MassMutual Regulatory Advisory Services Fiduciary …€¦ · Fiduciary liability Fiduciary...

GLOSSARY

Fiduciaries and non-fiduciaries

Fiduciary liability

Fiduciary standards and required action

Taking voluntary action and mitigating risk

Best practices in plan governance

How MassMutual helps

Helping you fulfill your fiduciary duties

MassMutual Regulatory Advisory Services Fiduciary Guide

Introduction

FOR PLAN SPONSOR USE ONLY.

http://www.massmutualatwork.com

GLOSSARY


Fiduciary liability





Introduction

Fiduciary services @work As your plan’s service provider, MassMutual is always ready to share with you the benefit of our knowledge and experience, to help you effective-ly manage your plan and comply with legal and regulatory requirements. We have organized this Guide to inform you of important legal consider-ations, and to share our thoughts on issues and processes you may wish to consider.

This Guide provides information to help you determine who your plan’s fiduciaries are, and detail their responsibilities. We have included other information designed to inform you of key fiduciary considerations, as well as practical tips and techniques you can implement for your plan. The information in this Guide takes into consideration, the final Conflict of Interest Rule issued in April 2016.

The information presented here is not intended as tax or legal advice. Plan sponsors and fiduciaries should seek advice from legal counsel with respect to any questions or concerns they have regarding their plans or fiduciary obligations.

About the governing law

The definition, duties, and accountabilities of your Plan’s fiduciaries are generally laid out in the Employee Retirement Income Security Act of 1974 (ERISA). Additional responsibilities and clarifications are established by regulations and other guidance issued periodically by the United States Department of Labor (“DOL”). Parallel provisions are often set forth in the Internal Revenue Code, related regulations and guidance issued by the Internal Revenue Service (“IRS”). For simplicity’s sake, in this Guide we’ll generally refer to the governing body of law as “ERISA”.

Plans maintained by governmental entities, certain church plans (called “non-electing church plans”),and some 403(b) arrangements are not subject to the terms of ERISA. Nonetheless, much of the information in this Guide may be helpful to sponsors of such plans as they develop the procedures and processes they’ll use to guide their activities.

While the underlying law is nearly 40 years old, important requirements for fiduciaries change frequently. Due to these types of frequent and important changes, we’ll provide you with periodic updates to this Guide as well as other information, such as periodic white papers, other articles, and the annual Fiduciary Calendar to help keep you informed of current developments.


Fiduciary liability





GLOSSARY

Introduction

Who is a fiduciary?Plan fiduciaries play the lead role in safeguarding the rights of plan participants. Key principles guide their actions, and the standards imposed on them are exceptionally high. A plan may, and frequently will, have multiple fiduciaries with distinct and potentially overlapping areas of accountability.

ERISA generally considers you to be a fiduciary if you:

• Possess any discretionary authority or control over plan administration or management;including creating the rules, policies, practices, and procedures governing plan administration

• Possess any discretionary authority or control over the investment, management, or disposition of plan assets

• Provide the plan with investment advice for afee or other compensation

Note the emphasis on “discretion”. If you have a say in how the plan is managed or administered, or over the control of plan assets, you’re most likely a fiduciary. Keep in mind that the ability to exercise discretionary authority or control is determined by a facts-and-circumstances analysis. As part of this analysis, the emphasis is placed on having discretionary authority, rather than on whether that authority is actually exercised.

Named fiduciaryEvery plan must have a “named fiduciary”. This individual, group, or organization must be stated in the plan’s governing document. A named fiduciary has the authority to control and manage the operation and administration of the plan. They may also appoint other fiduciaries and engage non-fiduciary experts in order to prudently and effectively oversee the plan. Even when they delegate certain responsibilities to others, the named fiduciary will always be accountable for selecting their delegates and monitoring their activities.

Section 1 Fiduciaries and non-fiduciaries

> Who is a fiduciary?

Who are commonly considered plan fiduciaries?

Can someone be banned from serving as a fiduciary?

Who is not a fiduciary?

Hybrid roles


Fiduciary liability





GLOSSARY

Introduction

Who are commonly considered plan fiduciaries?Although each plan is different, certain roles are commonand carry fiduciary status.

• Plan sponsor

• Plan committees

• Plan administrator

• Investment manager

• Plan trustee

• Financial advisor


Who is a fiduciary?

> Who are commonly considered plan fiduciaries?



Hybrid roles


Fiduciary liability





GLOSSARY

Introduction


Yes. Two sections of ERISA address this issue. ERISA§409(a) allows a court to temporarily or permanentlyban a person from serving as a plan fiduciary, if heor she has been found guilty of a breach of fiduciaryduty. ERISA §411 specifically bans people convictedof certain crimes from serving as plan fiduciaries orconsultants to a plan. These crimes include fraud,bribery, embezzlement, perjury, and others. Evenfelony convictions of federal or state controlled-substances laws will preclude an individual fromserving as a plan fiduciary.

This prohibition is effective for 13 years following either conviction or termination of imprisonment, whichever is later. However, the sentencing court can set a lesser period, though it must be at least three years. The intent here is clear: ERISA makes every effort to protect plans and participants by imposing high standards of care on individuals who serve as fiduciaries.


Who is a fiduciary?


> Can someone be banned from serving as a fiduciary?


Hybrid roles


Who is not a fiduciary?Generally speaking, you’re unlikely to be considered a fiduciary if you:

• Solely perform “ministerial” functions suchas applying plan terms to determineparticipant eligibility, preparing participantcommunications, maintaining employmentrecords, and calculating benefits, as long asyou don’t exercise discretion in doing so; or

• Are a lawyer, auditor, accountant, actuary,service provider, third-party administrator,or other individual or firm providingnon-discretionary ministerial functionsat the direction of the plan’s fiduciaries.

Non-fiduciaries do not have the same level of responsibility as fiduciaries do. But, that’s far from saying they have no responsibility at all. First and foremost, they must be sure to follow the rules and procedures the fiduciaries designed to govern plan administration. Further, they must make every effort to employ full and accurate information as they do so.

Hybrid rolesIndividuals or organizations can serve multiple roles relating to the plan. It’s possible for some of these roles to be fiduciary roles, while others are not. The fiduciary standards, and related liabilities we’ll discuss in Section 2, apply only to the fiduciary portion of one’s plan duties. At the same time, since the guiding principles for plan fiduciaries are grounded in ethical behavior, they also can serve as a guide even for non-fiduciary roles.

Not all plan-related decisions made by a plan sponsor or employer are fiduciary decisions. For instance, decisions involving establishment and design of a plan, determination of the types of contributions permitted, or the imposition of a vesting schedule generally are not fiduciary decisions. Instead, they’re what are called “settlor” functions. This term is derived from trust law that speaks of the creator of a trust as a “settlor”. Settlor functions generally aren’t subject to ERISA’s fiduciary rules, though there are other laws thatmay apply to them. Of note, costs incurred in the “settlor” role cannot be paid or reimbursed through plan assets; more on this topic appears in Section 3 of this Guide.

Fiduciary liability





GLOSSARY

Introduction


Who is a fiduciary?



> Who is not a fiduciary?

Hybrid roles


Section 2 Fiduciary liability

Liability for actions of fellow fiduciaries

Liability for non-fiduciaries

Bonding

Indemnifying a fiduciary

Prohibited transactions

Correcting fiduciary breaches





GLOSSARY

As we’ve seen, ERISA imposes very high standards of conduct on plan fiduciaries. To promote compliance with these standards, ERISA imposes personal liability on plan fiduciaries for losses to the plan resulting from a breach of fiduciary duties, regardless of whether the breach was intentional. Some of the following facts may seem intimidating, but please recognize that specific mechanisms (such as the DOL’s Voluntary Fiduciary Correction Program discussed later in this Section) are available to help plan fiduciaries resolve violations. Realize too, that not every error is of the magnitude of a fiduciary breach. In our experience, the best ways to avoid becoming subject to sanctions is to:

• constantly place the interests of the planand participants ahead of all other interests,including those of the employer andplan sponsor

• wisely select fiduciary delegates, and monitortheir activities regularly

• avoid self-dealing and other prohibitedtransactions

We share more on each of these topics as you move forward through this Guide.

As a plan fiduciary, you may be required to personally pay monetary damages, restore plan losses, or disgorge personal profits arising from

a breach in your fiduciary responsibility. You may also be removed as plan fiduciary or barred from acting in a similar capacity to the same or any other ERISA-governed plan for a specified period of time. Certain intentional or “willful” violations could carry criminal penalties of up to ten years in prison and fines up to $100,000 for individuals, and $500,000 for corporations. You become subject to personal liability as a plan fiduciary as soon as you become a fiduciary. There is no “trial period” during which you’re subject to either a lesser standard or reduced liability.

In general, you don’t assume fiduciary liability for the action or inaction of your predecessor(s) in your role. However, you’re obligated to take action to remedy the breach of a predecessor fiduciary if you gain knowledge of it. In a similar vein, you don’t take on the fiduciary responsibility for acts committed by your successor fiduciaries.

Once again, there are qualifications: you don’t cease to be liable for acts you took while you were a fiduciary simply because you’ve resigned that status and, if resigning as a fiduciary, you need to ensure adequate time for others to assume your responsibilities, unless severe circumstances (such as death or incapacity) make that impossible.

Introduction


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GLOSSARY

Introduction


Section 2 Fiduciary liability> Liability for actions of fellow fiduciaries


Bonding




Liability for actions of fellow fiduciariesWhen a plan has multiple fiduciaries, one may have liability for the fiduciary breach of another if:

• He or she knowingly participates in, orattempts to conceal, an act or omission ofanother fiduciary, and knows that such actor omission is a breach*

• He or she fails to comply with his or herspecific fiduciary duties and, as a result,enables another fiduciary to commit a breach*

• He or she fails to make reasonable effortsunder the circumstances to remedy a breachby another fiduciary, of which he or sheis aware*

The effect of delegating on fiduciary liability

As we’ve seen, fiduciaries may delegate some of their responsibilities to others. Delegation may reduce their liability for the fiduciary actions of their delegate under some circumstances. First, the fiduciary needs to be empowered to delegate. Second, they should have a sound process for identifying the need for selecting and monitoring a delegate; see Section 3 of this Guide for best practices in this regard. While a fiduciary may be relieved of responsibility for the specific actions of a delegate, he or she continues to be liable for selecting and monitoring delegates and their actions. Finally, delegating fiduciaries alsoretain responsibility for actions committed by other fiduciaries as outlined above.

<back* These standards are laid out in ERISA §405(a).






GLOSSARY

Introduction




> Liability for non-fiduciaries

Bonding




Liability for non-fiduciariesLegal liability may be somewhat limited for non-fiduciaries. Current case law indicates that ERISA provides no cause of action for damages against non-fiduciaries who knowingly participate in a breach of fiduciary duty. However, the courts have also ruled that a non-fiduciary may be liable for participating in a prohibited transaction, which we discuss later in this Section.

BondingERISA generally requires every plan fiduciary, and every person handling the plan’s money, to be bonded. The purpose of the bond is to protect the plan against loss due to fraud or dishonesty on the part of the bonded individual. A single bond may cover multiple fiduciaries. The bond must be at least $1,000 or 10% of the funds managed or handled by the fiduciary, whichever is greater. The maximum bond amount required under ERISA is $500,000. However, if the plan holds employer securities, the maximum required amount of the bond is increased to $1,000,000. Assets held by an insurance company generally are exempt from these bonding requirements.






GLOSSARY

Introduction





Bonding

> Indemnifying a fiduciary



Indemnifying a fiduciaryERISA doesn’t allow a plan to agree to indemnify or “hold harmless” a fiduciary for their actions. Doing so would clearly run counter to the public policy on which fiduciary responsibility is based. However, an employer sponsoring (or participating in) a plan may indemnify a fiduciary. Doing so doesn’t relieve the fiduciary of his or her fiduciary responsibilities or liability for their actions.However, it does permit the employer to satisfy (i.e., pay) certain liabilities incurred by the fiduciary.

Prohibited transactionsA variety of transactions and actions are expresslyprohibited by ERISA. Your ERISA attorney can provide you counsel on these transactions and possible exemptions from them. For basic discussion, please realize that ERISA prohibits certain basic transactions between the plan andany entity who is a “party-in-interest”. The prohibition exists regardless of the fairness of the transaction or any potential benefit to the plan or the participants, unless ERISA or the DOL has provided an exemption. The table on the next page notes who is considered a party-in-interest and provides more detail about prohibited transactions.

Example of transactions






GLOSSARY

Introduction





Bonding


> Prohibited transactions


Party-in-interest Prohibited transactions

A party-in-interest, as defined in ERISA §3(14), includes:

• Any fiduciary

• Any person or organization providingservices to the plan

• An employer or employee organizationwhose employees or members arecovered by the plan

• The owner of 50% or more of anemployer or employee organization

• A relative of the above

• A 10% shareholder, partner, or jointventurer of any of the above

ERISA §406(a) prohibits transactions between a plan and a party-in-interest that involve:

• The sale, exchange, or lease of property

• The lending of money or otherextension of credit

• Furnishing goods or services

• Transferring to, or permitting a party-in-interest to use plan assets and certaininvestments in securities of the employer

• Under certain circumstances, anacquisition or retention by the plan ofemployer securities or the employer’sreal property

Example of transactions

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GLOSSARY

Introduction





Bonding


> Prohibited transactions


While the list of potential prohibited transactions is lengthy, realize that the DOL has provided specific “statutory exemptions” that allow a plan to undertake certain actions, including (but not limited to):

• Making loans to participants that satisfycertain other legal requirements;

• Obtaining necessary services from a party-in-interest and to provide reasonablecompensation to that party-in-interest; and

• Permitting loans to employee stockownership programs.

If you have questions or concerns about a specifictransaction involving a plan for which you are a fiduciary, or to which you may become a party-in-interest, you may work with ERISA counsel to seek an individual prohibited-transaction exemption from the DOL.

In addition to avoiding prohibited transactions, plan fiduciaries are prohibited from “self-dealing”. In layman’s terms, self-dealing on the part of a fiduciary involves putting their own interests ahead of those of the plan, participants, or beneficiaries. Generally speaking, self-dealing consists of:

• Acting on behalf of a party whose interestsare adverse to the interests of the plan or itsparticipants;

• Receiving any consideration or compensationfor their own personal account from any partydealing with the plan in a transaction thatinvolved plan assets; and

• Dealing with plan assets in their own interestor for their own account. This prohibitiondoesn’t preclude a fiduciary from directinginvestments in his own individual accountin a self-directed plan.

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GLOSSARY

Introduction





Bonding



> Correcting fiduciary breaches

Correcting fiduciary breachesA wide variety of both basic principles and specific rules detail the requirements for plan administration, plan governance, and fiduciary responsibilities. It’s common for mistakes to take place, though not all mistakes rise to the level of a fiduciary breach. Simple steps can be taken to correct some common errors. Some of the more basic situations can be fixed by a plan sponsor without regulatory filings or fees. More complex situations, those occurring over longer periods of time, and those involving a fiduciary breach, may require reporting to regulators such as the DOLand IRS, and possible payment of fees.

Two programs have been created to help plan sponsors and fiduciaries detect and resolve plan errors. The IRS created the Employee Plans Compliance Resolution System (EPCRS) that generally pertains to errors in plan administration that fall under the plan-qualification provisions of the Internal Revenue Code. The DOL’s counterpart to EPCRS, the Voluntary Fiduciary Correction Program (VFCP), is geared toward resolving fiduciary breaches or possible breaches that occur where applicable provisions of ERISA are

not followed. For more information about these programs, contact MassMutual, the IRS, the DOL, or your ERISA counsel.

It is important to take prompt action to correct prohibited transactions should they occur. Doing so is required by fiduciary standards themselves. Moreover, if a prohibited transaction occurs, a 15% penalty tax applies to each party-in-interest who participates in the transaction. This penaltytax is assessed each year until the transaction is corrected. Payment of penalty taxes takes place through completing and filing Form 5330 with the IRS. As part of that filing, a sponsor must disclose the prohibited transaction and state whether it has been corrected. If it has not been corrected, the sponsor must furnish additional detail, andan explanation of why correction has not taken place. Correction mechanisms vary, and you should obtain the assistance of ERISA counsel, if you find that a prohibited transaction has occurred.

Action and inaction are both considered fiduciary acts.


Fiduciary liability




GLOSSARY

Introduction


Section 3 Fiduciary standards and required action> Basic principles

Delegating responsibilities

Monitoring plan costs

Forwarding contributions to the plan in a timely fashion

Disclosing required information to participants

Completing regulatory filings

Assessing and monitoring plan investments

Basic principlesAs a plan fiduciary, your primary function is to protect the interests of plan participants and their beneficiaries. As you do so, you must satisfy both basic principles and specific requirements.

• Exclusive benefit

• Prudence

• Plan documents

• Investments

“ …the Prudent Man Rule is one of conduct, and not a test of the result…” – Donovan vs. Cunningham716 F.2d 1455, 1467 (5th Cir. 1990)

To ensure that the plan is being maintained in compliance with ERISA and other applicable law, you should:

• Conduct periodic plan reviews to ensure consistency with current regulations

• Document the results of each review

• Take prompt action to address any discovered issues

• Ensure plan documents are easily accessible to all parties who may need them

• Timely execute all amendments, whether triggered by you or by regulatory changes

• Store copies of all amendments with the plan document

• Keep backup copies of plan documentsin a safe location according to your organization’s records-retention or disaster-recovery programs

• Ensure the backup documents are kept current by periodically comparing themto the originals

• Develop written policies and procedures for the proper administration of the plan

• Follow your procedures


Fiduciary liability




GLOSSARY

Introduction


Section 3 Fiduciary standards and required action

Basic principles

> Delegating responsibilities






Delegating responsibilitiesAs mentioned earlier, as a fiduciary, you may find it necessary or prudent to delegate some of your responsibilities to others. By doing so, you can employ people or organizations with appropriate expertise to address specific issues.

The responsibility delegated to any individual or group may be broad or limited. Different responsibilities may be delegated to different individuals or groups. As we’ve mentioned previously, you are not relieved of your ownfiduciary responsibility simply by delegating to others. At the very least, you will continue to have a fiduciary duty to choose any delegates prudently, and monitor their activities.

When delegating responsibility, as a prudent fiduciary, you should:

• Use reasonable judgment in determiningwhether the services of another fiduciaryare necessary or warranted

• Employ a documented process for vettingand selecting other fiduciaries

• Perform adequate background checksto ensure parties are eligible to serve asfiduciaries

• Clearly define the role and responsibilitiesbeing delegated

• Carefully monitor the activities of thefiduciaries you’ve appointed, or to whomyou’ve delegated responsibility

• Document the decision-making process,selection criteria, and the results of ongoingmonitoring in a due-diligence file

Finally, although it may seem obvious, realize that when fiduciary responsibility (or discretionary authority over plan administration, management, or investments) is delegated to someone, that person becomes a fiduciary. They are then subject to the standards and requirements discussed in this Guide.

Delegation of fiduciary responsibility is a fiduciary act.

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Fiduciary liability




GLOSSARY

Introduction



Basic principles

> Delegating responsibilities






Monitoring plan costsPlan fiduciaries have a responsibility to monitor plan costs. As part of this action, they need to ensure the fees assessed against the plan for services are reasonable, and that the services themselves are necessary for the establishment or ongoing operation of the plan. Further, they need to know which costs may be deducted from, or otherwise assessed against, plan assets. A fiduciary could be found in breach of their fiduciary responsibility for failing in these matters, and may even be considered to have committed a prohibited transaction. The penalties for either can be significant. Prohibited transactions and some of the consequences of a fiduciary breach are discussed in Section 2 of this Guide.

Reasonableness of expenses

ERISA requires fiduciaries to act prudently and in the sole interests of plan participants when selecting service providers for the plan. In order to avoid committing a prohibited transaction, they’re also required to determine that any contracted services are necessary for the plan, that service contracts or similar arrangements are reasonable, and that no more than reasonable compensation is paid from plan assets.

“ There can be no doubt that the ERISA statutory scheme imposes a duty to monitor upon fiduciaries when they appoint other persons to make decisions about the plan. According to DOL Reg. §2509.75-8, [a]t reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan.”

– Woods v. Southern Co.,396 F. Supp. 2d 1351 (N.D. Ga. 2005)

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Fiduciary liability




GLOSSARY

Introduction



Basic principles


> Monitoring plan costs





Detail of the fee disclosure regulations

The service providers that must comply with the regulations’ disclosure requirements are known as “covered service providers.” A service provider is considered “covered”, and subject to the regulations, if it enters into a contract or arrangement with a covered plan (as defined earlier), and reasonably expects to receive at least $1,000 in compensation, either directly or indirectly in connection with the services it provides to the plan. Direct and indirect compensation are defined later in this Section.

The type of service providers covered by the final regulations fall into three general categories:

• Fiduciaries and investment advisors

• Recordkeepers and brokers

• Other service providers receivingindirect compensation

Covered service providers must disclose certain information to the plan fiduciary in writing. This information includes a description of the services to be provided to the plan, and a statement of whether the covered service provider is anERISA fiduciary or investment advisor under federal or state securities law. MassMutual, while not a plan fiduciary, is considered to be a “covered service provider” and is subject to these regulations and fully complies with them.

The regulations also identify the types of compensation that need to be disclosed:

• A description of all reasonably expected directand indirect compensation in aggregate orby service, including the identification of theservices and the payer of the compensation;

Do the same rules apply to all plans?

No. Certain additional rules apply to ERISA individual account plans such as 401(k) plans and ERISA 403(b) plans; these rules involve certain disclosures to plan participants, which are accordingly addressed later in this Section, under “Disclosures to Participants”. The rules do not apply to non-ERISA plans such as IRAs, Simple IRAs, or SEP IRAs, and non-ERISA 403(b) arrangements. ERISA welfare plans will be addressed by the DOL separately.

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Fiduciary liability




GLOSSARY

Introduction



Basic principles







• A description of any compensation thatwill be paid among related parties on atransaction basis, or as charged against planassets, including identification of the serviceand the payer of such compensation; and

• A description of any compensation receivedin connection with the termination of thearrangement.

Recordkeeping and brokerage services must provide a description of all direct and indirect compensation that the covered service provider, affiliate, or subcontractor reasonably expects to

receive, and disclose a reasonable good-faith estimate including an explanation of themethodology used to arrive at the estimated cost. A description of the manner in which the compensation is received by the service provider must also be disclosed (e.g., whether the expense generating the compensation will be billed to the plan sponsor or deducted from participant accounts).

On or before the regulations’ effective date, each covered plan must receive the required disclosure from its existing service providers. For plans that change service providers after that date, a covered service provider must make the required disclosures to the plan fiduciary reasonablyin advance of the date on which the contract is entered. For example, a plan sponsor considering entering into a new arrangement with a covered service provider after July 2016, must receive written disclosures from the covered service provider prior to entering into the arrangement. For any existing arrangements, if there is a change to the information that the service provider wasrequired to disclose, the covered service provider must disclose the change, in writing, as soon as practical, but no later than 60 days from the date the provider is informed of the change, absent any extraordinary circumstance.

Direct and indirect compensationDirect compensation is compensation received directly from the covered plan. Indirect compensation is compensation received from any source other than the covered plan, in connection with a service arrangement. For example, indirect compensation generally includes fees received from an investment fund (such as 12b-1 fees) or from another service provider (such as a finder’s fee). Compensation paid by the plan sponsor is not subject to this regulation.

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Fiduciary liability




GLOSSARY

Introduction



Basic principles







Upon request from the responsible plan fiduciary, the covered service provider must furnish any other information relating to the compensation received in connection with the service arrangement, in order for the plan to comply with the reporting and disclosure requirements of ERISA. This requirement goes beyond the information required for Form 5500 compliance. The covered service provider must provide the information no later than 30 days after receipt of the written request.

If a covered service provider does not provide the required disclosures, the contract with the provider is presumed to be unreasonable. The result is that the service provider is deemed to have engaged in a prohibited transaction under both ERISA and the Internal Revenue Code. The plan fiduciary (not the service provider) is exempt from the penalty if the fiduciary promptly requests the required information from the service provider, and notifies the DOL if the service provider does not provide the information within 90 days.

A contract or arrangement will not be presumed to be unreasonable solely if the covered service provider, acting in good faith, makes an error or omission from the required disclosure. However, the covered service provider must disclose the correct information as soon as practical, butno later than 30 days after receiving notice of the error or omission.

With these new rules, retirement plans can improve on their investment offerings and services for the benefit of their plan participants. MassMutual has been at the forefront of fee disclosure, and will keep sponsors and advisors up-to-date about the disclosure requirements. We will also provide the required disclosures to plan fiduciaries within, or prior to, the required timeframes, and otherwise comply with the regulatory requirements.

Appropriate types of expenses

Expenses generally fall into two categories. TheDOL requires that fees be appropriately allocated to either category.

• “Plan expenses”

• “Settlor expenses”

Reasonable plan expenses are most frequently paid by the plan, but can be paid by the plan sponsor if they so desire. Settlor expenses, on the other hand, can never be paid from plan assets and, as a result, they cannot be deducted from participant accounts in a defined contribution plan or ERISA-governed 403(b) plan. It is important to distinguish these two forms of expenses because plan assets must be held for the exclusive benefit of participants. Improperly paying expenses out of plan assets, when they should have been paid by the plan sponsor, violates this rule and could lead to a breach of fiduciary responsibility, or worse, a prohibited transaction.

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Fiduciary liability




GLOSSARY

Introduction



Basic principles



> Forwarding contributions to the plan in a timely fashion




Forwarding contributions to the plan in a timely fashionContributions withheld from participants’ paychecks become plan assets and must be deposited to the plan according to the DOL’s timing requirements. This topic has become an area of focus by the DOL’s audit teams, so sponsors are well advised to understand and fullycomply with the rules. Contributions subject to these requirements include:

• pre-tax salary deferrals;• “Roth” salary deferrals;• participant after-tax contributions; and• loan repayments.

These contributions must be forwarded to the plan as soon as they can be reasonably segregated from the employer’s general assets. In no event can this be later than the fifteenth business day after the end of the month the participantwould have received the amount as wages.

DOL comments in 2010 and 2011 reveal that a sponsor’s customary practices can serve to define the timeframe within which contributions “can be reasonably segregated”.

For instance, if a sponsor for practical reasons customarily forwards contributions three or four days after the relevant pay date, they have established their reasonable timeframe as three or four days. A subsequent contribution made sevendays after the relevant pay date may be considered late in the eyes of the DOL, since it falls outside the plan’s normal (and hence presumably reasonable) practice.

Failing to timely remit participant contributions to the plan is a prohibited transaction. More information about prohibited transactions and other fiduciary liability appears in Section 2 of this Guide. This failure must be reported on the Form 5500 return filed for the applicable plan year, with an explanation of whether and how the prohibited transaction was corrected. The Voluntary Fiduciary Correction Program provides assistance in correcting the failure consistent with legal requirements.

Employers should confirm that any employer contributions are made no later than the employer’s tax-filing deadline, plus extensions. Also, in order for employer contributions to be credited as annual additions, for Internal Revenue Code §415 limitation purposes, contributions must be actually made no later than 30 days after the employer’s tax-filing deadline, plus extensions. Failure to make timely employer contributions need not be reported on Form 5500.

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Fiduciary liability




GLOSSARY

Introduction



Basic principles



> Forwarding contributions to the plan in a timely fashion




Depending on the facts and circumstances, it maynot qualify as a fiduciary breach, either. However, if the contribution is subsequently made after the deadline, it may not qualify for a tax deduction as it otherwise would have.

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Safe harbor for plans with fewer than 100 participants at the beginning of the plan year

The DOL has granted a special safe harbor for these plans. Contributions transferred to the plan within seven business days of being withheld from participants’ pay will satisfy the safe harbor. Transfers beyond seven business days will not satisfy the safe harbor but may still be considered to be timely; so long as the timing is considered reasonable based upon the particular facts and circumstances, and otherwise meets the general requirement discussed above.


Fiduciary liability




GLOSSARY

Introduction



Basic principles




> Disclosing required information to participants



Disclosing required information to participantsERISA requires plans to provide specific information to participants on an ongoing basis. This information is designed to inform participants of the plan’s provisions and financial status, their rights and, in the case of participant-directed, defined-contribution plans, additional material they can weigh, in reaching their investment decisions.

Disclosure: who and how

All items mentioned in this section must be provided to all currently eligible participants, regardless of whether they actively participate in the plan. In addition, the following also must receive copies of these materials:

• Terminated participants who possessdeferred benefits in a defined-benefit plan,or maintain account balances in a defined-contribution plan

• All participants and beneficiaries currentlyreceiving distributions from a defined- benefit plan

• Alternate payees who maintain accountsor benefits pursuant to qualified domestic-relations orders

• Beneficiaries of deceased participants until theaccount or benefit is completely distributed

Subject to various requirements, the disclosures can be provided to participants via hardcopy hand-out, regular mail, electronic distribution, or some combination of these methods. The method chosen must be “reasonably calculated to ensure actual receipt.” Making disclosures available in common areas of a workplace, or posting them on bulletin boards in common areas, are insufficient to meet this standard. Additional information about delivery of required information is available from MassMutual as well as the DOL’s publication “Reporting and Disclosure Guide for Employee Benefit Plans.”

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Fiduciary liability




GLOSSARY

Introduction



Basic principles







Summary plan description

The summary plan description (SPD) has been thecornerstone of required participant disclosures, and typically has been the most comprehensive information participants received about the plan. The SPD provides a summary of the plan’s provisions and participants’ rights in easy-to-understand language. ERISA requires plan sponsors to include specific information in the SPD. Failure to meet either content standards or distribution requirements subjects plan fiduciaries to liability, and potential costs and sanctions. Participants must receive a copy of the SPDwithin 90 days of becoming eligible to participate in the plan (or, if later, within 120 days after the plan initially becomes subject to ERISA). Additional copies must be furnished to plan participants and their beneficiaries uponrequest. If the plan is not amended, additional copies of the SPD must be furnished to participants every 10 years.

Summary of material modifications

Plan provisions are periodically modified by the actions of the plan sponsor, other plan fiduciaries, or changes to underlying laws and regulations. When those changes affect provisions communicated though the SPD, the sponsor must disclose the changes to participants through a Summary of Material Modifications (SMM). This

SMM must be provided to participants within 210 days after the close of the plan year in which the change was adopted. Until the SPD is updated to include the new provision(s), the sponsor should furnish copies of all SMMs, along with any SPDs furnished going forward, to ensure the information is up-to-date.

Participant investment and fee disclosures

From 2012 forward, the DOL requires the disclosure of certain investment and fee information to participants and beneficiaries eligible to make investment elections. These rules apply for ERISA-governed, individual accountplans, such as 401(k) and many 403(b) plans, where participants control the investment of any portion of plan assets. These disclosures are required so that participants and beneficiaries will have access to a wide range of plan-, fee-, and investment-related information that they need in order to make informed investment decisions.The following chart summarizes many of the requirements for these disclosures.

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Requirements for disclosures

General planinformationincludes:

• An explanation of how participants and beneficiaries may give investmentinstructions, including any transfer restrictions or other limitations

• Identification of any designated investment managers

• Identification of the plan’s designated investment alternatives (“DIAs”)

• Identification and description of any “brokerage windows” that enableselection of investment beyond those designated by the plan

Investment- relatedinformationincludes:

• Name and investment category of each of the plan’s DIAs, excludinginvestments held in a self-directed brokerage window

• A website that provides participants access to additional information abouteach DIA including: the name of its issuer; its objectives or goals; its strategiesand risks; its turnover rate; performance data updated at least quarterly; feeand expense information; and a glossary of terms

• Specific expense, benchmark, and performance information, some of whichcan vary depending on whether the investment provides a fixed rate of return

Administrativeexpense informationincludes:

• An explanation of any fees and expenses for plan services (e.g., legal,accounting, recordkeeping) that may be charged against participant accountsand that are not included within investment-related fees and expenses (seeInvestment-related information above)

• An explanation of the basis on which the charges will be allocated (e.g.,prorated by account balance or fee per person)

Individualexpense informationincludes:

• Expenses not included elsewhere that may be charged to a specific, individualparticipant’s account based on the participant’s actions or participant-specificservices (e.g., loan fees, fees for qualifying domestic relations orders, orhardship withdrawal requests) that enable selection of investment beyondthose designated by the plan


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Participants and beneficiaries* must be furnished an initial disclosure, including the above information, on or before the date they are first eligible to direct investments. The disclosure must also be provided at least every 14 monthsthereafter. Participants must receive notice of any change to this information 30 to 90 days in advance. Finally, at least quarterly, participants and beneficiaries must receive a statement of the dollar amount of any administrative expense or individual expense charged to their accounts during the preceding quarter, and the services to which the charges relate.

Summary annual report

Participants and beneficiaries receiving benefits under ERISA-governed individual account plans, must receive an annual report summarizing the financial status of the plan. This Summary Annual Report (SAR) must be provided within nine months of the close of the attributable plan year.

Annual funding notice

Participants in defined-benefit plans must receive a separate report summarizing the plan’s funding status. This report must be provided within 120 days of the start of each plan year.

* Beneficiaries who are not eligible to make investmentelections do not have to receive these disclosures. Generally then, these disclosures would be sent to beneficiaries only if the participant is deceased and the beneficiary exercises investment control over the account.


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> Completing regulatory filings


Completing regulatory filingsEach plan must file an annual report with the DOL. In general, this is accomplished using the Form 5500, related schedules and attachments. This form requires certain financial information as well as additional items necessary to document the plan. Its primary purpose is to provide information to the DOL, the IRS and, in the case of defined-benefit plans, the Pension Benefit Guaranty Corporation (PBGC). However, it also must be made available to participants and beneficiaries upon request.

The Form 5500 and applicable schedules must be filed for each plan year, including any short plan year. Form 5500 must be filed by the last day of the seventh calendar month after the end of the plan year. Extensions are available as outlined in the Instructions for Form 5500 and MassMutual’s Plan Year End Reference Guide. The DOL may impose penalties up to $1,100 per day for late filingsand for filings they determine to be “deficient” or lacking key information.

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> Assessing and monitoring plan investments

Assessing and monitoring plan investmentsAs mentioned earlier in this section, some of the plan’s fiduciaries will hold responsibility for assessing and monitoring plan investments. In the case of a defined-contribution plan, their responsibilities also include selecting the investments to be made available to planparticipants. As they do so, they must consider the needs and sophistication level of the participants who will invest through the plan.

A fiduciary must consider the following as they select investment alternatives and decide how to invest plan assets.

• Each investment must be evaluated as partof the overall group of available investments.

• The investment alternatives offered must bereasonable for the purposes of the plan.

• The risk of loss, and opportunity for return,of each investment alternative should befavorable relative to similar investments.

• Plan investments, or the selection ofinvestments made available under the plan inthe case of a self-directed individual accountplan, should be reasonably diversified toguard against loss.

• The fiduciary should employ proper methodsto evaluate investments, including retaining aprofessional investment advisor, if necessary.

• Fiduciaries should act in a manner in whichothers serving in a similar capacity, andfamiliar with such matters, would act.

• Fiduciaries should also exercise independentjudgment when making investment decisions.

Over time, the underlying investments that make up any pooled investment alternative (such as a mutual fund) may change. As a result, the investment style of a particular investment today may be different from the investment style it had when you decided to make it available under the plan. Plan fiduciaries should continually monitor the composition of the investment options they have chosen for the plan, to ensure each option has maintained its original investment style, and that the plan’s options overall remain diversified.

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> Assessing and monitoring plan investments

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Designated investment alternatives

A plan’s “designated investment alternatives” (DIAs) include those specific investment options selected by plan fiduciaries for the investment of plan assets. This term doesn’t include “self-directed brokerage accounts” and other similar arrangements that allow participants and beneficiaries to select investments beyond those specifically selected by plan fiduciaries. The distinction will become more meaningful as you read Section 4 about optional actions you can take, in order to manage your fiduciary liability.


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Section 4 Taking voluntary action and mitigating risk> Investment policy statement

ERISA §404(c) protection

Qualified default investment alternatives

Fiduciary liability insurance

Participant communication and education

Considerations for self-directed brokerage accounts

Observe best practices

As you’ve seen, the standards imposed on plan fiduciaries are extremely high, and a broad range of activities fall under their purview. The basic principles and required actions detailed in Section 3 of this Guide give you information about actions you must take as a plan fiduciary.

This section of the Guide is intended to share voluntary actions that, while not expressly required by ERISA, may help you improve your plan, while mitigating some of the risk you assume as a plan fiduciary. Every plan is different, so be certain to discuss these possibilities with your fellow fiduciaries, and the plan’s financial advisor, to determine whether they may be appropriate for your plan and its participants given your circumstances.

Investment policy statementERISA and the DOL consistently focus on the process plan fiduciaries use in carrying out their responsibilities. A prudent process, properly documented and consistently applied, can be the difference between being able to demonstrate strong plan governance, and having your decisions and decision-making process called into question.

When it comes to employing and demonstrating a sound process for selecting investments, you may find it useful to use an Investment Policy Statement. This document may provide a “roadmap” for the fiduciaries responsible for selecting the plan’s designated investmentalternatives. It may include both general guidelines and an overall philosophy for creating the investment array, along with specific criteria for selecting, evaluating, and monitoring investments.

ERISA doesn’t require you to establish an Investment Policy Statement. But, because of the useful role it can fill in helping guide your decisions, you may find it to be a helpful tool. Your plan’s financial advisor can share his or her thoughts about developing and implementing one.

If you jointly decide to proceed, MassMutual can furnish you and the plan’s advisor with a sample document, or you can use another one of the advisor’s design or choosing. It’s important to realize that once you document your investment selection and monitoring criteria, you need toabide by them. For that reason, be sure you think ahead and include criteria that can help guide your decisions without inadvertently “forcing your hand”.


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Section 4 Taking voluntary action and mitigating risk

Investment policy statement

> ERISA §404(c) protection






ERISA §404(c) protectionERISA §404(c) provides that if a plan voluntarily allows participants to exercise control over their investments and meets certain other criteria, the plan’s fiduciary will not be liable for losses arising from the participants’ investment elections. Some plan sponsors feel that if they allow for participants to exercise control over their own investments in a qualified plan, they automatically meet the 404(c) requirements. However, that is not the case. The ERISA §404(c) regulation provides numerous criteria that must be satisfied to ensure compliance, thereby transferring liability to the participants. The ERISA §404(c) Guide and Checklist in the coming pages can help you ensure your plan complies with these regulations in order to receive fiduciary protection if you choose to pursue this option.

Realize that Section 404(c) doesn’t relieve plan fiduciaries of their normal duties with regard to investments. Plan fiduciaries are still responsible for choosing available investments prudently, and monitoring those investment choices to ensure that they continue to meet the plan’s funding policy, and are prudent investments for theparticipants in the plan.


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> Qualified default investment alternatives





Qualified default investment alternativesWe’ve seen that invoking protection under §404(c)shields plan fiduciaries from liability for losses arising from investment decisions actively made by participants. Qualified default investment alternative (“QDIA”) provisions, if applicable to your plan, provide plan fiduciaries with similar protection from liability arising from investment losses*. However, this protection is provided for investment losses that occur when participantsdecline to make their own investment decisions, presuming that the requirements detailed below are met. Invoking QDIA protection, is separate from §404(c) protection and requires a separate election from the plan sponsor.

Several requirements must be met for a plan’s fiduciaries to receive QDIA protection:

• The plan’s default investment option mustsatisfy the QDIA definition and be a life-cycle (or target-date) investment option, a“balanced” investment option, or managedaccount. With limited exception, stablevalue and other capital-preservation optionsdo not satisfy the QDIA definition on astandalone basis. The intended result of thisrequirement is that a participant’s accountwill be invested in a diversified portfolio.Presumably such a portfolio has a greaterlikelihood of generating the long-terminvestment performance that, when combinedwith participant and employer contributions,may result in meaningful retirement incomefor participants.

• Participants must have had, and declined,an opportunity to direct the investments intheir accounts.

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* QDIA protection, if applicable to your plan, is available through ERISA §404(c)(5). What is typically mentioned as“§404(c) protection” for participants’ active investment decisions is provided under ERISA §404(c)(1). It is possible fora plan to take advantage of one without taking advantage of the other. Contact your service professional for optionsthat may be applicable to your plan.


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• An initial notice must be provided toparticipants to notify them about their rightswith respect to the default investment. Thisinitial notice must be provided at least 30days in advance of the earlier of their initialeligibility date, or their first investmentinto the QDIA. An alternate requirementapplies if participants have the option torequest a withdrawal of their contributionswithin the first 90 days after beingautomatically enrolled through an “eligibleautomatic contribution arrangement.”The alternate requirement provides thatparticipants must receive the initial notice“on or before” their eligibility date.

• Participants must receive an additionalnotice each year, at least 30 days prior to thebeginning of the plan year.

• The QDIA notice may not be part of the plan’sSPD (or SMM). It may, however, be part of aplan’s automatic enrollment or safe harbornotice, as applicable.

• Participants also must receive any materialprovided to the plan relating to participants’investments in the QDIA.

• Participants must have the opportunity totransfer amounts held in the QDIA into anyother investment alternative in the plan, withno financial penalty. This opportunity must

be consistent with the terms of the plan, but cannot be less frequently than quarterly.

• A QDIA cannot acquire or hold employer securities except under limited circumstances. One exception allows mutual funds, and similar pooled investment options, to hold securities of the sponsor, if doing so is consistent with the investment’s stated objectives, and the investment manager is independent of the plan sponsor and all of its affiliates.

• A QDIA must be managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary, or by an investment company registered under the Investment Company Act of 1940.

As when invoking 404(c) protection, fiduciaries remain responsible for prudently evaluating and monitoring the investments under the plan, including the QDIA. In the case of QDIAs, the sponsor must also ensure that the level of riskassociated with the QDIA is appropriate for participants. When considering balanced fund-type QDIAs, the sponsor should evaluate the investment’s risk for participants taken as a whole. When considering target-date or managed-account QDIAs, the sponsor should evaluate the appropriateness of the related risk for the subsets of participants who would be “defaulted” into each specific option.

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Common use of QDIA provision

You may be wondering how a participant can have an account in a participant-directed plan when they’ve declined to provide investment instructions. This situation most commonly occurs in one of two ways:

• The participant declines to activelycontribute to a defined-contributionplan that nonetheless makes employercontributions such as money-purchaseor profit-sharing contributions

• The participant is automaticallyenrolled in a salary-deferral,defined-contribution plan

Coordination with automatic enrollment

Automatic Enrollment provisions allow sponsors to enroll eligible participants at a pre-determined contribution rate. Eligible participants must be allowed to “opt-out”

(that is, decline enrollment altogether) or enroll at a different contribution rate. Unless eligible participants make affirmative elections to the contrary, any contributions arising from automatic enrollment will be invested in the plan’s “default” investment option. The plan’s default investment option can be any prudent option of the sponsor’s choosing, which might be an option satisfying the QDIA requirements.By accompanying automatic enrollment with a QDIA provision, sponsors can use a design-based approach to help participants overcome inaction to start deferral contributions, while limiting the fiduciary’s liability for the investment of those contributions. We encourage sponsors considering automatic enrollment features to also closely examine using a QDIA approach for the plan’s default investment option.


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> Fiduciary liability insurance




Fiduciary liability insuranceEarlier, we said that ERISA requires every plan fiduciary and every person handling plan assets to be bonded. This provision is intended to protect the plan by providing an element of recourse to reimburse the plan for losses suffered through fraud or dishonesty.

In a similar vein, a plan can (but is not required to) purchase fiduciary liability insurance to protect itself from liability or losses resulting from the acts of plan fiduciaries.

If the plan purchases the policy, or if plan assets are used to pay for the policy, the policy must allow the issuing insurer to seek recourse against the plan’s fiduciaries for any losses arising from a fiduciary breach. For a typically small premium, a fiduciary can purchase a “non-recourse” rider to the policy. This sort of rider protects the fiduciary because, through the rider, the insurer agrees to forego recourse against the fiduciary. The cost of this rider cannot be borne by the plan, nor can the plan reimburse the fiduciaries for the amountthey pay for the rider.

These policies typically provide protection fromunintentional breaches. Intentional or willful breaches are not usually covered by fiduciary liability insurance. You should also be aware that ERISA claims are typically excluded from company’s errors and omissions (E&O)insurance policies and directors’ and officers’ (D&O) liability insurance. In some cases, it may be possible to purchase a rider to existing E&O or D&O policies to cover ERISA issues.


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> Participant communication and education



Participant communicationand educationERISA doesn’t require plan fiduciaries to establish ongoing participant communication or education programs beyond furnishing required disclosures. It certainly makes sense though, to make sure participants are fully informed about how their plan works, and how they can take advantage of it.

The DOL provides a clear distinction between general investment education and advice. Undertaking a properly constructed program of general investment education doesn’t bring additional liability to the plan’s fiduciaries.

Consider collaborating with your plan’s financial advisor and MassMutual to establish a formal communication and education policy or calendar to keep yourself, and your participants, on track. Of course, if you do establish a policy or calendar, be sure to act according to it. Proper participant education is both a good idea and good defense against participant claims if a lawsuit arises.


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> Considerations for self-directed brokerage accounts


Considerations for self-directed brokerage accountsDefined-contribution plans may offer a self-directed brokerage option as an investment option. Essentially, brokerage accounts allow participants to invest in almost any publicly traded security, including individual stocks, instead of being limited to a group of pre-selected investments. There has been much discussion surroundingthe offering of the brokerage window as an investment option, and what type of fiduciary responsibility rests with the plan fiduciary who chooses to offer this investment option.

The utility of the brokerage window depends upon the sophistication of the participants to whom the investment option is being offered. Generally, the more sophisticated and investment savvy the group of participants, the more such participants will benefit from the brokerage window. Typically, these types of participants have a secure knowledge of investments and require greater investment freedom, making the freedom of a brokerage window a real asset to the plan. In short, these participants are more likely to thrive on relatively unlimited investment choice.

Participants with less sophisticated knowledge ofinvestments may not benefit from the brokerage window. They may not have the investment savvy or background to be able to make wise investment choices in an unlimited investment-option environment. In some cases, these participants may make poor investment choices, or even decline participation altogether, due to being overwhelmed with information and choice.

As we’ve seen, plan fiduciaries have a duty to prudently choose which investment options will be available in the plan. They should closely examine the investment sophistication of their plan participants in determining whether the brokerage window is an appropriate option to offer.

Observe best practicesThe following Section 5 contains some very specific best practices we’ve gleaned from our nearly 70-year history of servicing retirement plans. We suggest you review that section and determine whether any, or even all, of thosepractices may shore up your plan governance.


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Section 5 Best practices in plan governance> Establish a documented process for plan governance

and decision-making

Design the plan with strategic focus

Carefully and consistently administer the plan according to its written terms

As mentioned previously, much of the focus on fiduciary responsibility centers on the processes on which fiduciaries rely to make their decisions. Therefore, adopting and maintaining a sound process is crucial. Observing the following best practices can assist a plan’s fiduciaries in fulfilling their responsibilities, and providing benefits to plan participants.

Establish a documented process for plan governance and decision-making1) Consider appointing a Retirement Plan

Committee (“Committee”) to oversee the Plan.Carefully consider whether you wish to avoidincluding senior executives (or a non-profitorganization’s or union’s senior decision-makers) in the Committee; doing so may helpavoid potential conflicts of interest in theevent their fiduciary responsibility to othersconflicts with their fiduciary responsibilityto the participants.

2) The Committee should determine anddocument the intended frequency of theirmeetings via a Committee Charter. This Chartershould also stipulate procedures for the additionand removal (both voluntary and involuntary)of Committee members, as well as the numberof members, and the period for which theywill serve. It should determine whether actionis possible in the absence of any Committeemembers and, if so, what constitutes a quorum.Finally, it should stipulate whether action canbe taken only by unanimous decision, a simplemajority, or some other measure.

3) The Committee must meet according to theintentions stated in the Committee Charter.For instance, if the Charter states the Committeewill meet quarterly, the Committee must meetquarterly, notwithstanding any competingdemands on the Committee members.

4) The Committee, in conjunction with the plan’sfinancial advisor, should consider designing,implementing, and monitoring an InvestmentPolicy. Such a document may state the assetclasses to be included in the plan’s investmentarray, the criteria on which plan investments willbe evaluated, the process for making selections,the process and factors for ongoing monitoringof the investments, and the process and timelinefor making any changes to the investments.

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Section 5 Best practices in plan governance> Establish a documented process for plan governance

and decision-making



5) Committee meetings should be documented.While it’s not necessary to follow rigid meetingrules (such as “Robert’s Rules of Order”), youshould maintain formal minutes, with recitationand adoption of the prior meeting’s minutesas the first order of business in thesubsequent meeting.

6) The Committee should document the processby which a portion of its authority can bedelegated to other individuals or groups, as wellas the criteria by which those other individualsor groups will be selected. The Committee alsoshould document the process by which it willoversee the actions of those other individualsor groups. Recall that delegating authority toothers is a fiduciary act in itself.

Focus on, and document, your process.

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Section 5 Best practices in plan governance

Establish a documented process for plan governance and decision-making

> Design the plan with strategic focus


Design the plan with strategic focus1) The Committee, in conjunction with the plan’s

financial advisor and other experts, should periodically review the plan’s provisions to ensure they remain consistent with the strategy and resources of the sponsor organization, and the needs of the participants.

2) Plan provisions which are open to interpretation should be clarified, whether in the plan document itself or in an administrative procedure, to ensure consistent interpretation and implementation.

3) Plan provisions which have been demonstrated to cause administrative complexity should be reviewed to determine whether changes would simplify plan administration and reduce risk, consistent with the strategy and resources of the sponsoring organization, and the needsof the participants.


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Section 5 Best practices in plan governance

Establish a documented process for plan governance and decision-making


> Carefully and consistently administer the plan accordingto its written terms

Carefully and consistently administer the plan according to its written terms1) The Committee, its representative or a delegate,

should establish and document a process to ensure all parties responsible for administrative actions have full knowledge of the plan or, at the very least, its sections relevant to their specific responsibilities.

2) The Committee, its representative or a delegate, should ensure written procedures exist for all repetitive actions involving the plan. These procedures should be periodically audited or tested to ensure they consistently generate the intended and appropriate results, making revisions to the procedures as necessary.

Based on recent submissions to the Voluntary Compliance Resolution program administered by the Internal Revenue Service, special care should be taken around procedures for:

• Determining participants’ eligibility forthe plan

• Furnishing enrollment materials toeligible participants

• Timely and accurately implementing participant elections

• Accurately determining compensation according to the plan’s definition

• Accurately computing contributionamounts, including elective deferrals, in line

with participant elections, and the plan’s

definition of compensation

• Timely remitting contributions to the plan, with particular emphasis on salary deferrals, non-deductible participant contributions, and loan repayments, as applicable

3) Formal, designated “backup” personnel shouldexist for each element of plan administration,with the intent of eliminating delays and errorsin the absence of key staff members.

4) The designated backup personnel should knowwhere to find written administrative proceduresgoverning their area of accountability, as wellas where to find applicable plan documents.

5) The designated backup personnel shouldperform their respective actions periodically,even if the people with primary accountabilityare present, in order to keep theirknowledge current.


Section 6How MassMutual helps

ERISA §404(c) guide and checklist

Criteria Yes No Additional information

1. The plan allows participantsto exercise control over theinvestment of all or someof their individual accountbalance.*

A participant is considered to exercise control only if:

• He or she is free of improper influence from the fiduciaries andthe plan sponsor

• The fiduciary has disclosed to the participant all materialnon-public facts regarding the investment, unless forbiddenfrom doing so by a law that is not pre-empted by ERISA

• He or she is given a reasonable opportunity to provideinvestment instructions to the plan fiduciary (or his designate)

• The fiduciary has no knowledge, and cannot reasonably beexpected to have knowledge, that the participant is legallyincompetent

2. The fiduciary is obligatedto comply with theinvestment instructionshe or she receives.

You may check “yes” even if the fiduciary is allowed to refuseinvestment instructions that would:

• Constitute a prohibited transaction

• Generate taxable income to the plan

• Not comply with the plan’s governing documents

• Jeopardize the plan’s tax-qualified status

• Result in a loss greater than the participant’s accountbalance

• Result in a loan to the plan sponsor or any affiliate of theplan sponsor

• Result in the plan holding assets outside the jurisdiction ofUnited States District Courts other than as permitted byERISA §404(b)

• Result in an acquisition or sale of any employer real propertyor employer security, or result in a sale, exchange, or leaseof property between the plan and the plan sponsor, or anyaffiliate of the plan sponsor, except for certain transactionsexpressly permitted by law

In order to invoke §404(c) protection, you must answer “yes” or “not applicable” to all questions.

* Note that §404(c) protection is only available to that portion of a participant’s account balance over which he or she mayexercise investment control, presuming the rest of the criteria on this Checklist are met

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Section 6How MassMutual helps> ERISA §404(c) guide and checklist

ERISA quick checklist

Qualified default investment alternative checklist

Documentation checklist


* Prior to this time, the information requirements for 404(c) compliance were far more extensive. These requirementswere incorporated in the annual participant disclosure requirements when they were enacted, thus eliminating theneed for them as part of 404(c) compliance.

ERISA §404(c) guide and checklist (continued)


3. Participants are provided with an explanationthat the plan is intended to satisfy ERISA§404(c) and, as a result, the fiduciaries may berelieved of liability for losses that may arise fromparticipant investment decisions.

As a practical matter, this requirement is often accomplished by an appropriate statement within the Summary Plan Description.

4. For plan years beginning on or afterNovember 1, 2016, participants are given theinformation required in the annual participantdisclosure regulations.*

5. If the plan allows investment in employersecurities, participants are provided adescription of the procedures to addressthe confidentiality of information to buy andsell securities, and the exercise of voting, tender,and similar rights.

This may not be applicable if the plan does not allow for investment in employer securities.

NOTE: Participants also must be furnished the name of the fiduciary responsible for monitoring confidentiality.

6. Participants are provided with the name, address,and phone number for the person(s) responsiblefor providing the information in item 5.

7. If fees are charged for carrying out investmentinstructions, fiduciaries have determined theyare reasonable.

Not applicable. MassMutual does not assess fees for carrying out investment changes.

8. If fees are charged for carrying out investmentinstructions, fiduciaries have establishedprocedures to periodically inform participants ofactual expenses that affect their own account.

Not applicable. MassMutual does not assess fees for carrying out investment changes.

NOTE: This requirement is fulfilled by providing the Participant Fee Disclosure as discussed in Section 3 of this Guide.


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Section 6 How MassMutual helps> ERISA §404(c) guide and checklist





ERISA §404(c) guide and checklist (continued)


9. The plan providesparticipants with a broadrange of investment options.

To check “yes”, the available investment alternatives mustallow the participant to do all of the following:

• Materially affect his potential return and the degree ofrisk he assumes

• Diversify his individual account so as to minimize therisk of large losses

• Choose from at least three investment alternatives(the “Core Options”):

- Each of which is diversified

- Each of which has materially different risk andreturn characteristics

- Which, taken together, allow the participant toconstruct a portfolio bearing risk and returncharacteristics in a range normally appropriate forsimilarly situated investors

- Each of which, when combined with investments in theplan’s other investment alternatives, tends to minimizethe overall risk of the participant’s portfolio

10. If the Plan imposesconditions on thefrequency of investmentinstructions, they arereasonable, givenexpected market volatility.

To check “yes”:

• Participants must be able to transfer among the “CoreOptions” at least quarterly, though additional requirementswould apply if transfers among non-“Core Options” areallowed more frequently than transfers are allowed amongthe “Core Options”.

Check here if the plan allows transfers between all investmentoptions daily. In such a case, the plan automatically meets theabove requirement.

• If transfers are allowed to or from employer securities, thenadditional rules apply. MassMutual can provide furtherinformation at your request.

Not applicable. The plan does not allow for investment inemployer securities.


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Section 6 How MassMutual helps> ERISA §404(c) guide and checklist






ERISA compliance begins with knowing the rules. Plan administrators and other plan officials can use this checklist as a quick diagnostic tool for assessing a plan’s overall compliance. However, it’s no substitute for a comprehensive compliance review.

If you answer “no” to any of the following questions, it’s possible that your plan may not be in compliance with ERISA’s requirements.

Question Yes No

Have you provided plan participants with a Summary Plan Description, annual summary financial reports, and summaries of any material modifications to the Plan*?

Have eligible participants been provided with enrollment materials in a timely fashion?

Do you maintain copies of the plan documents at the principal office of the plan administrator, and make them available for examination by participants and beneficiaries?

Do you respond to written participant inquiries for copies of plan documents and information within 30 days?

Is your plan covered by a fidelity bond, in the appropriate amount, to shield the plan from losses due to fraud and dishonesty?

Have plan representatives provided all participants with the fee and investment disclosures requiredby ERISA Reg. §2550.404a-5?

Are all services provided to the plan actually necessary?

Have plan fiduciaries received the fee disclosures required by ERISA §408(b)(2) from all covered service providers?

Are the fees paid from plan assets reasonable in light of the value received?

Do plan fiduciaries meet regularly and at the agreed-upon frequency?

Do plan fiduciaries keep well-documented minutes of their meetings?

Is the fiduciaries’ decision-making process documented?

Is documentation retained that supports each decision made by the fiduciaries, including decisions to take no action on a specific topic?

Did the employer or other plan sponsor send participant contributions to the plan on a timely basis within DOL guidelines?

Did the plan pay participants, benefits on time and in the correct amounts?

Has the plan engaged in any financial transactions with persons related to the plan or any plan official? (For example, has the plan made a loan to, or participated in an investment with, the employer?)

Has any plan official used the assets of the plan for his or her own interest?

Have the plan assets been used to pay expenses that were not authorized in the plan document, were not necessary for the proper administration of the plan, or were more than reasonable in amount?

* Recall that “participants” include (1) people who are eligible but have chosen not to contribute to a contributory plan like a401(k) plan, (2) terminated participants who retain balances in the plan, (3) beneficiaries who maintain the accounts of deceasedparticipants, and (4) alternate payees who have been awarded plan assets pursuant to a Qualified Domestic Relations Order,in addition to (5) active participants who receive contributions and/or maintain account balances in the plan.

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Section 6 How MassMutual helps ERISA §404(c) guide and checklist

> ERISA quick checklist




* This Notice cannot be included in the plan’s Summary Plan Description or a Summary of Material Modifications.However, it can be part of a plan’s automatic enrollment or safe harbor notice, as applicable.


Qualified default investment alternative (“QDIA”) provisions can provide plan fiduciaries with protection from liability for investment losses which occur when participants are given, but decline, the right to make their own investment decisions. To invoke this protection, certain requirements must be met. These are outlined earlier in Section 4 of this Guide and also appear below.

If you answer “no” to any of the following questions, it’s unlikely that the plan can qualify for QDIA protection.

Question Yes No

Have participants been provided with, but declined, the opportunity to direct their investments?

Does the plan’s default investment meet the definition of a QDIA as discussed previously in this Guide? (Generally speaking, these would be lifecycle/target-date investments, “balanced” investments, or managed accounts that are designed to provide participants with a diversified portfolio.)

Is the plan’s default investment managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary, or by an investment company registered under the Investment Company Act of 1940?

Is the plan’s default investment free of any employer securities, other than those discussed in Section 4 of this Guide?

Do participants have the option to transfer amounts held in the default investment to any of the plan’s other investment alternatives, with no financial penalty?

May participants transfer amounts held in the default investment at least as frequently as participants who affirmatively invested in that same investment?

May participants transfer amounts held in the default investment at least quarterly?

Have subsequent Notices been provided to participants annually at least 30 days in advance of the start of the plan year?*

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Introduction


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Section 6 How MassMutual helps



> Qualified default investment alternative checklist




Get started by ensuring that your plan files contain at least the following documents. All of your files should be updated as frequently as necessary, but no less often than annually. Your files should also be protected as part of your organization’s records-retention policy, business-continuity plan, or your normal process to safeguard valuable organization records.

Item

1. Plan records

• Executed plan and trust documents, including amendments

• Records of approval by the Board of Directors or the plan sponsor’s governing body

• Copies of minutes from all fiduciary meetings

• Copies of non-discrimination tests

• Copies of the plan’s determination letter and/or opinion letter (as applicable)

2. Required participant communications

• Fee and investment disclosures required by ERISA Reg. §2550.404a-5

• Summary Plan Description

• Summary of Material Modifications

• Summary Annual Report

• Explanation that the plan intends to satisfy ERISA §404(c), as applicable, and if not provided in other materialssuch as the Summary Plan Description

• Automatic Enrollment, Safe Harbor, and QDIA Notices, as applicable

3. Plan reporting

• Form 5500 with all applicable schedules

• Copy of the plan’s auditor’s report, as applicable

4. Service provider information

• Contracts

• Service Agreements

• Opinion/determination letter

• Fee disclosures from all “covered service providers” as required by ERISA §408(b)(2)

5. Investment information

• Investment Policy Statement

• Documentation used to select investment options

• Minutes from meetings (and all related documents) when fiduciaries monitor the plan’s investments

Fiduciary liability




Introduction


GLOSSARY

Section 6 How MassMutual helps




> Documentation checklist


Exclusive benefit. You must act solely in the interests of plan participants and beneficiaries. Your sole purpose as a fiduciary is to provide them with benefits, and defray reasonable expenses of administering the plan. <back

Fiduciaries and investment advisors. These include persons who provide services directly to the plan as fiduciaries or as investment advisors; and persons who provide services as fiduciaries to an investment that holds plan assets, in which the plan has a direct investment. <back

Financial advisor. Depending on the nature of the services provided, the plan’s compensated financial advisor may also be a fiduciary. <back

Investment manager. Just as a plan sponsor or committee may appoint a plan administrator to exercise discretionary authority over plan administration, they may also appoint an investment manager to exercise discretionary authority over the control and management of plan assets. These individuals or organizations, often called “3(38) fiduciaries” after the section of ERISA that addresses them, are also considered fiduciaries. Note that a plan’s service provider is not considered an investment manager simply because they provide a menu of investments that the plan’s fiduciaries can select from to create the plan’s investment array. Likewise, a mutual

fund’s manager isn’t considered a plan’s fiduciary as a result of their investment of the fund’s assets; note that they would be a fiduciary to the fund, however. <back

Investments. You must consider specific criteria when selecting plan investments, including the reasonableness of the investment options for the purposes of the plan, an evaluation of each option as part of the overall group of investments, and the risk of loss and opportunity for return of each option. In plans allowing participant direction of investments, you should provide participants with the resources they need in order to make informed decisions. In plans that aren’t participant-directed, such as defined-benefit plans, you should diversify plan investments in order to minimize the risk of large losses, unless you can demonstrate it would not be prudent to diversify the assets. <back

Other service providers receiving indirect compensation. These include any person who provides services including investment consulting, accounting, auditing, actuarial and third-party administration, and reasonably expects to receive indirect compensation for these services. <back

GLOSSARY

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Introduction


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Plan administrator. An individual or group is often named as the party responsible for ensuring that required disclosures are provided to participants in a timely manner, that regulatory filings are timely and accurately made, and that the plan is administered according to its written terms and applicable law. This individual or group likely will have discretion to develop the rules, policies, and procedures that they, or others they name, will use to properly administer the plan’s provisions. As mentioned previously, they may be granted additional discretionary authority by the plan committee, if one exists, or directly by the plan sponsor. You may hear the phrase “3(16) fiduciary” mentioned with respect to the plan administrator; that’s simply the section of ERISA that defines the plan administrator and confers fiduciary status on her or him. If the plan doesn’t specifically designate a plan administrator, the plan sponsor is considered to fill that role. The plan’s recordkeeper or third-party administrator should not be confused with the plan administrator. These entities typically do not have the discretionary authority that would confer fiduciary status on them and hardly ever fill fiduciary roles other than, possibly, plan trustee as defined in the next column. <back

Plan committees. A plan sponsor often designates other groups or individuals to perform various aspects of plan management, such as selecting and monitoring plan investments, evaluating plan costs, and selecting and monitoring the plan’s financial advisor and service providers. Plan committees may delegate some portion of their authority to the plan administrator. In some cases, the plan sponsor may appoint a plan administrator and forego a committee. <back

Plan documents. You have a duty to understand your plan’s documents to determine if their terms conform to ERISA, and whether it’s then reasonable to follow them. If the terms of plan documents are contrary to ERISA, ERISA governs, and the plan should be amended to bring it back into compliance with ERISA and other applicable law, such as the Internal Revenue Code. If the terms comply with ERISA, it is then your fiduciary responsibility to act in accordance with them. <back

“Plan expenses” are those which, if determined to be “reasonable,” may be paid from plan assets or deducted from participant accounts. Examples include plan audit fees, recordkeeping fees, certain investment advisory and management fees, and other fees associated with the necessary operation and ongoing administration of the plan. <back

GLOSSARY

Fiduciaries and non-fiduciariesFiduciaries and non-fiduciaries

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Introduction




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Plan sponsor. The employers or other organizations that establish and maintain plans are fiduciaries, and frequently serve as the named fiduciary of their plan. They often appoint other fiduciaries, such as the plan’s trustee and plan administrator, though they may fulfill these roles themselves. <back

Plan trustee. Plan assets, in many cases, are held in trust unless they are held in an insurance contract. The plan’s trustee may be an organization, an individual, or group of individuals. The trustee may have discretionary authority over the management and control of plan assets. Alternately, the trustee may be a “directed trustee” who lacks discretionary authority over plan assets, but is responsible for safeguarding and accounting for assets in the trust. All trustees are fiduciaries, irrespective of whether they possess discretionary authority. <back

Prudence. You are expected to act with:

“ the care, skill, prudence, and diligence under the circumstances existing at the time that a prudent person (acting in a similar capacity and familiar with such matters) would employ.”

A prudent fiduciary will become educated on the subject of any decision and possibly employ the services of someone who has demonstrated expertise on the subject. Repeatedly, courts and regulators have focused on the process fiduciaries

have used to reach decisions and not on the results of the decisions themselves. Therefore, as a fiduciary, you should ask questions, validate facts, and explore alternatives before coming to a conclusion. You should also take care to document your process and actions, in order to demonstrate prudence if challenged. <back

Reasonable. To clarify the “reasonableness” requirement, the DOL issued regulations under ERISA §408(b)(2) in July, 2010. These regulations apply to “covered plans,” which are generally defined to be all types of retirement benefit plans subject to Title 1 of ERISA, including defined- benefit, defined-contribution, and ERISA-governed 403(b) plans.

The DOL regulations clarified that in order for contracts and arrangements to possibly be considered “reasonable”, certain fee disclosures must be made to the plan fiduciaries that have the authority to enter, extend, modify, or terminate contracts and other arrangements with plan service providers. The plan’s fiduciaries then have the responsibility to review the disclosed fees, and determine whether they are reasonable. It’s important to note that the extent and value of services provided should be taken into account, and that it isn’t necessary to seek the lowest absolute cost in order to deem fees “reasonable”.<back

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GLOSSARY


Fiduciary liability


Introduction





Recordkeepers and brokers. These include service providers who provide recordkeeping or brokerage services to individual account plans that allow for participant-directed investments, if at least one of the plan’s available investment alternatives is offered on the service provider’s platform. <back

“Settlor expenses” are those incurred by the plan sponsor as part of their action in establishing the plan. As mentioned earlier, a sponsor’s decisions involving establishment or termination of a plan, determination of the types of contributions permitted, or the imposition of a vesting schedule are not fiduciary decisions or part of a fiduciary role. Instead, they’re what are called “settlor” functions and the associated costs are termed “settlor expenses.” Some additional examples of settlor expenses include legal costs for establishing a plan, and may even include costs for plan amendments that are driven by sponsor decisions instead of regulatory requirements. Fees and costs associated with late regulatory filings or correcting errors in plan administration may also be considered settlor expenses. <back

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Fiduciary liability


Introduction





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