0. IRS, DOL Audits, and Fiduciary Litigation
FRED REISH, ESQ.
November 6, 2014

1. DOL Investigations of Plans
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

2. DOL Investigations
The Department of Labor continues to prioritize late deposits of deferrals, significant losses, and related party transactions.
However, it is also focusing on other issues . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

3. DOL Investigations: Investment Expenses
In a DOL investigation, an investigator asked:
“Why did the Plan decide to use A shares for some of its investment funds rather than shares offered to employer-sponsored plans, such as R shares?
For the [XYZ mutual fund], why did the Plan decide to offer Y shares? Could the Plan use ‘I’ shares?”
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

4. DOL Investigations: 408(b)(2)
The DOL has started investigating plans concerning 408(b)(2) disclosures. A recent DOL letter requested:
Copies of fee disclosures from service providers.
All written agreements relating to services rendered to the Plan by all service providers.
Minutes of any Board of Directors’ meetings in which the Plan was discussed as well as the minutes of any Plan Trust or Plan Committee meetings.
continued . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

5. DOL Investigations
Continued . . .
Sch. C - Indirect Compensation from Investment Vehicles
Documents sufficient to show all compensation (money and any other thing of value) paid by any fund, account, or entity in which the Plan invests or charged against the fund or account and reflected in the value of the Plan's investment, to any person or entity in connection with services rendered to the Plan.
continued . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

6. DOL Investigations
Continued . . .
Examples include, but are not limited to: brokerage commissions and fees charged in connection with purchases and sales of interest in the fund, sub- transfer agency fees, shareholder servicing fees, account maintenance fees, 12b-l distribution fees, . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

7. DOL Investigations Sch. A, Line 2 - Insurance Commissions and Fees
Documents sufficient to show all compensation (money and any other thing of value) paid by the Plan or on behalf of the Plan to any person or entity in connection with services rendered to the Plan, including but not limited to commissions and consulting fees, and sales and base commissions . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

8. DOL Investigations of Service Providers
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

9. Why is the DOL Investigating Service Providers
The Department of Labor is concerned with:
prohibited transactions by service providers;
the significant influence that service providers have over retirement plan operations; and
conflicted advice that may adversely impact participants.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

10. What is the DOL looking for?
Whether a service provider is acting as a fiduciary (acknowledged or functional).
Whether a service provider can affect its fees.
Whether fees have been properly disclosed.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

11. Prohibited Transaction Examples
If acting as a fiduciary and receive variable compensation based on fiduciary advice.
If acting as a fiduciary and recommends an investment fund managed by an affiliate.
If, as fiduciary, recommends investments or investment managers to participants that provide additional compensation (e.g., asset allocation models or managed accounts).
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

12. Document Request
As part of the investigations, the DOL typically requests a large quantity of documents.
8. Documents constituting or describing an agreement, arrangement or understanding between the company (or an affiliate) and an employee benefit plan client (or such client’s sponsor) that either of the following activities by the company (or an affiliate) would serve as the primary basis for investment decisions regarding investment of the assets of the plan:
rendering advice to the plan as to the value of securities or other property, and/or
making recommendations to the plan as to the advisability of investing in, purchasing or selling securities or other property.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

13. Document Request DOL requests (cont.):
11. Documents indicating the names, titles and last known business and home addresses and telephone numbers of the individuals who:
rendered advice to employee benefit plan clients as to the value of securities or other property,
made recommendations to employee benefit plan clients as to the advisability of investing in, purchasing or selling securities or other property and/or,
. . . including identification of the name and EIN and plan number of each such plan.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

14. Document Request DOL requests (cont.):
12. Documents that describe, list, or schedule any fees charged by the company or an affiliate to manage the assets of, or provide investment advice or other services to, employee benefit plan clients.
. . .
20. Contracts, service agreements and any other documents relating to any relationships between the company and any mutual fund or mutual fund family whose products or services the company has identified for, recommended to, offered to, or utilized in connection with services provided to any ERISA plan client.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

15. Document Request DOL requests (cont.):
27. Documents sufficient to identify all compensation received, directly or indirectly, by the company from mutual funds or mutual fund families whose products or services the company has identified for, recommended to, offered to, or utilized in connection with services provided to, any ERISA plan client.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

16. Actual DOL Investigations
“[Wirehouse] has settled allegations made by the U.S. Department of Labor that the company and one of its employees violated [ERISA] by failing to prevent the fiduciaries of pension plans of two Alabama-based companies from engaging in prohibited transactions.
The out-of-court settlement requires [Wirehouse] to restore a total of $170,854 to the plans and provide additional training to its investment advisers serving as fiduciaries of employee benefit plans.”
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

17. Actual DOL Investigations
“[BD/RIA] has agreed to pay $633, to 10 pension plans This agreement follows an investigation by the [DOL] that found the full-service brokerage company violated federal law when it recommended certain hedge funds of funds as investments These recommendations resulted in the hedge funds of funds paying [BD/RIA] revenue-sharing and other fees.”
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

18. Actual DOL Investigations
“[RIA] has agreed to pay $1,265, to 13 pension plans to resolve alleged violations of ERISA.
An investigation found that the fiduciary investment adviser made investments in mutual funds on behalf of ERISA-covered defined benefit plan clients and received 12b-1 fees from those funds [RIA] failed to fully disclose the receipt of the 12b-1 fees, and to use those fees for the benefit of the plans either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the company.”
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

19. IRS Audits of Plans
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

20. Common IRS Audit Issues
Definition of compensation
Plan document updates$
Employee eligibility and/or classification
Plan loans$
In-service distribution issues
Timely deposit of deferrals
ADP/ACP nondiscrimination testing
Vesting
Minimum required distributions
Top-heavy and section 410(b) testing
QDRO procedures
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

21. Other Issues of Concern
Large Plan Audits (2,500 employees or more):
Partial Termination
Substantial change in year, or over years in participant count
Merger and Acquisitions
Protected optional forms
Inaccurate participation data
continued . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

22. Other Issues of Concern
Continued . . .
Distributions and loans
Spousal consents
Assets
Large administrative expenses
Large category of “other assets”
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

23. Selected Current EPCU Projects
457(b) Plans of Non-Governmental (Exempt Organizations)
Diversification of Investments with Employer Securities in DC Plans
Form 5500-EZ Excess Participant Loans Project
Ineligible Employer – 403(b) Project
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

24. EPCU Letter Regarding Company Stock
This letter is being sent to you because our records show that the plan referenced above filed a return that contained information requiring further explanation. This letter constitutes a compliance check.
Failure to provide this information could result in further action or examination of your plan.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

25. EPCU Letter Regarding Company Stock
Does the plan document contain the diversification language required by Internal Revenue Code section 401(a)(35)?
Are applicable individuals who have accounts attributed to elective deferrals, employee contributions, or rollover contributions that are invested in employer securities given the opportunity to divest the employer securities and reinvest an equivalent amount in other investment options?
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

26. ERISA Litigation
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

27. Supreme Court of the United States Fifth Third Bancorp, et al. , v
Supreme Court of the United States Fifth Third Bancorp, et al., v. Dudenhoeffer
We hold that no such [Moench] presumption applies. Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund's assets.
Note: Ruling on plan document language.
134 S. Ct (2014).
continued . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

28. Fifth Third Bancorp, et al., v. Dudenhoeffer
Continued . . .
In our view, where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances. [Emphasis added.]
continued . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

29. Fifth Third Bancorp, et al., v. Dudenhoeffer
Continued . . .
. . . , courts must bear in mind that the duty of prudence, under ERISA as under the common law of trusts, does not require a fiduciary to break the law.
Note: Investment policies for company stock.
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

30. ERISA Litigation Risk Management
Fiduciary Duties Relating to:
Cost of funds offered
Expense ratios/payment levels
In-house funds
Fees
Fiduciary warranty
Float
Substituting Funds
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

31. In-House Funds Krueger v. Ameriprise:
Ameriprise 401(k) plan offered investment options of funds of its affiliates.
The plaintiffs alleged that investments were selected as options because they generated profits to the sponsor and its affiliates.
The court denied the defendants’ motion to dismiss and held that the plaintiffs’ allegations plausibly alleged that affiliated funds were selected to benefit the defendants at the expense of participants.
The fact that the defendants included a range of investment options under the plan did not shield the defendants from liability.
2012 WL (D. Minn. Nov. 20, 2012).
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

32. Fiduciary Warranty Santomenno v. Transamerica Life Ins. Co.:
The plaintiffs alleged that Transamerica charged excessive fees in connection with mutual fund investment options.
Transamerica’s contract included a “warranty” that the plan sponsor would not be liable for fiduciary breach.
Transamerica argued that it did not have a fiduciary duty to participants because fees were negotiated before it became a fiduciary.
The court held that Transamerica could not escape fiduciary status – the fiduciary warranty undermined what might otherwise have been an arm’s length transaction over fees.
2013 WL (C.D. Cal. Feb. 19, 2013).
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

33. Quick Hits
Perez v. Geopharma, No. 8:14-cv-66-T-33TGW, 2014 WL (M.D. Fl. July 25, 2014).
Check signing authority results in fiduciary status.
Tatum v. RJR Nabisco Investment Committee, 761 F.3d 346 (4th Cir. 2014).
Failure to engage in a prudent process results in higher standard of care (“would” vs. “could”).
Hi,Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, 2014 WL (6th Cir. 2014).
Service provider becomes ERISA fiduciary for receipt of non-disclosed and non-approved compensation.
continued . . .
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

34. Quick Hits
Continued . . .
Tolbert v. RBC Capital Markets Corporation, 758 F.3d 619 (5th Cir. 2014).
Issue: Is the non-qualified deferred compensation plan an ERISA plan?
Holding: Yes, because the “express terms” of the plan contemplate employees deferring income “to the termination of covered employment or beyond.”
Remanded: Was it a “top hat” plan? (It covered some administrative assistants.”)
IRS Audits, DOL Investigations and Fiduciary Litigation - November 6, 2014

35. FRED REISH, ESQ. 1800 Century Park East, Suite 1500 Los Angeles, CA 90067
(310) (310) [fax]
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