AmeriBen /ICE Group Annual Management Conference

1. AmeriBen/ICE GroupAnnual Management Conference Thursday, September 27, 2012

2. Fiduciary Risk Management: A Matter of Thoughtful Process and Best Practice Bret F. Busacker Hawley TroxellEnnis & Hawley 208.388.4885 bbusacker@hawleytroxell.com

3. Agenda • Regulatory overview • Judicial interpretations • Current IRS/DOL priorities • Fiduciary best practices

4. Sailing Through Rough Waters Managing Risk Monitoring Compliance

5. Fiduciary Duties under ERISA • ERISA specifies the fiduciary duties applicable to sponsors and administrators of employee benefit plans • These fiduciary duties generally apply to both retirement plans and welfare plans (i.e., group health plans, employer provided insurance, FSAs, etc.) • ERISA fiduciary duties do not apply to: • Church plans (unless ERISA coverage is elected) • Plans of government employers • Even if ERISA does not apply, state law generally imposes similar fiduciary duties and compliance with ERISA standards is best practice

6. Fiduciary Duties under ERISA • ERISA Fiduciary Duty • Exercises (or right to exercise) discretionary control over plan administration or plan assets • Act in best interests of plan and plan participants • Prudent man standard (regarding assets) • Not arbitrary or capricious (regarding administration) • The “Two Hat” conundrum – fiduciary must wear only one at a time • Fiduciary Missteps • Breach of fiduciary duty • Prohibited transactions • Arbitrary acts • Penalties for Noncompliance • Restoration of lost benefits • Excise taxes under ERISA and/or IRC • Fiduciaries may be held personally liable

7. Important ERISA Cases • Firestone v. Bruch (Supreme Court Case) • Governing instrument grants broad interpretive powers to the plan administrator. • Court must give deference to this interpretive authority unless the acts of the administrator are arbitrary and capricious. • Conkright v. Frommert (Supreme Court Case) • Xerox pension plan administrators were found by the Second Circuit to have unreasonably misinterpreted the terms of the company pension plan in calculating benefit accruals of rehired participants and were directed to fix the calculations. • Xerox then fixed the calculations, but followed a controversial methodology. • The Second Circuit crafted a “one strike you are out rule” and refused to grant the Xerox plan administrators deference with respect to its administration of the plan. • Supremes reaffirmed arbitrary and capricious standard in ERISA claims cases and rejected Second Circuit “one strike you are our rule”. • Supremes recognized that plan administrators still are entitled to deference even if they may a mistake in the process.

8. Important ERISA Cases • Tussey v. ABB • Fidelity Management and Research provided plan investments. • Fidelity Trust Company provided plan recordkeeping services. • Fidelity provided other corporate services for a loss. • Plan fiduciaries did not seek lower cost share classes with respect to plan investments. • Court found a breach of fiduciary duty because ABB simply failed to ask Fidelity good questions: • Are there cheaper share classes that the plan may be eligible for? • How do the fees I pay from the plan affect the pricing of other services I am receiving? • Court found a breach of fiduciary duty because ABB failed to follow its own investment policies.

9. Important ERISA Cases • Tibble v. Eddison • Plaintiffs were participants in the Edison 401(k) Plan sponsored by Edison International. • Plaintiffs made breach of fiduciary duty and prohibited transaction claims based on excessive fees being charged to the plan, the use of retail share classes, and revenue sharing with the plan’s recordkeeper. • Defendant had a sophisticated investment review process and used outside independent advisors when considering investment options for the plan. • Court ruled on only one narrow claim made by the plaintiffs. • Court found that Edison had not asked whether the plan could use institutional share classes with lower fees. • Court rejected argument that Edison acted prudently because the plan was not entitled to use institutional share classes. Court observed that Edison would have received a waiver of the restriction on institutional share classes if it had asked for it. • Case illustrates that courts continue to give broad deference to plan fiduciaries in their administration of the plan so long as they ask questions, document their findings, and reasonably follow the terms of the plan. • Court also underscores that plan fiduciaries must monitor their decisions and reevaluate those decisions from time-to-time as practices and standards change.

10. Current DOL/IRS Priorities • Increased audits (Federal and State) • Qualified plan audits • Group health plan audits • Fiduciary compliance • Fee disclosure • Service provider fee disclosure • Participant fee disclosure (including benchmarks) • Noncompliance is automatic breach • Additional disclosures for target date funds (forthcoming) • Revised regulations on definition of fiduciary (forthcoming) • Could cause more service providers to be ERISA fiduciaries

11. The Basics for Maintaining a Tight Ship • Evaluate who currently has administrative authority over ERISA plans • Delegate authority to a benefits committee, investment committee, and/or HR committee (as appropriate) • Formally define responsibilities, obligations, and limits to authority (as appropriate) • Meet regularly (quarterly is standard) to: • Review expenses charged to the plans • Review investments • Evaluate benefits and make plan changes • Establish an Investment Policy Statement

12. Fiduciary Best Practices Internal Governance Structure • Typically the Board of Directors/Board of Managers is the “named fiduciary” in the plan document • Authority/responsibility may be delegated to a benefits committee, investment committee, and/or HR committee (as appropriate) • Delegations should be documented by a charter (setting forth responsibilities, obligations, and authority limitations (as appropriate)) • Named fiduciary must monitor who has formal and informal administrative authority

13. Fiduciary Best Practices Service Provider Agreements • Recordkeepers, advisors, brokers, and insurance companies are common service providers to employee benefit plans • Many service agreements are written on a take it or leave it basis • Plan fiduciaries must, in all cases, determine whether an agreement with a service provider is reasonable in both terms and the amount of compensation paid • Service providers must disclose in writing all direct and indirect fees they will receive • A prohibited transaction is deemed to occur if the service provider does not disclose its fees or if the arrangement is not reasonable • Because service providers are generally not fiduciaries (unless they provide investment advice), fiduciaries are liable for service provider mistakes • Agreements should include reasonable indemnification • Fiduciaries should monitor service providers carefully

14. Fiduciary Best Practices Investment Selection and Review • Maintain 404(c) protection • SPD and new participant fee disclosure notice generally satisfy 404(c) notice requirements • Should have at least three diverse investment options • Should not have brokerage window only • Establish Qualified Default Investment Alternative (QDIA) • Investment performance and fees should be reviewed regularly • Consider retaining independent investment advisor to analyze investment performance and fees • Consider additional disclosures for target date funds

15. Beyond the Basics in Retirement Plans(Focus on Fiduciaries) • Are roles and responsibilities well defined? • Named fiduciary • Investment/asset fiduciary • RIAs v. asset managers • Do the plan documents reflect practical administrative realities? • Review plan documents • Review service agreements • Review delegations • Develop a comprehensive strategy • Are proper protections in place? • Indemnification provisions • Fiduciary insurance • Fidelity bond

16. Beyond the Basics in Retirement Plans(Focus on Fiduciaries) • Is proper oversight taking place? • Regular committee meetings • Consistent return and report practices • Policies and procedures around plan expenses • Independent advisors • Are service provider agreements reasonable? • Service provider performance • Agreement terms reviewed • Compensation benchmarking • Fee benchmarking • Does plan administration follow ERISA rules? • Claims procedures • Fee disclosure • Form 5500 filings • Fidelity bond – etc.

17. Questions? Bret F. Busacker 208.388.4885 bbusacker@hawleytroxell.com www.hawleytroxell.com