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James R. Griffin Jackson Walker L.L.P. jgriffin@jw.com • 214-953-5827. Fiduciary Worries That Go Bump In The Night. What Are We Going to Cover?. Default Investments Plan Expenses and Fee LaRue. Unadvertised Topics Quick Updates . Qualified Plan Determination Letters Cycle C

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Fiduciary worries that go bump in the night

James R. Griffin

Jackson Walker L.L.P.

jgriffin@jw.com • 214-953-5827

Fiduciary Worries That Go Bump In The Night

What are we going to cover
What Are We Going to Cover?

  • Default Investments

  • Plan Expenses and Fee

  • LaRue

Unadvertised topics quick updates
Unadvertised TopicsQuick Updates

  • Qualified Plan Determination Letters

    • Cycle C

  • 403(b) Plans

  • Nonqualified Deferred Compensation Plans

  • Cafeteria Plan Regulations

A new fiduciary safe harbor
A New Fiduciary Safe Harbor

  • Pension Protection Act

  • ERISA Section 404(c)(5)

  • Encourage automatic enrollment

Qdia effective date
QDIA Effective Date

  • DOL Final Regulation effective December 24, 2007

    • No QDIA protection for default investments before that date

      • Exception for stable value funds

    • Beginning on that date, all defaults can be protected—if certain conditions are satisfied.

Qdia requirements
QDIA Requirements

  • Eligible default investment

  • Default

  • Timely notice

  • Information about QDIA

  • Right to change investments

  • Broad range of investments

Eligible investments
Eligible Investments

Five types of investments eligible to be QDIAs

  • Three long-term investments

  • One short-term investment

  • One grandfathered investment

Long term qdia investments
Long Term QDIA Investments

  • Age-based funds or models, e.g., target maturity mutual funds

  • Risk-based funds or models, e.g., balanced or lifestyle funds (based on “age” of workforce)

  • Age-based managed accounts.

Qdia investments
QDIA Investments

  • Short-term investment: a money market account for up to 120 days.

  • Grandfathered investment: Stable value—for default amounts invested before December 24, 2007.

Uses of default investments
Uses of Default Investments

  • Automatic enrollment

  • Regular enrollment

  • Change of investments

  • Change of providers

  • Any other default


No relief from duty to prudently select and monitor all plan investments, including the QDIA investments.

Notice requirements
Notice Requirements

The notice must satisfy five requirements

  • describe the circumstances when a default investment will be made

  • explain the participant’s right to direct investments

  • describe the QDIA, including investment objectives, risk-and-return characteristics, and fees and expenses

Notice requirements1
Notice Requirements

  • Explain that participants can change from the QDIA, including any restrictions fees and expenses

  • Explain where participants can get information about the plan’s other investments.

Timing of notice
Timing of Notice

The notice must be given:

  • Initial: at least 30 days before the date of eligibility or before the date of the first investment in a QDIA; or

  • Initial: on or before the date of eligibility if participants have the right to make a withdrawal under Code §414(w); and

  • Annual: within a reasonable period of at least 30 days before each plan year.

Recipients of notice
Recipients of Notice

  • All persons with QDIA accounts (the annual notice).

  • Eligible employees (the initial notice for employees who will be entering the plan).

  • Potentially eligible employees (the initial notice for some rollovers).

Qdia disclosures
QDIA Disclosures

  • A copy of the most recent prospectus provided to the plan

  • Materials related to voting, tender and similar rights, to the extent passed through to participants under the terms of the plan

  • Additional information concerning the QDIA, for example, annual operating expenses, other QDIA investment materials provided to the plan

Transfer restrictions
Transfer Restrictions

There cannot be any transfer restrictions or fees in the first 90 days.

Types of 401 k fees
Types of 401(k) Fees

  • Investment-related fees

  • Administrative fees

  • Other

Investment related fees
Investment Related Fees

  • Investment Management Fees

  • Sales-Related Fees

    • Brokerage securities commissions (for stocks/bonds)

    • Mutual funds sales load (front/back) or 12b-1 fees

    • Insurance commissions paid to general agencies (for annuity purchases)

    • Solicitation fees (for the sale of funds or products in a non-advisory/nonfiduciary context – “Finders Fees”

Administrative fees
Administrative Fees

  • Account Establishment or Maintenance fee (at the custodian, the plan recordkeeper or other “custodians”)

  • Plan Document fees (e.g., prototype documentation)

  • Participant recordkeeping (flat dollar charge per participant) by plan recordkeeper

  • Plan loan fees

  • Legal/actuarial/consulting services

Other fees
Other Fees

  • Payments for order flow (brokerdealers/ investment advisers)

  • “Float” (e.g., revenue earned by custodial firm (bank, broker-dealer, mutual fund complex) between trade and settlement date on funds deposited to account)

  • “Revenue Sharing” (from mutual fund complexes and/or 401(k) platform sponsors to distribution arrangements, usually paid for out of the advisory or platform fees)

Other fees1
Other Fees

  • Soft dollars (managers for investment transaction)

  • Bundled fee structures (incorporating investment management, transactional and custodial costs, which can include

    • platform charges by 401(k) plan recordkeepers, or

    • “wrap”/managed money platform payments to investment advisers and/or broker-dealers)

  • Participant education charges (agreements structured to comply with DOL Interpretative Bulletin 96-1).


  • Board members

  • Administrative/Investment Committee members

  • Company

  • Providers of investment platforms to plans

  • Trustees

The employers

Northrop Grumman



General Dynamics

International Paper

Lockheed Martin


Kraft Foods


General Motors

John Deere

The Employers

Legal arguments
Legal Arguments

  • Fees charged were “unreasonable”

  • Plan fiduciaries failed to understand or monitor the level of fees and such failure caused the fees to be “unreasonable”

  • Board members failed to monitor the members of the administrative/investment committee

Legal arguments1
Legal Arguments

  • Plan fiduciaries failed to adequately disclose revenue sharing payments.

  • Because of the failure to disclose revenue sharing payments to participants, safe harbor protection afforded by ERISA Section 404(c) is not available to fiduciaries.

Remedies and relief
Remedies and Relief

  • Recovery of losses suffered by the plan

  • An accounting of all fees and expenses

  • Disgorgement by providers of revenue sharing amounts

  • Removal of fiduciaries

  • Other injunctive and equitable relief

Hecker v deere co 2007
Hecker v. Deere & Co. (2007)

  • Plaintiffs alleged:

    • that the defendants (the plan sponsor and Fidelity, as trustee and recordkeeper) violated ERISA disclosure and fiduciary obligations by failing to disclose revenue sharing payments to participants

    • that the plan sponsor violated its fiduciary duty obligations by "selecting and offering investment options with unreasonably high fees”

  • Defendants filed a motion to dismiss the entire case.

Hecker v deere co 20071
Hecker v. Deere & Co. (2007)

  • The court:

    • ERISA does not require the disclosure to participants of revenue sharing arrangements

    • There was nothing to suggest that disclosure of the revenue sharing arrangements would enhance plan participants’ investment decisions

    • The sponsor satisfied the requirements of ERISA Section 404(c) and, therefore, the plan fiduciaries were relieved from liability for the investment decisions made by plan participants

Hecker v deere co cont
Hecker v. Deere & Co.(cont.)

  • The court

    • The “only possible conclusion is that to the extent participants incurred excessive expenses, those losses were the result of participants exercising control over their investments within the meaning of the safe harbor provision” and, therefore, the plaintiffs’ case must be dismissed

    • Since there could be no claim for breach of fiduciary duty against the sponsor, no liability can exist against Fidelity.

    • Even if the safe harbor provided by ERISA Section 404(c) were inapplicable, Fidelity would not be liable because it did not have fiduciary responsibility for plan disclosures or selecting plan investments

    • This case is currently upon appeal in the 7th Circuit

New form 5500 fee disclosures
New Form 5500 Fee Disclosures

  • Expanded disclosure on Schedule C

  • Effective for plan years beginning on or after January 1, 2009.

Changes to schedule c
Changes to Schedule C

  • Disclosure of Direct and Indirect “Reportable Compensation”

    • Plans must identify all persons receiving $5,000 or more of total compensation (money or anything else of monetary value), directly or indirectly, in connection with services provided to the plan.

    • Reportable direct compensation

      • direct payments by the plan out of a plan account

      • direct charges to participant individual accounts

      • charges to forfeiture accounts


Changes to schedule c1
Changes to Schedule C

  • Disclosure of Direct and Indirect “Reportable Compensation”

    • Reportable indirect compensation

      • compensation received from sources other than directly from the plan or plan sponsor.

Prohibited transaction rules
Prohibited Transaction Rules

  • A fiduciary is prohibited from causing plan assets to be transferred to a “party in interest,” including service providers to the plan.

  • An exemption exists for otherwise prohibited transfers of plan assets to service providers, as long as the terms of the service provider arrangement and compensation received are reasonable, “necessary” and appropriate for the services provided and approved by an independent party on behalf of the plan.

Proposed changes
Proposed Changes

  • DOL Proposed Regulations

    • Significantly expand the contractual requirements and fee and conflict of interest disclosures required of certain service providers.

  • Disclosure Requirements: Who must disclose?

    • A service provider providing services as a fiduciary under ERISA or under the Investment Advisers Act of 1940

    • A service provider providing securities or other brokerage, consulting, investment advisory, investment management, custodial, recordkeeping, banking, insurance or third party administration services, or

    • A service provider who receives indirect compensation or fees for accounting, actuarial, appraisal, auditing, legal or valuation services.

Proposed changes1
Proposed Changes

  • Contract Requirements

    • The contract or arrangement must be in writing

    • The terms must specifically require the service provider to disclose

      • all services it provides to the plan

      • all compensation or fees it will receive (directly or indirectly) in connection with such services

      • the manner of the receipt of such compensation or fees (e.g., directly bill the plan or reflected as a charge against the plan’s investment)

      • whether the service provider will provide any services as a fiduciary under either ERISA or the Advisers Act

      • interests the service provider may have in any transactions with the plan

      • whether it has material financial, referral or other arrangements with money managers, brokers or other service providers that may create a conflict of interest in rendering the services

      • whether the service provider can affect its own compensation or fees

Proposed changes2
Proposed Changes

  • Proposed Class Exemption

    • Protects a fiduciary from a service provider which fails to make the required disclosures

  • Enforcement

    • If the service provider fails to disclose the required information (or the contract does not require such disclosure):

      • the PTCE does not provide relief for the plan fiduciary which hired the service provider, and

      • unless another exemption is satisfied, the service arrangement would result in a non-exempt prohibited transaction resulting in potential penalty taxes to the service provider.

Congressional action
Congressional Action

  • Fair Disclosure for Retirement Security Act (H.R. 3185)

    • Introduced by George Miller (D-California)

  • Defined Contribution Fee Transparency Act (H.R. 3765)

    • Introduced by Richard Neal (D-Massachusetts)

  • Defined Contribution Fee Disclosure Act (S. 2473)

    • Introduced by Tom Harkin (D-Iowa)

Does larue mean anything to me
Does LaRue Mean Anything To Me?

Supreme court update larue
Supreme Court Update: LaRue

  • The Facts:

    • LaRue participated in a 401(k) plan managed by a third-party administrator

    • LaRue directed DeWolff to transfer his plan investments two times

    • No action was taken and LaRue lost $150,000

  • The Lawsuit

    • LaRue sued the plan and the TPA seeking “make whole” remedy

    • LaRue also sued for breach of fiduciary duty

  • The Lower Courts

    • Denied LaRue’s claim--individual damages are not available under ERISA

  • Appeal to United States Supreme Court

Three types of erisa claims
Three Types of ERISA Claims

  • Plan Benefits

  • Breach of Fiduciary Duty

  • ERISA Violations

Court ruling
Court Ruling

  • Supreme Court Majority

    • Changing nature of retirement system (DB→DC) means that limiting relief to plan only allows for unremedied wrongs

    • Found that ERISA permits individual relief for breach of fiduciary duty

    • Did not assess whether a breach occurred or whether defenses exist

  • Justices Roberts & Kennedy

    • Case may be a claim for benefits

  • Justices Thomas & Scalia

    • Read the statute

Reaction to larue
Reaction to LaRue

  • ERISA § 404(c) Compliance

  • Plan Procedures

  • Fiduciary Liability Insurance

  • Investment Policies and Procedures

  • Service Provider Agreements

  • Investment Education and Advice

  • Reasonableness of Fees