Compliance
• Employee Retirement
Income Security Act
– reporting and disclosure
rules
– claims procedure
– fiduciary standards
• Internal Revenue Code – tax qualification
requirements
1

ERISA
• Reporting & Disclosure – Form 5500
– distribution of SPD, SMM
• Claims Procedures – exhaustion of process
– venue requirements
– claims filing period
• Fiduciary – this is where all the action is!
– “Governance”
– “Process”
2

ERISA – Allocation of Plan Responsibilities
• Settlor – the right to amend/terminate
– non-fiduciary function
• Administrative – both fiduciary & non-fiduciary roles
– day-to-day administration – non-
fiduciary function
– plan interpretation; claims appeals –
fiduciary function
• Investment – duty to select & monitor
investments – fiduciary function
3

Fiduciary Responsibilities
• Administrative:
– plan interpretation (ex: how entry date is determined; match & vesting is
calculated);
– claims appeal (ex: final arbiter of any claim denial that is appealed);
– plan administration matters that require the exercise of discretion (ex:
experimental medical/drug treatments); and
– selection of platform provider (ex: administration and recordkeeping).
• Investment:
– selection and monitoring of investment alternatives (ex: select, monitor
investment funds in the fund lineup made available under Plan);
– selection of default investment alternative (ex: if investment direction is not
given);
– adoption of investment policy and designation of funding policy; and
– selection of platform provider (ex: as to investment lineup).
4

Status As A Fiduciary
• A person is a fiduciary if he or she:
– is named or identified as a fiduciary in the plan documents;
– exercises any discretionary authority or discretionary control
over the management or disposition of plan assets;
– provides investment advice for a fee; or
– has any discretionary responsibility for plan administration.
• Operational exercise of authority or control resulting in fiduciary
status
– the “inadvertent” fiduciary
5

Prudence and Exclusive Benefit – Two ERISA
Fiduciary Standards
• ERISA fiduciaries are held to the standards of:
– Prudence
 “carrying out their duties with the care, skill and prudence”
 “under the circumstances then prevailing”
 “of a prudent man acting in a like capacity and familiar with
such matters”
 “in the conduct of an enterprise of a like character and with
like aims”
• In short, a “comparable fiduciary” standard
– look to “best practice” of a similar fiduciary of a similar size
plan in a similar circumstance; not a “prudent person” or
“prudent expert” standard
6

ERISA Fiduciary Standards (continued)
• Exclusive Benefit
– Acting for the exclusive purpose of providing benefits to plan
participants and beneficiaries and defraying the plan’s reasonable
administrative expenses
– Prohibits administrative or investment fiduciary member actions that
may present a conflict.
• As to nonqualified plans (e.g., SERP)
– top-hat plans – i.e., maintained for a select group of
management or highly compensated employees
– not subject to fiduciary provisions of ERISA
7

ERISA Fiduciary Rules Are “Process Driven”
• ERISA prudence analysis focuses on facts and decision making
process at time of event, not based on hindsight.
• Key “process” components include:
– details of the decision making process (content and scope of
analysis); and
– establishment and adherence to internal procedures and
polices.
• A critical component is plan governance and the allocation of
plan related responsibilities.
8

ERISA SECTION 404(c) Protection
• Participants exercise investment control over their accounts; plan fiduciaries
not liable for any losses or breaches resulting from the exercise of such
control, provided that:
– plan fiduciaries are liable for the selection and monitoring of investment
alternatives
– plan fiduciaries are responsible for the investment of any assets for which no
direction is received
• Requirements:
– broad range of investment alternatives
 ability to diversify
 choose from at least 3 core investment options (e.g., equity, fixed income,
cash equivalents)
– participants are afforded the opportunity to exercise control over account
 ability to make changes appropriate in light of market volatility
 provided with sufficient information
9

New Fiduciary Regulations:
Investment Advice for a Fee
• Makes a “recommendation”
• To a plan, plan fiduciary, plan participant, IRA or IRA owner
• For a fee (direct or indirect)
• By a person who:
– Acknowledges fiduciary status OR
– Directs advice to a specific recipient(s) regarding the
advisability of a particular investment or management decision
regarding securities or other investment property OR
– Renders advice pursuant to an agreement, arrangement or
understanding that the advice is based on the particular
investment needs of the recipient
10

What Is A Recommendation?
• A communication that by its context, content and presentation
could reasonably be viewed as a suggestion to take (or refrain
from taking) a particular course of action
– Objective standard
– The more individually tailored a communication the more likely
it is a recommendation
11

What Is NOT A Recommendation?
General Communications: newsletters, talk shows, public
speeches, general marketing materials, general market data
• Platform Providers: (Record-Keepers and TPAs)
– Actions:
 Marketing platform without regard to plan needs and with written
notice
 Identifying specific DIAs (1) based on objective criteria set by plan
fiduciary, or (2) in response to RFP – both with written notice
 Providing objective financial data
– Recipients: plans other than IRAs or brokerage windows
– Remember: plan fiduciaries must prudently select and monitor
platform providers
12

What is NOT a Recommendation (cont.)
Investment Education:
• Four Types (at least) of Non-Fiduciary Education
– Plan Information: DIA objectives and characteristics
– General Information: standard concepts (diversification, inflation, risk /
return), general strategies, historical asset class returns, assessing risk
tolerance
– Asset Allocation Models: hypothetical allocations based on generally
accepted investment theories
– Interactive Materials: worksheets for assessing retirement needs and impact
of asset allocations
• Specific DIAs: May be used in asset allocation models and interactive
materials for plans other than IRAs and brokerage windows if:
– Identifies all similar DIAs, and
– Includes statement on where to find further information
• Remember: plan fiduciaries must monitor asset allocation models and
interactive materials to confirm that they are fair and unbiased
13

Exceptions to Definition of Recommendation
Employees: (Plans, Sponsors / Affiliates, Fiduciaries)
• Provides investment advice to non-participant (e.g., fiduciary) for
no cost except normal compensation, or
• Provides investment advice to participant for no cost except
normal compensation, and:
– Job description does NOT involve provision of investment
advice, and
– Not registered or licensed (and advice does not require it)
14

Exceptions to Definition of Recommendation (cont.)
Plan Fiduciaries with Financial Expertise:
– Context: arms-length transaction
– Purpose: higher standard not imposed if fiduciary is sophisticated and
knows counterparty is not required to act in plan’s best interest
– Requirements:
 Fiduciary independent of counterparty;
 Counterparty knows or reasonably believes fiduciary is a bank, insurer,
registered investment adviser, broker-dealer or manages ≥ $50 million;
 Counterparty knows or reasonably believes fiduciary is capable of
evaluating risks in general and in respect of the particular transaction;
 Counterparty informs fiduciary it is not impartial; and
 Counterparty does not receive fee directly from plan / IRA in transaction.
– Note: representations do not have to be on transaction basis
15

New Class Exemptions ̶ Best Interest Contract
Exemption
• Purpose: To allow financial institutions and advisers to receive
different types of compensation that would otherwise give rise to
a prohibited transaction as a result of advice given to certain
retirement investors.
• Complying with Exemption:
– Writing
 Contract
 Fiduciary Acknowledgment
 Impartial Conduct Standards
 Warranties
 Disclosures
– Notifying DOL
– Recordkeeping
16

Impact of New Definition on Plan Fiduciaries
• More Indirect – Not as Substantive as Upon Financial Firms
• Fiduciary status of service providers
– Investment Consultant – now must acknowledge fiduciary
status
– Other Service Providers – consider whether or not a fiduciary
• Selection of service provider a fiduciary function
17

Fiduciary Litigation
• Two general themes
– investment results / stock drop
– investment & administrative fees
 revenue-sharing
 share classes
 fee discounts – did anyone ask?
• Best defense: Well-documented process
• Tatum v. RJR Pension Investment Committee:
– Committee could not show that they conducted a prudent
review in eliminating Nabisco stock from plan; court applied a
“would have” standard for the Committee – the action was not
only permissible, but was the best action
18

Considerations
• Statute of Limitations – duty to monitor beyond the 6-year
ERISA SOL
• Documentation of Process – if a prudent process is demonstrated,
all that need be shown is that the
challenged action was permissible
– RFP – how often?
• Attorney Fees –
Settlement to Avoid Trial
– in 2015, 3 cases settled for in
excess of $220 mil in “losses”
recouped by plans & $80 mil in
attorney fees
19
• Plaintiff Counsel Look for
Weak Links
– Defense is best offense

Considerations (continued)
• Novant
• Boeing
• Nationwide
• Ameriprise
• Anthem
• Chevron
• CVS
• Delta Airlines
• American Airlines
• Verizon
• Starwood
• Yale
• NYU
• MIT
• Duke
• Vanderbilt
• USC
• Cornell
• Columbia
20
Universities

Claims Litigation
• Strict adherence to ERISA claims procedures
• Impose claim filing period limits
• Restrict venue
• Require exhaustion of claims procedure before returning to court
21

Other Trends – “De-Risking”
• Lump-sum Windows – 3rd party risk transfers
• Both designed to get
participants out of plan
– PBGC premiums
– transfer of longevity risk to participants /
annuity provider
– accounting gains – shedding more
liability than assets being paid out (less
so after 2016 due to new mortality tables
and rising interest rate environment)
• Fiduciary considerations – Remember importance of allocation
of settlor and fiduciary
responsibilities
22

Internal Revenue Code
• Plan document compliance
• Operational compliance
23

Other DOL Considerations
• Plan Asset Violations – timely remittance of salary withholdings
• Form 5500 & audit report
24

Plan Document Compliance
• Goodbye to the determination letter program!
– Cycle A
– initial letters
– plan termination
– other circumstances?
 IRS resources
25

Operational Compliance
• Mistakes much more common
• Self-correct or seek IRS approval?
• Revenue Procedure 2016-51
– VCP
– self-correction – significant & insignificant mistakes
– Audit CAP – sanction to consider maximum penalty amount
• Additional flexibility if mistakes fixed quickly
26

Common Mistakes
• Definition of “Compensation”
• Failure to timely offer opportunity to participate
– treatment of different categories of employees
• Calculation mistakes
27

Concerns
• When switching providers
• When restating plan document – prototype & volume submitter
plans
• How far back to look?
• Do accurate records exist?
• Tracking down former employees
• Multiple failures
28

1/19 presentation to web network