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Corporate Compliance and The U.S. Department of Labor How to Bulletproof Your Company From DOL and Participant Initiated ERISA Liability. Jay Van Heyde, Esq. Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A. April 19, 2012. I. Review of Fiduciary Duties. ERISA Provisions

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Corporate Compliance and The U.S. Department of LaborHow to Bulletproof Your Company From DOL and Participant Initiated ERISA Liability

Jay Van Heyde, Esq.

Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A.

April 19, 2012


I review of fiduciary duties
I. Review of Fiduciary Duties

  • ERISA Provisions

    1. Plan Establishment and Named Fiduciary

    a. Must have written plan document

    b. Must provide for one or more “named fiduciaries”

    c. Named fiduciaries have authority to control and manage plan operations and administration

    d. Named fiduciaries are listed in plan, or named pursuant to plan procedure or by employer

    e. Plan must describe mechanism for allocation of operational and administrative procedures -- the focus of this presentation


I review of fiduciary duties cont
I. Review of Fiduciary Duties (cont.)

2. Basic Fiduciary Duties

a. Fiduciary is required to discharge duties:

i. Solely in interest of participants and beneficiaries

ii. Exclusively to provide benefits to participants and beneficiaries

iii. To defray “reasonable” administrative expenses

iv. With care, skill, prudence and diligence under the circumstances that a prudent man acting in a like capacity and familiar with such matters would use

v. By diversifying assets to minimize risk of large loss

vi. In accordance with the plan documents


I review of fiduciary duties cont1
I. Review of Fiduciary Duties (cont.)

b. ERISA relieves fiduciaries of some investment liability if ERISA “Section 404(c)” followed

i. Fiduciary not responsible for losses resulting from investment direction by participants if 404(c) followed

  • Review 404(c) checklist periodically

  • Cannot force participants to self-direct

  • Need qualified default investment alternative

  • Stable value or money market fund not the solution

  • Rely on and work with a qualified financial advisor

    ii. Fiduciary must still prudently select and monitor investment options


I review of fiduciary duties cont2
I. Review of Fiduciary Duties (cont.)

3. Co-fiduciary liability – a fiduciary can be liable for another fiduciary’s breach if:

a. Knowingly participates or knowingly conceals

b. Fails to fulfill own responsibilities and enables another fiduciary to breach duties

i. This is where the Board of Directors is at risk

ii. Duty to monitor and adopt proper procedures

c. Has knowledge, unless makes reasonable effort to remedy breach


I review of fiduciary duties cont3
I. Review of Fiduciary Duties (cont.)

B. Specific fiduciary duties described

1. Appointment and removal of trustee and plan administrator

a. Typically a Board function

b. Trustee can be internal or external

c. Plan administrator typically internal

d. Third party administrators (TPA) typically are not fiduciaries -- review their service agreements!


I review of fiduciary duties cont4
I. Review of Fiduciary Duties (cont.)

2. Appointment and removal of investment manager

a. Varies – can be Board or Investment Committee function

b. Requires a prudent selection process

3. Appointment and removal of service providers

a. Recordkeeper/Third Party Administrator

b. Accounting/CPA

c. Legal counsel


I review of fiduciary duties cont5
I. Review of Fiduciary Duties (cont.)

4. Selection of investment funds

a. Self-directed – selection of funds

b. Monitoring/replacement of funds

c. Who performs this function? Board? Investment Committee?

5. Preparation of Summary Plan Description

a. CIGNA v. Amara (5/16/2011)

b. SPD is not a plan document

c. Fiduciary function of plan administrator

d. Equitable relief for breach if there are damages


I review of fiduciary duties cont6
I. Review of Fiduciary Duties (cont.)

  • Settlor functions not subject to ERISA

    1. These are the business decisions

    2. Not subject to ERISA even if made by a fiduciary

    3. Examples:

    a. Type of plan and options

    b. Vesting, contribution types, eligibility

    c. Continue or terminate plan

    4. Subject to normal business judgment rule


Ii consequences of fiduciary breach
II. Consequences of Fiduciary Breach

A. Personal liability for fiduciary breach

1. Make good the losses from breach

2. Restore any profits from misuse of assets

3. Subject to equitable or remedial relief

4. Participants and beneficiaries may:

a. Recover benefits under terms of plan

b. Enforce rights under terms of plan

c. Clarify rights to future benefits under plan

d. Enjoin an act or practice that violates ERISA

e. Obtain other equitable relief to:

i. Redress any ERISA violations

ii. Enforce ERISA or terms of plan


Ii consequences of fiduciary breach cont
II. Consequences of Fiduciary Breach (cont.)

5. Secretary of Labor may:

a. Bring breach of fiduciary duty case

b. Enjoin any act that violates ERISA

c. Obtain equitable relief to:

i. Redress any ERISA violations

ii. Enforce ERISA requirements


Ii consequences of fiduciary breach cont1
II. Consequences of Fiduciary Breach (cont.)

d. Collect civil penalties (20% penalty)

i. 20% of applicable recovery amount

ii. Applies to breach of fiduciary duty

iii. Applies to knowing participation in breach

iv. Penalty may be waived or reduced

v. Secretary must find reasonable, good faith behavior

6. Excise taxes may be imposed

a. Failure to provide information

b. Prohibited transactions


Iii establishing the fiduciaries
III. Establishing the Fiduciaries (cont.)

  • Who are the primary fiduciaries?

    1. Trustee

    a. Typically named in plan document to start

    b. Procedure for resignation/removal

    c. Typically, “employer” has the authority to change

    d. Who is the “employer” though?

    i. If someone other than the Board is doing it, “how did we get here”?

    ii. Should be properly documented delegations and procedures


Iii establishing the fiduciaries cont
III. Establishing the Fiduciaries (cont.) (cont.)

2. Plan Administrator

a. Typically, the employer, unless....

b. Procedure for resignation/removal

c. Typically, the “employer” has the authority to change

d. Who is the “employer”? Same procedure

B. What is the role of the Board of Directors?

1. This is document specific

2. Generally, “employer” obligations must be undertaken by Board


Iii establishing the fiduciaries cont1
III. Establishing the Fiduciaries (cont.) (cont.)

3. Board role here is a fiduciary duty

a. Prudent selection of fiduciaries

b. Duty to monitor fiduciaries

c. Possible co-fiduciary liability

d. Possible investment selection liability

4. Best practices to establish fiduciaries

a. Start with plan document review

i. Review the plan administration and trustee provisions

ii. Review the SPD for consistency


Iii establishing the fiduciaries cont2
III. Establishing the Fiduciaries (cont.) (cont.)

b. Board resolutions/consents

i. Establish committee/name a person

ii. Define the job/limits

iii. Establish/draft job charter/bylaws

iv. Decide if role authoritative or advisory?

v. Clearly define roles

vi. Develop periodic monitoring process

5. Consider indemnification for insiders

a. Are fiduciaries covered by “employee” or “officer” indemnification?

b. Is more specific indemnification needed?

c. Define standards for indemnification


Iii establishing the fiduciaries cont3
III. Establishing the Fiduciaries (cont.) (cont.)

6. Consider fiduciary liability insurance

7. Plans must have Fidelity bond

C. Role of Investment Committee

1. Who selects the investment funds? Board? Committee? Specific officer?

2. Is this clear and documented? “How did we get here”?

3. This is a “big ticket liability item”

4. Typically, Committee has “authority” to select and monitor funds

a. Follow best practices to document the authority

b. Board should establish Committee procedures

c. Board should periodically monitor process


Iii establishing the fiduciaries cont4
III. Establishing the Fiduciaries (cont.) (cont.)

5. Role of financial advisor

a. Heightened fiduciary standard

b. Co-fiduciary status for advisor

6. Review of fees paid by plan

a. DOL hot button

b. Annual review by financial advisor

c. Benchmark/compare fees

d. DOL regulatory changes for 2012

i. Mandated disclosures· Service provider to plan sponsors

· Plan sponsors to participants


Iii establishing the fiduciaries cont5
III. Establishing the Fiduciaries (cont.) (cont.)

ii. New disclosure deadlines

· Service providers – July 1, 2012

· Plan sponsors – August 30, 2012 (60 days)

· First quarterly statements – November 14, 2002

e. Use the new information to monitor fees

7. Best practices for Investment Committee

a. Document the procedure

b. Maintain minute book for meetings

i. Minutes of all meetings

ii. Reports of financial advisor

c. Courts look at the process – prudent?


Iii establishing the fiduciaries cont6
III. Establishing the Fiduciaries (cont.) (cont.)

  • Role of Plan Administrator

    1. Often times same as Investment Committee

    2. Typically, an employee becomes it

    3. It is not the TPA

    4. Role is to interpret and administer

    a. Create a minute book of procedures

    b. Consistently apply procedures

    c. Do not discriminate

    5. Legally responsible for SPD


Iv summary
IV. Summary (cont.)

  • Properly delegate and document

  • Follow a prudent process

  • Document adherence to the process

  • Hire the experts

  • Review with the team annually

    F. Keep the Board informed


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