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Fiduciary Oversight: A Process & Approach to Best Practices. Charles A. Bruder, Esq. Scott Rappoport. The material provided herein is for informational purposes only and is not intended as legal advice or counsel. Please help yourself to food and drinks

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Fiduciary oversight a process approach to best practices

Fiduciary Oversight:A Process & Approach to Best Practices

Charles A. Bruder, Esq.

Scott Rappoport

The material provided herein is for informational purposes only and is not intended as legal advice or counsel.


Please help yourself to food and drinks

Please let us know if the roomtemperature is too hot or cold

Bathrooms are located past the reception desk on the right

Please turn OFF your cell phones

Please complete and returnsurveys at the end of the seminar


Fiduciary oversight

Fiduciary Oversight

A Process & Approach to Best Practices

Scott Rappoport


Put not your trust in money, but put your money in trust.

Oliver Wendell Holmes


Session overview
Session Overview

Legislative Review

  • Recently enacted legislation

  • Adopted and proposed regulation

    The Fiduciary Process

  • Identify Fiduciaries

  • Modular Approach to Safe Harbors

    Best Practices

  • Fiduciary Oversight

  • Plan Monitoring, Assessment & Reporting


Legislation regulatory actions
Legislation & Regulatory Actions

  • LaRue v. DeWolff (Supreme Court 10/2007)

  • ERISA litigation up 25%/year (past 4 years)

  • Pension Protection Act (2006)

  • DOL disclosure initiatives (2008)

  • Changes to Form 5500


Who is a fiduciary
Who is a Fiduciary?

Any person who:

  • Exercises any discretionary authority or discretionary control in managing the plan or who has any authority or control in managing or disposing of its assets;

  • Has any discretionary authority or responsibility in administrating the plan; or

  • Renders investment advice for a fee or compensation with respect to any monies or other property belonging to the plan.


Responsibilities of a fiduciary under erisa
Responsibilities Of a Fiduciary Under ERISA

  • Fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries.

  • Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters.


What are fiduciaries exposures under erisa
What Are Fiduciaries’ Exposures Under ERISA?

Fiduciary liability is personal, absolute and unlimited. ERISA holds fiduciaries personally liable for their actions.


A common fiduciary breach
A Common Fiduciary Breach:

There is a misconception about the concept of a fiduciary providing individualized advice to a plan.

This term does NOT refer to the giving of advice to individual participants. It refers to an advisor that performs services specific to the plan such as:

  • assisting in the selection of investments

  • creation of an Investment Policy Statement

  • monitoring of plan assets


Safe harbors
Safe Harbors

Voluntary

May insulate from liability

Must demonstrate compliance with requirements:

  • Prudent selection

  • Prudent monitoring

  • Acknowledgement of fiduciary status


404 a safe harbor provisions
404(a) Safe Harbor Provisions

  • Investment decision delegated to “prudent expert”

  • Experts selected by due diligence process

  • Experts exercise discretion over assets

  • Expert acknowledges co-fiduciary status in writing

  • Fiduciary must ensure that experts perform the agreed upon tasks using agreed upon criteria


404 c safe harbor provisions
404(c) Safe Harbor Provisions

  • Requires notification in writing of intent to comply with 404(c) safe harbor

  • Three different investment options with differing risk/return profiles

  • Information and education on the different investment options

  • Opportunity to change investments with appropriate frequency.


Fiduciary adviser safe harbor provisions
Fiduciary Adviser Safe Harbor Provisions

Select a qualified fiduciary adviser who:

  • Acknowledges fiduciary status in writing

  • Discloses all conflicts of interest

  • Discloses all forms of compensation


Fiduciary advisor safe harbor cont d
Fiduciary Advisor Safe Harbor Cont’d

  • Plan sponsor must determine the appropriateness of the advice arrangement

  • Plan sponsor annually audits such arrangements


Qualified default investment alternative qdia
Qualified Default Investment Alternative (QDIA)

Plan sponsor can avoid liability for participant investment decisions by offering QDIA

  • Age-based funds or models

  • Risk-based funds or models

  • Age-based managed accounts

  • Money market accounts for 90-120 days


Fiduciary oversight benefit sources solutions best practices
Fiduciary Oversight Benefit Sources & Solutions Best Practices

  • Creation of the Investment Policy Statement/Governing Body Document

  • Creation of the Investment Committee

  • Designation of Qualified Professional Investment Counsel

  • Ongoing Monitoring & Reporting


Monitoring reporting benefit sources solutions best practices
Monitoring & ReportingBenefit Sources & Solutions Best Practices

  • Review actual Portfolio for MPT Statistics

    • Appropriate Index

    • Peer group

  • Compare investment expenses for risk & reward

  • Create a quarterly correlation matrix

  • Review operational quality of investment managers

  • Disclose plan expenses and revenue sharing

  • Create “plain English” quarterly “minutes” for plan sponsor tied to an annual IPS review

  • Standards defined in the IPS


Monitoring reporting
Monitoring & Reporting

Investment Committee Meeting Minutes

Information that is provided must be evaluated and

actions that are considered must be documented

Watch list procedures must be followed


Monitoring reporting benefit sources solutions best practices1
Monitoring & ReportingBenefit Sources & Solutions Best Practices

  • Watch List Procedures

  • Replacing Funds

  • Communication of Changes


How can benefit sources solutions help
How Can Benefit Sources & Solutions Help

  • Fiduciary Review

    • Checklist

    • Mutual Fund Review

    • Source of technical information 888-560-5171


Fiduciary oversight a process approach to best practices1

Fiduciary Oversight:A Process & Approach to Best Practices

Charles A. Bruder

Norris McLaughlin & Marcus, P.A.


A client calls you and indicates that he/she may have violated the provisions of a company sponsored retirement plan…what do you do?


Fiduciary duties and corrective action a practical approach
Fiduciary Duties and Corrective Action – A Practical Approach

  • Several available options

    • Do nothing, and hope that the problem is not discovered

    • “Self correct” the potential fiduciary breach

    • Disclose the breach to the appropriate government agency/program

  • The key to addressing a breach of a fiduciary duty is identifying the available correction methods and determining the appropriate course of action


The do nothing approach
The “Do Nothing” Approach Approach

  • Pros

    • No action or cost involved

    • Does not require disclosure to any government agency/plan participant

    • May result in cost savings to the plan sponsor

    • Permits the plan sponsor to continue with its current form of plan administration


The do nothing approach1
The “Do Nothing” Approach Approach

  • Cons

    • The “ticking time bomb”

    • Raises the potential costs associated with corrective action

    • Failure to address a fiduciary breach may be a further breach of fiduciary duty

    • Audit Lottery – Are you feeling lucky?


Fiduciary duties and corrective action a practical approach1
Fiduciary Duties and Corrective Action – A Practical Approach

Available Corrective Programs

  • Employee Plans Compliance Resolution System (“EPCRS”)

  • Voluntary Fiduciary Correction Program (“VFCP”)

  • Internal Revenue Service (“IRS”) Notice 2008-113


Employee plans compliance resolution system
Employee Plans Compliance Resolution System Approach

  • EPCRS contains three correction programs:

    • Self-Correction Program (SCP)

    • Voluntary Correction Program (VCP)

    • Audit Closing Agreement Program (Audit CAP)


Employee plans compliance resolution system1
Employee Plans Compliance Resolution System Approach

Qualification Failures

  • Plan Document Failure

    • Plan provision (or absence of provision) that violates the Code

  • Operational Failure

    • Plan document complies with the Code but plan doesn’t operate in accordance with its provisions


Employee plans compliance resolution system2
Employee Plans Compliance Resolution System Approach

Principles and Correction Methods

  • Full correction required for all plan years

  • Acceptable correction methods & retroactive plan amendments

    • Expanded definition of “reasonable and appropriate”

  • Model correction methods provided in Appendices A & B of Rev. Proc. 2008-50


Employee plans compliance resolution system3
Employee Plans Compliance Resolution System Approach

SCP – Self Correction Program

  • No disclosure to IRS, no fee, no sanctions

  • Can only correct operational failures

  • Must have a favorable IRS Determination Letter

  • Must have established practices & procedures to assure ongoing compliance

  • Corrective action requires documentation


Employee plans compliance resolution system4
Employee Plans Compliance Resolution System Approach

SCP – Self Correction Program

  • Insignificant vs. significant failures

    • Applicable corrective period – choosing the right one

    • Factors in determining the type of failure which may be self-corrected

  • What if the failure cannot be self-corrected?


Employee plans compliance resolution system5
Employee Plans Compliance Resolution System Approach

VCP – Voluntary Compliance Program

  • Single program and single-admission process

  • Submission procedures

  • Ends with a compliance statement – Don’t need to sign statement

  • Determination Letter/Retroactive Plan Amendment may result in Determination Letter if plan on-cycle


Employee plans compliance resolution system6
Employee Plans Compliance Resolution System Approach

SCP versus VCP

  • Distinction between insignificant and significant errors

  • List of Factors to Consider

    • whether failure occurred during period of exam

    • % of assets/contributions involved

    • # of years involved

    • % of participants affected

    • % of participants who could have been affected

    • correction within reasonable period

    • reason for the failure

  • Uncertainty for plan sponsor


Employee plans compliance resolution system7
Employee Plans Compliance Resolution System Approach

Rev. Proc. 2008-50: New Fee Schedule

  • VCP fee unchanged

  • Compliance fee for §401(a)(9) failures reduced to $500

  • Fee for failure to amend for EGTRRA good-faith amendments, §401(a)(9) interim amendments, and amendments required to implement optional law changes: flat $375


Employee plans compliance resolution system8
Employee Plans Compliance Resolution System Approach

Audit CAP

  • Higher sanction

  • Factors used in determining sanction:

    • Practices in place to identify and prevent plan failures

    • Steps taken to correct failures

    • Reason for the failures


Employee plans compliance resolution system9
Employee Plans Compliance Resolution System Approach

Audit CAP

  • Length of time that failures occurred

  • Number of NHCEs affected if plan is disqualified

  • Existence of a favorable Determination Letter

  • Whether the error involves a demographic failure

  • Whether the only failure is an employer eligibility failure


Employee plans compliance resolution system10
Employee Plans Compliance Resolution System Approach

EPCRS – What is Not Covered

  • Form 5500 filing delinquencies

    • DFVC Program

  • Prohibited transactions

  • Funding deficiencies

    • Certain limited relief available under the Worker, Retiree and Employer Recovery Act of 2008


Fiduciary duties and corrective action a practical approach2
Fiduciary Duties and Corrective Action – A Practical Approach

Voluntary Fiduciary Corrective Program

  • Corrective program sponsored by the U.S. Department of Labor

    • Certain enumerated transactions which may be corrected

      • Prohibited purchases

      • Sales and exchanges

      • Improper loans

      • Delinquent contributions

      • Improper plan expenditures


Fiduciary duties and corrective action a practical approach3
Fiduciary Duties and Corrective Action – A Practical Approach

Why VFCP?

  • Type of corrective action required

  • Avoidance of civil penalties imposed by the IRS

  • Obtain a DOL “no action” letter

  • Avoidance of the imposition of excise taxes if the class exemption provisions are met

  • Processing/corrective costs

  • Forum shopping


Voluntary fiduciary correction program
Voluntary Fiduciary Correction Program Approach

VFCP – Class Exemptions

  • Six classes of prohibited transactions covered

    • Failure to transmit contributions/loan payments in a timely manner

    • Loans made to parties in interest

    • Sales of property with parties in interest

    • Sales of real property to a plan with a leaseback to the employer

    • Purchase of an illiquid asset by a plan

    • Certain plan expense issues


Epcrs or vfcp
EPCRS or VFCP? Approach

  • Which program is appropriate for correction of a fiduciary breach?

    • Type of action (or inaction) which resulted in the breach of fiduciary duty

    • Appropriate correction method

      • Crossover issues

    • Cost/benefit analysis

    • Processing time


Fiduciary duties and corrective action a practical approach4
Fiduciary Duties and Corrective Action – A Practical Approach

Code Section 409A

  • Although not technically a “fiduciary duty,” a potential source of financial woe for an employer

  • Code section has broad application to a variety of arrangements

  • IRS Notice 2008-113 provides a model correction program

    • Expands the program established under IRS Notice 2007-100


Irs notice 2008 113
IRS Notice 2008-113 Approach

  • Program scope

    • No relief for documentary compliance failures

      • Includes required amendments

    • Limited relief available for “insiders”

    • Applicable to “inadvertent and unintentional” errors

    • “Full” correction is required

    • Avoidance of excise taxes


Irs notice 2008 1131
IRS Notice 2008-113 Approach

Eligibility Provisions

  • “Inadvertent and unintentional” operational errors

    • Impermissible payments made to an employee

  • Demonstrable steps must be taken to avoid future errors

  • Recipient’s income tax return for the year in which the error occurred cannot be under IRS audit

  • The error has been fully corrected

    • IRS guidelines for full correction

  • The company cannot be in financial distress

    • Significant risk of non-payment?


Irs notice 2008 1132
IRS Notice 2008-113 Approach

Same Year Corrective Method

  • Early payments must be returned to the company

  • Late payments must be to the employee

    • Non-insiders may take up to 24 months from income tax return due date to repay

    • Requires immediate and heavy financial need

  • Interest payments may be required

  • Avoidance of Code Section 409A penalties


Irs notice 2008 1133
IRS Notice 2008-113 Approach

Post Year Corrective Method

  • Non-insiders

  • Corrective methods are similar to the “same year” correction guidelines

  • Employee may be required to make interest payments

  • Avoidance of Code Section 409A penalties


Irs notice 2008 1134
IRS Notice 2008-113 Approach

Other Key Features

  • Correction of impermissible stock right grants

    • “Reset” feature

  • Limited corrective opportunity for other operational errors

    • $16,500 ceiling in 2008

  • Other corrections permitted but will not avoid the 20% excise tax

  • Employer notice requirements


Questions answers

Questions & Answers Approach

Thank you for coming!


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