What East Tennessee Employers Need to Know: Fiduciary Update and Best Practices

1. What East Tennessee Employers Need to Know:Fiduciary Update and Best Practices Robert Rachal August 19, 2014

2. Program Overview • Donning the fiduciary hat: • General standards and risks of non-compliance • Exploring ERISA’s fiduciary duties: • Disclosure issues What East Tennessee Employers Need to Know

3. The Fiduciary Hat What East Tennessee Employers Need to Know

4. The Fiduciary Hat Generally, four ways to be a fiduciary: • Named in plan document • Authority to manage/dispose of plan assets • Discretion over plan administration • Investment advice for a fee What East Tennessee Employers Need to Know

5. Exploring ERISA’s Fiduciary Provisions What East Tennessee Employers Need to Know

6. ERISA’s Fiduciary Duties • ERISA Section 404 and 29 C.F.R. 2550.404a-1: • Duty of Loyalty: eye single to interests of participants • Duty of Prudence: prudent man under circumstances then prevailing for enterprise of like character and like aims • Duty to Diversify: minimize risk of large losses • Duty to follow plan documents/override: bound by settlor intent, unless inconsistent with the statute • Duty to monitor (29 C.F.R. 2509.75-8, FR 17): “At reasonable intervals” – delegation is not impenetrable shield What East Tennessee Employers Need to Know

7. Other Fiduciary Provisions • Section 405:Co-fiduciary liability • Sections 406 & 408: Prohibited transactions & exemptions What East Tennessee Employers Need to Know

8. The Cost of Non-compliance • ERISA Sections 502(a)(2) & 409: • “Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed . . . shall be personally liable to make good to such plan any losses resulting from each breach, and to restore to such plan any profits of such fiduciary . . . .” What East Tennessee Employers Need to Know

9. Donning The Fiduciary Hat • How do fiduciaries insulate themselves from liability? • Statutory shields: Delegation; Section 404(c) • Insurance and/or Indemnification What East Tennessee Employers Need to Know

10. Managing Complex Plans: Business Realities • Millions for benefits • Benefits complex and often difficult to understand = can be difficult to communicate and administer • Companies use myriad sources, media, employees, and vendors to communicate and administer benefits • Fiduciaries must manage and oversee to minimize errors while maximizing employee satisfaction • Typically done through committee structure, with senior HR employees charged to carry out tasks

11. Fiduciary Pitfalls: Disclosure issues • Classic case:Varity Corp. v. Howe • Recent cases:Christensen v Qwest Wilkins v Mason Tenders What East Tennessee Employers Need to Know

12. Varity Corp. v. Howe, 516 U.S. 489 (1996) • Corporate reorganization “plac[ed] … Varity’s money-losing eggs in one financially rickety basket” • Project Sunshine: Varity held meetings with employees to discuss the spin-off, touting financial viability of Massey Combines and security of employee benefits • USSC: communications with participants meant Varity acting in fiduciary, not corporate capacity • “Varity’s deception violated ERISA” What East Tennessee Employers Need to Know

13. Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006) • Plaintiff Christensen requested five benefit estimates by telephone between March and November of 2003, which estimates ranged from $1,715 to $1,763 per month • Estimated were generated by an automated system that the plan used to answer an average of 115,000 telephone and e-mail estimate requests per year • The automated system was run by Watson Wyatt, a vendor hired by the plan's administrative committee to handle ministerial plan administration functions • Both the SPD and each benefit estimate warned that the estimates were not binding and subject to change

14. Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006) • When he retired, Christensen was notified that he would receive $1,485 per month, and subsequently sued arguing that the administrative committee breached its fiduciary duties by telling him incorrectly on at least five occasions that his monthly benefits would exceed $1,700. • The error was apparently caused by classifying Christensen in a higher pension band than that for which he qualified. • Error caught when did manual check to calculate retirement benefit; these manual checks are not done for estimates, which are generated automatically off of the data in the file

15. Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006) • The Eighth Circuit held that the plan administrator did not breach its fiduciary duty • On the duty of loyalty claim, the court held it is not disloyal to plan participants to adopt a prompt, inexpensive, substantially accurate benefit estimate system to provide benefit estimates, when: • Evidence suggests plan administrator knew of and worked with vendor to eliminate recurring errors; and • Those estimates were accompanied by adequate disclosures that the estimates are non-binding and may not always be accurate

16. On the duty of care claim, the court also held this error was not a breach: Distinguished between fiduciaries and employee who entered wrong pension band information to conclude this was a clerical or ministerial error No evidence plan administrator failed to use reasonable care in selecting and retaining Watson Wyatt or in monitoring the accuracy of the benefit estimate system Rather, evidence suggested plan administrator worked with Watson Wyatt to eliminate recurring problems Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006)

17. “Take Aways” from Qwest • In determining whether was a fiduciary breach court distinguished between fiduciaries and those who act on their behalf to carry out myriad ministerial and clerical tasks • Other courts have done so, e.g., Frahm v. Equitable Assurance, 137 F.3d 955, 959-60 (7th Cir. 1998); Schmidt v. Sheet Metal Workers Nat. Pension Fund, 128 F.3d 541, 544-45, 547-48 (7th Cir. 1997) • Puts the focus on fiduciary’s management and oversight of these processes

18. Things fiduciaries can do to manage and oversee ministerial and clerical processes: Review and make sure plan-wide disclosures, particularly SPDs, are accurate and informative, e.g., in Qwest both SPDs and benefit estimates warned the estimates were not binding and subject to change Hire and train qualified personnel to perform these tasks, e.g., in Qwest no evidence Watson Wyatt was unqualified or not properly trained “Take Aways” from Qwest

19. “Take Aways” from Qwest • Things fiduciaries can do to manage and oversee ministerial and clerical processes: • Have some type of process in place to uncover and correct any systematic or recurring errors, e.g., in Qwest the HR pension manager worked with Watson Wyatt on these issues

20. Courts view SPDs as the key ERISA disclosure document for employees to learn about their employee benefits Courts thus often treat SPD’s as one-way ratchets: If the SPD is more favorable to the participant than a conflicting plan term, at least if participant relied on the SPD, the SPD controls Means must draft SPD with same care draft plans Courts are also expecting SPDs to disclose any material adverse information that may impact a participant’s ability to qualify for benefits Background: Special Case of SPDs in ERISA Disclosure Regime

21. SPDs and Wilkins v. Mason Tenders, 445 F.3d 572 (2d Cir. 2006) • Multi-employer plan required participant to provide evidence was in covered employment if employer under-reported income • Court held ERISA does not impose a fiduciary duty to continuously audit employers; rather, can be met by reasonable procedures such as random audits of employers • Court held, however, that it was a breach of disclosure requirements of ERISA § 102(b) to fail to disclose this policy in the SPD

22. Court reasoned that § 102(b) Requires the SPD to set out the “circumstances which may result in disqualification, ineligibility, or denial or loss of benefits.” Under-reporting was a persistent, not an isolated problem; and The participant would reasonably expect he would receive benefits for covered employment unless told needed to maintain records SPDs and Wilkins v. Mason Tenders, 445 F.3d 572 (2d Cir. 2006)

23. “Take Aways” from Wilkins • Wilkins is consistent with other courts that have required SPDs to disclose policies or practices that will result in the loss of benefits • Difficulty is keeping SPDs concise and readable while trying to anticipate various contingencies • In Wilkins the under-reporting issue was persistent; thus court expected this policy to impact a significant number of participants

24. Duty to Disclose: 10 Tips 1)  Heads you win, tails I lose.  (Remember the SPD is often treated as a one way ratchet) (2)  Top dog.  (Remember the SPD is the most important document you draft) (3)  In plain English.  (Use plain language to disclose limitations and adverse changes in SPDs) (4)  Oversight needed.  (Systematically monitor and review all plan-wide communications) (5)  Know one when you see one.  (Distinguish between fiduciaries and those who do ministerial work)

25. Duty to Disclose: 10 Tips (6)  Train speakers.  (Train and monitor designated benefit counselors and other speakers) (7)  Funnel questions.  (Funnel benefit questions to designated, trained speakers) (8)  No Chinese walls. (Not telling people who should know is not a defense) (9)  Some things don't mix.  (Don't mix business/corporate and fiduciary communications) (10)  Don't stick your head in the sand.  (If it smells funny, investigate it)

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