Fiduciary Best Practices for Grey Areas

Fiduciary Best Practices for Grey Areas ASPPA Annual Conference 2009 Presented bySaswati Paul November 1-4, 2009 GREENBERG TRAURIG, LLP ▪ ATTORNEYS AT LAW ▪ WWW.GTLAW.COM ©2008, Greenberg Traurig, LLP. Attorneys at Law. All rights reserved.

Agenda • ERISA Good Governance Practices • Fiduciary Status • Duties of Prudence and Loyalty • Prohibited Transactions • Fiduciary Good Governance Structures • Risk Management (Procedural Prudence/Due Diligence) • DOL Enforcement/Navigating Through a DOL Investigation

ERISA Good Governance PracticesWho is a Fiduciary? • Fiduciary Status • Statutory Definitions • ERISA Section 3(21)(A) defines a person as a fiduciary to the extent that he/she meets three conditions: • exercises discretionary authority or control over plan management or any authority or control over management or disposition of plan assets; • renders investment advice regarding plan assets for a fee or other compensation or has authority to do so; OR • has any discretionary authority or responsibility in plan administration.

Who is a Fiduciary?(continued) • Named Fiduciary • Under Section 402(a), every plan must have a “named fiduciary” who can appoints an “investment manager” • Named fiduciaries are not liable for the acts of a properly appointed investment manager unless the named fiduciary participated in and/or failed to remedy the investment manager’s breach. • Certain positions “by their very nature” have fiduciary status

Who is a Fiduciary?(continued) • Trustees • Section 403(a) also requires that the assets of an ERISA plan be held in trust by one or more trustees pursuant to a written trust agreement. • The trustee shall have exclusive authority and discretion to manage and control the assets of the plan. • Proxy voting (voting shares of corporate stock held by a plan) is a fiduciary act. Responsibility lies with trustee unless plan or agreement provides otherwise or investment manager is named (DOL Regs. Section 2509.9402).

Who is a Fiduciary?(continued) • Functional Test • Whether the person exercises any discretionary authority or control over the plan. • The exercise of discretion in selecting a plan service provider is also considered a fiduciary act. • Essentially a “facts & circumstances” test. • Settlor Functions • Business decisions such as establishing/adopting, amending, terminating or merging a plan, choosing correction options for plan failures (ADP) or selecting a trustee are considered settlor functions and are not subject to fiduciary rules. However, actions taken to implement such decisions are subject to ERISA fiduciary standards.

Who is a Fiduciary?(continued) • Fiduciaries Who Provide Investment Advice • A person is considered a fiduciary with respect to a plan to the extent that person “renders investment advice for a fee or other compensation” with respect to the plan assets. See 29 C.F.R. Sec. 2510.3-21(c), which sets the rules for when a person will be deemed to be providing “investment advice.” • The DOL distinguishes investment “education” from “investment advice.” • Fiduciary Status of Employees and Employers of Fiduciaries • Persons who perform only administrative or ministerial functions for a plan are not fiduciaries with respect to the plan. However, most courts find an employee to be a fiduciary where he or she exercises authority or control over plan decisions, even if within the scope of his or her authority.

Who is a Fiduciary?(continued) • Limitations on Fiduciary Status • Section 3(21)(A) provides that a person is a fiduciary only “to the extent” he/she performs one of the defined fiduciary functions. • ERISA Section 404 sets forth the basic rules on the responsibilities of fiduciaries under ERISA • Duty of Loyalty • A fiduciary must discharge his duties “solely in the interest of the plan’s participants and beneficiaries” and “for the exclusive purpose” of providing benefits and defraying reasonable expenses of administration.

Who is a Fiduciary?(continued) • Duty of Prudence • A fiduciary must discharge his duties “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.” • Duty of Diversification • ERISA requires that a fiduciary diversify the plans investments “so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.”

Who is a Fiduciary?(continued) • Duty to Follow Plan Documents • ERISA requires that a fiduciary discharge his duties “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions” of ERISA. • Bonding • ERISA Section 412 requires every fiduciary of an ERISA plan and every other person handling funds or other property of the plan to be bonded.

Who is a Fiduciary?(continued) • Prohibited Transactions Under ERISA Section 406 • In addition to the provisions addressing general fiduciary responsibilities in Section 404, ERISA Section 406 specifically prohibits certain specific transactions that pose a significant potential for loss or abuse of plan assets. • Party-In-Interest Transactions Under Section 406(a) • ERISA’s prohibited transaction provisions are violated even where no harm results to the plan. Some courts have characterized this as a per se prohibition on the transactions specified by Section 406.

Who is a Fiduciary?(continued) • ERISA § 406(a)(1)(A) • A sale, exchange or lease of property between a plan and a party in interest is prohibited. • ERISA § 406(a)(1)(B) • A loan or other extension of credit between a plan and a party in interest is prohibited. • ERISA § 406(a)(1)(C) • The provision of services, goods or facilities between the plan and a party in interest is prohibited under ERISA Section 406(a)(l)(C).

Who is a Fiduciary?(continued) • ERISA § 406(a)(1)(D) • The transfer of plan assets to a party in interest or the use of plan assets by or for the benefit of a party-in-interest is prohibited. • ERISA § 406(a)(1)(E) • Prohibits a plan’s acquisition of any employer security or employer real property in violation of ERISA Section 407, which provides a myriad of requirements which must be followed in order to qualify.

Who is a Fiduciary?(continued) • Prohibitions on Fiduciary Conduct Under § 406(b) • In addition to transactions between the plan and“parties in interest,” ERISA also prohibits self-dealing and other conflicts of interest by plan fiduciaries underSection 406(b) of ERISA. • Section 406(b)(1) • Section 406(b)(l) specifically prohibits a fiduciary from dealing with the assets of a plan in its own interest orfor its own account. • A fiduciary may have an “interest” which may affect the exercise of such fiduciary’s best judgment. • A fiduciary (such as the plan sponsor) may not hire itselfor its affiliate to provide services to the plan (with some exceptions).

Who is a Fiduciary?(continued) • ERISA Section 406(b)(2) • Under ERISA Section 406(b)(2) a fiduciary may not represent an adverse party in a transaction involving the plan. An “adverse party” is any party whose interests conflict with those of the plan and its participants. • ERISA Section 406(b)(3) • In addition, under ERISA Section 406(b)(3) a fiduciary may not receive any consideration for his own personal account from any party dealing with the plan in connection with a transaction involving the assets of the plan.

Who is a Fiduciary?(continued) • Statutory Exemptions Under Section 408 • Given the breadth of the prohibited transaction provisions, Congress added Section 408(b) of ERISA, which contains a number of statutory exemptions from the prohibited transaction rules. • The DOL can also promulgate both individual and class exemptions under ERISA Section 408

Who is a Fiduciary?(continued) • ERISA § 404(c) Plans • Compliance with regulations under ERISA Section 404(c) relieves a plan fiduciary of responsibility for most of the investment decisions of plan participants who exercise control over assets in their defined contribution plan accounts. • Specifically, where a plan complies with the DOL’s Section 404(c) regulations, plan fiduciaries will not be responsible for losses to a participant’s account that are the result of a participant’s exercise of control.

Who is a Fiduciary?(continued) • In order to satisfy the requirements of Section 404(c), a plan must meet four requirements: • offer a broad range of investment alternatives, including at least three alternatives that have different risk and return characteristics (“Core Alternatives”); • allow participants meaningful control over their accounts, including the right to direct transfers between Core Alternatives at least once per quarter; • provide certain information to participants automatically, such as a description of the investment alternatives and any transaction fees, and copies of prospectuses; and • provide other information upon request of the participant. • NB: there are pending DOL fee disclosure regulations requiring further information be provided to participants.

Who is a Fiduciary?(continued) • The fiduciary is not completely relieved of liability under a Section 404(c) plan since he remains responsible for the prudent selection of the investment alternatives offered to plan participants. • Fiduciary Liability Under Section 409 • Breaching fiduciaries are personally liable to restore to the plan any losses resulting from their breach and to disgorge any profits made by the fiduciary through the use of plan assets. • Breaching fiduciaries are also subject to “such other equitable or remedial relief as the court may deem appropriate,” including removal of such fiduciary.

Who is a Fiduciary?(continued) • All plan fiduciaries are potentially subject to co-fiduciary liability under Section 405 • ERISA Section 405(a) imposes liability on fiduciaries for a breach by another fiduciary with respect to the same plan under certain circumstances: • If a fiduciary knowingly participates in or knowingly undertakes to conceal an act or omission of another fiduciary knowing it to be a breach; • If a fiduciary fails to comply with Section 404(a)(1) and thereby enables another fiduciary to commit a breach; or • If a fiduciary has knowledge of another fiduciary’s breach and does not make reasonable efforts under the circumstances to remedy the breach.

ERISA Good Governance Practicesor How to Avoid Fiduciary Liability • Fiduciary Good Governance Structures • Separate settlor and fiduciary functions. • Leave corporate board members and top-tier officers (whose insider positions can create conflicts) off plan committee. • Appoint competent people to plan committee who can provide the plan with the services needed (i.e., qualifications, experience, knowledge) and educate them as to their ERISA fiduciary responsibilities. • Avoid de facto fiduciaries. • Insulate board from oversight and appointment of plan committee. • Limit non-public information flow from officers to plan committee. • Use an independent fiduciary/consultant to advise plan committee. • Purchase adequate fiduciary liability insurance.

How to avoid Fiduciary Liability(continued) • Risk Management • Procedural Prudence/Due Diligence • Read, understand and comply with plan documents. • Obtain a fidelity bond for those who handle plan assets (protects against losses for fraud/dishonesty). • Stay current on the law through continuing ERISA education. • Meet regularly, use agendas, keep minutes and document all decisions. • Prepare and maintain a written investment policy statement. • Select service providers by competitive bidding/RFPs and document the selection process and on-going decision making process. • Consider using an independent consultant to advise on investment alternatives, manager performance, and plan fees/costs.

How to avoid Fiduciary Liability(continued) • Procedural Prudence/Due Diligence (continued) • Re-evaluate fees periodically. • Provide unbiased investment education to participants and make sure not to endorse any specific provider or product. • Carefully review participant communications (SPD should be accurate), respond timely to participant questions and complaints, distribute prospectuses where applicable, and disclose all fee and expense loads to affected participants upon request and in writing. • And always remember that procedures go a long way in terms of proving prudence, so . . . DOCUMENT, DOCUMENT, DOCUMENT!

DOL EnforcementNavigating Through a DOL Investigation • DOL Enforcement Authority • ERISA Sections 504 (civil) and 506 (criminal) grants the Secretary of Labor broad discretion to investigate whether any person has violated or is about to violate any provision of Title I of ERISA. • Sharing Responsibilities with the IRS and DOJ • Under Reorganization Plan No. 4 of 1978, dated August 10, 1978, the DOL and the Internal Revenue Service (IRS) allocated certain ERISA enforcement duties between themselves.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • The Role of the DOL’s Employee Benefits Security Administration (“EBSA”) • Employee Benefits Security Administration (“EBSA”) (formerly the Pension and Welfare Benefits Administration or “PWBA”) investigates compliance with employee benefits law through ten Regional and five District Offices throughout the country and a division of investigations in the Office of Enforcement in the national office in Washington, DC. • The Strategic Enforcement Plan • The Strategic Enforcement Plan was issued on April 6, 2000, and provides broad outline of the agency’s continuing enforcement priorities on a yearly basis.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • New Contributory Plan Criminal Project for 2010 • Focus on criminal investigations of individuals involved with the embezzlement of plan funds including those who withhold money from worker paychecks without depositing them, and those who file false 5500 information. • Employee Contributions Project • Since 1995, DOL has pursued its 401(k) Employee Contribution Enforcement Project to emphasize employers’ prompt deposit of employee contributions in employees’ accounts. For 2010, the delayed remittance of contributions is a new national priority. • Rapid ERISA Action Team (“REACT Initiative”) • This enforcement project focuses attention on plans whose employers are in financial difficulty or bankruptcy.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Orphan Plans • DOL began this project in 2000 to address plans that have been abandoned by plan sponsors and fiduciaries. • Multiple Employer Welfare Arrangements • For a number of years the DOL has focused attention on fraudulent MEWAs generally marketing health insurance to small businesses and self-employed individuals while circumventing state regulation. • Employee Stock Ownership Plans (“ESOPs”) • This project generally focuses on incorrect valuations of employer securities and the failure to provide participants with benefits such as voting rights, diversification, and the right to sell shares. • Reporting and Disclosure Enforcement • EBSA’s Office of the Chief Accountant enforces ERISA’s reporting and disclosure rules.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Consultant/Adviser Project • EBSA reported that this project focuses on the receipt of improper, undisclosed compensation by pension consultants and other investment advisers. In 2010, this project will be expanded to include those who use their fiduciary status to increase their compensation (including with respect to disability and life insurance plans). • EBSA’s recent investigation of Bernard Madoff Investment Securities LLC were conducted under the auspices of this project. • Other Areas of DOL Enforcement • The DOL also continues to focus on services providers’ receipt and disclosure of indirect compensation. • Additionally, the DOL continues its quality review program for employee benefit plan audits, in which it reviews plan audits to ensure that the audit work performed supports the opinion rendered on the plan’s behalf on the plan’s financial statements (by OCA). • Desk Reviews of Form 5500 filings (by OCA).

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Confidentiality During an Investigation • ERISA Section 504 generally permits the DOL to provide information regarding any matter that may be a subject of an investigation to any person affected by the matter being investigated and to any agency or department of the United States, except for information obtained pursuant to Code Section 6103. • Financial information may be exempt from DOL disclosure in response to a FOIA request (FOIA Exemption 8). • DOL officials must refuse to disclose information obtained from financial regulatory agencies unless there is express authority permitting such disclosure. • Similarly, information that is subject to the Privacy Act may not be disclosed without an individual’s authorization. • Matters occurring before a GJ are prohibited from disclosure pursuant to Federal Rule of Criminal Procedure Rule 6(e).

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Fiduciary Exception to Attorney-Client Privilege • Under the fiduciary exception to attorney-client privilege, fiduciaries may not assert the privilege to withhold information about their fiduciary activities from plan participants or the DOL. • In general, if the target of the investigation is already represented by counsel, it is best to have counsel hire any experts or consultants to protect privilege on any analyses or reports produced during the course of the investigation.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • The Investigatory Process • Generally, the target of the investigation will receive an appointment letter requesting an on-site interview. The investigator may also request specific documents if he or she intends to review documents in the office before conducting an on-site interview. • The investigator does not have to allow for the presence of the target’s attorney during the interview in a civil investigation because of the voluntary nature of the interview. However, in practice, if the presence of the attorney does not hinder the investigatory process, the investigator will generally allow the attorney to be present • It is a good idea to take a look at EBSA’s Enforcement Manual which is available on DOL’s website, www.dol.gov. The Enforcement Manual provides a step-by-step guide on the how the investigation will proceed.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • The Investigatory Process (continued) • The DOL may also issue administrative subpoenas requiring the production of documents or oral testimony. • The DOL has broad subpoena authority. • Refusal to comply with lawful DOL subpoena may result in civil enforcement action that can culminate in significant contempt sanctions. • Regardless of what type of document request you receive from the DOL, it is best to negotiate limitations on the scope of the subject matter of the investigation, the time period under review, and the priority of document production since the initial request can often be quite voluminous and unspecified. • It is advisable to request sampling with the caveat that the DOL may request additional information if the sample is found to be inadequate.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Once the DOL has completed its investigation of the target plan, it can issue one of four types of letters: • a no violation letter or closing letter (very rare); • a contingency letter stating that no action is warranted; • a Voluntary Compliance (“VC”) notice letter which notifies plan fiduciaries of ERISA violations, requests corrective action and invites the plan fiduciary to discuss with the DOL how the violations may be corrected and any losses restored to the plan (the VC letter also advises that the matter could be referred to the Solicitors of Labor for possible legal action and that a 20% mandatory civil penalty will be assessed on the recovery amount); and • a demand or litigation letter issued by the Regional Director/Solicitor.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Civil Penalties • ERISA Section 502(i) permits the DOL to assess a 5 percent civil penalty on the “amount involved” and up to 100 percent of the amount involved if the transaction is not corrected against a party in interest in the event that it engages in a prohibited transaction under ERISA Section 406 with a plan. • ERISA Section 502(l) provides that the DOL “shall” assess a 20 percent penalty. This mandatory penalty is calculated on the amount recovered by the DOL pursuant to a settlement agreement or court order due to a breach of fiduciary responsibility or knowing participation in such a breach or violation by another person.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Civil Penalties(continued) • According to the DOL, even correction by a plan after receiving a voluntary compliance notice may be interpreted as a “settlement agreement” requiring imposition of the 502(l) penalty. • In general, it is best to make corrections, to the extent possible, before the DOL issues a VC letter, and to state in writing to the DOL that any corrections made were not subject to a settlement agreement with the DOL. • The parties may petition the DOL for a waiver or reduction of this penalty if the person acted reasonably and in good faith in committing the breach or violation, or if the person will not be able to restore all losses to the plan, participant or beneficiary without severe financial hardship unless the waiver or reduction is granted.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • Criminal Penalties • Section 501 of ERISA provides that any person who willfully violates any of the reporting and disclosure requirements of Title I of ERISA is subject upon conviction to imprisonment for not more than ten years or a fine of not more than $100,000 (or $500,000 in the case of a non-individual defendant). • Section 511 of ERISA provides that any person who uses or threatens force or violence to restrain or intimidate any participant or beneficiary in order to prevent or interfere with his or her exercise of rights under a plan or ERISA is subject upon conviction to imprisonment for not more than ten years or a fine of $100,000 or both.

DOL Enforcement/Navigating Through a DOL Investigation(continued) • To avoid a bad fiduciary outcome as a result of a DOL Investigation: • Have a plan committee that understands its fiduciary duties under ERISA, have it periodically re-evaluate service providers and their fees, provide unbiased investment education to your participants, carefully review all participant communications for accuracy, and respond quickly and thoroughly to participant complaints. • And to re-emphasize a point made earlier, always remember that procedures go a long way in terms of proving prudence, so . . . DOCUMENT, DOCUMENT, DOCUMENT!

DISCLAIMER • These materials have been prepared by Greenberg Traurig, LLP for informational purposes only and constitute neither legal nor tax advice. • Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship. • Anyone viewing this presentation should not act upon this information without seeking professional counsel.

Fiduciary Best Practices for Grey Areas