Title: Overview of ERISA Fiduciary Responsibility and Liability and Best Practices
1Overview of ERISA Fiduciary Responsibility and
Liability and Best Practices
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3Introduction
- I. Fiduciary Responsibilities Under ERISA
- II. Fiduciary Risk and Potential Liability
- III. Fiduciary Protection and Best Practices
4I. Fiduciary Responsibilities Under ERISA
- An ERISA plan must have at least 1 fiduciary.
- Typically, plan sponsor is the plans Named
Fiduciary. - Plans advisor is also a fiduciary if advisor
provides investment advice. - Person is not a fiduciary if such individual or
entity only performs ministerial functions.
5Definition of Fiduciary
- Fiduciary includes the following
- Person with discretionary authority over
management of plan. - Person with authority over disposition of plan
assets. - Advisors who provide investment advice for a fee.
- Person with discretionary authority with respect
to plan administration. - Functional test
- Formal appointment is not required to become a
plan fiduciary. - Fiduciary-like conduct is sufficient to confer
fiduciary status on a person.
6Definition of Investment Advice
- Person provides investment advice if
- Advice on value or advisability of investments
- is provided to plan on regular basis
- under mutual understanding that advice will be
- primary basis for investment decisions
- and based on particular needs of plan.
- Investment education is not fiduciary advice.
- On Oct. 21, 2010, the DOL proposed changes to
investment advice definition, broadening
category of advisors subject to ERISA.
7Fiduciary Responsibilities
- Fiduciary standard of care under ERISA.
- Must act solely in interest of plan participants
- Exclusive purpose of providing benefits to plan
participants. - Carrying out duties prudently.
- Following terms of plan document unless
inconsistent with ERISA. - Diversifying plan investments.
- Paying only reasonable plan expenses.
8Focusing On Specific Duties
- Exclusive purpose of providing benefits
- Primary responsibility to act solely in interest
of participants. - Carrying out duties prudently
- Must manage plan assets with care, skill,
prudence and diligence - that a prudent person acting in a similar
situation - and familiar with such matters would exercise.
- Duty of prudence focuses on process.
- Following terms of plan document
- Must obey unless inconsistent with ERISA.
9Focusing On Specific Duties (contd)
- Diversifying plan investments
- Must diversify plans investments in order to
minimize risk of large losses. - Paying only reasonable plan expenses
- Must ensure fees paid to plans providers are
reasonable. - Separately, prohibited transaction rules also
require (1) service arrangement must be
reasonable, (2)
services must be necessary, and
(3) compensation must be reasonable. - ERISA 408(b)(2) regs will require providers to
deliver fee disclosures to plan sponsors (July
2011).
10Fiduciary Protection Under ERISA 404(c)
- ERISA Section 404(c)
- Plan sponsor is responsible for
participant-directed investments unless plan
complies with ERISA 404(c). - Many plans fail to comply with ERISA 404(c)
requirements operationally. - Conditions of ERISA Section 404(c)
- Participant must exercise independent control.
- Plan menu must have broad range of investment
options.
11ERISA 404(c) Conditions
- Exercising independent control
- Participant must have reasonable opportunity to
give instructions, and have sufficient
information. - DOL finalizes rules on participant-level
disclosures on Oct. 14, 2010, amending
404(c)-related disclosures. - Broad range of investment options
- Participant must have reasonable opportunity to
materially affect investment return, choose from
at least 3 options, and diversify investments. - Duty to select/maintain investment menu
- Must manage investment options in accordance with
duties of prudence and diversification.
12II. Fiduciary Risk and Potential Liability
- Fiduciary liabilities
- ERISA permits participants to bring lawsuits
against fiduciaries who breach their duties. - Responsible fiduciary is personally liable for
losses resulting from breach of duties. - Other types of relief may be available from
court. - DOL penalty for fiduciary breach
- 20 civil penalty by DOL under ERISA 502(l).
- DOL has discretion to reduce or waive penalty.
- IRS may impose also impose excise taxes under
prohibited transaction rules.
13Co-Fiduciary Liability
- ERISA 405(a) imposes co-fiduciary liability on
Fiduciary 1 for a breach by Fiduciary 2 if - Fiduciary 1 knowingly participates in breach by
Fiduciary 2, - Fiduciary 1 fails to discharge its duties,
enabling breach by Fiduciary 2, or - Fiduciary 1 knows of breach by Fiduciary 2, but
does not make reasonable efforts to remedy. - Thus, a fiduciary who becomes aware of another
fiduciarys bad acts must take reasonable action.
14Breaches Prior To or After Being a Fiduciary
- Ordinarily, fiduciary is not liable for breach
committed before/after becoming fiduciary. - However, fiduciary must take steps to remedy
breach if he or she becomes aware of breach. - Must take action if new fiduciary becomes aware
of a breach which occurred previously. - Co-fiduciary liability arises if no action is
taken to correct such breach.
15Liability Relating to Duty to Pay Reasonable Plan
Expenses Only
- Increased interest in 401(k) fees has resulted in
lawsuits against employers and providers. - Types of claims made by participants in class
action lawsuits - Plan fiduciaries failed to monitor indirect
compensation from plans investment providers to
other service providers (e.g., revenue sharing). - Selection of inappropriate share class (i.e., use
of retail instead of cheaper institutional
share class). - Fees not adequately disclosed to plan
participants.
16Recent Developments in 401(k) Litigation
- First generation of 401(k) fee lawsuits launched
against plan providers. - Haddock v. Nationwide Financial Services
- Investment provider sued over its receipt of
fees from mutual funds offered under annuity
contracts - Ruppert v. Principal Life Insurance Company
- Complaint that fiduciary standards breached
by service providers receipt of revenue sharing
payments from mutual funds - Phones Plus, Inc. v. Hartford Financial Services
- Complaint that The Hartford received revenue
sharing payments for services that it was already
obligated to provide to its plan clients
17Second Generation of Fee Litigation Cases
- The Main Thrust dozens of lawsuits filed
against plan sponsors. - Class actions brought on behalf of participants.
- First cases brought by small St. Louis litigation
firm. - Defendants are large employers, company officers
and plan committees. - New Tactics another round of lawsuits filed
against plans sponsors and providers. - Allegations that revenue sharing payments to
other providers should have been used for benefit
of participants.
18Recent Wins for Defendants
- Courts generally reluctant to dismiss 401(k) fee
suits before factual findings are made. - Exception Hecker v. Deere
- Suit filed against employer and Fidelity for
(1) excessive fees in investment options, and
(2) failure to disclose revenue sharing. - 7th Circuit affirmed motion to dismiss (2009).
- Court was influenced by plans brokerage window
providing access to 2,500 mutual funds. - Plaintiffs (with support of DOL) ask 7th Circuit
for rehearing, but petition is denied. - Other defendants in recent 401(k) fee cases have
successfully defended themselves.
19Recent Wins for Plaintiffs
- Braden v. Wal-Mart Stores, Inc.
- As 401(k) sponsor, Wal-Mart selects retail mutual
funds (with 12b-1 fees) for plans menu. - Given its large size (10B), the Wal-Mart plan
could have selected institutional fund shares. - Wal-Mart must demonstrate fees are reasonable.
- Plaintiffs in other 401(k) fee cases have won
monetary settlements. - Tibble v. Edison International (2010) is one of
first 401(k) fee cases to go to trial. - Plaintiffs win on judgment, and court rules
retail funds were imprudently selected for plan
menu.
20Implications of 401(k) Fee Cases
- Unclear whether cases will result in significant
recoveries for plaintiffs. - Victories for plaintiffs could result in exposure
for many similar 401(k) plans. - Additional lawsuits likely.
- Litigation publicity will increase regulatory and
legislative pressure. - Non-monetary settlement terms are likely to
become best practices for plans generally.
21III. Fiduciary Protection and Best Practices
- ERISA bond protects plan only.
- ERISA 412 requires bonding for every person who
handles plan funds. - Must cover 10 of plan assets, subject to
500,000 maximum (1M if plan holds employer
securities). - Exemption for broker-dealers.
- Fiduciary liability insurance
- Protects plan or fiduciaries.
- Generally covers trustees, plan sponsor and their
employees. - May be purchased by plan or plan sponsor.
22Professional Liability Insurance
- Protects plan consultants and advisors.
- Also referred to as EO insurance.
- Coverage for certain claims typically excluded.
- Claims arising out of impropriety of plans
payment of service fees. - Claims arising from late trading or market
timing. - Claims arising from soft dollar or revenue
sharing. - Exclusions can be modified by negotiation.
- Dollar limits on policy coverage may apply.
23Contractual Limitation on Liability
- Limitation on liability provisions
- Indemnification of service providers
- DOL position in Adv. Op. 2002-08A
- Contract must not limit providers liability for
its fraud or misconduct. - Limitation on liability for negligence may be
permitted. - Due diligence procedures
- Assess reasonableness of relationship as a whole.
- Document assessment in consideration of plans
potential risk of loss due to limitation on
liability.
24Fiduciary Investment Reviews
- Investment Policy Statement (IPS)
- Written IPS can help demonstrate compliance with
ERISA fiduciary standards. - IPS should include clear standards.
- Continuous monitoring
- Investments should be reviewed regularly.
- Plan fiduciaries must understand analysis.
- Replace funds that do not meet criteria.
- IPS can help with decision-making process.
25Fiduciary Investment Reviews (contd)
- Documentation of fiduciary reviews
- Documentation can help demonstrate fiduciary
prudence. - Utilize independent investment expert.
- Can provide valuable reports, analysis and
recommendations. - Fiduciaries should always consider whether advice
is conflicted. - Evaluating expense ratios/fees
- Fiduciary review should take into account all
fees and expenses.
26Best Practices Arising from 401(k) Fee Litigation
- Plan sponsors are beginning to adopt best
practices with respect to 401(k) fees. - Plan fiduciaries are judged by their processes.
- Professionals and providers can assist plan
sponsors implement best practices. - Developing process to understand fees.
- Plan sponsors must make effort to learn how much
plan and participants are actually paying. - There are many types of indirect fees
(e.g., soft dollars, sub-transfer
agency fees, 12b-1 fees, sales charges, revenue
sharing and float).
27Best Practices Arising from 401(k) Fee
Litigation (contd)
- Comparing fees against benchmark
- Establish objective process to assess
(1) qualifications of
providers,
(2) quality of services, and
(3) reasonable of
fees in light of services provided. - Benchmarking services
- Can assist employer identify any hidden fees.
- Equips employer with tool to be used as part of
prudent review process. - Provides competitive pricing information.
28Best Practices Arising from 401(k) Fee
Litigation (contd)
- Documenting reviews of providers and fees
- Review of providers fees should be properly
documented. - Documentation should demonstrate thoughtful
process. - Solicit bids when considering a new provider, and
document bid process. - Conducting fiduciary audit
- Hire independent third party to audit plans
external fiduciaries.
29Best Practices Arising from 401(k) Fee
Litigation (contd)
- Fiduciary manual
- Helps plan fiduciaries better understand their
responsibilities under the plan. - Fosters ERISA compliance and can serve as a
reference guide for fiduciary duties. - Can serve as compliance tool for monitoring
providers. - Disclosure to participants
- In light of pending rules and current litigation
environment, ensure meaningful fee disclosures
are provided to participants.
30Fiduciary Relief Offered by Certain Platform
Providers
- Program intended to share or relieve investment
responsibilities of 401(k) plan sponsor. - First Approach
(1) Independent
firm prepares premier list of funds from
providers platform
(2) Sponsor selects funds from
pre-approved list and
(3) Independent firm agrees to serve as
co-fiduciary. - Second Approach
(1) Provider has model
list of options from broad range of investment
categories
(2) Sponsor must select funds for each category
(3) Provider guarantees compliance with
certain aspects of ERISA prudence requirement.
31Fiduciary Relief Offered by Certain Platform
Providers (contd)
- Program provides some assurances to plan sponsor.
- Fine print should be examined closely.
- Questions to ask platform provider
- Standards for conduct?
- Aspects of fiduciary duties/liability not
covered? - When does relief apply?
- Does sponsor ever have to indemnify provider?
- Fees
- Notice for removal of investment option from
line-up
32Conclusion
- Fiduciary protection is available from many
sources - ERISA bond (protecting plan)
- Fiduciary liability insurance (protecting
sponsor) - Professional liability insurance (protecting
advisor) - Contractual limitations on liability
- Fiduciary investment reviews
- Best practices arising from 401(k) fee litigation
- Fiduciary relief offered by certain platform
providers
33Overview of ERISA Fiduciary Responsibility and
Liability and Best Practices
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