Fiduciary Risk and Liability Management Strategies
Fiduciary Risk and Liability
Management Strategies
A Guide for Employee Retirement Plan Sponsors
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Fiduciary Risk and Liability Management Strategies
Value proposition
For more than a decade, the Learning Center has consistently and persistently delivered
high-end, high touch consultations on over 100,000 retirement cases. We work with elite
advisors, providing them with not only the “knowledge” but the “know-how” to close new
business, gather new assets and create repeatable business practices.
The Learning Center provides exclusive access to our key partners to a unique blend of
timely technical information, actionable sales ideas, marketing seminars and workshops,
real-time sales support and top of the line continuing education courses. This value-add
program is designed to not only provide the tools but also assist you at each step of the
way down the path of success.
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Fiduciary Risk and Liability Management Strategies
Course overview
Fiduciary issues in the spotlight
Fiduciary responsibilities of employee plan sponsors
Fiduciary liability reduction strategy
Investment policy statement
Fee disclosure compliance
ERISA 404(c) compliance
Qualified default investment alternatives (QDIAs)
Fiduciary advisor
Automatic enrollment safe harbors
Correction programs
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Fiduciary Risk and Liability Management Strategies
Learning objectives
List the four key fiduciary responsibilities for sponsors of employee retirement plans
Identify the potential consequences of a fiduciary failure
List the five components of a fiduciary liability reduction strategy
Define six fiduciary liability reduction tactics
Differentiate between the two Department of Labor (DOL) fiduciary correction programs
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Fiduciary Risk and Liability Management Strategies
Fiduciary Issues in the Spotlight
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Fiduciary Risk and Liability Management Strategies
Increasing number of fiduciary lawsuits
Introduction
For several years plan sponsors have faced an increasingly litigious environment
In 2014, the DOL had enforcement results for ERISA plans of:
$823 million in monetary enforcement
3,928 civil cases (up 7%)
365 criminal cases (up 14%)
Nearly 40 lawsuits have been filed against 401(k) fiduciaries due to excessive fees in
the last few years1
The Supreme Court case of LaRue v. DeWolff, Boberg and Associates, Inc.
changed the industry by allowing individual, breach of fiduciary duty lawsuits
against plan fiduciaries
Fiduciaries (including sponsors of employee retirement plans) have a personal
risk and potential liability under current ERISA guidelines
1 Groom Law Group, 401(k) Fee Litigation January 2015
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Fiduciary Risk and Liability Management Strategies
Fiduciary responsibilities of
employee retirement plan sponsors
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Fiduciary Risk and Liability Management Strategies
What are the fiduciary’s responsibilities?
Fiduciary responsibilities
Exclusive benefit rule
Fiduciary must operate plan in a way that solely
benefits participants and beneficiaries, while
paying reasonable fees
Prudent expert rule
Fiduciary actions will be held to a standard of an
experienced professional
Plan document rule
Fiduciary must follow the plan unless the terms of
the plan contradict the rules of ERISA
Diversification rule
Fiduciary must offer a wide range of investment
options to help participants meet their investment
needs and diversify their investments accordingly
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Fiduciary Risk and Liability Management Strategies
What plan transactions are prohibited?
Certain transactions between a fiduciary (who is a “party in interest”) and the plan are
prohibited (unless an exemption applies):
Sale, exchange or lease of property
Lending of money or other extension of credit
Furnishing of goods, services or facilities
Transfer or use of plan assets
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Fiduciary Risk and Liability Management Strategies
What happens when a fiduciary fails?
In case of a breach of duty, a fiduciary:
Shall be personally liable to make the good losses to the plan
Shall be personally liable to return any profits resulting from the breach
May be subject to civil penalties and fines
May be removed as a fiduciary
DOL civil penalty
Criminal penalty examples
20% on the amount payable
pursuant to a court order or
settlement agreement
$5,000 fine and/or jail time for
reporting or disclosure failures
Various penalties under
ERISA 502(c)
$10,000 fine and/or jail time for
plan kick backs or embezzling
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Fiduciary Risk and Liability Management Strategies
What is a fiduciary liability reduction strategy?
Regularly conduct a fiduciary review
Identify plan fiduciaries and their roles
Assess plan documentation (e.g., the plan document, trust agreement, service provider
agreements, summary plan description, fidelity bond, participant communication material,
investment policy statement, etc.)
Evaluate plan operations and administration procedures (e.g., services providers and fees)
Address plan investments
Assess fiduciary gaps
Implement fiduciary liability reduction tactics
Document the process
Reassess plan on an ongoing basis
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Fiduciary Risk and Liability Management Strategies
Investment Policy Statement
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Fiduciary Risk and Liability Management Strategies
An IPS Is not required — BUT
ERISA does not require an IPS, but ERISA regulations state that having such a
document is consistent with meeting plan fiduciary responsibilities1
Court cases have found that the lack of an IPS was a breach of ERISA’s “prudent man
rule” (Liss v. Smith, 991 F.Supp. 278, S.D.N.Y. 1998)
It is one of the first documents requested in a DOL plan investigation2
DOL investigations conclude more quickly when an IPS exists
Frequency found in plans3
89% of all plans
By participant
count
1-49
50-199
1,000-4,999
5,000+
74%
80%
96%
92%
1 29
C.F.R. §2509.94-2(2)
Enforcement Manual, Chapter 48
3 Plan Sponsor Council of America, 57th Annual Survey, 2014
2 DOL/EBSA
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Key elements of an IPS
The objective and purpose of the IPS for the plan
Roles and responsibilities of key players
Factors the plan will take into account when selecting investments
The frequency and the methodology for rebalancing investment portfolios, if applicable
Procedures for controlling and accounting for investment expenses
Procedures for monitoring investment performance, how to identify and put investments
that are underperforming on watch, and what the criteria are for replacing an investment
A description of how the plan will select service providers
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Fiduciary Risk and Liability Management Strategies
Fee disclosure compliance
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Fiduciary Risk and Liability Management Strategies
Plan fee trilogy
Three sets of fee disclosure regulations:
Final DOL Reg. 2550.408b-2
Final DOL Reg. 2550.404a-5
Final DOL Reg. 2520.103-1 (Form 5500, Schedule C)
DOL Reg. 2550.408b-2
DOL Reg. 2550.404a-5
Form 5500, Schedule C
Service provider gives info to plan
sponsor of DB and DC plans
Plan sponsor gives info to
participants and beneficiaries of
participant-directed DC plans
Plan sponsor of DB, DC and
Welfare benefit plans gives info
to IRS and DOL
Guidelines Disclose direct and indirect
compensation of $1000 or more
Disclose certain plan- and
investment-related information
with annual notice and quarterly
statement
Report direct and indirect
compensation of $5,000 or
more paid to service provider
Status
DOL to release amendments to
final rules in 2015 that would
make a technical adjustment to
the timing requirement for annual
disclosures
DOL to release a notice of
proposed rulemaking 7/2015
that would improve and
modernize the Form 5500 in
the areas of financial and other
annual reporting requirements,
and make the investment and
other information on the Form
5500 more data mineable
Who
DOL to release amendments to
final rules 9/2015 that will require
use of a fee disclosure “guide”
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Fiduciary Risk and Liability Management Strategies
Plan fees must be “reasonable”
Plan sponsors have a fiduciary responsibility under ERISA to ensure plan fees are
reasonable based on services provided:
Range of fees can be wide
Implied requirement to periodically benchmark fees among service providers
Proprietary and free online fee comparison tools
Today’s plan service arrangements and means of compensating service providers have
become increasingly complex, making it more difficult for plan sponsors to determine
whether the fees and compensation paid for services are reasonable
Many plan participants are often unaware of how plan fees may affect their
plan balances
DOL plans aggressive enforcement under its Fiduciary Service Provider Compensation
Project
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Fiduciary Risk and Liability Management Strategies
Average plan costs
Average plan costs as a percentage of assets
1.60%
1.40%
1.20%
1.00%
Small plan
0.80%
Large plan
0.60%
0.40%
0.20%
0.00%
Total investment
Total bundled
Source 401k Averages Book 14th Edition
Small plan – 100 participants and $5,000,000 assets
Large plan – 1000 participants and $50,000,000 assets
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Fiduciary Risk and Liability Management Strategies
Form 5500, Schedule C reporting
Applicable to “large plans” (i.e., 100 or more participants)
What fees and expenses must the plan sponsor report?
“Money and any other things of value (for example, gifts, awards, trips), received by a
person, directly or indirectly, from the plan (including fees charged as a percentage of
assets and deducted from investment returns) in connection with services rendered to
the plan, or the person’s position with the plan.”
DOL Regulation 2520.103-1(e)
Reportable
compensation
Direct
Indirect
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Fiduciary Risk and Liability Management Strategies
What is direct compensation
Direct compensation includes:
Payments made by the plan (through the trust or participant accounts) for:
Services rendered to the plan or because of a person’s position
with the plan
Direct payments from a plan account
Charges to plan forfeiture accounts
Charges to fee recapture accounts
Charges to a trust account before allocations to participant accounts
Charges to participant accounts
Excludes payments from the plan sponsor
Typically found on trust statement
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Fiduciary Risk and Liability Management Strategies
What is indirect compensation?
Indirect compensation includes:
Compensation received from sources other than directly from the plan or plan sponsor
for services
Rendered to the plan or
Because of a person’s position
Payment is based, in whole or in part, on (1) services that were rendered to
the plan or (2) on a transaction or series of transactions with the plan
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Fiduciary Risk and Liability Management Strategies
Indirect compensation examples
Examples
Fees or expense reimbursements from mutual funds or an insurance company
12b-1 distribution fees
Sub-transfer agency fees
Shareholder servicing fees
Finders fees
Float revenue
Nonmonetary compensation such as trips, gifts or awards to persons for their role
with a plan
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Fiduciary Risk and Liability Management Strategies
Types of indirect compensation
Reportable Compensation
Direct
Indirect
Eligible
Ineligible
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Fiduciary Risk and Liability Management Strategies
Eligible indirect compensation
Two criteria:
Definition of indirect compensation
Fees or expense reimbursement payments charged to investment funds and reflected in the
value of the investment or return on investment of the participating plan or its participants
finder’s fees “soft dollar” revenue
Float revenue
Brokerage commissions or other transaction-based fees for transactions or services involving
the plan that were not paid directly by the plan or plan sponsor
“Eligible” if service provider gives plan sponsor written disclosure of:
Existence of indirect compensation
Services provided for the indirect compensation or the purpose for the payment
Amount or estimate of the indirect compensation or formula to compute it
Identity of who is paying and who is receiving the indirect compensation
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Fiduciary Risk and Liability Management Strategies
Eligible indirect compensation
Benefit
Plan sponsor qualifies for simplified alternative reporting on Schedule C
Need only enter the information identifying the person who provided the written disclosure
Source: 2013 IRS Form 5500, Schedule C
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Fiduciary Risk and Liability Management Strategies
Ineligible indirect compensation
Definition:
If indirect compensation is not of a type that qualified for eligible treatment, or service
provider fails to provide required written disclosure, plan sponsor must complete
detailed reporting on Schedule C
Does not qualify for simplified alternative reporting
Source: 2013 IRS Form 5500, Schedule C
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Fiduciary Risk and Liability Management Strategies
Reportable gifts and entertainment
Report amounts received by plan sponsors and by service providers explicit to that plan:
Nonmonetary compensation (other than compensation with a value of less than $50 and
an aggregate annual value from any one source of less than $100)
Gifts with a value of less than $10 are not counted towards the $100 threshold
Employees of an organization who provide a benefit are treated as one source, but
employees of an organization who receive a benefit are treated as separate persons
No stated de minimis rule for ERISA self-dealing prohibitions
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Fiduciary Risk and Liability Management Strategies
Annual participant disclosures
Annual Disclosures
Plan
Investment
General plan
information
Identifying information
General administrative
expenses
Performance data
General individual
account expenses
Benchmarks
Fees and expenses
Website
Glossary
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Fiduciary Risk and Liability Management Strategies
Annual participant disclosures (cont.)
Annual Disclosures
Plan
Investment
General plan
information
Identifying information
General administrative
expenses
Performance data
General individual
account expenses
Benchmarks
Fees and expenses
Website
Glossary
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Fiduciary Risk and Liability Management Strategies
Quarterly statements
Individual Expenses
Actually Charged
Administrative
Individual Account
Dollar amount
of fees
Dollar amount
of fees
Description of
services
Description of
services
General statement
on revenue-sharing
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Fiduciary Risk and Liability Management Strategies
Consider a plan fee audit
Key questions:
Do you compile adequate information that allows you to evaluate whether plan fees and
services are reasonable?
Do you satisfy the Form 5500, Schedule C reporting requirements, if applicable?
Are servicer providers furnishing you the annual disclosures they must provide, and do
you understand them?
Are service providers readily willing to discuss the annual disclosures with you?
Are you confident you are satisfying the annual and quarterly participant disclosure
requirements?
Do the participants in your plan understand the disclosures?
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Fiduciary Risk and Liability Management Strategies
ERISA 404(c) Compliance
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Fiduciary Risk and Liability Management Strategies
Who would benefit?
Several individuals could potentially
benefit from compliance with ERISA
404(c), including:
Business owners interested in
establishing defined contribution plans
Business owners who maintain defined
contribution plans
Other plan fiduciaries
Plan participants
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Fiduciary Risk and Liability Management Strategies
What is ERISA 404(c) compliance?
ERISA 404(c) provides a mechanism to shift investment responsibility to participants:
ERISA 404(c) reduces employer fiduciary liability
Basic requirements: Participants and beneficiaries
Receive adequate information
Note that participant fee disclosures regulations replace much of the information that
that had been required to be provided under ERISA section 404(c)
Opportunity to make periodic investment changes
Allowed to invest in a broad range of investments
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Fiduciary Risk and Liability Management Strategies
Consider an ERISA 404(c) compliance audit
Key questions:
Does the plan document state the plan intends to comply with ERISA 404(c)?
Do plan participants have the ability to control their assets?
Has the plan provided the participant with the required information, including the
information required under participant fee disclosure rules?
If requested by the participant, does the plan provide the information that must be
available upon participant request?
Does the plan provide the necessary participant information in a timely manner?
Does the plan carry out participant investment instructions?
Do participants have the ability to change their investments as often as the volatility of
the investments may require (and at least quarterly)?
Does the plan offer a broad range of investment alternatives?
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Fiduciary Risk and Liability Management Strategies
Qualified default investment alternatives
(QDIAs)
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Fiduciary Risk and Liability Management Strategies
Who would benefit?
Several individuals could potentially benefit
from QDIAs including:
Business owners interested in establishing
participant-directed defined contribution
plans
Business owners who currently maintain
participant-directed defined contribution
plans
Other plan fiduciaries responsible for plan
investment decisions
Plan participants
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Fiduciary Risk and Liability Management Strategies
Why consider a QDIA?
The potential benefits:
The employer is not liable for investment elections made by participants in an ERISA
Sec. 404(c) plan
ERISA Sec. 404(c) requirements include:
Participant direction of investments
Participants receive adequate investment information, including information required
under participant fee disclosure regulations
A broad range of diverse investment alternatives
Pre-PPA-06, no ERISA 404(c) protection for employers using default investment options
After PPA-06, effective in 2007, ERISA 404(c) protection applies to qualified default
investment alternatives
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Fiduciary Risk and Liability Management Strategies
What is a QDIA?
Investments permitted as a QDIA
Investment Type
Limitations
Specialized funds
Multiple age-, target date- or life expectancybased funds
Single fund
Suitable for the average risk tolerance of
participants based on employee demographics
(e.g., balanced fund)
Managed account
Based on age, target retirement date or life
expectancy
Capital preservation fund
Limited use
“Grandfathered” stable
value funds
For default contributions made on or before
12/24/07
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Fiduciary Risk and Liability Management Strategies
Consider a default investment audit
Key questions:
Do you offer a default investment for your plan?
Do you want to ensure you have ERISA 404(c) fiduciary protection for the
default investment?
Is your plan’s default investment option a QDIA?
Have you followed a prudent process for the selection of the plan’s QDIA?
Have you documented the selection process in your plan’s Investment
Policy Statement?
Have you provided the required participant disclosures for the QDIA?
If your QDIA is a target date fund, have you considered the suggestions the DOL
offers in its “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries?”
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Fiduciary Risk and Liability Management Strategies
Automatic enrollment safe harbor
(a.k.a. qualified automatic
contribution arrangement)
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Fiduciary Risk and Liability Management Strategies
Automatic enrollment safe harbor
Investor scenario
Company owner with 100 employees
Company has a 401(k) plan
401(k) plan has very low participation
Year after year, the plan continues to
fail its nondiscrimination testing
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Fiduciary Risk and Liability Management Strategies
Automatic enrollment safe harbor
Step 1: Understand the rules
Qualified Automatic Contribution Arrangement (QACA) requirements:
Automatic deferrals by all eligible participants (3%–10% of compensation)
Automatic annual deferral increases (deferral rate of at least 4% during the second
year, 5% during the third year, and 6% during the fourth year and thereafter up to a
max. of 10%)
Employer contribution: a matching contribution equal to 100% of deferrals up to 1%
of compensation, plus 50% of deferrals from greater than 1% to 6% of compensation
OR a 3% nonelective contribution
Immediate vesting of salary deferrals; full vesting of employer contributions after two
years of service
Participant notification of plan terms
Use of QDIA is optional
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Fiduciary Risk and Liability Management Strategies
Automatic enrollment safe harbor
Step 2: Consider the potential benefits
Increased plan participation
Automatic deferral increases
Automatic passage of nondiscrimination testing and top-heavy rules
Help ensure employees are saving for retirement
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Fiduciary Risk and Liability Management Strategies
Automatic enrollment safe harbor
Step 3: Work with your advisor
Work with your advisor to
explore new strategies for
increasing 401(k) plan
participation
Discuss the requirements to
have an automatic enrollment
safe harbor plan
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Fiduciary advisor
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Fiduciary Risk and Liability Management Strategies
Who would benefit?
Several individuals could potentially benefit
from having a fiduciary advisor, including:
Plan sponsors who want to provide
workplace retirement plan participants
with access to professional investment
advice while limiting their fiduciary liability
Plan participants
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Fiduciary Risk and Liability Management Strategies
Fiduciary advisor safe harbor requirements
“Fiduciary advisor”
Authorized by the plan sponsor to provide investment advice to participants
Uses an eligible investment advice arrangement that is either a:
Level-fee arrangement
Computer model arrangement
Combination of the above
Additional requirements
Independent audits
Computer model certification
Disclosure and notice requirements
Record retention requirements
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Who can be a fiduciary advisor?
A person who is:
Registered as an investment advisor under the Investment Advisers Act of 1940 or under
State laws
A bank, a similar financial institution supervised by the United States or a State, or a savings
association (as defined under the Federal Deposit Insurance Act), but only if the advice is
provided through a trust department that is subject to periodic examination and review by
Federal or State banking authorities
An insurance company qualified to do business under State law
Registered as a broker or dealer under the Securities Exchange Act of 1934
An affiliate of any of the preceding
An employee, agent or registered representative of any of the preceding who satisfies the
requirements of applicable insurance, banking and securities laws relating to the provision
of advice
Any person who develops the computer model, or markets the computer model or investment
advice program
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Fiduciary Risk and Liability Management Strategies
Correction programs
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Fiduciary Risk and Liability Management Strategies
Voluntary Fiduciary Correction Program (VFCP)
Four-step process
Step 1:
Identify any violations and
determine whether they fall within
the transactions covered by the
VFCP.
Step 3:
Calculate and restore any losses
or profits with interest, if
applicable, and distribute any
supplemental benefits to
participants
Step 2:
Follow the process for correcting
specific violations (e.g., improper
loans or incorrect valuation of plan
assets)
Step 4:
File an application with the
appropriate EBSA regional office
that includes documentation
showing evidence of corrective
action taken
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Fiduciary Risk and Liability Management Strategies
Delinquent Filer Voluntary Compliance Program
Form 5500 filing failures
Submit required forms and documents prior to the date on which the administrator is
notified in writing by the DOL of a failure to file a timely annual report
Pay reduced civil penalties for voluntarily complying with the annual reporting
requirements through the DFVCP
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Fiduciary Risk and Liability Management Strategies
EPCRS
Correction program
Description
Self-Correction Program (SCP)
Permits a plan sponsor to correct
certain plan failures without contacting
the IRS or paying any fee.
Voluntary Correction Program (VCP)
Permits a plan sponsor to, any time
before audit, pay a fee and receive IRS
approval for correction of plan failures.
Audit Closing Agreement Program
(Audit CAP)
Permits a plan sponsor to pay a
sanction and correct a plan failure
while the plan is under audit.
For Broker/Dealer , CPA and Plan Sponsor use only. Distribution to any other audience is prohibited.
© 2015 Columbia Management Investment Advisers, LLC. All rights reserved.
53
Fiduciary Risk and Liability Management Strategies
Summary
For Broker/Dealer, CPA and Plan Sponsor use only. Distribution to any other audience is prohibited.
© 2015 Columbia Management Investment Advisers, LLC. All rights reserved.
Fiduciary Risk and Liability Management Strategies
Summary
Conduct fiduciary audit
Plan fiduciaries and their roles
Plan documentation (e.g., the plan document, trust agreement, service provider
agreements, summary plan description, fidelity bond, participant communication
material, investment policy statement, etc.)
Plan operations and administration
Plan investments
Assess fiduciary gaps
Implement fiduciary liability reduction tactics
Document the process
Reassess plan on an ongoing basis
For Broker/Dealer , CPA and Plan Sponsor use only. Distribution to any other audience is prohibited.
© 2015 Columbia Management Investment Advisers, LLC. All rights reserved.
55
Estate Planning with 529 Plans
Important Disclosures
Investment products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory
services provided by Columbia Management Investment Advisers, LLC. Collectively, the entities are known as
Columbia Management.
This material is for educational purposes only. It cannot be used for the purposes of avoiding penalties and taxes.
Columbia Management does not provide tax or legal advice. Consumers should consult with their tax advisor or
attorney regarding their specific situation.
Material prepared by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with
Columbia Management. Information and opinions provided by third parties have been obtained from sources believed
to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Management.
Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and
Threadneedle group of companies.
Columbia Management Investment Distributors, Inc., 225 Franklin Street, Boston, MA 02110-2804
For Broker/Dealer , CPA and Plan Sponsor use only. Distribution to any other audience is prohibited.
© 2015 Columbia Management Investment Advisers, LLC. All rights reserved.
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