© 2015 Kilpatrick Townsend

Fiduciary Update:

Best Practices and New Regulations

Lois W. Colbert

Kilpatrick Townsend & Stockton LLP

August 13, 2015

UT-Battelle Labor and Employment Conference

© 2013 Kilpatrick Townsend

Refresher on ERISA Fiduciary RulesFor U.S. plans subject to ERISA

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Regulatory and Legal Backdrop

ERISA – Law and Regulation

•Passed in 1974 primarily to remedy pension fraud and mismanagement

•Parallel labor and tax provisions

•Governmental plans are exempto A plan established or maintained by the US government, by the government of

any state or political subdivision thereof, or by any agency or instrumentality of such a government

•Regulatory agencies impacting retirement plans:

o Primary: Department of Labor, IRS/Treasury, Pension Benefit Guaranty Corporation (PBGC)• Directly regulate plans

o Secondary: Securities and Exchange Commission• Regulates plan investments and advisers

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Settlor versus Fiduciary

Settlor Role

•The plan sponsor makes plan design decisions in a “settlor” capacity, not a fiduciary capacity

o “Settlor” is a term of art in the world of ERISA fiduciary litigationo “Settlor” decisions are business decisions

•Importantly, “settlor” decisions are not subject to the fiduciary standards o A decision to terminate a plan is not subject to the fiduciary standards, but

implementation of the decision to terminate the plan is subject to the fiduciary standards

o A decision to amend a plan is not subject to the fiduciary standards, but interpretation of the amendment is subject to the fiduciary standards

•Settlor/fiduciary boundaries protect both (e.g., mixed settlor/fiduciary functions invite special scrutiny)

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Who is a Fiduciary?

Fiduciary

•Who is a fiduciary?

o A person (individual, committee, or entity) who:• exercises discretion in the management of plan assets,• provides investment advice for a fee or has authority to do so, or• has or exercises discretion in plan administration

o A person who appoints an individual, committee or an entity to do one or more of these

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Who is a Fiduciary?

Status as a Fiduciary

•Fiduciary status is functional– A person who performs a fiduciary function becomes a fiduciary

•But fiduciary status for one function need not cause fiduciary status for another function

– Clear boundaries protect fiduciaries by circumscribing responsibilities• Boundaries between “appointing fiduciary” role and “front-line” fiduciary role

(e.g., a committee might appoint an investment manager and be a fiduciary for that purpose; the investment manager is then the front-line fiduciary in managing its account)

• Boundaries between investment fiduciary role and plan administration fiduciary role

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Who is a Fiduciary?

Proposed Regulations on Provision of Investment Advice

•Expands the definition of an “investment advice fiduciary”

•Six proposed “carve-outs” from investment advice fiduciary status

•Changes to prohibited transaction exemptions

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Who is a Fiduciary?

• In 1975, the DOL imposed a five-part test for determining whether someone is an investment advice fiduciary.

• Under this test, a person is an investment advice fiduciary if the person renders advice to a plan that:o is a recommendation on investing in, purchasing, or selling securities or

other property, or advice as to their value; o is provided on a regular basis; o is provided pursuant to a mutual agreement, arrangement, or

understanding, either written or otherwise; o will serve as a primary basis for investment decisions with respect to

plan assets; and o is individualized to the plan based on the particular needs of the plan.

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Who is a Fiduciary?

Under the proposed regulations, an investment advice fiduciary includes a person who:•provides the following type of advice directly to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner in exchange for a fee or other compensation, whether direct or indirect:

o a buy, hold, or sell recommendation (defined below); o a recommendation as to the management of securities or other property

(e.g., proxy voting); o a recommendation to roll over or distribute assets from a plan or IRA, and

a recommendation as to the investment or management of such assets; o an appraisal or fairness opinion regarding the value of securities or other

property in connection with a specific transaction or transactions; or o a recommendation of a person who will receive a fee in connection with

any of the above (e.g., selection of investment managers and advisers)

AND

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Who is a Fiduciary?

• either directly or indirectly (e.g., through or together with any affiliate): o represents or acknowledges that it is “acting as a fiduciary” with respect

to the advice described on prior slide, or o provides advice that satisfies the following three primary elements:

it is rendered pursuant to a written or verbal agreement, arrangement, or understanding;

it is individualized—or specifically directed—to the advice recipient; and

it is for consideration in making investment or management decisions with respect to securities or other property of the plan or IRA.

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Who is a Fiduciary?

• Substantially expands types of activities and services that would result in fiduciary statuso Expressly includes recommendations on rollovers and plan and IRA

distributionso May include personnel with customer contact, including call center

employees, who make statements viewed as “recommendations” under the definition, unless an exception applies.

• Removes need for mutual understanding• In addition to requirement that advice be “individualized,” adds alternative

requirement that advice be “specifically directed to” recipient • Replaces requirement that advice serve as “a primary basis” for investment

decision with requirement that advice be “for consideration.” • Defines “recommendation” as “a communication that . . . would reasonably be

viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”

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Who is a Fiduciary?

Carve-Outs•Counterparties

•Swaps and Securities Based Swap Transactions

•Employees of Plan Sponsor

•Platform Providers

•Certain Types of Valuations

•Investment Education

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Core Duties

Five Core Duties:

•Carry out your duties prudently (“Prudence”)

•Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them (“Duty of Loyalty”)

•Follow plan documents (unless inconsistent with ERISA)

•Diversify plan investments (exception for company stock), and

•Pay only reasonable plan expenses

No fiduciary duty is owed to the plan sponsor under ERISA

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Core Duties

Prudence

•Prudence in general– A fiduciary must act with the care, skill, prudence, and diligence under the

circumstances prevailing that a prudent man acting in a like capacity and familiar with such matters would use

– This standard of care has been called the “highest known to the law”– Many commentators call it the “prudent expert” standard

•Prudence in practice– Engage in a robust process– Investigate– Deliberate– Hire an expert if necessary– Create a protective record

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Core Duties

• Examples of prudence in practice:

– Using investment consultant or vendor selection/management consultants – Benchmarking performance– Benchmarking fees– Monitoring of service providers in attentive and structured manner– Inquiring about systems (e.g., systems for disaster recovery and protective

redundancy)– Negotiating terms of retention

• Has “most favored nation” status been obtained? • Is it contractually assured?

– Meeting with service provider’s team

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Core Duties

Duty of Loyalty

•Duty of loyalty in general– A fiduciary must act

o solely in the interest of plan participants, ando for the exclusive purpose of providing benefits and defraying

reasonable expenses

•Duty of loyalty in practice – When focused on fiduciary issues, focus solely on plan participants

rather than interests of plan sponsor – Fiduciaries can have different roles, but must “change hats” (e.g.,

corporate officer on a fiduciary committee must only consider participants and beneficiaries when acting as committee member)

– When focusing on pure settlor issues (e.g., plan design issues), it is appropriate to consider interests of plan sponsor

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Core Duties

Applying the Duty of Loyalty - Charging Expenses to Plan Trusts

•Use of plan assets must be for the exclusive purpose of: – providing benefits to participants and beneficiaries, or– defraying reasonable expenses of administering the plan.

•Deciding whether a particular expense should be paid from plan assets is an ERISA fiduciary act

•Permissible expenses include reasonable, direct expenses properly and actually incurred in performing a fiduciary’s duties to the specific plan being charged

– It is not permissible to pay settlor/ plan sponsor expenses from plan assets

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The Special Importance of Process

Fiduciary Conduct: “Process, Process, Process”

•Courts do not typically measure prudence by result with the benefit of hindsight; they look for “procedural prudence” and they measure it by discerning the path the fiduciary took to arrive at the action or omission that is claimed to have been imprudent

•Determine relevant information and gather the information (e.g., when hiring a service provider, issue an RFP)

•Examine and evaluate information; deliberate as a group •Determine course of action or decision with respect to issue

•Maintain records of the foregoing– A written record is the best – and sometimes the only – evidence of prudence – The discipline of maintaining a written record has the effect of fostering

prudence and thwarting imprudence

•If substantive process has been delegated, then records of process must be maintained at the delegated level

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Prohibited Transactions

A fiduciary must not engage the plan in a non-exempt prohibited transaction (“PT”)

•Party in Interest PTs– ERISA prohibits virtually every type of transaction between a plan and a

party in interest

•Party in interest broadly defined – not intuitive– A party in interest includes

• the plan sponsor company• the union• any fiduciary, counsel or employee of the plan• any service provider to the plan• relatives of the individuals described above• any 50% or more owner of the plan sponsor and certain other parties in interest

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Prohibited Transactions

Conflict in Interest PTs

•A fiduciary may not engage in “self-dealing:”

– deal in his own interest or for his own account in a transaction involving plan assets

– act in a transaction involving the plan on behalf of a party whose interests are adverse to the plan or its participants

– accept a bribe or kickback from someone dealing with the plan in a transaction involving plan assets

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Prohibited Transactions

Potential liability for PTs

•Fiduciaries can be personally liable for losses or the restoration of profits to the plan

– Liability can include attorney’s fees

•Parties in interest, including fiduciaries, can be liable for excise tax on the “amount involved” in the transaction

– Initial excise tax is 15%– Increases to 100% if PT is not timely corrected

•Many statutory and regulatory exemptions from the PT rules are available

Investment Fiduciary Role

The Role of the Investment Policy Statement

• Tax-qualified retirement plans only

• The Investment Policy Statement (IPS) sets forth the investment policy for the plan– ERISA does not expressly require plans to maintain an investment policy,

but it is best practice to do so– The IPS sets forth the roles and the parties involved in the investment of the

plan’s assets– The IPS sets forth the criteria by which investment managers and

investment options are selected, monitored and maintained or eliminated

• Investment fiduciary must be careful to follow the IPS– IPS should be reviewed frequently and updated as necessary

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Investment Fiduciary Roles & Delegations

• The investment fiduciary is typically the “named fiduciary” for investments, and based on this status it may: – Appoint an investment manager; and– Appoint another fiduciary, e.g., a trustee.

• ERISA “defaults” asset management to the plan trustee, unless:– The plan provides that the trustee is subject to the direction of a

named fiduciary (e.g., the investment fiduciary)– Pursuant to express authority in the plan, a named fiduciary appoints

one or more ERISA investment managers, or– Investments are participant directed – ERISA §404(c)

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Investment Management Status

• Who is an ERISA Investment Manager (“IM”)?– A fiduciary who has the power to manage, acquire or dispose of plan assets,

and is a registered investment advisor, bank or insurance company which has acknowledged its fiduciary status in writing

• Advantages of Appointing an IM:– The named fiduciary who retained the IM is off the hook for liability if

something goes awry in the management of those assets, unless the hire and/or retention was imprudent

– For example, appointing an IM who is the subject of regulatory investigations and fiduciary lawsuits, without investigating the merits, could be viewed as imprudent

– The IM directs the trustee and the trustee gets a complete pass from fiduciary liability as long as it follows the directions, unless it follows a direction that it knows has been given in breach of the IM’s fiduciary duty

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Selection and Hiring of IM

Selecting and Hiring an Investment Manager Is a Fiduciary Function

•Selection tools:– Uniform RFPs can maximize the “apples to apples” comparison in selecting IM– Detailed benchmarking of IM candidates

•Relevant factors to consider include:– Track record, sector reputation and financial controls – Team experience and stability– Contract that clearly acknowledges IM fiduciary status and that includes adequate

indemnities and termination/transition provisions

•ERISA Section 408(b)(2) permits contracting or making reasonable arrangements with a “party in interest” (definition generally includes existing service providers) if:

– No more than “reasonable compensation” is paid for services– Arrangement may be terminated with reasonably short notice & no penalty

•Process, process, process*

Monitoring IM

Monitoring an Investment Manager is a Fiduciary Function

•DOL suggests monitoring includes these items:– review the IM’s performance at least annually– read any reports they provide– check actual fees charged (applies to internal expenses as well as external expenses)– ask at least annually about policies and practices (e.g., valuation policies, allocation

policies, proxy voting policies, conflict of interest policies)

•Duty to monitor includes duty to terminate and/or replace if warranted

•Process, process, process

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Selection and Hiring

Selecting an Investment Option Is a Fiduciary Function

•Investment fiduciary is responsible for selecting 401(k) Plan Investment Options

•Relevant factors to consider include:– Benchmarking of historic fund performance against industry standard– Track record, sector reputation and financial controls of fund manager– Team experience and stability– Expert advice from investment consultant

• Fideltiy Investments -- 401(k) Plan investment consultant• Russell Investment -- Retirement Account investment consultant

•Process, process, process

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Monitoring

Monitoring an Investment Option is a Fiduciary Function

•Periodic formal review of investment fund performacne (e.g., 3-4 times per year)

– Benchmarking performance of investment options– Analyzing fees paid from investment options

• Benchmarking– Using institutional share class where available, unless compelling reason not to do so– Placing underperforming fund on watch list– Monitoring and reacting to changes in investment fund management

•Duty to monitor includes duty to terminate and/or replace if warranted

•Process, process, process

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Fees and Benchmarking

Increasing focus on plan fees and expenses•The investment fiduciary must be aware of, and understand, the fees and expenses associated with plan investments paid by 401(k) plan assets

•The The investment fiduciary must make a reasonableness determination regarding these fees and expenses under ERISA.

•Consider using the investment consultant to weigh in on the reasonableness of 401(k) plan fees

•Consider benchmarking

•Is there revenue sharing?– If yes, what is impact on actual expenses paid by participants?– Consider allocating revenue sharing back to the accounts of those who generate it

Different concerns for 401(k) Plans and Pension Plans•401(k) plan fees largely paid by participants – this creates heightened scrutiny by regulatory agencies and plaintiffs

•Pension plan fees paid by employer, which funds the plan*

Fees and Benchmarking

• Focus of Regulatory Agencies– DOL service provider fee disclosures which apply to Pension Plans and

401(k) Plans– DOL participant fee disclosures apply to 401(k) Plans

• 401(k) plan sponsors are increasingly targets in ERISA actions related to their fee arrangements with investment related fiduciaries

• Benchmarking fees and performance– Useful information for plans– Sound procedure– Maintain records

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401(k) Fees and Benchmarking

• 401(k) litigation and DOL audits can challenge:

– Lax float practices

– Excessive fees• Duplicative fees• Fee levels unjustified (active versus passive)• Share class

– Failure to conduct due diligence

– Failure to disclose hidden fees to participants• Transaction fees and expenses• Revenue sharing

– Failure to Monitor

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ERISA Section 404(c)

• Relevant to 401(k) Plans

• Relieves investment fiduciary of fiduciary liability for participant-directed investment decisions

• Plans must comply with requirements of ERISA Section 404(c) or plan fiduciaries may still be liable for participant investment decisions.

• ERISA section 404(a) requires that the investment fiduciary prudently select and monitor the available investment options for the exclusive purpose of providing retirement benefits to participants.

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Investment Fiduciary Best Practices

• Conduct periodic formal review of investment fund performance (e.g., 3-4 times per year)– Benchmark performance of investment options– Analyze fees paid from investment options; use benchmarking– Use institutional share class where available, unless compelling reason not to do

so– Monitor and react to changes in investment fund management– Plan underperforming funds on watch list; replace funds as necessary

• Conduct periodic formal review of IM performance (e.g., 3-4 times per year)

– Benchmark performance of IMs– Read any reports they provide– Check actual fees charged– Review policies and practices (e.g., valuation policies, allocation policies, proxy

voting policies, conflict of interest policies)– Plan underperforming funds on watch list; replace funds as necessary

• Obtain advice from investment consultant on above

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Investment Fiduciary Best Practices

• Maintain, regularly review, and update IPS for each plan

• Conduct fiduciary training every few years (sooner for new committee members)

• Provide committee meeting material in advance

• Create record at the committee level that reflects deliberations and decisions in way that facilitates third party perception of diligence, care and loyalty

• Have investment documents reviewed by internal legal

Company Stock

• Recent Development• Last year, the Supreme Court decided Fifth Third Bancorp et al v. Dudenhoeffer• Dudenhoeffer significantly changes the fiduciary standards for company stock in

401(k) plans, and these changes increase the risk of offering company stock in

these plans

• Background• Dozens of “stock drop” class action lawsuits against 401(k) plan fiduciaries in

past two decades. Stock drop suits typically allege that plan fiduciaries breached

their ERISA fiduciary duties by retaining company stock that was overvalued

and/or by not disclosing unfavorable inside information. Specifically, they allege:• Breach of Duty of Prudence: From continuing to hold and offer company

stock in the plan; and• Breach of Duty of Loyalty: From insider fiduciaries not disclosing to

participants inside information about the company.

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Company Stock

• Moench Presumption• In 1995, Third Circuit Court of Appeals held that, if company stock was “hardwired”

into plan (i.e., required to be offered as investment option under plan terms), ERISA would presume that offering company stock was prudent unless company faced imminent financial collapse. Over time, “Moench presumption” was adopted by five other Federal Appeals Courts

• Impact of Dudenhoeffer • Dudenhoeffer rejected the Moench presumption. The impact is summarized in a

table on the next slide. However, early indications are concerning – for example, both the Fifth Circuit and Ninth Circuit recently reopened cases that had earlier been decided in favor of plan fiduciaries based on the Moench presumption.

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Company Stock

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Company Stock

Hard-Wired with Fiduciary Override • Plan amendment is a settlor (non-fiduciary) action• Typically the plan document has been amended to provide that the Company

stock fund is a required investment option (“hard-wired”)• In light of Dudenhoeffer, the plan should be amended to add an express

“fiduciary override”:• Company stock fund will continue to be required by terms of the plan• But, if the investment fiduciary determines that offering the Company stock fund is no

longer prudent in whole or in part, the investment fiduciary can eliminate the Company stock fund as an investment option without a plan amendment

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Company Stock

Fiduciary Actions• The investment fiduciary should regularly monitor the Company stock fund, along

with other investment options.• There is no longer a basis to forego monitoring the Company stock fund for

prudence/suitability. • The easiest target for plaintiffs is a lack of fiduciary action. Thoughtful fiduciary

processes, even if they produce a decision that is questionable in hindsight, are much harder to attack.

• Best-practice processes for monitoring the Company stock fund are currently unclear, because the Moench presumption made them unnecessary and courts had no occasion to define what was needed.

• Given uncertainties, fiduciaries need assistance from third-party investment advisors. Previously, advisors have steered clear of Company stock. After Dudenhoeffer, some may step up, at least to advise on structuring the review process.

• Plan sponsor should maintain a program of active participant communication and education about diversification.

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Cases to Consider

Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009):

•Deere plan’s offering of retail class funds was not a fiduciary breach because participants could choose among funds with a wide range of fees

•Deere plan offered 23 Fidelity mutual funds, 2 Fidelity Trust managed investment options, and access to 2,500 other funds through BrokerageLink.

•“Even if §[404(c)] does not shield a fiduciary from an imprudent selection of funds under every circumstance that can be imagined, it does protect a fiduciary that satisfies the criteria of §[404(c)] and includes a sufficient range of options so that the participants have control over the risk of loss.”

Braden v. WalMart Stores, Inc., 588 F.3d 585 (8th Cir. 2009):

•The Wal-Mart plan’s offering of only 10 retail mutual funds despite its bargaining power may be a fiduciary breach.

− “Taken as true, and considered as whole, the complaint’s allegations can be understood to assert that the Plan includes a relatively limited menu of funds which were selected by Wal-Mart executives despite the ready availability of better options.”

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Cases to Consider

Tibble v. Edison, CV 07-5359 SVW (E.D. Ca 2010):

•District court finds breach of fiduciary duty after bench trial with respect to 3 retail mutual funds (out of about 40 available under the plan) that were offered despite the availability of institutional shares. Higher fees were directly available to revenue sharing.

•PIC has long been invested in institutional share classes, but this case also stands for proposition that as more and better investment options become available, fiduciaries should consider those investment options

Renfro v. Unisys Corp., No. 10-2447 (3rd Cir. 8/19/2011):

•Unisys plan offered 67 mutual funds, stable value fund, employer stock fund, and 4 commingled pools. $1.9 billion of $2.0 billion total assets were invested in mutual funds.

– “In light of the reasonable mix and range of investment options in the Unisys plan, plaintiffs’ factual allegations about Unisys’s conduct do not plausible support their claims [of fiduciary breach].”

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Cases to Consider

Tibble v. Edison Int’l, 729 F.3d 1110 (9th Cir. 2013)

•Review of district court decision finding breach of fiduciary duty from failing to investigate availability of institutional shares funds.

•Finds that statute of limitations applies from the time that the initial investment decision was made, rejecting a “continuing violations theory.” However, plaintiffs may show that changed circumstances required a” full due diligence review of the funds.”

Supreme Court Reverses and Remands (May 18, 2015)

•Held: 9th Circuit concluded improperly that the statute of limitations had run.

•Decision states: “Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones.”

•Also: Fiduciaries “must ‘systematic[ally] conside[r] all the investments of the trust at regular intervals’ to ensure that they are appropriate.”

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Cases to Consider

Tussey v. ABB, Inc., 746 F.3d 327 (8th Cir. 2014)

•Review of district court decision finding a breach of fiduciary duty based on failure to follow investment policy statement with respect to monitoring plan investments and failure to monitor revenue sharing payments received by Fidelity.

•Affirms finding that plan administrator failed to monitor revenue sharing payments received by Fidelity and to avoid overpaying for recordkeeping services.

•Finds that deference to plan administrator extends beyond claims for benefits; deference may apply to fiduciary breach claims, for fiduciary decisions involving selecting and monitoring investment options and interpreting investment policy statement and remands for further consideration.

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Cases to Consider

George v. Kraft Foods Global, Inc, No. 10-1469 (7th Cir. 4/11/2011):

•Allowing claims to go forward that it was breach to offer unitized stock fund.

– Disadvantages of unitized fund:• Investment drag: Portion of fund invested in cash limits gains when stock rises (but limits

losses when it falls)• Transactional drag: Costs of frequent traders are subsidized by long-term investors.

– Not enough to consider issues – an affirmative decision is necessary on the record is necessary.

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Administrative Fiduciary Role

SPDs, SMMs and SBCs

Fiduciary Disclosure – SPDs, SMMs and SBCs

•SPD sets forth in understandable terms rights, benefits, and responsibilities of participants and beneficiaries.

– Not a sales document; key role is managing legal exposure.– What are the negatives for participants/beneficiaries? What are the less apparent

watch outs?

•SMMs describe changes made to the plan and changes in the information in the SPD.

•SBCs are legally-required standardized documents describing the terms and conditions of medical coverage.

– Only applies to medical options.

•Plan sponsors are required to provide copies of these documents to plan participants upon enrollment (including annual enrollment for SBCs), following a plan change (for SBC, prior to the change if it affects the SBC information), and upon written request of a plan participant or beneficiary.

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Service Provider Contracts and Monitoring

Fiduciary Delegations

•Delegation of fiduciary duties is permitted, provided:– Prudent appointment– Subject to ongoing monitoring

•Delegations of fiduciary responsibility should ensure:– Understanding among all parties of their responsibilities under delegation.– Crisp boundary lines defining the responsibilities of different parties.– Each party is capable of performing the tasks assigned to it.

•Consider master delegation list– Facilitates coordinating and updating delegations, including ensuring

sufficient formality and precision.

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Service Provider Contracts and Monitoring

Hiring a Service Provider is a Fiduciary Function

• Hiring process tools:– Uniform RFPs can provide “apples to apples” comparison.– Benchmarking of service providers, including their fees can provide useful

information.

• Relevant factors to consider include:– Reputation and financial soundness of provider– Quality of services and similar prior experience; – Qualifications of proposed team; team stability; and– Contract with reasonable termination/transition provisions.

• ERISA Section 408(b)(2) permits contracting or making reasonable arrangements with a “party in interest” (definition includes certain service provider) if:– No more than “reasonable compensation” is paid for services, and– Arrangement may be terminated with reasonably short notice & no penalty.

• Receiving 408(b)(2) disclosures before new contracts

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Service Provider Contracts and Monitoring

Contracting with Service Providers

• Key service contract provisions include:– acknowledgement of fiduciary status if warranted

– no more than reasonable compensation

– reasonable termination provisions without penalty

– limitation of liabilities and indemnities

– privacy issues

– if possible, duty to cooperate with transition upon termination

– any applicable deadlines for performance of services and consequences when deadlines are not met

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Service Provider Contracts and Monitoring

Monitoring a Service Provider is a Fiduciary Function

• DOL suggests monitoring includes these items:– review the service providers’ performance at appropriate intervals (the

timing can be specified in the workplan, e.g., no less than annually for the most important vendors; other vendors can be reviewed less frequently);

– read any reports they provide;– check actual fees charged; and– ask about changes in service providers’ internal and external policies and

practices (to ensure change notifications are fully understood and to check, e.g., annually, for changes without notification).

• Duty to monitor includes duty to terminate and/or replace if warranted

• Process, process, process

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Claims Procedures

Dealing with Benefit Claims• Every ERISA plan must have and follow reasonable claims procedures• DOL regulation prescribes baseline standard for manner and content of

notification of benefit determination

– Claimant must be able to appeal an adverse decision and receive a full and fair review of the claim and the adverse decision

• Administrative fiduciary usually handles claims under tax-qualified retirement plans

• Third-party adminstrators generally handle benefit claims under health and welfare plans. – Administrative fiduciary generally handles non-benefit claims under health

and welfare plans• Service contracts generally should address timely payment of claims and

standards for administering the claims procedure

• Claims procedure is critical in identifying and managing litigation risk

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Claims Procedures

Health and Disability Claims

• Health and welfare claims procedures differ from retirement plan claims procedures

• Health and disability claims procedures are more participant protective than retirement plan claims procedures

• Accelerated time periods for deciding initial claims and appeals

• Longer period to appeal denied claims (180 days v. 90 days)

• Appeals must be decided anew by an independent named fiduciary

• Additional information must be provided in claim and appeal denial notices

• Affordable Care Act adds additional protection for active medical options– Additional independent review of denied appeals for certain benefit claims – Additional information for denial notices– Foreign language standards apply to denial notices and communications

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401(k) Participant Fee Disclosures

401(k) Plan Participant Fee Disclosure

• Plan administrator must provide participants and beneficiaries certain plan-related and certain investment-related information– Before they make their first investment and annually thereafter

• Plan-Related Information– General– Administrative expenses information– Individual expenses information– Actual charges or deductions (at least quarterly)

• Investment-related information – comparative format to facilitate comparison of investment options– Performance data– Benchmark information– Fee and expense information– Internet website address for additional information

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401(k) Participant Fee Disclosures

401(k) Plan Participant Fee Disclosure

• Plan administrators are protected from liability for the completeness and accuracy of information provided to participants if plan administrator reasonably and in good faith relies upon service provider information.

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Form 5500 and Auditor’s Reports

Form 5500

• The plan administrator of certain ERISA plans must file an “annual report” with the U.S. Department of Labor (DOL):

– Every retirement and 401(k) plan – Every ERISA group health plan that is subject to ERISA except plans with less than

100 participants which are unfunded, insured or a combination of unfunded and insured

– Certain fringe benefit plans, including group legal services, educational assistance programs and adoption assistance plans

– Day care centers– Certain apprenticeship and training plans

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Form 5500 and Auditor’s Reports

Form 5500

• Responsibility and related potential liability for filing the Form 5500 fall on the plan administrator, regardless of whether this responsibility has been contracted to a third party

• A Form 5500 that has been rejected by the DOL for failure to provide material information will be treated as not having been filed

– The DOL may assess a civil penalty against a plan administrator of up to $1,100 per day starting from the date of the administrator's failure or refusal to file the Form 5500

– No private cause of action available for a participant or beneficiary

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Form 5500 and Auditor’s Reports

Form 5500

An auditor’s report (independent qualified public accountant's opinion)is part of the Form 5500 filing for certain plans

• Welfare plans - only larger funded welfare plans must file an auditor’s report 

• Coverage: – Annual report financial statements and schedules– Accounting principles and practices reflected in the report and the consistency of

their application– Any changes in the accounting principles that have a material effect on the financial

statements

• Unqualified opinion– Plan's financial statements fairly present the financial status of the plan at the end of

the audit period – Any changes in the plan's financials conform with generally accepted accounting

principles (GAAP)

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Compliance Audits

Agency Audits

• The Internal Revenue Code (“IRC”) and ERISA give IRS and DOL authority to conduct investigations to determine whether any person has violated or is about to violate the IRC or ERISA. These agencies may:

– Investigate on-site

– Require submission of reports, books, and records

– Inspect books and records

– Question individuals

– Subpoena plan records and testimony in connection with investigation

– Subpoena records and testimony of service providers

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Compliance Audits

DOL Enforcement Priorities include:• Compliance with HIPAA, and other health mandates • Employee contributions• Plan expenses/settlor fees• Ensuring funded plans are “made whole” when overpayments (with

earnings) are not 100% recovered

Who gets audited?• Random review by geography, industry or plan type• Participant complaints• Publicity• Form 5500 targeting • Specific national office initiatives

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Compliance Audits

Audit Risks

• IRS– Threat of disqualification– Closing agreements with negotiated sanctions– Other penalties (e.g., excise taxes)

• DOL– Breach of Fiduciary Duty (restore losses, pay penalties)– Filing and Disclosure Penalties– Criminal Penalties

• Internal Compliance Audits: A Proven Defense– Reviewing plan operations against plan documents and law– Use sampling– Self-correct if necessary– Determine disclosure or non-disclosure (to facilitate, most companies manage

compliance audits as part of their settlor function)

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Administrative Fiduciary Best Practices

• Create (and then execute on) work plan for 1 or 2 years, including– Periodic meetings (e.g., as necessary, but no less than annually)

– Regularly review delegations (e.g., annually) and, if necessary, update

– Periodically review policies (e.g., annually) and, if necessary, update

– Special projects

• Consider internal master delegation list• Provide background/training for new members• Conduct fiduciary training every few years• Provide committee meeting materials in advance• Create record at the committee level that reflects deliberations and

decisions in way that facilitates thirdparty perception of diligence, care and loyalty

Cases to Consider

CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011)

• The Supreme Court found that CIGNA failed to give proper notice to participants in its pension plan of the conversion of the plan to a cash balance formula and the conversion of their accrued benefits to an opening cash balance account. 

• A summary plan description (SPD) is not – by itself – a part of the formal plan document.  Without more, this limits an SPDs ability to limit participants’ “contract” rights. However, it can give rise to participant equitable rights, e.g., by mistakenly going beyond what the plan provides.

• Case emphasizes the importance of formal plan documents, which confirms the utility of welfare plan “wrap” documents.

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Cases to Consider

US Airways v. McCutchen, S.Ct. April 16, 2013.   • A health plan participant received a legal settlement for a third-party injury, and

the plan sought reimbursement of the medical expenses it paid on the participant’s behalf. 

• In a clear win for plan sponsors, the Supreme Court held unanimously that an express provision in the plan document authorizing the plan to seek reimbursement from third party recoveries will trump any equitable defenses, like unjust enrichment, that may be asserted by the participant.   

 • The bottom line for plan sponsors – careful drafting of the plan document and

related summary plan description is the key to enforcement of a health plan’s right of reimbursement from third party recoveries.  In light of this decision, plan sponsors should review the subrogation and reimbursement provisions in their plan documents and summary plan descriptions, and make needed revisions. 

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