Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Fiduciary Requirements of ERISA and the Internal
Revenue Code
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funded employee-benefit plan creates fiduciary relationship
fiduciary responsibility is broad
plan must specify “named fiduciary”
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Fiduciary Duties
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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’
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Fiduciary Duties
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diversify plan investments
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BUT are exceptions for holding employer securities and
employer real property
follow provisions of documents and instruments
governing plan unless inconsistent with ERISA
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Delegation of Fiduciary Duties
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fiduciary duties can be delegated if plan provides definite
procedure to do so
delegation of fiduciary duties does NOT remove all fiduciary
responsibility
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Delegation of Fiduciary Duties
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fiduciary liable for breech of responsibility IF
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Prohibited Transactions
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Prohibited Transactions
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Prohibited Transactions
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a ‘party in interest’ (‘disqualified person’ in Internal Revenue
Code) is broadly defined as
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Prohibited Transactions
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
IRS and Labor Department can waive prohibited
transaction rules
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specific statutory exemptions
exemptions for transaction or class of transactions
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Unrelated Business Taxable Income [UBTI]
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Unrelated Business Taxable Income [UBTI]
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Investment Policy: Investment Vehicles
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common stocks
short-term debt
long-term debt
real estate
equipment leasing
other investments
investment mix
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Investment Strategy
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growth-oriented strategies
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risk
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
Social Effects
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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
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
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.
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
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.
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Qualified Plan Investments
Chapter 11
Employee Benefit & Retirement Planning
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?
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