1. Prepared for ACCE Benefits Trust
Fiduciary Review
Prepared for
ACCE Benefits Trust

2. Agenda ERISA Overview and Covered Plans ERISA Fiduciary Basics
Definition of Fiduciary
Fiduciary Duties
Participant-Directed Plans
Group Health Plans
Liability and Enforcement

3. ERISA Overview
ERISA governs the operation and administration of private pension and welfare benefit plans.
ERISA includes:
Tax Qualification and Funding Rules (For Pension Plans)
Fiduciary Responsibility Provisions
Administrative Requirements (E.g., reporting and disclosure)
Liability and Enforcement Provisions

4. ERISA “Plans” - Definitions
Plans covered by ERISA must be:
A “Welfare Plan” or “Pension Plan”
And,
“maintained” by an employer,
cover employees (excludes, e.g., director plans), and
not a payroll practice or otherwise excluded under DOL rules (excludes, e.g., bonus plans, cafeteria plans (except health care FSA), health savings accounts, unfunded disability, dependent care, education assistance, on-site dining or recreation (except day care)).

5. ERISA “Plans” - Definitions
Welfare Plans – provide sickness, medical, hospital, accident, disability, death, unemployment, vacation benefits, apprenticeship training, daycare centers, scholarship funds, prepaid legal services, severance.
The Company Health and Welfare Plan for Active and Inactive Employees, includes the following benefits:
Active employee and retiree medical, dental, vision, dependent care and health care flexible spending accounts, life insurance, accident insurance, additional vacation, long term disability
The Company Flexible Benefits Plan (only the Health FSA is an ERISA Plan)

6. ERISA “Plans” - Definitions
Pension Plans – provide retirement income and/or result in deferral of income to termination of employment or beyond.
“Non-Qualified Plans”
unfunded, tax deferred arrangements for employees, e.g., SERP, CLRP, Deferred Compensation Plan
exempt from most of ERISA’s substantive requirements, including the fiduciary duty rules.
“Tax-qualified” Plans
funded, with significant tax benefits for employer and employee

7. ERISA “Plans” - Definitions
“Qualified” defined contribution plans – benefit based on individual accounts adjusted for actual investment experience and expense
The Company 401(k) Plan
“Qualified” defined benefit plans – promises to provide a retirement benefit based on an objective benefit formula (any non-DC plan)
The Company Retirement Plan

8. Tax Qualification - Pension Plan Overview
Significant tax benefits for employer and employee
Immediate employer deduction for funding
Tax deferral for benefit build-up
Tax rules govern significant aspects of plans, including: eligibility, coverage, benefit allocations and accruals, vesting and distributions
Many of the basic tax rules are included in both of the Internal Revenue Code and ERISA.

9. ERISA Fiduciary Basics
Fiduciary Responsibility Provisions
Impose “highest” fiduciary duty – stricter than business judgment rule
Supplemented by prohibited transaction rules
Administrative Requirements
Reporting and disclosure; plan documentation; claims procedures; rules governing custody and control of “plan assets”
Liability and Enforcement
Personal Liability of Fiduciaries

10. Definition of “Fiduciary”
A “fiduciary” is a person who –
has any authority or control re management of plan assets
has discretionary authority over plan administration, OR
renders investment advice to the plan for a fee
“Functional Fiduciary”
Need not be identified as a fiduciary or accept fiduciary status. Actual exercise of control is sufficient.

11. Definition of “Fiduciary”
Some fiduciaries are “Named Fiduciaries”
Plan “administrator” and “named fiduciary” responsible for plan investments; decision-maker for benefit claims; trustees.
Plans may allow named fiduciaries to allocate responsibilities among themselves, delegate other persons to carry out fiduciary duties, and appoint investment managers.

12. Definition of “Fiduciary”
“Settlor” activities (e.g., employer, business decisions relating to plan establishment and design) are not fiduciary activities.
Amending a plan is a “settlor” activity, not subject to ERISA requirements governing fiduciary activities.
May not use plan assets to pay for “settlor” activities.
Settlor or fiduciary advice – privilege considerations.

13. Definition of “Fiduciary” – Responsibilities
Administrative
Select & monitor plan service providers (e.g., third party recordkeeper, counsel, actuary)
Statutory reporting (Form 5500)
Participant communications
Eligibility and benefit claims processing and appeals
Recordkeeping (plan and participant)
Ensuring tax qualification
Ensuring compliance with group health plan mandates
Approval of plan expenses
ERISA bond; insurance
Investment/Asset Management
Trustee selection & monitoring
Investment manager/fund selection & monitoring
Adopt and monitor investment policies: investment objectives, asset allocation, proxy voting, 401(k) plan options
404(c) compliance (401(k) plan)
Establish and monitor of funding and actuarial policies (defined benefit plans)
Ensure timely plan contributions

14. Fiduciary Duties - Overview
ERISA’s general fiduciary responsibility requirements require fiduciaries to —
act prudently,
solely in the interest of the plan's participants and beneficiaries (duty of loyalty),
use plan assets only to pay plan participants and beneficiaries and "reasonable" plan expenses,
diversify plan investments to avoid large losses, and
comply with governing plan documents.

15. Fiduciary Duties - Prudence
Process, process, process . . .
Fiduciary need not guarantee success of decisions, but must ensure prudent decision-making process
Good intentions are not enough
"A pure heart and an empty head are not an acceptable substitute for proper analysis.”
Necessary to document procedural prudence
See e.g., Tussey v. ABB (401(k) fee case)

16. Fiduciary Duties - Prudence
A prudent procedure is one employed by a “prudent expert” and not a “prudent layman”
Identify necessary information
Gather from competent, independent sources
Decide, consistent with information
Document the decision
Use experts, as necessary
All fiduciary decisions are subject to this standard.
Courts and DOL defer to fiduciaries who engage in a prudent process, even if decisions are wrong in hindsight.

17. Fiduciary Duties - Loyalty
Investment Committee members may “wear two hats”
Employer/Settlor Hat: need not consider plan’s interests (e.g., plan amendments)
Fiduciary Hat: make decisions “solely in the interest” of plan participants
Example: In choosing a service provider and approving fees, may not consider “non-plan” interests
See e.g., Tussey v. ABB (court concluded 401(k) plan fees improperly subsidized other-employer costs)

18. Fiduciary Duties – Prohibited Transactions
General fiduciary provisions are supplemented by “prohibited transaction” rules.
ERISA Section 406(a) prohibits certain transactions between a plan and "parties in interest."
ERISA Section 406(b) prohibits self-dealing and other certain transactions involving fiduciary conflicts.
ERISA Section 408 provides statutory exemptions and allows administrative exemptions.
IRC Section parallel prohibited transaction excise tax provisions impose excise taxes on "disqualified persons."

19. Fiduciary Duties – Prohibited Transactions
Self-Dealing
Ex: Fiduciary may not cause plan to buy property or obtain services from fiduciary’s affiliate
Conflicts (Representing Both Sides)
Ex: Fiduciary may not cause plan to buy property from the fiduciary or another person represented by fiduciary (including another plan)
“Kickbacks”
Ex 1: Fiduciary (e.g., consultant) may not receive finder’s fee from service provider with whom plan contracts
Ex 2: Receiving gifts and entertainment

20. Fiduciary Duties – Services and Fees
Plans may receive services and pay fees to a "party in interest" (including a service provider) only if conditions under services exemption at ERISA section 408(b)(2) are met —
services are "necessary and appropriate,"
plan fees are "reasonable"
reasonable arrangement
terminable on reasonably short notice
service providers fully disclose fees
fiduciaries should document receipt and review
No relief for services if there is fiduciary misconduct, e.g., self-dealing, conflicts or kickbacks.

21. Fiduciary Duties – Services and Fees
Decisions about the disposition of plan assets, including whether to pay expenses are “fiduciary”
Under DOL rules, plans may pay reasonable expenses -
For services that are appropriate and helpful to the plan, e.g., administrative/investment expenses (but not settlor expenses)
If fees that are "reasonable" in amount (compared to fees charged by other providers of similar services)
Reimbursement of reasonable fiduciary expenses (travel, meetings, etc.) is permitted
In general, fiduciaries may not approve the use of plan assets to pay even reasonable fees to itself or a party in whom the fiduciary has an “interest”

22. Fiduciary Duties – Services and Fees
A fiduciary may engage itself (or its affiliate) to provide plan services, IF plan only pays “direct expenses”.
Direct expenses are expenses that would not be incurred “but for” the fiduciary’s provision of services, e.g.,
costs, such as travel expenses, telephone charges, leasing or purchase price of dedicated equipment; amounts paid to 3d parties for services
salary and benefits of employees engaged full-time in providing necessary plan services
overhead costs are NOT included
Must document basis for direct expenses charged.
See e.g., Sunkist Growers Settlement (C.D. Ca. 10/18/13) (DOL enforcement action)

23. Fiduciary Duties – Participant-Directed Plans
ERISA § 404(c) relieves plan fiduciaries from liability for losses that are a “direct and necessary” result of a participant’s exercise of control over the investment of his or her account.
Plan fiduciaries remain responsible for selecting and monitoring plan investment options.
Relief is available ONLY if conditions under DOL regulations are satisfied.

24. Fiduciary Duties – Participant-Directed Plans
404(c) regulations require:
“Opportunity” to exercise control.”
Participants receive certain information and plan permits participants to give directions.
A “broad” range of investment options.
Actual exercise of control by participant.
Effective in 2012, new regulations require increased disclosure to participants about investments and fees.

25. Fiduciary Duties – Participant-Directed Plans
New ERISA § 404(c)(4) – participants treated as “exercising control” over their accounts in a “qualified change in investment options” if participant provided prior instructions.
New ERISA § 404(c)(5) – a participant is treated as exercising control over his or her plan account “in the absence of a direction,” if the account is invested in a “qualified default investment alternative” according to DOL regulations.

26. Fiduciary Duties – Target Date Funds
DOL “Tips” for Plan Fiduciaries
Review performance and fees, asset class allocation, glidepath.
Consider how allocation and glidepath align with participants’ ages and retirement dates.
Consider fees of TDF and “underlying funds.”
Ask about non-proprietary or custom TDF options.

27. Fiduciary Duties – Health and Welfare Plans
Benefits may be self-funded or insured
Fiduciary obligations exist for both
Participant contributions generally set by employer each year (settlor function) but collection of contributions is a fiduciary duty
DOL has adopted a “non-enforcement” policy (Tech. Rel ), which generally provides that:
Participant contributions that are paid through a cafeteria plan need not be held in trust.
Participant contributions that are for insurance premiums that are remitted to insurer as soon as reasonably possible but no later than 90 days need not be held in trust.

28. Fiduciary Duties – Health and Welfare Plans
Fiduciaries are responsible for ensuring compliance with a number of unique requirements that apply to group health plans.
The Affordable Care Act expanded these requirements.
Examples include COBRA, HIPAA portability and nondiscrimination, Mental Health Parity, notice and disclosure requirements and complex claims procedures that may require external review.

29. Liability and Enforcement
Fiduciaries may have personal liability for:
plan losses caused by a breach of duty,
disgorging profits, and
other appropriate equitable relief.
ERISA Section 409
A fiduciary may be liable for another fiduciary’s breach of duty.
ERISA Section 405

30. Liability and Enforcement
ERISA Section 502 allows participants, beneficiaries, DOL, and other fiduciaries to bring claims for breach of fiduciary duty under ERISA section 409.
Under IRC § 4975, "disqualified persons" engaging in prohibited transactions are liable for excise taxes of 15% of "amount involved," if transaction involves a retirement plan.
Civil penalties of 5% of "amount involved" for other plans may be imposed by DOL (ERISA § 502(i)).
Breaching fiduciaries also may be personally liable for a 20% penalty in cases brought by DOL (ERISA § 502(l)).

31. Liability and Enforcement DOL/EBSA Enforcement Activities
Delinquent Contributions
Plans in Bankruptcy/Abandoned Plans
Employee Stock Ownership Plans
Consultant/Adviser Project
Participant and Beneficiary Complaints
5500 Desk Reviews/Non-Filer Enforcement
Health Fraud/Multiple Welfare Arrangements
See
Other Priorities – Review of service provider fee disclosures; health plan compliance

32. DOL’s Tips for Fiduciaries
Have you identified your plan fiduciaries, and are they clear about the extent of their fiduciary responsibilities?
Are you aware of the schedule to deposit participants’ contributions in the plan, and have you made sure it complies with the law?
If you are hiring third-party service providers, have you looked at a number of providers, given each potential provider the same information, and considered whether the fees are reasonable for the services provided?
Have you documented the hiring process?

33. DOL’s Tips for Fiduciaries
Are you prepared to monitor your plan’s service providers?
Have you identified parties-in-interest to the plan and taken steps to monitor transactions with them?
Are you aware of the major exemptions under ERISA that permit transactions with parties-in-interest, especially those key for plan operations (such as hiring service providers and making plan loans to participants)?
Have you reviewed your plan document in light of current plan operations and made necessary updates? After amending the plan, have you provided participants with an updated SPD or SMM?
Do those individuals handling plan funds or other plan property have a fidelity bond?

34. DOL’s Tips for Fiduciaries
Does your plan have a reasonable claims procedure that is being followed by plan fiduciaries?
Does your plan have a procedure for handling Qualified Medical Child Support Orders?
If participants make their own investment decisions, have you provided sufficient information for them to exercise control in making their own decisions?

35. Questions? Groom Law Group, Chartered 1701 Pennsylvania Avenue, NW
Suite 1200
Washington, DC 20006