Fiduciary Responsibilities Under ERISA

1. This UBA Employer Webinar Series is brought to you by United Benefit Advisorsin conjunction with Jackson Lewis For a copy of this presentation, please go to www.UBAbenefits.com. Go to the Wisdom tab and scroll down to HR Webinar Series and click. Under Employer Series click the Registration and Presentation link. Click the red Presentation button to see the slides.

2. Presented by: Randy Limbeck (Omaha) September 16, 2014 Fiduciary Responsibilities Under ERISA

3. About the Firm Represents management exclusively in every aspect of employment, benefits, labor, and immigration law and related litigation Over 770 attorneys in 55 locations nationwide Current caseload of over 5,000 litigations and approximately 300 class actions Founding member of L&E Global

4. Disclaimer This presentation provides general information regarding its subject and explicitly may not be construed as providing any individualized advice concerning particular circumstances. Persons needing advice concerning particular circumstances must consult counsel concerning those circumstances.  Indeed, health care reform law is highly complicated and it supplements and amends an existing expansive and interconnected body of statutory and case law and regulations (e.g., ERISA, IRC, PHS, COBRA, HIPAA, etc.).  The solutions to any given business’s health care reform compliance and design issues depend on too many varied factors to list, including but not limited to, the size of the employer (which depends on complex business ownership and employee counting rules), whether the employer has a fully-insured or self-funded group health plan, whether its employees work full time or part time, the importance of group health coverage to the employer’s recruitment and retention goals,  whether the employer has a collectively-bargained workforce, whether the employer has leased employees, the cost of the current group health coverage and extent to which employees must pay that cost, where the employer/employees are located, whether the employer is a religious organization, what the current plan covers and whether that coverage meets minimum requirements, and many other factors.  IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)

5. What We Will Consider Who is a Plan Fiduciary? Fiduciary Duties and Standards Under ERISA Fiduciary Damages and Penalties Methods to Minimize Fiduciary Risk/Exposure Claims Procedures Issues Pertinent Prohibited Transactions Emphasize the Welfare Plan Side/Health/Disability/Severance/Life Insurance

6. What is ERISA? • Enacted in 1974 to protect the interests of participants in employee benefit plans and their beneficiaries by establishing: • Standards of conduct • Responsibility • Obligations for plan fiduciaries • Also provides remedies for violations • Covers such plans as healthcare, disability and death benefits, pension and accident • Church and government plans are exempt from ERISA

7. Agencies with Jurisdiction Over Employee Benefit Plans Department of Labor Employee Benefit Security Administration Pension Benefit Guaranty Corporation Department of Health and Human Services (Health Care Reform, HIPAA) Internal Revenue Service States’ Departments of Insurance

8. Who is a Plan Fiduciary? Many of the actions involved in operating a plan make the person or entity performing them a fiduciary Fiduciary status is based on the functions performed for the plan, not just a person’s title

9. Who is a Plan Fiduciary? • A person is a fiduciary with respect to a plan: • “to the extent that he or she exercises any discretionary authority or discretionary control respecting management of such plan or management or disposition of its assets” or • “has any discretionary authority in the administration of such plan”

10. Activities Giving Rise to Fiduciary Status Appointing other plan fiduciaries Delegating responsibility to or allocating duties among other plan fiduciaries Selecting and monitoring plan investment vehicles Selecting and monitoring third-party service providers Negotiating the compensation of third-party providers Interpreting plan provisions Exercising discretion in denying or approving benefit claims

11. Functions That Are NOT Considered Fiduciary Functions Performance of purely ministerial duties, i.e., no discretion or control The power to influence a fiduciary’s decision, e.g., mere advice by a professional to a fiduciary. The advisor must have “actual decision making powers” Investment education (must not be investment advice for a fee) An insurance carrier or TPA negotiating an agreement with the plan sponsor is not a fiduciary act

12. Functions That Are NOT Considered Fiduciary Functions • The DOL: has set forth the following types of administrative activities that it does NOT consider fiduciary functions. Beware that the courts are not following this list in an expansive way. • Application of rules determining eligibility for participation of benefits • Calculation of services and compensation credits for benefits • Preparation of employee communications material • Maintenance of participants’ service and employment records

13. Functions That Are NOT Considered Fiduciary Functions • Preparation of reports required by government agencies • Calculation of benefits • Orientation of new participants and advising participants of their rights and options under the plan • Collection of contributions and application of contributions as provided in the plan • Preparation of reports concerning participants’ benefits • Processing claims • Making recommendations to others for decisions with respect to plan administration

14. Fiduciary Duties Under ERISA – 404(a) • “A fiduciary shall discharge duties with respect to a plan solely in the interest of the participants and beneficiaries and • For the exclusive purpose of: • Providing benefits to participants and their beneficiaries • Defraying reasonable expenses of administering the plan • With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims”

15. Additional Fiduciary Duties • Diversify the plan’s investments unless it is clearly imprudent to do so • Adherence to the Plan Document • ERISA requires plan fiduciaries to act in accordance with the plan document – as long as those provisions are consistent with ERISA • Is there a plan document?

16. Fiduciary Damages and Penalties Loss resulting from the fiduciary breach (plus court costs and attorney’s fees) 20% civil penalty of amount payable pursuant to court order or settlement agreement with (DOL) $110 per day penalty for failure to provide requested documents Prohibited transaction excise taxes (15% per year of amount involved until corrected) Criminal liability Punitive damages are not allowed

17. Personal and Co-Fiduciary Liability • ERISA provides that fiduciaries who breach their duties are personally liable to restore any plan losses and to return any profits improperly gained from the plan • A fiduciary also may be liable as a co-fiduciary, under ERISA, by: • Participating knowingly in or knowingly undertaking to conceal an act or omission of another fiduciary, knowing that the act or omission is a breach • Failing to comply with fiduciary requirements, enabling another fiduciary to commit a breach of duty • Knowing about another fiduciary’s breach and failing to take steps to remedy that breach

18. Methods to Minimize Fiduciary Risk/Exposure • Act Prudently • Act solely in participant’s interests • Be knowledgeable/educate yourself as needed • Do not act or give advice outside expertise • Do not give investment advice

19. Methods to Minimize Fiduciary Risk/Exposure • Do you have a plan document/wrap plan? • Is it signed and dated? • Up to date? • Do 5500s align with SPDs and plan document?

20. Methods to Minimize Fiduciary Risk/Exposure • Periodically read the plan document and SPD • Are they consistent? • Do they reflect the intent? • Does the SPD reflect how the plan is administered? • Does the SPD include all the DOL required information? • Do not allow TPA or other vendor to use good faith or gross negligence standard • Follow plan amendment procedures

21. Follow the Plan’s Claims and Claims Review Procedures • Just do it right – what happens – get a letter/email/or oral request • Clearly document delegation and process/who does what? • ERISA claims procedures • Time-frames must be met • Documentation of claims and claims review • Complete documentation • Recognize subject to disclosure in court • Review of denials – required ERISA language in response/meet the ERISA requirements

22. Follow the Plan’s Claims and Claims Review Procedures • Proper handling of claims and claims review procedures is critical in the event of litigation • Exhaustion of administrative remedies defense • Record limited to claims and claims review record – you have the opportunity to create the record • Window into plan

23. Methods to Minimize Fiduciary Risk/Exposure • Demonstrate fulfillment of fiduciary duties • Procedural Prudence. Emphasis is the process of fiduciary decisions, not the result • Administrative Record. Document, document, document. Everything should be documented, including detailed minutes of all meetings and discussions, retain documents used at meetings, the advice received from experts, deliberations on advice and the action eventually taken

24. Methods to Minimize Fiduciary Risk/Exposure • Hire Experts • A fiduciary may rely on expert evaluations in making a prudent decision, however, the fiduciary must undertake a review of the expert’s work before relying on it to make a decision, i.e., a fiduciary may not blindly rely on an expert’s advice • The advice must be impartial, e.g., trustees were not allowed to claim reliance on expert advice from a broker who received commissions because the broker was not an “impartial analyst” • Part of procedural prudence • Fiduciary must monitor delegatees

25. Methods to Minimize Fiduciary Risk/Exposure Establish clearly defined fiduciaries Clearly allocate duties Self-direction of investments by participant does not totally eliminate fiduciary responsibility

26. Methods to Minimize Fiduciary Risk/Exposure • Plan administrator • Not the employer • Committee • Plan investments may require different committee • Monitor fees and expenses/revenue sharing agreements/service provider agreements • Hold and attend regularly scheduled meetings, at least semi-annual, quarterly is better/less for welfare plans

27. Methods to Minimize Fiduciary Risk/Exposure • Consider appointing fiduciaries/committee members by plan document • Fiduciary insurance • Do you have it? • Does the directors and officers policy cover?

28. Methods to Minimize Fiduciary Risk/Exposure • Investment selection and monitoring – fiduciary should: • DOL regulations provide that a fiduciary satisfies ERISA’s prudence rule if, with respect to an investment made, the fiduciary gives “appropriate consideration” to those facts and circumstances that the fiduciary knows or should know are relevant to the particular investment • Employ proper methods to investigate, evaluate and structure the investment, including retention of professional advisors if the fiduciary lacks expertise

29. Methods to Minimize Fiduciary Risk/Exposure • Solicit information from competing investment platforms • Assemble and analyze data • Compare competing programs on cost, performance and references • Exercise independent judgment. Avoid conflicts of interest

30. Methods to Minimize Fiduciary Risk/Exposure Remove key insiders from Benefits Committee. The Benefits Committee should not include the CEO, CFO or legal counsel. These individuals may attend meetings and participate in discussions, but should not have a vote Committee members must acknowledge their fiduciary status, in writing Prepare an Investment Policy Statement for retirement plans

31. Methods to Minimize Fiduciary Risk/Exposure • Committee Charter? • Welfare plans – probably not necessary • Retirement plan – should have a charter

32. Methods to Minimize Fiduciary Risk/Exposure • Separate settlor and fiduciary functions • A settlor function is an action or decision made by the plan sponsor/employer • The most common settlor functions are design decisions, such as, establishment of the plan, benefit formula and class of employees eligible to participate in the plan • Settlor functions are not an exercise of fiduciary discretion and, therefore, not subject to ERISA fiduciary duties and standards • A fiduciary making a settlor decision may turn a non-fiduciary action into fiduciary action

33. Methods to Minimize Fiduciary Risk/Exposure • Respond to document requests/30 days to respond • 30 days to respond • $110 per day/per violation penalty • Attorney’s fees • Leverage in litigation • Indemnification from Plan Sponsor?

34. Methods to Minimize Fiduciary Risk/Exposure • The attorney-client privilege may not exist with respect to legal advice given to Committee members • Given unique relationship, courts have created an exception to attorney-client privilege when a fiduciary receives certain legal advice • Courts have determined that exception exists because there is no legitimate need for a fiduciary to shield his actions from those whom he is obligated to serve

35. Methods to Minimize Fiduciary Risk/Exposure • Exception generally applies with respect to communications with counsel that otherwise are privileged but relate to administration of plan, e.g., benefits determinations • Courts have held that fiduciary exception does not apply when fiduciary performs a settlor function, i.e., plan amendment, design or termination

36. The Firestone Decision Standard of review is derived from the plan’s language The Supreme Court held that a “denial of benefits challenged under [502](a)(1)(B) should be reviewed de novo unless the benefit plan gives the administrator or fiduciary the discretionary authority to determine the eligibility for benefits or to construe the terms of the plan”

37. The Two Standards De novo standard: will apply where the plan language does not vest discretionary authority in the plan administrator to determine benefit claims Arbitrary and capricious standard: will apply if the plan language vests discretion in the plan administrator to determine such claims

38. Importance of the Arbitrary and Capricious Review The denial of benefits may only be overturned if it was “without reason, unsupported by substantial evidence or erroneous as a matter of law” The court’s sole inquiry: whether the determination was based on a “reasonable” interpretation of the plan. If reasonable, it must be upheld

39. Compliance with ERISA’s Internal Claims Procedures ERISA statute and DOL regulations set forth requirements for the internal claims review process Much ERISA litigation concerns allegations that the required internal process was not followed Therefore, it is important to understand the requirements, draft plans that comply, and educate plan administrators to follow them

40. Claims Review Procedures – Requirements Under DOL Regulations Notification of Initial Claim Denial Must Include: Specific reason for denial Reference to plan provisions on which denial is based Description of additional material/information needed to perfect the appeal and why needed Description of plan’s review procedures, including right to bring civil action after adverse determination on review

41. Claims Review Procedures – Requirements Under DOL Regulations Appeal Procedures Must Provide: At least 60 days to appeal (180 days for group health and disability plans) Opportunity for claimant to submit comments, documents, records and information related to the claim Access by claimant (free of charge) to all documents, information and records relevant to the claim A review that takes into account all comments, documents and information submitted by claimant regardless of whether submitted with initial claim

42. Claims Review Procedures – Requirements Under DOL Regulations Notice of Determination on Appeal Must Contain: Specific reason for denial Reference to plan provisions relied upon Statement that claimant can receive for free access to documents: (1) submitted, considered, generated, relied upon in connection with decision; (2) that demonstrate compliance with procedures; or (3) for group health and disability plans, any statement of policy or guidance concerning the denied treatment A description of any voluntary appeal procedures and statement of right to bring a civil action

43. Prohibited Transactions Transactions between an ERISA plan and a fiduciary or “party in interest,” unless the transaction falls within specific statutory exemptions or DOL-created exemption

44. Who Does This Apply To? • ERISA fiduciaries and party in interest • Person who provides services to the plan • Any employer with employees covered by the plan (also employee organization) • Owners (direct or indirect) of 50% of voting power, capital interest, profit interest, etc. • “Relatives” of the above • Employee, officer, director or 10% shareholder of above, etc. • 10% owner of partnership

45. Remedies and Penalties • ERISA • Individual liability for losses arising from prohibited transaction • DOL-imposed penalties • Injunctive relief • IRC • 15% if corrected before IRS makes a tax assessment or mails notice of deficiencies regarding it (first tier) • 100% otherwise (second tier)

46. Pertinent Prohibited Transactions • Prohibited transactions • ERISA Section 406(a) states that: • “A fiduciary with respect to a plan shall not cause a plan to engage in a transaction, if he knows or should know that such a transaction constitutes a direct or indirect: • Furnishing goods, services, or facilities between the plan and a party in interest • Transfer of plan assets to a party in interest or use of plan assets by or for the benefit of a party in interest

47. Transactions Between Plan and Fiduciary Fiduciary deals with plan assets for his own interest or account The fiduciary receives any consideration for his own personal account from any party in connection with a transaction involving plan assets

48. ERISA Statutory Exemptions Major exception – so long as reasonable compensation is paid, contracting with a party in interest for office space, legal, accounting or other services necessary to plan operation

49. Some “Golden Rules” Read your own plan documents Keep documents and communications to participants consistent Periodically self-audit operation of plan Make sure you provide all legally required notices to participants Timely notify participants of changes to the plan Always check what boxes are “checked” in your adoption agreement you receive from the plan provider

50. Some “Golden Rules” Timely correct any operational failures Treat people and claims consistently Operate the plan for the benefit of “all” participants