Presented by: R. Randall Tracht Riva T. Johnson Craig A. Bitman

1. Presented by: R. Randall TrachtRiva T. JohnsonCraig A. Bitman Please dial: 800.203.2706 Passcode: 93743964 November 16 and 18, 2004 Morgan, Lewis & Bockius LLP

2. Introduction: Managing Fiduciary Risk • Indemnification, Fiduciary Liability Insurance and Fidelity Bonding • Structure of Plans and Fiduciary Committees (with emphasis on 401(k) plans and plans with employer stock investments) • Service Provider Relationships

3. Liability and Penalties for Fiduciary Breaches • Personal liability for fiduciary losses – ERISA §409(a) • Obligation to restore losses suffered by a plan • Obligation to restore profits made through improper use of plan assets • Other equitable and remedial relief (e.g., removal of a fiduciary)

4. Liability and Penalties for Fiduciary Breaches • Statutory penalties: • ERISA §502(l) – statutory penalties for fiduciary breaches equal to 20% of “applicable recovery amount” • Excise taxes for prohibited transactions • Criminal penalties for: • Willful violation of reporting requirements • Use of fraud, force or violence to interfere with ERISA rights

5. Fiduciaries Under ERISA • Discretionary control over plan or plan assets • Investment advice for a fee • Discretionary authority regarding plan administration • Fiduciary determination is a “functional” analysis • Named vs. unnamed fiduciaries • Settlor vs. fiduciary activities

6. Fiduciary Standard of Care • A fiduciary shall discharge its duties solely in the interests of plan participants and beneficiaries for the “exclusive purpose” of providing benefits to participants and beneficiaries and defraying reasonable expenses of the plan • With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person 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

7. Fiduciary Standard of Care • A fiduciary is obligated to diversify plan investments unless it is clearly prudent not to do so • A fiduciary must act in accordance with the applicable plan documents

8. Indemnification, Liability Insurance and Fidelity Bonding

9. Limits on Managing Fiduciary Liability • ERISA voids anything that relieves a fiduciary from his or her ERISA duties • “Hold harmless” provisions are void • Plan cannot indemnify; however, indemnification from the employer or a third party is allowed

10. Indemnification Provisions • Standard practice to include employer indemnification for individual fiduciaries in the plan and trust documents • Rules are the same for ERISA pension and welfare plans • Check documentation • Separate agreement may be needed

11. Indemnification Provisions • Indemnification can and usually does cover negligence;less often covers gross negligence; and should not cover intentional or willful misconduct • State law may prohibit the employer from indemnifying intentional misconduct • Law is split on whether one fiduciary has a right of contribution against another fiduciary – generally, liability is joint and several

12. Fiduciary Liability Insurance • ERISA expressly permits the purchase of fiduciary insurance by a plan, so long as such insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary • In addition, a fiduciary may purchase insurance to cover his or her own liability, so long as such insurance is purchased with such fiduciary’s own money

13. Fiduciary Liability Insurance • Lastly, nothing precludes an employer or an employee organization from purchasing insurance to cover potential liabilities of fiduciaries and other persons serving in a fiduciary capacity with respect to its employee benefit plans

14. ERISA’s Bonding Requirements • All plans subject to ERISA must have bond except where benefits are funded solely from general assets of the employer or union and assets are not segregated in a separate bank account or otherwise • No bond is required of regulated banks, insurance companies and trust companies acting as fiduciaries • Bond must cover losses from theft, fraud and dishonesty • Can be purchased with plan assets

15. ERISA’s Bonding Requirements • Bond must be for at least 10% of funds “handled” during the preceding plan year, with a $1,000 minimum and a $500,000 maximum • “Handled” means total of funds subject to loss – if fiduciary has access to all assets, all would count as handled

16. ERISA’s Bonding Requirements • Definition of “handled”: • Whether an individual’s duties involve physical contact/control over funds or property of a plan • Whether an individual has the power or ability to exert physical contact/control over funds or property of a plan • Whether an individual has power to transfer funds or property of a plan to him/herself or another person

17. ERISA’s Bonding Requirements • Definition of “handled”: (continued) • Whether an individual has the power to disburse funds or property of a plan • Whether an individual signs or endorses checks in connection with disbursements, or • Whether an individual has supervisory or decision-making authority with respect to persons or activities described above

18. Structure of Plans andFiduciary Committees

19. Committee Structure – Allocation of Fiduciary Duties • Fiduciary roles often apportioned among: • Board of directors • Committees • Investment managers • Participants • Plan documents must be clear

20. Committee Structure and Co-Fiduciary Liability • Statutory provisions • Enabled co-fiduciary breach • Duty to remedy breach

21. Committee Structure and Duty to Monitor • Delegation/allocation does not extinguish all liability • Appointing fiduciary must actively monitor the appointees • How to monitor?

22. Plan Design – ERISA Section 404(c) Plans • Where participants direct investments, fiduciaries can be relieved of responsibility for investment choices made by participants • Fiduciaries remain liable for selecting appropriate investment alternatives

23. Plan Design – ERISA Section 404(c) Plans • Individual account plan • Opportunity to control • Affirmative instruction • Independent control • Disclosure requirements • Broad range of investment alternatives

24. Plan Design – Employer Stock Investments • Plans that are designed to permit employer stock investments introduce added complexity to fiduciary framework • Additional requirements to fit within Section 404(c) protection: • Stock must be a non-core alternative • Plan must provide all shareholder disclosures • Voting, proxy, and tender rights • Need for confidentiality procedures and confidentiality officer • Independent fiduciary may be needed • Transferability of shares issues

25. Plan Design – Employer Stock Investments • Employer stock investments present unique and complicated issues for design and operation of fiduciary committees • Tittle v. Enron • Key allegations • Key issues • Key rulings

26. Plan Design – Employer Stock Investments • Enron – Key Allegations • The Administrative Committee breached fiduciary duty by failing to prudently monitor investments • Enron and its Board of Directors failed to properly appoint and monitor the members of the Administrative Committee • Enron and certain executives failed to provide material adverse information about true health of company to the Administrative Committee and participants

27. Plan Design – Employer Stock Investments • Enron – Key Issues and Rulings • Can officers be held liable for breach of fiduciary duty when they act in corporate capacity? YES • Do officers have a duty to disclose material non-public information to a plan’s administrative committee? YES • Can officers be held liable as co-fiduciaries for failing to prevent the administrative committee from engaging in further breaches? YES

28. Plan Design – Employer Stock Investments • Enron – Key Issues and Rulings(continued) • Must plan fiduciaries advise participants that misleading statements were made by others? YES • Do plan fiduciaries have a duty to investigate the financial health of a plan investment when they learn of possible problems? YES • Can fiduciaries be held liable for offering investments in employer stock where the plan document provides for such investment? YES

29. Plan Design – Employer Stock Investments • Enron – Key Issues and Rulings(continued) • Must officers disclose non-public material information to participants when such disclosure is not required by (or is prohibited by) the securities laws? YES • Can fiduciaries execute a pre-scheduled blackout period when it will be injurious to participants? NO • Does 404(c) relieve the Enron fiduciaries from liability for investments in Enron stock? NO

30. Recommended Actions • Monitor all appointments • Committees must be properly constituted • Consider separating administrative and amendment authority • Document all activities carefully • Monitor investments effectively • Ensure proper participant communication

31. Service Provider Relationships

32. Service Provider Relationships • Thoughtful and effective use of third-party service providers can help fiduciaries manage fiduciary risk • Fiduciaries can delegate duties (e.g., investment management responsibilities) that they are ill-equipped to handle in-house • Use of service providers can help fiduciaries demonstrate satisfaction of fiduciary standard of care • Examples of typical third-party service provider relationships: health and welfare plan administration (including benefit claims determination); record-keeping services; trustee services; actuarial services; legal services; etc.

33. Service Provider Relationships • Issues relating to delegation of authority to third-party service providers • Initial selection and ongoing monitoring of service provider generally is a responsibility of the delegating fiduciary • Allocation of fiduciary responsibility/loss generally a matter of explicit written agreement between the parties • Notwithstanding contractual provisions, allocation of losses often a matter of ongoing relationship between the parties

34. Service Provider Relationships • Legal issues to consider in evaluating service provider contracts • If applicable, recognition of fiduciary status • Standard of care established under the contract • Indemnification provisions (particularly, whether indemnification provisions are parallel) • Duty to defend and ability to control defense

35. Service Provider Relationships • Limitation of liability (LOL) clauses • Recent DOL Guidance – Advisory Opinion 2002-08A • LOLs for fraud or willful misconduct void against public policy • DOL determined other LOLs not “per se” impermissible • Fiduciaries must conduct fiduciary analysis of LOLs – comparable services vs. comparable costs • Fiduciary should consider impact of LOLs on fiduciary liability insurance • Attorneys and LOLs

36. Contacts R. Randall Tracht rtracht@morganlewis.com, 412.560.3352 Riva T. Johnson riva.johnson@morganlewis.com, 214.438.1557 Craig A. Bitman cbitman@morganlewis.com, 212.309.7190