Pension Protection Act & Other Fiduciary Responsibilities

1. Pension Protection Act&Other Fiduciary Responsibilities

2. MICHAEL J. FURRER Securities & Investment Advisory Services offered through: WOODBURY FINANCIAL SERVICES, INC. PO BOX 64284, St. Paul, MN 55164 (800) 800-2638 Member FINRA, SIPC, & Registered Investment Advisor

3. Fiduciary Responsibility under ERISA The purpose of this presentation is to provide general information regarding the fiduciary issues associated with retirement plans. The intent is not to provide legal advice or to recommend any particular investment or retirement plan vendor. For legal advice or an interpretation of ERISA please see your Legal or Tax Counsel. Do not consider this presentation as a comprehensive review of ERISA, or the Pension Protection Act. This presentation is a review of select topics. For a comprehensive review of ERISA or the PPA please consult your Legal or Tax council. Additional information regarding retirement plans and ERISA can be found on the U.S. Department of Labor website located at www.dol.gov

4. Fiduciary Responsibility in a Nutshell A fiduciary relationship is one in which a person places confidence in another to act for the benefit of the first.

5. Fiduciary ResponsibilityUnder ERISA − What is It? ERISA Sec. 404 requires that a fiduciary discharge his duties with respect to a plan solely in the interest of plan participants and their beneficiaries. It imposes four basic rules: • Exclusive Purpose Rule • Prudent Person Rule • Investment Diversification • Consistency With Plan Documents Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

6. Four Basic ERISA Fiduciary RulesPrudent person standard of care For the Exclusive Purpose (Duty of Loyalty): Providing Benefits to participants and their beneficiaries Defraying Reasonable Expenses of the plan Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

7. Four Basic ERISA Fiduciary RulesPrudent person standard of care Prudent Person Rule, (Duty of Care): With the care, skill, prudence, and diligence under the circumstances then prevailing that a person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

8. Four Basic ERISA Fiduciary RulesPrudent person standard of care Investment Diversification By diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

9. Four Basic ERISA Fiduciary RulesPrudent person standard of care Consistency with plan documents In accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III of this chapter. Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

10. Fiduciary Responsibility −Why is it Important? ERISA’s fiduciary obligations are among the “highest known to the law.” They do not permit fiduciaries to ignore grave risks to plan assets, stand idly by while participants’ retirement security is destroyed, and then blithely assert that they had no responsibility for the resulting harm. DOL Amicus Brief, Tittle v. Enron

11. Fiduciary ResponsibilityUnder ERISA − What is It? • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. • Carrying out their duties prudently • Following the plan documents (unless inconsistent with ERISA) • Diversifying plan investments • Paying only reasonable plan expenses Source: U.S. Department of Labor, Employee Benefits Security Administration

12. Fiduciary ResponsibilityUnder ERISA − What is It?Prohibited Transactions Transactions between the plan and party in interest Prohibited transactions: • Sale, exchange, or leasing of property between the plan and a party in interest • Lending money or extending credit between the plan and a party in interest • Furnishing goods, services, or facilities between the plan and a party in interest • Transfer of plan assets to or use of plan assets for the benefit of a party in interest Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

13. Fiduciary Responsibility Prohibited Transactions (Cont.) Transactions between the plan and party in interest Prohibited transactions: • Acquisition, on behalf of the plan , of any employer security or employer real property in violation of section 1107(a) of this title No Fiduciary who has authority or discretion to control or manage assets of the plan shall permit the plan to hold any employer security or employer real property if he knows or should know that holding such real property violates section 1107(a) of this title. Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

14. Fiduciary ResponsibilityProhibited Transactions, (Cont.) Transactions between the plan and fiduciary. A fiduciary with respect to a plan shall not: • Deal with plan assets for fiduciary’s own interest or account • In his individual or in any other capacity acting in a transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to those of the plan, its participants or beneficiaries • Receiving any consideration from any party dealing with the plan in connection with plan assets (e.g. kickbacks) Source: FDIC Trust Examination Manual Appendix E-Employee Benefit Law updated 4/02/2008

15. Fiduciary ResponsibilityUnder ERISA – Who has It? • Fiduciary is defined in ERISA Status arises from: • being named in plan documents as fiduciary, Plan must have at least one named fiduciary • selection as plan administrator or trustee, or • exercising the functions of a fiduciary as defined on the following slides. Source: U.S. Department of Labor, Employee Benefits Security Administration

16. Fiduciary ResponsibilityUnder ERISA – Who has It? • Discretionary Control A person using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Source: U.S. Department of Labor, Employee Benefits Security Administration

17. Fiduciary ResponsibilityUnder ERISA – Who has It? 2. Named Fiduciary A plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors. Source: U.S. Department of Labor, Employee Benefits Security Administration

18. Fiduciary Responsibility Under ERISA – Who has it? 3. A person Functioning as a fiduciary A person who gives investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so. Is an example of functioning as a fiduciary. Source: U.S. Department of Labor, Employee Benefits Security Administration

19. Fiduciary Responsibility Under ERISA – Who has It? “In addition to the members of the Administrative Committee, who were expressly charged with responsibility for managing the plan and their assets, Enron, Lay and the Compensation Committee were also fiduciaries, but by virtue of a somewhat different role. As persons who had the power to appoint, retain and remove plan fiduciaries, they had discretionary authority over the management or administration of a plan under ERISA and were thus themselves fiduciaries.” DOL Amicus Brief, Tittle v. Enron

20. Fiduciary ResponsibilityUnder ERISA –Who does not have it? Service providers such as attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan. Source: U.S. Department of Labor, Employee Benefits Security Administration

21. Fiduciary ResponsibilityUnder ERISA – Breach of duty Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. Source: U.S. Department of Labor, Employee Benefits Security Administration

22. Fiduciary ResponsibilityUnder ERISA – Breach of Duty Liability for other fiduciaries: All fiduciaries have potential liability for the actions of their co-fiduciaries. Knowingly participates in another fiduciary’s breach of responsibility. Conceals another fiduciary’s breach, or does not act to correct the breach. Source: U.S. Department of Labor, Employee Benefits Security Administration

23. Fiduciary ResponsibilityUnder ERISA – 404(c) relief ERISA 404(c) relieves a fiduciary of liability for the investment decisions of plan participants in an individual account plan if the plan allows the participant: • To exercise control over the assets in his or her account • To choose from among a broad range of investment alternatives the manner in which some or all of the account assets are invested. They must have a choice of at least three investment alternatives, each of which is diversified and has materially different risk and return characteristics. Source: U.S. Department of Labor, Employee Benefits Security Administration

24. Fiduciary ResponsibilityUnder ERISA – 404(c) relief • To exercise control, a participant must have a reasonable opportunity to: • Give investment instructions as frequently as appropriate for the investment alternatives, at least every three months • Obtain sufficient information to make informed investment decisions Source: U.S. Department of Labor, Employee Benefits Security Administration

25. Fiduciary ResponsibilityUnder ERISA – 404(c) relief Information that must be provided plan participants: • An explanation that the plan intends to be a 404(c) plan. • An explanation that the fiduciaries may be relieved of liability. • A description of each investment alternative available under the plan, which can be when the plan permits any investment, but should encourage participants to review information on the investment. • Each designated alternative must include a general description of the investment objectives and risk return characteristics, and information regarding the type and diversification of assets in the portfolio of the designated alternative. • The identity of any designated investment manager. Source: Reish Luftman Reicher & Cohen ERISA 404(c) checklist

26. Fiduciary ResponsibilityUnder ERISA – 404(c) relief Information that must be provided plan participants (continued) • An explanation of the circumstances under which participants may give investment instructions including limitations on such instructions; restrictions on transfer; limitations on voting rights; and information on penalties or adjustments related to fund transfers. • A description of transaction fees and expenses chargeable against the participant's account. • Information on indemnification of the plan fiduciary responsible for giving information on request. • Information regarding investments in employer securities including a description of the procedure to provide for confidentiality and identity of the fiduciary charged with monitoring compliance with the confidentiality requirement. Source: Reish Luftman Reicher & Cohen ERISA 404(c) checklist

27. Fiduciary ResponsibilityUnder ERISA – 404(c) relief Information that must be provided plan participants (continued) • A copy of most recent prospectus provided to the plan if the investment is subject to the Securities Act of 1933 (this can be given immediately before or after investment). • After investment, participants must be provided with plan materials related to the exercise of voting, tender, or similar rights. If there are plan provisions regarding the exercise of such rights, participants must receive a description of or reference to such provisions. While the plan is not required to pass through such rights, Section 404(c) relief is not available to the extent that plan fiduciaries exercise the rights. Source: Reish Luftman Reicher & Cohen ERISA 404(c) checklist

28. Fiduciary ResponsibilitySarbanes-Oxley • Sarbanes-Oxley imposes duty on plan administrators to provide notice to participants of periods when participants cannot direct or transfer investments or take distributions or loans. A Blackout period is defined as a period of more than three business days during which a participant has been temporarily suspended, limited or restricted” from either directing or diversifying assets credited to their account, obtaining a distribution or obtaining a loan. This discussion of Sarbanes-Oxley is not intended as a comprehensive review of Sarbanes-Oxley, it is merely a brief discussion of the blackout period notice and it’s impact on retirement plans. For a comprehensive review of Sarbane-Oxley please consult your legal or tax counsel. Source Sarbanes-Oxley.com

29. Fiduciary ResponsibilitySarbanes-Oxley (Cont.) • Notice must be provided to participants and beneficiaries between 30 and 60 days, before the last days on which one of the restrictions applies. The sponsor may use calendar week in which the blackout period will begin and end. • For all Blackout Notices purposes, the days being counted are calendar days, not business days. • If the blackout dates change after the Notice is given, then a second notice must be provided to reflect the change. This discussion of Sarbanes-Oxley is not intended as a comprehensive review of Sarbanes-Oxley, it is merely a brief discussion of the blackout period notice and it’s impact on retirement plans. For a comprehensive review of sarbane-oxley please consult your legal or tax counsel. Source sarbanes-oxley.com

30. Fiduciary ResponsibilitySarbanes-Oxley (cont.) ERISA Penalties for Failure to Provide the Blackout Notice A separate $100 penalty will be imposed for each participant and beneficiary who does not receive the notice. The plan administrator is liable for the penalty. Liability for the penalty may not be shifted to the plan. The $100 penalty is imposed on a per-day late, per-violation basis. For example, if there are 200 participants and the notice is 5 days late; the penalty would be 200 x 5 x $100 or $100,000.    This discussion of Sarbanes-Oxley is not intended as a comprehensive review of Sarbanes-Oxley, it is merely a brief discussion of the blackout period notice and it’s impact on retirement plans. For a comprehensive review of Sarbane-Oxley please consult your legal or tax counsel. Source sarbanes-oxley.com

31. Highlights of the Pension Protection Act of 2006 The purpose of this discussion is not a comprehensive review of the Pension Protection Act. It is merely a discussion of select topics that relate to 401(k) retirement plans. For a comprehensive review of the Pension Protection Act, please consult your legal or tax counsel.

32. Act Overview • Makes permanent several retirement plan and IRA provisions that were to sunset after 2010 • Provides incentives for 401(k) plans adopting automatic enrollment • Creates an investment advice safe harbor for participants and provides new protections for plan sponsors • Adds new payout and rollover options for defined contribution plans • Overhauls the funding and disclosure rules for defined benefit plans Source: U.S. Department of Labor, Employee Benefits Security Administration

33. Changes effective now • EGTRRA provisions made permanent: • Increased contribution limits for IRAs and qualified plans • Roth 401(k)s and 403(b)s • Rollover rules • Catch-up contributions • Higher deduction limits • Savers’ Credit Source: U.S. Department of Labor, Employee Benefits Security Administration

34. Changes effective now • Cash balance and hybrid plans protected from age discrimination charges • Indian tribal government plans covering workers doing governmental functions treated like state and local government plans Source: U.S. Department of Labor, Employee Benefits Security Administration

35. Changes effective now • Reservists’ retirement distributions: • 10 percent early distribution penalty tax will not apply to IRA and retirement plan withdrawals made by reservists called to active duty for at least 179 days • Distribution rules amended to make active duty a distributable event under 401(k) and 403(b) plans • Applies to individuals ordered or called to active duty after September 11, 2001, and before December 31, 2007, for distributions after September 11, 2001 Source: U.S. Department of Labor, Employee Benefits Security Administration

36. Changes effective in 2007 • New investment advice rules • Permit qualified “fiduciary advisers” to offer investment advice to participants and IRA owners (subject to certain conditions) • Established fiduciary and disclosure safeguards to ensure that advice provided to employees is solely in their best interests • Fiduciary protection for default investments Source: U.S. Department of Labor, Employee Benefits Security Administration

37. Changes effective in 2007 • Faster vesting requirements for employer contributions to DC plans • Non-spouse rollovers to IRAs • After-tax rollovers from qualified plans to 403(b) plans • Deposit of tax refund to IRA • IRA limits indexed • Diversification of employer stock investments Source: U.S. Department of Labor, Employee Benefits Security Administration

38. Changes effective in 2008 • Automatic enrollment plans • Safe harbor for automatic enrollment in 401(k) and 403(b) plans • 90-day window for participants to withdraw automatic deferrals • Excess contributions and excess aggregate contributions distributed within six months of plan year end without penalty • Excess contributions and excess aggregate contributions taxable in year of distribution Source: U.S. Department of Labor, Employee Benefits Security Administration

39. Changes effective in 2008 • Rollovers from qualified plans and 403(b) plans to Roth IRAs • Maximum ERISA bond increased from $500,000 to $1 million for plans with employer stock • DB plan funding and enhanced disclosures • Increased deductions for employers with both a DB and DC plan Source: U.S. Department of Labor, Employee Benefits Security Administration

40. Changes effective after 2008 • Plan amendments required by last day of 2009 plan year • DB-k plans available in 2010 Source: U.S. Department of Labor, Employee Benefits Security Administration

41. QDIAQualified Default Investment Alternative ERISA provides relief from liability for investment outcomes to fiduciaries of individual account plans that allow participants to exercise control over the investment of assets in their plan accounts Source: U.S. Department of Labor, Employee Benefits Security Administration

42. QDIA (Cont.) The regulation deems the participants to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a qualified default investment alternative (QDIA) Source: U.S. Department of Labor, Employee Benefits Security Administration

43. QDIA For Fiduciary Relief, the following conditions must be present: • Assets must be invested in a qualified default investment alternative as defined in the regulations. • Participants and Beneficiaries must have been given an opportunity to provide investment direction, but failed to do so • A notice must be furnished to participants and beneficiaries 30 days in advance of the first investment, and at least 30 days in advance of each subsequent plan year, and must include: a description of the circumstances under which assets will be invested in a QDIA; a description of the investment objectives of the QDIA; and an explanation of the right of participants and beneficiaries to direct investment of assets out of the QDIA • Source: U.S. Department of Labor, Employee Benefits Security Administration

44. QDIA For Fiduciary Relief, the following conditions must be present: • Any material, such as investment prospectuses and other notices, provided to the plan by the QDIA must be furnished to participants and beneficiaries. • Participants and beneficiaries must have the opportunity to direct investments out of the QDIA with the same frequency available to other plan investments but no less frequently than quarterly, without financial penalty • The plan must offer a broad range of investment alternatives as defined in regulations under 404(c) of ERISA Source: U.S. Department of Labor, Employee Benefits Security Administration

45. Qualified Default Investment Alternatives • Under the Regulations, a QDIA must satisfy the following requirements: A QDIA must not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer the investment from the Qualified Default Investment Alternative to any other investment alternative available under the plan. A QDIA must be either managed by an investment manager, or an investment company registered under the Investment Company Act of 1940 A QDIA must be diversified so as to minimize risk of large losses. A QDIA may not invest participant contributions directly in employer securities. Source: U.S. Department of Labor, Employee Benefits Security Administration

46. Qualified Default Investment Alternatives • Under the Regulations, a QDIA must satisfy the following requirements: A QDIA may be: Life-Cycle or targeted-retirement-date fund; Balanced Fund; or Professionally managed account Source: U.S. Department of Labor, Employee Benefits Security Administration

47. Sample QDIA, Lifestyle Fund Category risk profile Returns relative to benchmark and peers Expense Ratios In order to be classified as a QDIA the investment must not be all income nor can it be all equities. It must a a mix of both asset classes to minimize the risk of large losses. Source: US Department of Labor, Employee Benefit Security Division This “Fund Fact Sheet is a sample of what might be considered an appropriate QDIA. The source of this fund fact sheet is the John Hancock retirement plan website. There is other information and material that must be made available to plan participants should this fund or other similar funds can be considered a qualifying QDIA. Please consult your investment fiduciary or legal counsel for guidance.

48. Best Practices

49. Allocate Responsibility • In the plan documents • Who appoints whom? • Who does what? • Continue to supervise after delegating

50. Investigate Fiduciary Liability Insurance • Adequate coverage limits • Exclusions • For all internal fiduciaries