Retirement Plans Under Attack by Plan Participants and Government Agencies: An Action Plan for...

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Re6rement Plans Under A:ack by Plan Par6cipants and Government Agencies:

An Ac6on Plan for Employers

Re6rement Plans Under A:ack by Plan Par6cipants and Government Agencies – An Ac<on Plan for Employers

Steven J. Friedman • New York

Current Regulatory Environment – IRS Employee Plans Examina<on Program

IRS imposes monetary sanc<ons on employer plan sponsors for: •  Failure to operate 401(k)/403(b) plans in accordance with Internal Revenue Code requirements

•  Failure to follow the terms of the plan documents even if plan opera<on is within compliance with Internal Revenue Code requirements

Issuance of IRS Revenue Procedures establishing Employee Plans Compliance Resolu<on System: •  Requires review of internal controls to qualify for IRS self-‐

correc<on program and mi<gate the amount of IRS monetary sanc<ons

•  Sanc<ons imposed by IRS on audit even if failures are uninten6onal discrepancies between plan opera<on and plan documents that result in no harm to plan par<cipants

•  Sanc<ons are based on a percentage of plan assets and can be quite substan<al



Substan<al increase in enforcement ac<vi<es: •  Significant increase in number of audits in the last several years

•  IRS audits have well exceeded 11,000 •  Significant changes to IRS Plan Determina<on Program

•  IRS examina<on ac<vi<es increases importance of annual review of internal controls to qualify for self-‐correc<on


Closing agreement = sanc6ons and fines

in addi6on to IRS required correc6ons

Fact: every re<rement plan

has disqualifying defects

DOL Inves<ga<ons

Focus on •  Timeliness of Contribu<ons •  Expenses

–  Should they be paid by the plan? –  Are they too high? –  Vendor Choices

•  Services

•  Fiduciary Prac<ces –  Commi\ee Mee<ngs –  Minutes of Mee<ngs –  Investment Policy –  Costs of Investments –  RFPs/RFIs –  Confiden<ality Policy (Employer Stock

Funds) –  Vendor Contracts

•  Disclosures –  SPDs/SMMs –  Summary Annual Reports –  Fees/Services –  Mapping/Blackout –  QDIAs –  Auto enrollment

Screening Reviews

•  Replicate IRS and DOL Audits •  Discover Defects •  Adopt Best Prac<ces •  U<lize IRS and DOL Voluntary Correc<on Programs •  It is best accomplished through an independent PRIVILEGED legal review that affords protec<on

401(k)/403(b) Plan Screening Review

The Opera<onal Screening Review would cover one or more problem areas, for example:

–  Plan eligibility and entry (with a focus on re-‐hires) –  Automa<c Enrollment/Increase –  Limits on elec<ve deferrals –  Timely deposits of par<cipant contribu<ons –  Alloca<on of employer and matching contribu<ons –  Nondiscrimina<on tes<ng and controlled group –  Par<cipant loans and hardship withdrawals, and plan distribu<ons

–  Composi<on of eligible compensa<on –  Spousal consent –  5500 Repor<ng –  Corporate ac<on and Plan governance

401(k)/403(b) Plan Screening Review

•  Gather all Plan documenta<on •  Interview company employees who administer the

Plan to make sure they’re following the Plan; if necessary conduct training

•  Review vendor contracts and interview vendors for compliance with the Plan documents

•  Review Par<cipant disclosures and enrollment materials

•  Review Plan procedures for compliance with the law (e.g., are all required no<ces being given)

•  Do some sample tes<ng of par<cipant records (e.g., look at plan loans processed over the last year or two)

•  Correct any errors

Plan Draeing and Opera<on – Top 10 Errors

1.  Automa<c Enrollment/Automa<c Increase –  No<ces –  QDIA

2.  Compensa<on –  Overstated –  Understated

3.  Eligibility of Employees –  Too early –  Too late –  Ineligible Altogether

4.  Employee Exclusions –  Non Discrimina<on pigalls –  Seasonal, part-‐<me, per diem

5.  Ves<ng –  Elapsed <me or hours pigalls

Plan Draeing and Opera<on – Top 10 Errors

6.  Forfeitures –  Timing –  Reduce or reallocate

7.  Safe Harbor Contribu<ons –  No<ces –  Alloca<ons –  Amendments

8.  In-‐Service Distribu<ons –  Loans –  Hardship –  Illiquid assets

9.  Distribu<on Types –  Lump Sum –  Installment

10.  Matching True-‐up

IRS Voluntary Correc<ons

•  Self-‐Correc<on Program –  Insignificant failures –  Significant failures if corrected quickly enough

•  Voluntary Correc<on Program –  Significant failures –  Retroac<ve plan amendment

Who are the Plan Fiduciaries?

•  If any of the following – –  Discre<onary responsibility for administra<on

–  Exercises discre<onary authority or control over plan assets

–  Provides investment advice for a fee

•  DOL’s expansion of fiduciaries

Iden<fying the ERISA Fiduciary

•  Named fiduciary – a fiduciary who is named in the plan document or who, pursuant to a procedure specified in the plan, is iden<fied as a fiduciary. Common named fiduciaries are the sponsoring employer and the employer’s board of directors.

•  Deemed fiduciary – an individual or en<ty that performs a fiduciary func<on regardless of whether such individual or en<ty is actually named as a fiduciary –  For late deferrals, this would be

the person who approves the ACH transfer of contribu<ons to the trust or signs the contribu<on check

Fiduciary Func<ons

•  Plan administra<on, including claims •  Plan investments •  Plan expenses paid from plan assets •  Selec<on and monitoring persons performing fiduciary du<es

•  Par<cipant communica<ons

Which Hat Are You Wearing?

•  ERISA allows employers to wear “two hats”

•  It is important to know which hat you are wearing because ERISA’s fiduciary rules may apply

Which Hat Are You Wearing?

Se\lor •  Plan Design •  Amendment or Termina<on •  Employee Communica<ons

about corporate issues •  A\orney-‐Client Privilege

applies

Fiduciary •  Plan Administra<on •  Implementa<on of

Amendment/Termina<on •  Holding/Inves<ng Plan Assets •  Appoin<ng a fiduciary •  Par<cipant Communica<ons •  A\orney-‐client privilege may

not apply

General ERISA Fiduciary Du<es

•  Exclusive Benefit Duty •  Prudent Person Duty •  Diversifica<on Duty •  Plan Adherence Duty •  Disclosure Duty •  Duty to Monitor •  Co-‐Fiduciary Liability

How the Commi\ee Implements Procedural Prudence

•  Selec<on of providers •  Request compe<ng bids from

service providers •  Evaluate creden<als and

capabili<es •  Understand compensa<on

arrangement •  Evaluate contract terms for

reasonableness (e.g., termina<on penal<es)

•  Check references •  Regularly monitor and adjust

when appropriate

Diversifica<on Requirement: Fiduciary Protec4on

•  ERISA Sec<on 404(c) provides some fiduciary relief for investment losses resul<ng from par<cipant elec<ons in par<cipant directed plans

•  Plan which complies with ERISA Sec<on 404(c): –  Opportunity to Control: Par<cipant must be provided an opportunity to control assets of his or her individual account

–  Diversified Choice: Par<cipant must be en<tled to choose from a broad range of diversified investment alterna<ves

–  Actual Control: Par<cipant must actually exercise independent control

Managing Fiduciary Responsibility Plan Commi\ee Opera<on

•  Set a structure for opera<ons, such as guidelines for reviewing investment alterna<ves or for handling claims

•  Select service providers to assist with Commi\ee func<ons (e.g., investment advisor, accountant, fiduciary advisor)

•  Determine how plan-‐related expenses will be evaluated and, if permi\ed under the plan, paid out of plan assets

•  Set up regular mee<ngs •  Set up procedure for documen<ng all mee<ngs held and

ac<ons taken and providing minutes to monitoring fiduciary

Breach of Fiduciary Rules Protec<ons from Fiduciary Liability

•  Monitor other fiduciaries/service providers

•  Conduct plan self-‐screening reviews

•  U<lize IRS/DOL compliance programs to correct plan and fiduciary failures when they occur

•  Procure liability coverage for fiduciaries

DOL Voluntary Correc<on Programs

•  Voluntary Fiduciary Correc<on Program –  Online calculator

•  Delinquent Filer Program –  Large Plans –  Small Plans

Recent Li<ga<on

•  401(k) Fee Cases –  ERISA breach of fiduciary duty lawsuits were filed against large publicly traded companies and several 401(k) service providers

Recent Li<ga<on

•  The suits included a variety of allega<ons, including: –  Fees and expenses paid by the plans were unreasonable –  Plan fiduciaries failed to monitor the fees and expenses, and did not understand the fees

–  Plan fiduciaries failed to properly disclose fees –  Plan fiduciaries failed to select lowest investment class

–  Plan fiduciaries were conflicted –  Plan fiduciaries failed to have procedures to properly iden<fy, review, and monitor fees and expenses

What to Do to Prevent Errors?

•  Communicate with Vendors •  Communicate within organiza<on (Payroll/HR/Legal)

•  Read and Retain Documents and Contracts

•  Review Regularly –  Plan Document and Opera<on Review

–  Fiduciary Compliance Review

Fiduciary Compliance Review

A Fiduciary Compliance Review would examine: –  Prudent selec<on and monitoring of plan investments –  “Reasonable” Plan fees and costs –  Par<cipant disclosures and communica<ons –  Timely deposits of par<cipant contribu<ons –  Poten<al conflicts of Company and plan interests –  Plan governance and procedural due diligence –  Adequacy of fidelity bonds, fiduciary liability insurance, and indemnifica<ons

Fiduciary Compliance Review

•  Review Plan documenta<on (i.e., including the “boilerplate”) to determine who does what

•  Iden<fy all the Plan fiduciaries and their intended func<ons

•  Make sure all delega<ons are in place

•  Interview fiduciaries who are Company employees to make sure they’re doing what they’re supposed to do (especially payroll)

•  Establish and conduct periodic fiduciary training

•  Review vendor contracts for extent of fiduciary liability

•  Interview third-‐party service providers (e.g., investment managers) for compliance with the Plan

•  Review Plan fiduciary mee<ngs and minutes for adherence to DOL guidance

•  Correct any errors

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Retirement Plans Under Attack by Plan Participants and Government Agencies: An Action Plan for...

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