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2. Getting Ready for Fee Disclosures, DOL Audits and Other ERISA Issues Marcia S. Wagner, Esq. 2

3. 1. Fee Disclosures – NY Ins Reg 194 2. ERISA Coverage 3. ERISA 408(b)(2) Disclosures 4. DOL Audits 5. Best Practices 3

4. Fee Disclosures – NY Ins Reg 194 4

5. Background on Regulation 194 2004 joint investigation by NY AG and Ins Department. Ins Department begins outreach and proposing draft regulation in 2008. Regulation 194 issued on Jan 25, 2010. Regulation 194 becomes effective on Jan 1, 2011. Agency groups (IIABNY and CIBGNY) give up fight to overturn after loss in NY Appeals Court in 2012. Broad implications for other states and agency groups. 5

6. Scope of Regulation 194 Covers sale of all types of direct insurance. Examples include: – Property/casualty – Life insurance – Accident and health – Surety bonds – Annuities – Individual insurance – Group or blanket insurance 6

7. Role and Compensation Disclosure Always required. May be provided in writing at or before application for insurance contract. Or may be provided verbally, if written disclosure is made at or before issuance of insurance contract. Amount of Compensation Disclosure Only required upon request by insured. Must be provided at or prior to issuance of insurance. 7

8. Required Content for Role and Compensation Disclosure Producer’s role in transaction. Whether producer will receive compensation from sale. Variability of compensation. Statement that Amount of Compensation Disclosure is available upon request. 8

9. Required Content for Amount of Compensation Disclosure Amount of compensation. Alternative quotes. Material ownership of insurer. Material ownership of producer. Statement about rebates. 9

10. ERISA Coverage 10

11. Core Benefits vs. Voluntary Benefits Rising costs created demand for voluntary benefits. Attractive “no cost” solution for employers. Hidden Risk for Voluntary Benefits Dispute may arise between employee and insurer. If benefits are subject to ERISA, employer and producer can be pulled into litigation with insurer. ERISA Coverage Core benefits are generally subject to ERISA. Voluntary benefits may be subject to ERISA under certain circumstances. 11

12. ERISA Test for Benefits Benefits are “established or maintained” by employer. Focus on employer’s involvement in administration. DOL Safe Harbor for Avoiding ERISA Status No employer contributions. Voluntary participation only. Employer involvement is limited to payroll deductions and permitting insurer’s promotion of benefits. No compensation for employer. 12

13. Blurring of Line Between ERISA vs. Non-ERISA Traditionally, only Core Benefits were subject to ERISA. But employers have become increasingly involved in Voluntary Benefits and they may cross the line by: – Negotiating benefits – Subsidizing cost – Linking coverage to employee status – Using employer’s name in promotional materials – Promoting vol. benefits alongside core benefits – Recommending vol. benefits – Indicating that ERISA applies – Assisting employees with claims and disputes 13

14. ERISA 408(b)(2) Disclosures 14

15. Background for 408(b)(2) Fee Disclosures “Hidden” compensation payments from benefit plan’s investment and insurance products to providers. – Employers may be unable to evaluate total compensation of providers. – Indirect compensation is not prohibited under ERISA. – But lack of info may lead to plan sponsor’s breach of fiduciary duties. New 408(b)(2) fee disclosures ensure plan sponsors have sufficient info. 15

16. 408(b)(2) Disclosures Are From ERISA’s PT Rules PT rules prohibit provider from using plan assets. But 408(b)(2) Exemption allows use of plan assets to pay service provider. Conditions for 408(b)(2) Exemption Contract is reasonable. Services are “necessary” for benefit plan operation. Compensation to provider is reasonable. New requirement for retirement benefits. – Disclosures must be made before provider is engaged. Pending requirement for welfare benefits. 16

17. Fee Disclosures Required for Welfare Benefits Current 408(b)(2) fee disclosures do not apply. 408(b)(2) Exemption requires general fee disclosures so employer can confirm compensation is reasonable. How to Ensure Compensation Is Reasonable Employer has duty to request and consider all compensation (including indirect compensation). Providers are subject to liability for participating in employer’s breach of fiduciary duty. Suggested Best Practice for Welfare Benefits – Providers voluntarily provide 408(b)(2) disclosures. 17

18. Service Providers Covered by 408(b)(2) Rule Any person servicing an ERISA retirement plan who receives $1,000 or more for: – Investment advisory services – 401(k) recordkeeping/brokerage services – Key services provided for indirect compensation (e.g., insurance, investment consulting). Example: Insurance producer who sells life insurance and annuity products to fund ERISA pension plan. Must provide written fee disclosures automatically (even if not requested by employer). Service agreement is not required. 18

19. Required Content for 408(b)(2) Disclosures Description of services Description of compensation Manner of receipt of compensation Additional disclosures for indirect compensation Compensation for provider’s affiliate or third party subcontractor must be separately disclosed. 19

20. Timing of 408(b)(2) Fee Disclosures Disclosure must be made reasonably in advance of starting or renewing services. Changes to info must be made no later than 60 days after provider becomes aware of change. Erroneous info will not result in violation if provider has acted in good faith and with diligence. – Errors and omissions must be disclosed within 30 days after coming to light. 20

21. 408(b)(2) Disclosure Failures Disclosure failure results in PT. Severe penalties for plan sponsor and provider. But relief for plan sponsor if corrective action taken. Required Corrective Action from Plan Sponsor Must immediately request corrected disclosure. If provider fails to deliver corrected disclosures within 90 days, plan sponsor must notify DOL. Plan sponsor may need to terminate provider’s services in accordance with ERISA duties. 21

22. DOL Audits 22

23. Source of DOL Enforcement Authority Civil Enforcement – ERISA 502(a) empowers DOL to bring civil actions. – ERISA 502(l) requires 20% civil penalty on all DOL settlements (subject to limited exceptions). Criminal Enforcement – ERISA 501 imposes criminal sanctions for willful violations (maximum of $100k/$500k and 10 years). Investigative Authority – ERISA 504 grants DOL broad authority and may subpoena books/records. 23

24. EBSA’s National Enforcement Projects Contributory Plan Criminal Project (CPCP) – Targets employers and providers who commit fraud and abuse resulting in unpaid contributions to plans. Rapid ERISA Action Team (REACT) – Focuses on plans of employers filing for bankruptcy. Consultant/Advisor Project (CAP) – Targets providers with undisclosed compensation and fiduciary self-dealing (variable compensation). Health Benefits Security Project (HBSP) – Focuses on MEWAs and welfare benefits sold to small businesses by providers engaging in fraud. 24

25. Reasons for Initiating Investigations Participant complaints – Filed with EBSA’s Office of Participant Education Referrals from other regulators (e.g., SEC, IRS) National Enforcement Projects Form 5500 filings 25

26. Procedure for DOL Investigation Initial Letter – Document Request – Appointment Letter Document Production and On-Site Interviews Closing Letter No DOL action to be taken “Voluntary” compliance notice Litigation letter 26

27. Best Practices 27

28. Before the Audit 1)Maintain stand-alone ERISA policy. 2)Track all client accounts subject to ERISA. 3)Ensure employer has wrap plan for welfare benefits. – Meets plan document / SPD requirements under ERISA. – Eliminates multiple 5500 filings. 4)Formalize procedure for fee disclosures and updates. 5)Maintain “model” client documents that reflect current law. 28

29. Before the Audit (cont’d) 6)Ensure all client service agreements are signed. 7)Develop “model” response for routine 5500 info requests. 8)Confirm referrals are fully disclosed and do not violate PT rules. 9)Confirm affiliated and third party subcontractors are fully disclosed. 10)Provide ongoing education/training. 11)Internal audits. 29

30. During the Audit 1)Choose one point person to serve as liaison. 2)Ask DOL for permission to bring in ERISA counsel. 3)Negotiate scope of document request (e.g., limit to sampling of client documents). 4)Perform legal review of subpoenaed and any other requested materials before delivery to DOL. 5)If any discrepancies are uncovered, provide explanation and/or proposed remedial action. 6)Prepare personnel for on-site interviews. 30

31. Getting Ready for Fee Disclosures, DOL Audits and Other ERISA Issues Marcia S. Wagner, Esq. 99 Summer Street, 13th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com 31 A0090735