisor will not be responsible (e.g., employer stock) Other Responsibilities ◦ For any non-fiduciary services, agreement should clarify advisor will not be acting as plan officer ◦ Should also clarify if participants will be receiving education or advice from advisor

36. 36 Suggested Best Practices: Recordkeeper Considerations Recordkeeper’s Impact on Investment Costs ◦ Recordkeeping platform determines universe of available investment funds and their share classes ◦ Different share classes have varying expenses (e.g., 12b-1 fee, shareholder service fee) ◦ Should clarify that advisor will not be responsible for share class determined by recordkeeper’s program Recordkeeper’s Mandatory Funds ◦ Recordkeeper may require use of certain funds (e.g., proprietary TDF) ◦ Should clarify advisor will not monitor such funds

37. 37 Suggested Best Practices: Special 3(38) Considerations General 3(38) Considerations ◦ Plan should transition to recordkeeper capable of supporting advisor, including model portfolios ◦ Recordkeeper may require authorization letter or side agreement with Plan Sponsor Hybrid 3(38) Considerations ◦ Advisor should provide notice of proposed menu changes except in extraordinary circumstances ◦ Fiduciary must have power to take any necessary action in accordance with ERISA

38. 38 Conclusions No “One Size Fits All” Model for Providers ◦ TPAs have flexibility in accepting Named Fiduciary duties in addition to duties as plan’s Administrator ◦ Financial advisors can serve as Core 3(21), Hybrid 3(38) of Full 3(38) Fiduciaries Consulting with ERISA Counsel ◦ Providers should consult ERISA counsel before implementing any service model changes ◦ Plan sponsors should consult ERISA counsel to ensure fiduciary responsibilities are allocated properly

39. 39 Important Information This presentation is intended for sponsors of 401(k) plans and other types of defined contribution retirement plans with participant-directed investments that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), as well as the service providers that work with such plans. This information is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or its affiliates.

40. Marcia S. Wagner, Esq. q. 99 Summer Street, 13th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0115595 The Do’s, Don’ts and Best Practices for 3(16), 3(21) and 3(38) Fiduciaries