Fiduciary Responsibility Presented by: First Western Trust Retirement Consulting Services January 2017

Increased Focus on Fiduciaries Low retirement confidence* Lack of retirement readiness DOL enforcement activity - $696.3 M in recovery in 2015 Plan Fiduciary Fiduciary litigation National/Local law firms DOL regulations Fiduciary definition Regulation *21% of American workers are very confident about having enough money for a comfortable retirement* Source: 2016 Retirement Confidence Survey, Employee Benefit Research Institute and Greenwald & Associates.

Who Is Responsible for the Plan? The Plan Sponsor (aka Fiduciary) is responsible for making sure the plan is being operated in accordance with ERISA, the Internal Revenue Code, and the plan documents.

Greatest impact: $3 trillion brokerage IRA market DOL Fiduciary Rule Updated the rule and related prohibited transaction exemptions – introduces the Best Interest Contract (BIC) Exemption – released April 6, 2016 Applies to recommendations to ERISA plan sponsors, plan participants and IRA holders Significantly expands the communications considered fiduciary advice Generally effective as of April 10, 2017 Huge impact on financial advisers and their firms Greatest impact: $3 trillion brokerage IRA market

DOL Fiduciary Rule Fiduciaries must live up to highest standards of care and prudence Satisfy a professional standard of care when making investment recommendations – Prudent Advice Put customer’s interest first – Loyal advice Avoid misleading statements about conflicts of interest, fees and investments Follow policies and procedures to adhere to the best interest standard – prohibiting incentives not in the best interest Charge no more than reasonable Disclose basic information about fees and conflicts of interest

How will Trump Presidency affect the DOL Fiduciary Rule? Potential delay of fiduciary rule up to one-year That time will be used to make “appropriate changes” to the law Trump could instruct Department of Justice to stop defending law suits filed against the rule Trump administration could refuse to fund and enforce the fiduciary rule thus rendering it pointless No impact

IRS and DOL Interest The DOL is focused on fiduciary violations of ERISA. Are proper processes and procedures being followed to protect the participants? The IRS focuses on whether plan sponsors are in compliance with the Internal Revenue Code. Is the plan sponsor following all the rules? 1000 new auditors – over a billion dollars in restoration, fines and penalties

Race to the Courthouse Law Firm Interest $204 million in attorney fees $116 per participant awards Schlitcher Bogard & Denton Class Action Roadmap Lockheed Martin - $62M Boeing - $57M MassMutual - $30.9M MIT – pending Yale & 10 other ERISA lawsuits are the 2nd most common lawsuits filed in federal courts

Fiduciaries Should Know: Fiduciary is held to the highest standard of care Fiduciaries Should Know: How much everything in the plan costs How that money is paid and to whom Whether those expenses are in line with the expenses of comparable plans A recent DOL advisory opinion stated that plan fiduciaries must understand the formula, methodology, and assumptions used to determine the fees generated from plan investments

Exclusive Benefit Rule: Every decision made is in the best interest of the participant Exclusive Benefit Rule: Avoid any perceived or real conflict of interest Hiring a service provider/investment advisor How are they being compensated? Are the fees reasonable? Are they being unduly enriched? Is the company receiving any direct benefit?

Tussey v ABB Landmark Court Case Fidelity recordkeeper - ABB breached their responsibility to monitor costs $37M settlement Revenue sharing benefitted ABB Failed to negotiate/leverage size of the plan Did not follow IPS when making fund changes Decreased the company out-of-pocket expense at the detriment of the participants

Landmark Court Case Tussey v ABB Breaches of Fiduciary Responsibility Agreed to pay Fidelity an amount that exceeded market The 401(k) participants subsidized payroll cost, health and pension recordkeeping expenses Float on the Plan was credited inappropriately Failed to follow the terms of the Investment Policy Statement (IPS) Breaches of Fiduciary Responsibility

Lessons Learned Review Revenue Sharing – who is receiving and how much Determine Administrative Costs in absence of revenue sharing Benchmark compared to similar size plans Utilize lowest share class Negotiate on behalf of your participants Continuously monitor Document

Banner Health 401(k) 2014 Form 5500

Banner Health 401(k) 2015 Form 5500

Additional Court Cases Hecker v Deere – 404(c) White v Chevron– excessive fee/SV vs MMKT Renfro v Unisys – excessive fees Johnson v. Fuijitsu – challenged custom TD funds

Personal injury attorneys are joining in Is it only BIG Plans? No!!! Personal injury attorneys are joining in

Personal Injury Attorney

Trends in ERISA Litigation Legal challenges are being filed to “protect the interest of plan participants”, but there is a source of revenue for the plaintiffs’ bar Settlements are fueling the fire Plaintiffs’ bar outreach includes ads in local papers, TV, and trolling on Facebook

Trends in ERISA Litigation Plaintiffs’ attorneys are trying to make law What is the nature of fiduciary responsibility? Did you do your job well enough? Is the plan being administered prudently? What is the quality of the fiduciary process?

What can I do to protect myself?

Lessons from ERISA Litigation Monitor Investment Management Fees Benchmark to ensure administrative fees are reasonable Choose plan investments prudently Periodically take Plan through competitive bidding process Understand revenue sharing and who is getting paid what

Lessons from ERISA Litigation Create and follow an Investment Policy Statement Delegate Investment fiduciary decisions to a Prudent Expert Create a Fiduciary File Document meetings and decisions with Minutes Be “Audit Ready all the Time”

What current proposals are being considered?

#1 Concern for American Families RETIREMENT SECURITY!! Will we ever be able to retire?

America’s Retirement Coverage Challenge Participation rates for workers earning between $30,000 - $50,000 per year IRA vs. Employer Plan 4.6% of workers save through an IRA 71.5% save through their Employer Sponsored 401(k) or 403(b) plan

Coverage Gap Over 20 million private sector workers earning between $30k - $100k do not have access to a retirement plan at work.

# 1 Concern of the Government Having enough revenue to pay for all its commitments. Will we ever have a balanced budget?

So, what is being considered?

Camp Tax Reform Proposal Eliminate new SEPs and SIMPLE 401(k) Plans Freeze existing 401(k) plan limit until 2024 Currently $18,000 and $6,000 catch-up 10% additional taxes on pre-tax contributions to retirement plan for taxpayers in highest bracket Plan Sponsors with more than 100 employees - Only 50% of employee deferrals can be made pre-tax; the balance would have to be Roth.

Brady Blueprint Proposal Universal Savings Accounts (“USA”) Contribute up to $5,500 per year (indexed) on after-tax basis Distributions exempt from income tax Individuals can take a distribution for any purpose An unintended consequence - business owners would be able to save up to $12,000 per year between USA and IRA on a tax deferred basis without having to make any contributions for employees. Why sponsor a retirement plan?

State Initiatives

Three Approaches State-sponsored ERISA plan Non-ERISA state plans Subject to limits contained in ERISA Employers would have fiduciary obligation Non-ERISA state plans No employer contributions Employer involvement is minimal; limited to providing information to employees Employee participation is completely voluntary Work within the voluntary employer-based system State conducts education campaigns and connects employers with providers who can help establish a retirement plan – creating an exchange

What changes will be enacted?

2017 and beyond More ERISA litigation Clarification on how the DOL fiduciary rule will proceed Tax reform which will impact qualified retirement plans

Thank you Paula Hendrickson Senior Vice President/ Director Retirement Consulting Services First Western Trust Paula.Hendrickson@myfw.com 303.634.2721