Retirement Plans and Fiduciary Duty
February 18, 2014
© 2012 McGladrey LLP. All Rights Reserved.
© 2012 McGladrey LLP. All Rights Reserved.
Today’s presenter
Sheryl Eakins
Director
Elkhart, IN
Sheryl.eakins@mcgladrey.com
574-296-3712
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© 2012 McGladrey LLP. All Rights Reserved.
Retirement Plans and Fiduciary Duty
Today’s topics
- Basic fiduciary duty
- Who is a fiduciary?
- Fiduciary breach
- Best practices to minimize fiduciary liability
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Basic fiduciary duty
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What is a fiduciary’s basic duty?
A fiduciary should act solely in the interest of the
plan's participants and beneficiaries and for the
exclusive purpose of providing benefits for
participants and their beneficiaries
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Basic fiduciary standards
A fiduciary should operate the plan:
-
-
-
For exclusive purpose of providing benefits to participants
& beneficiaries and defraying reasonable expenses of
administration;
With the care, skill, prudence, and diligence under the
circumstances then prevailing 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 investments of the plan so as to minimize
risk of large losses, unless under the circumstances it is
clearly prudent not to do so; and
In accordance with the documents and instruments
governing the plan insofar as they are consistent with the
provisions of Title I of ERISA.
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Exclusive purpose
Exclusive purpose rule imposes on a fiduciary duty
of loyalty to plan participants & beneficiaries
Examples of failing to follow the exclusive benefit
rule
-
Self-dealing
Preferential treatment of some participants
ESOP trustee’s misleading & biased materials in proxy
solicitation
Insurance provider’s (who was fiduciary) allocated
investment fees & expenses that were not reasonable
Improper valuation of plan assets
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Exclusive purpose, fees
Employers have specific and ongoing fiduciary
obligation under ERISA to evaluate and understand
the fees and expenses paid by the plan, employers
must:
-
-
Establish prudent process for selecting investment
alternatives and service providers;
Ensure fees paid to service providers and other expenses
reasonable in light of the level and quality of services
provided;
Select prudent and adequately diversified investment
alternatives; and
Monitor investment alternatives and service providers
once they have been selected to assure they continue to
be appropriate.
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Exclusive purpose fees, cont.
DOL three-part initiative on fee disclosure
-
Form 5500, Schedule C Disclosure
Service Provider Fee Disclosure Requirements
Participant Level Fee Disclosure Requirements
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Exclusive purpose fees, cont.
Form 5500, Schedule C (effective 01/01/2009)
-
Required disclosure of comp to service providers of $5,000
or more in direct or indirect compensation
Service Provider (effective 07/01/2012)
-
Service Providers must disclose information to fiduciaries so
that the fiduciaries may:
• Assess reasonableness of compensation paid to service
providers
• Determine whether there are any actual or potential
conflicts of interest that affect service provider’s
performance of services
• Satisfy reporting and disclosure requirements under
ERISA
Participant Disclosures (effective August 30, 2012)
-
Plan fiduciaries must disclose information to plan participants
to help participants make informed investment decisions
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Prudent man standard
Based on objective prudent man test developed in
common law of trusts
Courts interpret prudent man rule bearing in mind
special nature & purposes of employee benefit
plans
Examples of not following prudent man rule:
-
Employer removed as trustee of defined contribution plan
because of repeated efforts to plunder the plan’s assets
Plan fiduciary didn’t give alternate payee opportunity to
obtain valid QDRO
Bank trustee that failed to act prudently when it resigned
as trustee
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Prudent man standard, investments
A trustee or other fiduciary responsible for investing
the plan's assets must, in order to satisfy the
prudent person standard, consider the following
factors:
-
The composition of the portfolio with regard to
diversification
The liquidity and current return of the portfolio relative to
the anticipated cash flow requirements of the plan
The projected return of the portfolio relative to the funding
objectives of the plan
In accordance with Investment Policy Statement
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Investment Policy Statement (IPS)
IPS purpose is to set forth goals and objectives of
investment options to be made available to plan
participants
Should be framework of guidelines for
-
Monitoring and evaluating plan’s investment options
Including procedure for terminating and replacing any
nonperforming fund
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Investment Policy Statement (IPS)
An effective IPS might include, among other things:
-
-
Statement regarding investment objectives applicable to
long-term retirement plan savings
Methodology for selecting broad, diversified array of
investment options
Criteria for selecting investment options to allow participants
choices appropriate for their personal savings goals
Performance standards expected to be retained in
investment menu
Criteria used to evaluate the fees and expenses of each fund
Plan's processes for monitoring and evaluating plan
investments
Names and responsibilities of those plan fiduciaries charged
with selecting and monitoring the plan's investments
Compliance with ERISA Section 404(c), if applicable
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Investment diversification
Plan fiduciary must diversify plan assets to
minimize the risk of large loses unless clearly
prudent not to do so
Basic policy is to require diversification & if on its
face doesn’t exist fiduciary has burden of justifying
failure to follow
Risk of loss through default is not only risk
addressed by diversification requirement
-
Also risk of diminution of assets through market conditions
& not through default
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Investment diversification, cont.
Exemption from duty to diversify investments in
employer stock in eligible individual account plan
-
Including ESOP
Fiduciary liability related to individual account plans
controlled by participants & beneficiaries limited in
some circumstances
-
-
ERISA section 404(c) compliance is voluntary
Fiduciaries who choose to comply may be relieved of
fiduciary responsibility for investment losses when
participants exercise independent control
Fiduciaries are not relieved of duty to consider the
prudence of investment alternatives made available to
participants under the plan
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ERISA section 404(c) plan
Final regulations provide that participants must:
-
-
Have opportunity to choose from broad range of
investment alternatives
• At least 3 choices, each diversified with materially
different risk & return characteristics
Receive investment instruction with appropriate frequency
• Must be allowed to give investment instructions at
least quarterly
Diversify investments
Obtain sufficient information to make informed investment
decisions
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Duty to act in accordance with plan documents
Fiduciary has duty to not only act with exclusive purpose
and according to prudent man standard but in
accordance with documents & instruments governing
plan
-
Plan document is contract between plan sponsor and plan
participants & beneficiaries
Plan document is manual for operating and administering
plan
• Must keep it updated to comply with ERISA and IRC
Although ERISA imposes some restrictions on plan
provisions it permits statement of administrator’s duties
-
If plan contains such statement these provisions control
Duty to act in accordance with plan documents doesn’t
override fiduciary’s foremost duty to serve interests of
plan participants
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Duty to act in accordance with plan
documents, cont.
Developing prudent process for managing &
administering plan and documenting compliance
with that process will increase chances of limiting
your fiduciary liability
These fiduciary procedures could include:
-
Compliance with written investment policy
Compliance with ERISA 404(c)
Compliance with ERISA’s reporting and disclosure rules
Development and delivery of effective, easy-to-understand
employee communications
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Avoid prohibited transactions
Plan fiduciary must avoid causing plan to engage in
any transaction that may constitute direct or
indirect:
-
-
Sale, exchange, or lease between plan and party in
interest
Lending money or other extension of credit between plan
and party in interest
Furnishing goods, services or facilities between plan and
party in interest
Transferring or using plan assets for own benefit or that of
any other plan fiduciary or party in interest
Dealing with employer securities or property in violation of
ERISA
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Party in interest defined
Under ERISA the following are parties in interest with
respect to a plan:
-
Any fiduciary, counsel, or employee of the plan
Person providing services to the plan
Employer who has employees covered by the plan, and any
direct or indirect owner of 50% or more of such employer
Relative of persons described previously
Employee organization, any of whose members are covered
by the plan
Corporation, partnership, estate, or trust of which at least
50% is owned by any person or organization described
above
Officers, directors, 10 percent-or-more shareholders, and
employees of any person or organization described above
10 percent-or-more partner of or joint venturer with any
person or organization described above
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Who is a fiduciary?
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Fiduciary
A fiduciary under ERISA is any person who:
-
-
Exercises any discretionary authority or control over the
plan's management;
Exercises any authority or control over the management
or disposition of the plan's assets;
Renders investment advice for a fee or other
compensation with respect to plan funds or property; or
Has any discretionary authority or responsibility in the
plan's administration.
Test for determining fiduciary status is functional
one. If any person has or may exercise any of the
above functions then will be deemed a fiduciary.
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Fiduciary, cont.
Plan sponsor is always a fiduciary
Examples of those who may be fiduciaries:
-
Plan administrator
Third party administrator
Officer or director
Shareholder
Trustee
Insurance company
Will depend on level of involvement
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Activities not creating fiduciary status
Those performing purely ministerial functions within
guidelines established by others are not plan
fiduciaries. DOL regulations list the following job
categories as ministerial:
-
Application of rules to determine eligibility for participation
or benefits;
Calculation of service and compensation for benefit
purposes;
Preparing communications to employees;
Maintaining participants' service and employment records;
Preparing reports required by government agencies;
Calculating benefits;
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Activities not creating fiduciary status
Ministerial functions, cont.:
-
-
Explaining the plan to new participants and advising
participants of their rights and options under the plan;
Collecting contributions and applying them as specified in
the plan;
Preparing reports covering participants' benefits;
Processing claims; and
Making recommendations to others for decisions with
respect to plan administration.
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Advisors/relationships typically not fiduciaries
Following are not considered plan fiduciaries solely
because they provide services to a plan
-
Attorney
Accountant
Investment advisor
Actuary
Insurance agent
Asset custodian
Consultants
Will be regarded as fiduciary if exercise discretionary
authority or control over management or administration
of plan or plan assets
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Fiduciary Breach
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Breaches of fiduciary duty
Fiduciary may be personally liable if considered to
be in breach of fiduciary duties under ERISA
May be considered in breach of fiduciary duties if:
-
Fail to comply with exclusive benefit rule by entering into
self-dealing transactions, such as using plan assets for
own or company's benefit
Fail to exercise responsibilities to the plan in a responsible
manner
Fail to diversify the menu of investment options offered
under the plan
Fail to monitor the plan's investment options and replace
funds as necessary pursuant to investment policy
Engage in a prohibited transaction
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Which decisions made by plan
representatives are fiduciary decisions?
Not every decision related to retirement plan is
fiduciary decision
Fiduciary liability only attaches to decisions that are
fiduciary in nature
DOL has provided guidance regarding which are
and are not fiduciary in nature
Decisions that are not fiduciary in nature are
referred to as settlor functions
-
More in nature of business decisions than fiduciary
decisions
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Which decisions made by plan
representatives are fiduciary decisions?
Examples of settlor functions:
-
Plan design decisions (e.g., whether or not to offer loans)
Decision to terminate a plan
Decision to make discretionary amendments to a plan
(e.g., to reduce or eliminate an employer match)
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Examples of failure to exercise fiduciary duty
Trustee distributed plan assets to plan administrator
when plan provided distributions could only be
made to participants & beneficiaries
Trustee failed to ensure that plan contributions and
loan repayments were made to plan
Trustee who distributed assets of terminated plan to
benefit himself
Trustee who failed to distribute plan benefits to
beneficiary as soon as amount payable was
determined
Company that unreasonably delayed transfer of
account balance from one fund to another
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Repercussions of failing fiduciary duty
Breach of fiduciary duty may result in:
-
-
Penalties
Required repayment of lost earnings
Intervention of the Department of Labor (DOL) in your
plan
Recovery by claimant of attorneys’ fees and costs
Participant lawsuits
Need for correction programs
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Penalties
20% penalty of amount payable for breaches of
fiduciary duties pursuant to court order or
settlement
DOL may waive or reduce penalty
Settlement by fiduciary doesn’t prohibit beneficiary
from later suing for same wrong
Excise tax for entity managers who approve
prohibited tax shelter transactions
-
$20,000 for each approval
Entity manager is person who decides assets to be
invested in transaction
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Repayment of assets or lost earnings
Any fiduciary who engages in prohibited transaction
is personally liable for any losses to plan
-
Must restore to plan any profit made through use of plan
assets
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Recovery of fees
ERISA authorizes recovery of attorneys’ fees, costs & interest
Court may award reasonable attorney’s fees and costs to
prevailing party
Supreme court ruled there’s no requirement litigant be
prevailing party in order to be awarded attorney’s fees & costs
Courts have examined 5 factors in deciding whether to award
fees & costs, not all of which must be present to justify award:
-
Opponent's culpability or bad faith
Opponent's ability to pay
Deterrent effect on others in similar circumstances
Whether action benefited all plan participants or the plan as a
whole
Relative merits of parties' positions
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Participant claims
ERISA permits plan participants to sue for equitable
relief on own behalf when harmed by fiduciary
breach of duty
Monetary damages & legal relief not available
To establish standing to bring ERISA claim party
must allege:
-
Injury in fact
Casual connection between injury & the alleged conduct
Redressability
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Other fiduciary issues
Nonfiduciary can be held liable for breach of
fiduciary duty
-
-
Claims for restitution rather than monetary damages
against nonfiduciary parties in interest permitted under
ERISA
20% penalty tax may also apply
May be liable for participating in prohibited transactions
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Other fiduciary issues, cont.
Qualified retirement plan can offset fiduciary’s
liability to plan for breach of fiduciary duty against
fiduciary’s benefit’s from the plan, e.g.:
-
-
If participant convicted of committing crime involving the
plan
For a civil judgment in connection with violation of
fiduciary rules
In case of settlement agreement between DOL or PBGC
and participant
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Best Practices
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Best Practices
Correction programs
Government guidance
Asset and liability protection
Helpful tools
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Correction programs
IRS Employee Plans Compliance Resolution
System (EPCRS)
DOL programs administered by Employee Benefits
Security Administration (EBSA)
-
Delinquent Filers Voluntary Compliance (DFVC) program
Voluntary Fiduciary Correction Program (VFCP)
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EPCRS
Correcting compliance errors
-
Self correction versus voluntary disclosure
IRS procedure with safe harbor guidelines
Addresses many common problem areas
• Eligibility & entry errors
• Testing failures
• Excess contributions
• Vesting failures
• Failure to pay RMD
• Top-heavy failures
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DFVC
EBSA program for delinquent Form 5500 filings
Plan administrators can bring plans into compliance for filing
of annual reports
Late and non-filing plans come into compliance by filing
completed 5500 for each plan year that annual report was not
filed
Fixed penalty amounts
Amounts based on whether large or small plan
Per plan cap on penalty
Program available if have not received late file notice from
DOL
IRS will waive separate penalties if file with DOL under DFVC
Penalty may not be paid from plan assets
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VFCP
EBSA program that allows for corrective action in
cases of specified breaches of fiduciary duty by
voluntarily undertaking corrective action prior to
EBSA audit or investigation
Corrections must restore to the plan:
-
Assets that would have been available to the plan if the
breach had not occurred
Lost earnings, including profits resulting from the use of
assets
If fiduciary corrects eligible transaction in
accordance with requirements EBSA will issue noaction letter
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VFCP, cont.
Eligible transactions:
-
-
Delinquent participant contributions and participant loan
repayments to pension plans
Delinquent participant contributions to insured welfare
plans or welfare trusts
Issuing a loan at below-market interest rate to party in
interest
Sale of asset by plan to party in interest
Others
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Participant contribution timing
Remittance of employee withholdings
-
-
As soon as money can be reasonably segregated, not to
exceed 15th working day of the following month
No formal policy for large plans
• Small plan requirement is 7 business days
• DOL enforces policy similar to remittance of payroll
taxes
• Facts & circumstances
Failure to timely remit is prohibited transaction
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Locating missing participants
-
-
Plan administrator has fiduciary duty to make reasonable
efforts to locate all participants
Reasonable efforts include:
• Mailing notice to last known address
• Searching internal and union records
• Check with designated plan beneficiary
• SSA letter-forwarding service
• Publishing general notice
• Using locator services
After exhausting all efforts consider distributing into
interest-bearing account in missing participant’s name
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Blackout periods
Administrators of individual account plans required
to provide participants & beneficiaries 30-day
advance notice of any blackout period
Time during which rights to:
-
Direct or diversify account investments
To obtain loan
To receive distribution
Temporarily suspended, limited or restricted for
more than 3 consecutive days
Penalties can be imposed for failure to provide
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Government Guidance
IRS Fix-it Guides
-
-
Tips on how to find, fix and avoid common mistakes
in retirement plans
Separate guides available for:
• 401(k)
• 403(b)
• SARSEP
• SEP
• SIMPLE IRA
Find at IRS-gov/retirement plans/plan sponsor
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Government Guidance
DOL did nationwide campaign “Getting it Right—
Know Your Fiduciary Responsibilities”, with focus
for plan sponsors & other fiduciaries on:
-
Understanding the terms of their plans
Selecting and monitoring service providers
Making timely contributions to funds
Avoiding prohibited transactions
Making timely disclosures to plan participants and the
government
Find information at DOL.gov/EBSA
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Asset and liability protection
ERISA fidelity bond
-
Every fiduciary of a plan and anyone else (plan official)
who handles or has authority to handle plan assets must
be bonded
Bond must provide direct right of access in favor of the
plan in the event the insured plan official takes plan assets
Must be at least 10% of plan assets up to maximum of
$500,000 per plan ($1,000,000 if have employer securities
in plan)
Unlawful for anyone who is required to be bonded to
handle plan assets without bond
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Asset and liability protection
Fiduciary liability insurance policy
-
Protects wide range of plan fiduciaries and the plan itself
from certain claims brought against it based on alleged
fiduciary breaches
Designed to protect fiduciaries who, although acting in
good faith, violate the complex fiduciary rules
Fiduciaries covered are typically:
• Past, present, and future trustees of the trust under
the plan
• In-house plan administrators
• All plan and trust fund employees who are fiduciaries
• Possibly others
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Helpful tools
Sample plan sponsor fiduciary manual
Sample plan sponsor fiduciary checklist
IRS to release self-audit tool
-
Intended to help plan sponsor examine where
administration of plan stands and point out possible areas
of concern
To be released in next few months
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Thank you
Retirement Plans and Fiduciary Duty
Sheryl Eakins
Director
Elkhart, IN
sheryl.eakins@mcgladrey.com
54
© 2012 McGladrey LLP. All Rights Reserved.
Disclaimer
The information contained herein is general in nature and based on
authorities that are subject to change. McGladrey LLP guarantees neither the
accuracy nor completeness of any information and is not responsible for any
errors or omissions, or for results obtained by others as a result of reliance
upon such information. McGladrey LLP assumes no obligation to inform the
reader of any changes in tax laws or other factors that could affect information
contained herein. This publication does not, and is not intended to, provide
legal, tax or accounting advice, and readers should consult their tax advisors
concerning the application of tax laws to their particular situations.
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