The intelligent fiduciary common problems you can avoid
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This document summarizes common fiduciary issues that retirement plan sponsors should be aware of and avoid: 1. Many organizations and individuals may unknowingly assume fiduciary status through discretion over plan assets or administration. Proper documentation of roles and responsibilities can help clarify fiduciary status. 2. Third party administrators and investment advisors may or may not be fiduciaries depending on the services provided. It is important to understand the level of discretion and control third parties have. 3. Fiduciaries have basic duties including acting prudently, diversifying investments, avoiding conflicts of interest, following the plan documents, and operating solely in the interest of participants. Understanding these duties can help fiduciaries comply.
The intelligent fiduciary common problems you can avoid
- 1. The Intelligent Fiduciary: Common Problems You Can Avoid Carol Buckmann, Counsel, Osler, Hoskin & Harcourt LLP, New York February 19, 2015 www.pensionsbenefitslaw.com © 2015,
- 2. Are You a Fiduciary? 2 You may be a fiduciary and not know it. Acknowledgement of fiduciary status is not required. A fiduciary has discretion or control over plan assets or administration, or gives investment advice for a fee Settlor v. fiduciary functions Ministerial jobs do not trigger fiduciary liability- -benefit calculations, tests Geopharma case blurs the line Implementing settlor decision may be a fiduciary act. If no other fiduciary is appointed, the plan sponsor and its Board members are default fiduciaries
- 3. Special Roles 3 Trustee Responsibilities Cannot be delegated U.S. qualified plans must have U.S. bank or trust company or decisions made by U.S. persons – domestic trust requirement Named Fiduciaries under ERISA Provide for in plan document Disperse responsibilities Investment managers Third party administrators (TPAs) May or may not be fiduciaries. Distinguish discretion from recordkeeping Board of Directors of plan sponsor always has residual fiduciary functions-can’t outsource everything TIP: Avoid problems. Know whether your TPA is a fiduciary.
- 4. Are Your Vendors Fiduciaries? 4 Investment adviser or broker? Tiblier v. Dlabal This makes a BIG difference-brokers are subject only to suitability standard Fiduciaries must put participant interests first Know the difference between RIA fiduciaries and ERISA fiduciaries Tiblier Court said adviser can’t be a fiduciary unless paid by plan The five part test for investment advice and possible changes 401(k) Vendors Leimkuehler and Santomenno cases-not fiduciaries Mass Mutual -can be fiduciaries “Product design” isn’t a fiduciary function TIP: Avoid “Teflon fiduciaries.” Your investment adviser should acknowledge ERISA fiduciary status in writing.
- 5. What about professional advisers? 5 Lawyers, accountants and actuaries performing their usual roles are not fiduciaries. They may be advising plan sponsor in its settlor role. TIP: Avoid improper use of plan assets. If advising settlor, do not pay their fees out of plan assets.
- 6. Basic Fiduciary Duties 6 Prudent expert standard under ERISA Diversification (unless it’s prudent not to do so) Avoiding prohibited transactions with related parties and self-dealing Follow plan terms But what happens if plan pays the wrong amount? Gabriel case, Guerra-Delgado case, EPCRS provide guidance (but see Bloemker v. Local 265 Pension Fund for an estoppel case the participant won) Operate plan solely in the interest of participants and beneficiaries “Safe Harbors” can protect fiduciaries Participant- directed investments, default investments, selection of annuity providers Co-fiduciary and successor liability TIP: Schedule a fiduciary education session.
- 7. Limits on Fiduciary Responsibility 7 Only to the extent performing fiduciary functions For example, a member of the Administrative Committee who is not on the Investment Committee is not responsible for investment decisions Personal liability only for losses connected to the breach of fiduciary duty Supreme Court in CIGNA v. Amara held that equitable relief (reformation, surcharge, estoppel) is available. Well-drafted plan documents and company charters can clearly define responsibilities and avoid overlapping functions BUT NOTE: Disclaimers will not work if you are acting as a fiduciary-functional definition
- 8. Plan Committees 8 Usually a Named Fiduciary under Section 402 of ERISA Board remains responsible only for prudent appointment and monitoring after full delegation Committees can be responsible for administration and/or investments Administrative committees are usually responsible for general compliance, including reporting and disclosure, non-discrimination testing, required amendments, claims review Investment committees are usually responsible for selecting managers or plan funds TIP: Make sure that your plan documents are adopted by the right fiduciaries
- 9. The Best Committees 9 Have a Charter or specific plan provisions establishing powers and duties Consist of members with specific competence: “A pure heart and an empty head are not enough” Understand how to review fees and share classes, and the importance of paying reasonable fees Make sure the right party is acting Hire the right professional advisers and have them present to report and answer questions at meetings Appropriately delegate to HR and Finance, but understanding that this does not remove committee responsibility TIP: Special issues arise when parent and subsidiary share responsibilities. • Retaining right to approve • Discretion to take necessary action • Need for clear charters/by-laws where there are parent and sub committees
- 10. The Best Committees (cont.) 10 Have an investment policy statement and follow it Tussey v. ABB Meet regularly Leave the right paper trail Agendas, formal minutes setting forth the reasons for decisions Establish good internal controls Hire good advisers Understand that plan communications need careful review. Distributing misleading or fraudulent communications is a fiduciary breach (CIGNA v. Amara) TIP: Schedule an ERISA governance review.
- 11. Hiring Independent Fiduciaries 11 Professional fiduciaries may be hired to represent plan participants where corporate officers would have a conflict of interest Typically hired when plans hold company stock Purchase or tender offer ESOP stock purchases Determining when to eliminate stock fund NOTE: the U.S. Supreme Court recently held in Dudenhoeffer that ESOP stock investments are no longer subject to a presumption of prudence
- 12. Hiring Independent Fiduciaries (cont.) 12 Used or required in some prohibited transaction exemptions Also have been used in de-risking transactions- annuity purchases May be used to decide whether plan should enter into settlement agreements Provides protection against agency action and participant lawsuits TIP: Make sure to investigate fiduciary’s qualifi- cations and certifications.
- 13. Fiduciary Liability Insurance 13 Don’t confuse it with the required ERISA bond or executive liability (D&O) insurance ERISA bond provides recovery to plan if there is a loss due to fraud or embezzlement-won’t reimburse fiduciaries Fiduciaries should not rely on D&O insurance- typically does not cover acting as a fiduciary Indemnification is not a good alternative Plan assets may not be used to indemnify fiduciary for breach of duty Employer indemnification may be limited by law or meaningless if employer in financial distress
- 14. Liability Insurance Issues 14 Must be a third party claim Third party service providers will not be covered- not employees or directors May have to add a rider to cover committee What is wrongful act? Is there a fraud exclusion? (CIGNA case) Who picks counsel and how are defense costs handled? Are errors in administration covered? Optional voluntary correction program coverage in absence of a claim Are corrective benefit payments excluded? TIP: Review your coverage with an expert.
- 15. Activity to Monitor 15 Both the Department of Labor and the SEC are considering proposals to broaden fiduciary responsibility of brokers and others. Controversial Department of Labor proposal (since withdrawn) would have eliminated part of five part test for investment advice Dodd Frank Act directed the SEC to consider one standard of liability for brokers and registered investment advisers We don’t yet know when or whether they will act. Watch for U.S. Supreme Court decision in Tibble-will determine whether duty to monitor and review investments is limited to six years Watch for possible changes re: de-risking responsibilities new PBGC reporting.
- 16. Questions? 16 Carol Buckmann cbuckmann@osler.com 212-991-2581 Sandra Cohen Sandra.cohen@osler.com 212-991-2508 U.S. Tax (IRS Circular 230): Any U.S. tax or other legal advice in this communication (including in any attachment) is not intended and is not written to be used, and it cannot be used, by any person to (i) avoid penalties under U.S. federal, state or local tax law, or (ii) promote, market or recommend to any person any transaction or matter addressed herein.