Fiduciary Oversight: Timely Topics for Employee Benefit Plan Sponsors

1. Fiduciary Oversight:Timely Topics for Employee Benefit Plan Sponsors Charles Bruder Scott Rappoport Kriste Naples-DeAngelo The material provided herein is for informational purposes only and is not intended as legal advice or counsel.

2. Please help yourself to food and drinks Please let us know if the roomtemperature is too hot or cold Bathrooms are located past the reception desk on the right Please turn OFF your cell phones Please complete and returnsurveys at the end of the seminar

3. Fiduciary Oversight Under ERISAPresented By: Scott Rappoport

4. Fiduciary Oversight In The Spotlight ERISA litigation up 25%/year (past 4 years) LaRue v. DeWolff (Supreme Court 10/2007) Financial Market Turmoil Pension Protection Act (2006)/DOL disclosure initiatives (2008)

5. Who is a Fiduciary? Any person who: Exercises any discretionary authority or discretionary control in managing the plan or who has any authority or control in managing or disposing of its assets; Has any discretionary authority or responsibility in administrating the plan.

6. Responsibilities of a Fiduciary Under ERISA Fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries. Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters.

7. What are Fiduciaries’ exposures under ERISA? Fiduciary liability is personal, absolute and unlimited. ERISA holds fiduciaries personally liable for their actions

8. Safe Harbors Voluntary May insulate from liability Excellent to take advantage of

9. 404(a) Safe Harbor Provisions-Delegating to Investment Counsel Investment decision delegated to “prudent expert” Experts selected by due diligence process Experts exercise discretion over assets Expert acknowledges co-fiduciary status in writing Fiduciary must ensure that experts perform the agreed upon tasks using agreed upon criteria

10. Fiduciary Adviser Safe Harbor Provisions Select a qualified fiduciary adviser who: • Acknowledges fiduciary status in writing • Discloses all conflicts of interest • Discloses all forms of compensation

11. 404(c) Safe Harbor Provisions-Participant Education & Communications Requires notification in writing of intent to comply with 404(c) safe harbor Three different investment options with differing risk/return profiles Information and education on the different investment options Opportunity to change investments with appropriate frequency

12. Qualified Default Investment Alternative (QDIA) Plan sponsor can avoid liability for participant investment decisions by offering QDIA • Age-based funds or models • Risk-based funds or models • Age-based managed accounts • Money market accounts for 90-120 days

13. Fiduciary Oversight Benefit Sources & Solutions Best Practices Creation of the Investment Policy Statement/Governing Body Document Creation of the Investment Committee Designation of qualified professional investment counsel Ongoing monitoring & reporting

14. Monitoring & ReportingBenefit Sources & Solutions Best Practices Review actual Portfolio for MPT Statistics Appropriate Index Peer group Compare investment expenses for risk & reward Create a quarterly correlation matrix Review operational quality of investment managers Disclose plan expenses and revenue sharing Create “plain English” quarterly “minutes” for plan sponsor tied to an annual IPS review Standards defined in the IPS

15. Monitoring & Reporting Investment Committee Meeting Minutes Information that is provided must be evaluated and actions that are considered must be documented Watch list procedures must be followed

17. The Profit Sharing/401k Council of America’s First 403(b) Benchmarking Survey 385 Not-for-profit respondents 41% of respondents are making changes due to new Treasury Regulations Benchmarking data is crucial to running your program “ How can you manage what you can’t measure?”

18. Plan Agreement Types 25.2% have an Annuity Group Custodial Agreement (GCA) 19.5% have Non-Annuity GCA Balance have Individual Custodial Agreements The larger the plan, the more like they are to utilize a Non-Annuity Custodial Agreement

19. Employer Contribution 89.4% of employers contribute to the plan 41.1% provide a stated match percentage 13.8% provide a guaranteed percentage of participants’ pay Most common (45.4%) match formula is dollar for dollar On the first 3% of pay 15.3%

20. Other Statistics • Average participation rate is 75.8% • 50-199 participants 81% • 1000+ 63.4% • 10.9% offer Roth, 8.9% make Roth contributions when offered • Average funds offered is 21 • 46.3% have an investment policy statement, 34.2% unsure if they have

21. How Can Benefit Sources & Solutions Help • Fiduciary Review • Checklist • Mutual Fund Review • Benchmarking • Source of technical information 888-560-5171

22. 2009 UBAHealth Plan Survey 22

23. Employees Waiving Medical Coverageand Waiver Bonus 23

24. Annual Cost Per Employee - Total Cost 24

25. Changes to Total Premiums 25th Percentile 75th Percentile Median Average 25

26. Monthly Employee Share - Dollar Amount 25th Percentile 75th Percentile Median Average 26

27. $0 Employee Contribution and Percent with Dependent Coverage 27

28. Basic Plan Design Components CoPays, Deductibles, Coinsurance and Out-of-Pocket Maximums 28

29. Median CoPays 29

30. In-Network Employee Deductibles 25th Percentile 75th Percentile Median Average 30

31. Out-of-Network Employee Deductibles 25th Percentile 75th Percentile Median Average 31

32. Wellness Programs and Incentives Incentives Included 32

33. Wellness Programs & Components 33

34. HRA And HSA Plans HRAs HSAs 34

35. Rx Tier Prevalence 35

36. Median Rx Retail CoPays by Plan Design 1st Tier 3rd Tier 2nd Tier 4th Tier 36

37. Separate Prescription Drug Deductible 37

38. Presented by:Kriste Naples-DeAngelo, CPA, MBAPartner-Pension Service Group Plan Sponsor/Management ResponsibilitiesPlan Governance and Fiduciary MonitoringBest Practices and How to Avoid the Most Common Errors in Your Employee Benefit Plan

39. Plan Sponsor/Management Responsibilities • Who is a Plan Fiduciary? • Employer/Plan Sponsor is the ultimate plan fiduciary • Many fiduciaries are named in the plan or policies of the plan • Trustee(s) • Investment Managers • Plan Administrator – (not TPA) may be an individual, the employer or subsidiary

40. Plan Sponsor/Management Responsibilities Who is a Plan Fiduciary (continued)? • Corporate Officers – may be fiduciaries by virtue of their office and with respect to decisions surrounding the plan • Selection of service providers • Design of the plan benefits • Hiring of investment managers • Selection of funds

41. Plan Sponsor/Management Responsibilities Who is a Plan Fiduciary (continued)? • Board of Directors – They generally appoint the Retirement/Investment Committee members or corporate officers who are responsible for decisions • 2509.75-8 D-4 “the board of directors may be responsible for selection or retention of plan fiduciaries. If so, they exercise “discretionary authority or discretionary control and are therefore fiduciaries of the plan. However, their responsibility and consequently liability is limited to such. • Retirement/Investment Committee – To the extent that they exercise discretion over the plan

42. Plan Sponsor/Management Responsibilities Who is NOT a fiduciary? • Professional services if they offer: • Legal Services • Accounting or Auditing Services • Recordkeeping, third-party administrators or actuarial services

43. Fiduciary Duties • Exclusive Benefit Rule – to operate the plan for the exclusive benefit of plan participants and their beneficiaries • Prudent Man Rule (ERISA 404(a)(1)(B))- with care, skill, prudence and diligence • Operate the plan according to the terms of the plan • Operating outside the governing terms can result in disqualification of the plan and breech of duty. • Diversified and appropriate investments – to manage the risk of loss of the investments • Reasonable plan expenses

44. Plan Governance – What to do? • Fiduciary Standards – Have not changed, they are just more magnified! • What to do? • Have a Plan Governance Committee • Have Committee meetings regularly • In light of the economy, have them more regularly • Keep written minutes • Document EVERYTHING! • Establish clear policies and procedures • Create and follow the Investment Policy Statement • Make sure that it is addressed on a regular basis and documented

45. Plan Governance – What to do? • Communicate with and educate plan participants • Transparency with regard to fees • Provide adequate investment information to enable proper decisions by participants • Consult experts • Due to the prudence requirements, fiduciaries must seek experts with the required knowledge necessary • Consider an ERISA attorney relationship • The fiduciary has a duty to prudently select and monitor these experts in their process • Bottom Line – Critical to have an effective process to identify and manage risk

46. Plan Sponsor Responsibilities • Fiduciaries that don’t follow basic standards • May be personally liable to restore losses to the Plan • May be liable to restore any profits made as a result of improper use of Plan assets • Responsibilities include Plan administrative functions: • Maintaining books and records • Filing complete and accurate Form 5500 • Establish safeguards to ensure that fiduciary responsibilities are met • One way this can be accomplished is by implementing internal controls over financial reporting

47. Internal Controls Over Financial Reporting Value of Internal Controls protect your plan in 2 Ways: 1) By minimizing opportunities for unintentional errors or intentional fraud that may harm the plan • Preventative Controls help accomplish this objective which are designed to discourage errors or fraud 2) By discovering small errors before they become big problems • Detective Controls help accomplish this objective by identifying the error or fraud after it occurs

48. Internal Controls Over Financial Reporting • Your Plan’s policies, procedures and organization design are all part of the internal control process • The following are some general characteristics: • Procedures that provide for segregation of duties • Qualified personnel to perform their assigned duties • Sound policies and procedures to be followed by personnel when performing their duties and responsibilities • A system that ensures proper authorization and proper recording of financial transactions.

49. Internal Controls Over Financial Reporting • Internal Controls will vary depending on the Plan’s size, type and complexity • Use a risk oriented approach • Ensure that high risk areas have adequate controls • Ensure that low risk areas do not have excessive controls • Before making a decision to adopt a control consider the cost • Consider the potential benefit the control will provide • Consider the possible consequence of not implementing it.

50. Internal Controls Over Financial Reporting • Determine Your Plan’s Control Objectives • 1st step is establishing controls over financial reporting to determine the objective or what you want to achieve: reliable financial statements that are prepared in accordance with generally accepted accounting principles. • Controls should be designed to address financial statement assertions in the various components of the Plan’s financial statements • Assertions can be classified into 5 broad categories: • Existence or occurrence, Completeness, Rights and Obligations, Valuation or allocation, Presentation and disclosure