1. © 2012 McGladrey LLP. All Rights Reserved. February 18, 2014 Retirement Plans and Fiduciary Duty

2. © 2012 McGladrey LLP. All Rights Reserved. Today’s presenter Sheryl Eakins Director Elkhart, IN Sheryl.eakins@mcgladrey.com 574-296-3712 1

3. © 2012 McGladrey LLP. All Rights Reserved. Retirement Plans and Fiduciary Duty  Today’s topics - Basic fiduciary duty - Who is a fiduciary? - Fiduciary breach - Best practices to minimize fiduciary liability 2

4. © 2012 McGladrey LLP. All Rights Reserved. Basic fiduciary duty

5. © 2012 McGladrey LLP. All Rights Reserved. What is a fiduciary’s basic duty?  A fiduciary should act solely in the interest of the plan's participants and beneficiaries and for the exclusive purpose of providing benefits for participants and their beneficiaries 4

6. © 2012 McGladrey LLP. All Rights Reserved. Basic fiduciary standards  A fiduciary should operate the plan: - For exclusive purpose of providing benefits to participants & beneficiaries and defraying reasonable expenses of administration; - With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; - By diversifying investments of the plan so as to minimize risk of large losses, unless under the circumstances it is clearly prudent not to do so; and - In accordance with the documents and instruments governing the plan insofar as they are consistent with the provisions of Title I of ERISA. 5

7. © 2012 McGladrey LLP. All Rights Reserved. Exclusive purpose  Exclusive purpose rule imposes on a fiduciary duty of loyalty to plan participants & beneficiaries  Examples of failing to follow the exclusive benefit rule - Self-dealing - Preferential treatment of some participants - ESOP trustee’s misleading & biased materials in proxy solicitation - Insurance provider’s (who was fiduciary) allocated investment fees & expenses that were not reasonable - Improper valuation of plan assets 6

8. © 2012 McGladrey LLP. All Rights Reserved. Exclusive purpose, fees  Employers have specific and ongoing fiduciary obligation under ERISA to evaluate and understand the fees and expenses paid by the plan, employers must: - Establish prudent process for selecting investment alternatives and service providers; - Ensure fees paid to service providers and other expenses reasonable in light of the level and quality of services provided; - Select prudent and adequately diversified investment alternatives; and - Monitor investment alternatives and service providers once they have been selected to assure they continue to be appropriate. 7

9. © 2012 McGladrey LLP. All Rights Reserved. Exclusive purpose fees, cont.  DOL three-part initiative on fee disclosure - Form 5500, Schedule C Disclosure - Service Provider Fee Disclosure Requirements - Participant Level Fee Disclosure Requirements 8

10. © 2012 McGladrey LLP. All Rights Reserved. Exclusive purpose fees, cont.  Form 5500, Schedule C (effective 01/01/2009) - Required disclosure of comp to service providers of $5,000 or more in direct or indirect compensation  Service Provider (effective 07/01/2012) - Service Providers must disclose information to fiduciaries so that the fiduciaries may: Assess reasonableness of compensation paid to service providers Determine whether there are any actual or potential conflicts of interest that affect service provider’s performance of services Satisfy reporting and disclosure requirements under ERISA  Participant Disclosures (effective August 30, 2012) - Plan fiduciaries must disclose information to plan participants to help participants make informed investment decisions 9

11. © 2012 McGladrey LLP. All Rights Reserved. Prudent man standard  Based on objective prudent man test developed in common law of trusts  Courts interpret prudent man rule bearing in mind special nature & purposes of employee benefit plans  Examples of not following prudent man rule: - Employer removed as trustee of defined contribution plan because of repeated efforts to plunder the plan’s assets - Plan fiduciary didn’t give alternate payee opportunity to obtain valid QDRO - Bank trustee that failed to act prudently when it resigned as trustee 10

12. © 2012 McGladrey LLP. All Rights Reserved. Prudent man standard, investments  A trustee or other fiduciary responsible for investing the plan's assets must, in order to satisfy the prudent person standard, consider the following factors: - The composition of the portfolio with regard to diversification - The liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan - The projected return of the portfolio relative to the funding objectives of the plan - In accordance with Investment Policy Statement 11

13. © 2012 McGladrey LLP. All Rights Reserved. Investment Policy Statement (IPS)  IPS purpose is to set forth goals and objectives of investment options to be made available to plan participants  Should be framework of guidelines for - Monitoring and evaluating plan’s investment options - Including procedure for terminating and replacing any nonperforming fund 12

14. © 2012 McGladrey LLP. All Rights Reserved. Investment Policy Statement (IPS)  An effective IPS might include, among other things: - Statement regarding investment objectives applicable to long-term retirement plan savings - Methodology for selecting broad, diversified array of investment options - Criteria for selecting investment options to allow participants choices appropriate for their personal savings goals - Performance standards expected to be retained in investment menu - Criteria used to evaluate the fees and expenses of each fund - Plan's processes for monitoring and evaluating plan investments - Names and responsibilities of those plan fiduciaries charged with selecting and monitoring the plan's investments - Compliance with ERISA Section 404(c), if applicable 13

15. © 2012 McGladrey LLP. All Rights Reserved. Investment diversification  Plan fiduciary must diversify plan assets to minimize the risk of large loses unless clearly prudent not to do so  Basic policy is to require diversification & if on its face doesn’t exist fiduciary has burden of justifying failure to follow  Risk of loss through default is not only risk addressed by diversification requirement - Also risk of diminution of assets through market conditions & not through default 14

16. © 2012 McGladrey LLP. All Rights Reserved. Investment diversification, cont.  Exemption from duty to diversify investments in employer stock in eligible individual account plan - Including ESOP  Fiduciary liability related to individual account plans controlled by participants & beneficiaries limited in some circumstances - ERISA section 404(c) compliance is voluntary - Fiduciaries who choose to comply may be relieved of fiduciary responsibility for investment losses when participants exercise independent control - Fiduciaries are not relieved of duty to consider the prudence of investment alternatives made available to participants under the plan 15

17. © 2012 McGladrey LLP. All Rights Reserved. ERISA section 404(c) plan  Final regulations provide that participants must: - Have opportunity to choose from broad range of investment alternatives At least 3 choices, each diversified with materially different risk & return characteristics - Receive investment instruction with appropriate frequency Must be allowed to give investment instructions at least quarterly - Diversify investments - Obtain sufficient information to make informed investment decisions 16

18. © 2012 McGladrey LLP. All Rights Reserved. Duty to act in accordance with plan documents  Fiduciary has duty to not only act with exclusive purpose and according to prudent man standard but in accordance with documents & instruments governing plan - Plan document is contract between plan sponsor and plan participants & beneficiaries - Plan document is manual for operating and administering plan Must keep it updated to comply with ERISA and IRC  Although ERISA imposes some restrictions on plan provisions it permits statement of administrator’s duties - If plan contains such statement these provisions control  Duty to act in accordance with plan documents doesn’t override fiduciary’s foremost duty to serve interests of plan participants 17

19. © 2012 McGladrey LLP. All Rights Reserved. Duty to act in accordance with plan documents, cont.  Developing prudent process for managing & administering plan and documenting compliance with that process will increase chances of limiting your fiduciary liability  These fiduciary procedures could include: - Compliance with written investment policy - Compliance with ERISA 404(c) - Compliance with ERISA’s reporting and disclosure rules - Development and delivery of effective, easy-to-understand employee communications 18

20. © 2012 McGladrey LLP. All Rights Reserved. Avoid prohibited transactions  Plan fiduciary must avoid causing plan to engage in any transaction that may constitute direct or indirect: - Sale, exchange, or lease between plan and party in interest - Lending money or other extension of credit between plan and party in interest - Furnishing goods, services or facilities between plan and party in interest - Transferring or using plan assets for own benefit or that of any other plan fiduciary or party in interest - Dealing with employer securities or property in violation of ERISA 19

21. © 2012 McGladrey LLP. All Rights Reserved. Party in interest defined  Under ERISA the following are parties in interest with respect to a plan: - Any fiduciary, counsel, or employee of the plan - Person providing services to the plan - Employer who has employees covered by the plan, and any direct or indirect owner of 50% or more of such employer - Relative of persons described previously - Employee organization, any of whose members are covered by the plan - Corporation, partnership, estate, or trust of which at least 50% is owned by any person or organization described above - Officers, directors, 10 percent-or-more shareholders, and employees of any person or organization described above - 10 percent-or-more partner of or joint venturer with any person or organization described above 20

22. © 2012 McGladrey LLP. All Rights Reserved. Who is a fiduciary?

23. © 2012 McGladrey LLP. All Rights Reserved. Fiduciary  A fiduciary under ERISA is any person who: - Exercises any discretionary authority or control over the plan's management; - Exercises any authority or control over the management or disposition of the plan's assets; - Renders investment advice for a fee or other compensation with respect to plan funds or property; or - Has any discretionary authority or responsibility in the plan's administration.  Test for determining fiduciary status is functional one. If any person has or may exercise any of the above functions then will be deemed a fiduciary. 22

24. © 2012 McGladrey LLP. All Rights Reserved. Fiduciary, cont.  Plan sponsor is always a fiduciary  Examples of those who may be fiduciaries: - Plan administrator - Third party administrator - Officer or director - Shareholder - Trustee - Insurance company  Will depend on level of involvement 23

25. © 2012 McGladrey LLP. All Rights Reserved. Activities not creating fiduciary status  Those performing purely ministerial functions within guidelines established by others are not plan fiduciaries. DOL regulations list the following job categories as ministerial: - Application of rules to determine eligibility for participation or benefits; - Calculation of service and compensation for benefit purposes; - Preparing communications to employees; - Maintaining participants' service and employment records; - Preparing reports required by government agencies; - Calculating benefits; 24

26. © 2012 McGladrey LLP. All Rights Reserved. Activities not creating fiduciary status  Ministerial functions, cont.: - Explaining the plan to new participants and advising participants of their rights and options under the plan; - Collecting contributions and applying them as specified in the plan; - Preparing reports covering participants' benefits; - Processing claims; and - Making recommendations to others for decisions with respect to plan administration. 25

27. © 2012 McGladrey LLP. All Rights Reserved. Advisors/relationships typically not fiduciaries  Following are not considered plan fiduciaries solely because they provide services to a plan - Attorney - Accountant - Investment advisor - Actuary - Insurance agent - Asset custodian - Consultants  Will be regarded as fiduciary if exercise discretionary authority or control over management or administration of plan or plan assets 26

28. © 2012 McGladrey LLP. All Rights Reserved. Fiduciary Breach

29. © 2012 McGladrey LLP. All Rights Reserved. Breaches of fiduciary duty  Fiduciary may be personally liable if considered to be in breach of fiduciary duties under ERISA  May be considered in breach of fiduciary duties if: - Fail to comply with exclusive benefit rule by entering into self-dealing transactions, such as using plan assets for own or company's benefit - Fail to exercise responsibilities to the plan in a responsible manner - Fail to diversify the menu of investment options offered under the plan - Fail to monitor the plan's investment options and replace funds as necessary pursuant to investment policy - Engage in a prohibited transaction 28

30. © 2012 McGladrey LLP. All Rights Reserved. Which decisions made by plan representatives are fiduciary decisions?  Not every decision related to retirement plan is fiduciary decision  Fiduciary liability only attaches to decisions that are fiduciary in nature  DOL has provided guidance regarding which are and are not fiduciary in nature  Decisions that are not fiduciary in nature are referred to as settlor functions - More in nature of business decisions than fiduciary decisions 29

31. © 2012 McGladrey LLP. All Rights Reserved. Which decisions made by plan representatives are fiduciary decisions?  Examples of settlor functions: - Plan design decisions (e.g., whether or not to offer loans) - Decision to terminate a plan - Decision to make discretionary amendments to a plan (e.g., to reduce or eliminate an employer match) 30

32. © 2012 McGladrey LLP. All Rights Reserved. Examples of failure to exercise fiduciary duty  Trustee distributed plan assets to plan administrator when plan provided distributions could only be made to participants & beneficiaries  Trustee failed to ensure that plan contributions and loan repayments were made to plan  Trustee who distributed assets of terminated plan to benefit himself  Trustee who failed to distribute plan benefits to beneficiary as soon as amount payable was determined  Company that unreasonably delayed transfer of account balance from one fund to another 31

33. © 2012 McGladrey LLP. All Rights Reserved. Repercussions of failing fiduciary duty  Breach of fiduciary duty may result in: - Penalties - Required repayment of lost earnings - Intervention of the Department of Labor (DOL) in your plan - Recovery by claimant of attorneys’ fees and costs - Participant lawsuits - Need for correction programs 32

34. © 2012 McGladrey LLP. All Rights Reserved. Penalties  20% penalty of amount payable for breaches of fiduciary duties pursuant to court order or settlement  DOL may waive or reduce penalty  Settlement by fiduciary doesn’t prohibit beneficiary from later suing for same wrong  Excise tax for entity managers who approve prohibited tax shelter transactions - $20,000 for each approval - Entity manager is person who decides assets to be invested in transaction 33

35. © 2012 McGladrey LLP. All Rights Reserved. Repayment of assets or lost earnings  Any fiduciary who engages in prohibited transaction is personally liable for any losses to plan - Must restore to plan any profit made through use of plan assets 34

36. © 2012 McGladrey LLP. All Rights Reserved. Recovery of fees  ERISA authorizes recovery of attorneys’ fees, costs & interest  Court may award reasonable attorney’s fees and costs to prevailing party  Supreme court ruled there’s no requirement litigant be prevailing party in order to be awarded attorney’s fees & costs  Courts have examined 5 factors in deciding whether to award fees & costs, not all of which must be present to justify award: - Opponent's culpability or bad faith - Opponent's ability to pay - Deterrent effect on others in similar circumstances - Whether action benefited all plan participants or the plan as a whole - Relative merits of parties' positions 35

37. © 2012 McGladrey LLP. All Rights Reserved. Participant claims  ERISA permits plan participants to sue for equitable relief on own behalf when harmed by fiduciary breach of duty  Monetary damages & legal relief not available  To establish standing to bring ERISA claim party must allege: - Injury in fact - Casual connection between injury & the alleged conduct - Redressability 36

38. © 2012 McGladrey LLP. All Rights Reserved. Other fiduciary issues  Nonfiduciary can be held liable for breach of fiduciary duty - Claims for restitution rather than monetary damages against nonfiduciary parties in interest permitted under ERISA - 20% penalty tax may also apply - May be liable for participating in prohibited transactions 37

39. © 2012 McGladrey LLP. All Rights Reserved. Other fiduciary issues, cont.  Qualified retirement plan can offset fiduciary’s liability to plan for breach of fiduciary duty against fiduciary’s benefit’s from the plan, e.g.: - If participant convicted of committing crime involving the plan - For a civil judgment in connection with violation of fiduciary rules - In case of settlement agreement between DOL or PBGC and participant 38

40. © 2012 McGladrey LLP. All Rights Reserved. Best Practices

41. © 2012 McGladrey LLP. All Rights Reserved. Best Practices  Correction programs  Government guidance  Asset and liability protection  Helpful tools 40

42. © 2012 McGladrey LLP. All Rights Reserved. Correction programs  IRS Employee Plans Compliance Resolution System (EPCRS)  DOL programs administered by Employee Benefits Security Administration (EBSA) - Delinquent Filers Voluntary Compliance (DFVC) program - Voluntary Fiduciary Correction Program (VFCP) 41

43. © 2012 McGladrey LLP. All Rights Reserved. EPCRS  Correcting compliance errors - Self correction versus voluntary disclosure - IRS procedure with safe harbor guidelines - Addresses many common problem areas Eligibility & entry errors Testing failures Excess contributions Vesting failures Failure to pay RMD Top-heavy failures

44. © 2012 McGladrey LLP. All Rights Reserved. DFVC  EBSA program for delinquent Form 5500 filings  Plan administrators can bring plans into compliance for filing of annual reports  Late and non-filing plans come into compliance by filing completed 5500 for each plan year that annual report was not filed  Fixed penalty amounts  Amounts based on whether large or small plan  Per plan cap on penalty  Program available if have not received late file notice from DOL  IRS will waive separate penalties if file with DOL under DFVC  Penalty may not be paid from plan assets 43

45. © 2012 McGladrey LLP. All Rights Reserved. VFCP  EBSA program that allows for corrective action in cases of specified breaches of fiduciary duty by voluntarily undertaking corrective action prior to EBSA audit or investigation  Corrections must restore to the plan: - Assets that would have been available to the plan if the breach had not occurred - Lost earnings, including profits resulting from the use of assets  If fiduciary corrects eligible transaction in accordance with requirements EBSA will issue no- action letter 44

46. © 2012 McGladrey LLP. All Rights Reserved. VFCP, cont.  Eligible transactions: - Delinquent participant contributions and participant loan repayments to pension plans - Delinquent participant contributions to insured welfare plans or welfare trusts - Issuing a loan at below-market interest rate to party in interest - Sale of asset by plan to party in interest - Others 45

47. © 2012 McGladrey LLP. All Rights Reserved. Participant contribution timing  Remittance of employee withholdings - As soon as money can be reasonably segregated, not to exceed 15 th working day of the following month - No formal policy for large plans Small plan requirement is 7 business days DOL enforces policy similar to remittance of payroll taxes Facts & circumstances - Failure to timely remit is prohibited transaction

48. © 2012 McGladrey LLP. All Rights Reserved. Locating missing participants - Plan administrator has fiduciary duty to make reasonable efforts to locate all participants - Reasonable efforts include: Mailing notice to last known address Searching internal and union records Check with designated plan beneficiary SSA letter-forwarding service Publishing general notice Using locator services - After exhausting all efforts consider distributing into interest-bearing account in missing participant’s name 47

49. © 2012 McGladrey LLP. All Rights Reserved. Blackout periods  Administrators of individual account plans required to provide participants & beneficiaries 30-day advance notice of any blackout period  Time during which rights to: - Direct or diversify account investments - To obtain loan - To receive distribution  Temporarily suspended, limited or restricted for more than 3 consecutive days  Penalties can be imposed for failure to provide 48

50. © 2012 McGladrey LLP. All Rights Reserved. Government Guidance  IRS Fix-it Guides - Tips on how to find, fix and avoid common mistakes in retirement plans - Separate guides available for: 401(k) 403(b) SARSEP SEP SIMPLE IRA - Find at IRS-gov/retirement plans/plan sponsor 49

51. © 2012 McGladrey LLP. All Rights Reserved. Government Guidance  DOL did nationwide campaign “Getting it Right— Know Your Fiduciary Responsibilities”, with focus for plan sponsors & other fiduciaries on: - Understanding the terms of their plans - Selecting and monitoring service providers - Making timely contributions to funds - Avoiding prohibited transactions - Making timely disclosures to plan participants and the government  Find information at DOL.gov/EBSA 50

52. © 2012 McGladrey LLP. All Rights Reserved. Asset and liability protection  ERISA fidelity bond - Every fiduciary of a plan and anyone else (plan official) who handles or has authority to handle plan assets must be bonded - Bond must provide direct right of access in favor of the plan in the event the insured plan official takes plan assets - Must be at least 10% of plan assets up to maximum of $500,000 per plan ($1,000,000 if have employer securities in plan) - Unlawful for anyone who is required to be bonded to handle plan assets without bond 51

53. © 2012 McGladrey LLP. All Rights Reserved. Asset and liability protection  Fiduciary liability insurance policy - Protects wide range of plan fiduciaries and the plan itself from certain claims brought against it based on alleged fiduciary breaches - Designed to protect fiduciaries who, although acting in good faith, violate the complex fiduciary rules - Fiduciaries covered are typically: Past, present, and future trustees of the trust under the plan In-house plan administrators All plan and trust fund employees who are fiduciaries Possibly others 52

54. © 2012 McGladrey LLP. All Rights Reserved. Helpful tools  Sample plan sponsor fiduciary manual  Sample plan sponsor fiduciary checklist  IRS to release self-audit tool - Intended to help plan sponsor examine where administration of plan stands and point out possible areas of concern - To be released in next few months 53

55. © 2012 McGladrey LLP. All Rights Reserved. Thank you Retirement Plans and Fiduciary Duty Sheryl Eakins Director Elkhart, IN sheryl.eakins@mcgladrey.com 54

56. © 2012 McGladrey LLP. All Rights Reserved. Disclaimer The information contained herein is general in nature and based on authorities that are subject to change. McGladrey LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. McGladrey LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. Circular 230 Disclosure This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. McGladrey LLP is the U.S. member of the RSM International (“RSMI”) network of independent accounting, tax and consulting firms. The member firms of RSMI collaborate to provide services to global clients, but are separate and distinct legal entities which cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. McGladrey, the McGladrey signature, The McGladrey Classic logo, The power of being understood, Power comes from being understood and Experience the power of being understood are trademarks of McGladrey LLP. © 2012 McGladrey LLP. All Rights Reserved.