Welcome! June 8, 2017 Houston, Texas - Whitley Penn · ASU 2015-07: Disclosure for Investments in...

Welcome!June 8, 2017

Houston, Texas

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New Partners

Daniel BoarderTransaction Advisory Services PartnerDallas Office

Kimberly DeWoodyAudit PartnerFort Worth Office

Lupe GarciaAudit PartnerHouston Office

Brian MitchellInternational Tax PartnerDallas Office

• Merger with Hanner & Associates

– January 2017

– A team of 20 professionals with a focus on Veterinary Medicine joined the Fort Worth office.

• Merger with Wagner, Eubank & Nichols

– January 2017

– A team of 60 professionals joined the firm.

– Expanded Whitley Penn into the Austin Market

Growth at Whitley Penn

• Merger with OvermontConsulting

– March 2017

– The OverMont team delivers financial, accounting, economic, and statistical analysis for national and international clients both in and out of the context of high-stakes commercial disputes.

– Houston, Texas

Growth at Whitley Penn

20 years ago…

• The average cost of a new house was $124,000• Average cost of a new car was $16,900• A movie ticket cost $4.59• Microsoftbecomes the worlds most valuable company valued at $261

billion dollars• Seinfeld was the most popular show on TV• Tiger Woods at 21 years old became the youngest ever golfer to win the

Masters• TheDow Jones Industrial Average closes above 7,000for the first time• Titanic came out in theaters

20 years later…

DOL Fiduciary Rule

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I. Fiduciary Rule Defined

II. Five Questions To Ask Yourself

AGENDA

FIDUCIARY RULE DEFINED

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THE SIX DUTIES HANDED DOWN TO PLAN FIDUCIARIES

1. Duty to be prudent

2. Duty of loyalty and impartiality

3. Duty to diversify

4. Duty to monitor and supervise

5. Duty to ensure reasonable plan costs

6. Duty to avoid prohibited transactions

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THE FIDUCIARY RULE

• Released on 4.6.16

• Redefines who is an ERISA

investment fiduciary as

defined under the 1974

Act’s Section 3(21)

• More acts are fiduciary

• More parties to retirement

assets in the U.S. are

fiduciaries

• The most notable and

disruptive change is the

extension of coverage to

IRAs

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CHANGING THE RULES IN THE MIDDLE OF THE GAME

• DOL’s North Star = best interest advice for

retirement investors

• DOL did not wish to pick winning and losing business models

• Many business models

currently serving the IRA

market inherently have

conflicts

7

CONFLICTED FIDUCIARIES?

• Best Interest Contract Exemption (BIC or BICE)

• BIC Exemption is a prohibited transaction exemption

• The BIC creates a way for conflicted fiduciaries to work with retail retirement investors

• Retail retirement investors include IRA accountholders, plan participants, and plans offered by fiduciaries managing less than $50 million

FIVE QUESTIONS TO ASK YOURSELF

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FIVE QUESTIONS

1. Do I know all the third parties that are acting in a fiduciary

capacity to our plan or plan participants under the new rules,

and what conflicts do these third parties have?

2. What are these third parties’ compliance policies and procedures

that will ensure their conflicts do not influence the advice they

are providing our plan or participants?

3. What is my perspective on investment advice (as newly defined)

for our participants?

4. What is our benefit philosophy regarding terminated

participants?

5. Should we update our plan design to align with our philosophy

on terminated participants?

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FIVE QUESTIONS

Do I know all the third parties that are acting in a fiduciary capacity to our plan or plan participants under the new rules, and what conflicts do these third parties have?

Advisors

• If not fiduciaries before, likely fiduciaries tomorrow

• If your advisor intends to use the BIC, you should

understand why, for what, and how

Providers/Recordkeepers

• Certain services that are not fiduciary today may be

fiduciary tomorrow

• Most notably, certain participant services, including call

center activities and, if offered, in-person interactions

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FIVE QUESTIONS

What are these third parties’ compliance policies and procedures that will ensure these conflicts do not influence the advice they are providing our plan or our participants?

• Now that you understand their conflicts, you must

understand how they will prevent their conflicts from

influencing their advice

• Fiduciary duty to avoid prohibited transactions

2

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FIVE QUESTIONS

What is my perspective on investment advice (as newly defined) for my participants?

• Activities which were previously guidance may now be advice

• Providers previously serving your plan or plan participants in a

non-fiduciary capacity may now be doing so in a fiduciary

capacity through the BIC

• Are you comfortable with your participants receiving advice

from someone with conflicts of interest?

3

13

FIVE QUESTIONS

What is our benefit philosophy regarding terminated participants?

• Many expect that the rule may result in fewer third parties

soliciting rollovers

• The result may be more participants wishing to stay in

your plans

• You should evaluate your philosophy surrounding your

terminated participants staying in your plan

4

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FIVE QUESTIONS

Should we update our plan design to align with our philosophy on terminated participants?

If you’re supportive of terminated participants staying in the plan

you may wish to re-evaluate your plan design and plan offerings

to ensure they align with this philosophy, including:

• Supporting roll-ins and consolidation of other qualified assets

• Offering partial distributions, specifically systematic payments

• Exploring guidance or advice offerings

• Evaluating planning tools and calculators

• Adding investment options or solutions designed for income

generation

5

15

UPDATES

Key Dates

• April 7, 2017 - Applicability dates and related prohibited transaction exemptions would be delayed from April 10, 2017 to June 9, 2017, with certain provisions in the exemptions further delayed to January 1, 2018.

• June 9, 2017 - Investment advice providers to retirement savers will become fiduciaries, and the “impartial conduct standards” will become requirements of the exemptions.

• January 1, 2018 - Other exemption conditions scheduled to become applicable on April 10, 2017, will be delayed to January 1, 2018, while the Department conducts its ongoing examination of the Fiduciary Rule as directed by President Donald J. Trump.

Key Deliverables from the DOL

• January 2017 - CONFLICT OF INTEREST FAQS (PART II - RULE) – 35 questions

• MAY 22, 2017 - FIELD ASSISTANCE BULLETIN NO. 2017-02 “Temporary Enforcement Policy on Fiduciary Duty Rule.”

• MAY 23, 2017 - CONFLICT OF INTEREST FAQs (Transition Period) – 15 questions

Recent News

On May 23rd, The Wall Street Journal published a piece by Labor Secretary Acosta discussing how the DOL will act to review and revise the Fiduciary Rule

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BRINGING IT ALL TOGETHER

• More acts are investment advice

• More parties to your plan and participants will be ERISA fiduciaries

• The rule doesn’t change your fiduciary duties, BUT…

• The rule may change the way you carry out these fiduciary duties

• We urge you to utilize the five-question framework

• Stay tuned….

QUESTIONS?

Thank You

Travis Whitten

Vice President, Financial Advisor

[email protected]

214.622.6028 Direct

214.274.7123 Cell

www.captrustadvisors.com

FOR MORE INFORMATION

John Pickett

Senior Vice President, Financial Advisor

[email protected]

214.622.6025 Direct

214.762.4863 Cell

www.captrustadvisors.com

mailto:[email protected]

http://www.captrustadvisors.com/

mailto:[email protected]

http://www.captrustadvisors.com/

Terry Cosand, CPA

Jeff Edwards, CPA

Accounting, Auditing & Compliance Update

Accounting & Auditing Update

New Topics

• PCAOB Release 2015-008, Improving the Transparency of Audits: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards

• ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting

3

PCAOB Release 2015-008

• PCAOB approved on December 15, 2015• PCAOB Form AP, Auditor Reporting of Certain Audit Participants

– Requires disclosure of the name of the engagement partner and information about other accounting firms’ participation in the audit (includes 11-K’s)• Engagement partner’s name is effective for auditor’s reports issued on or

after January 31, 2017• Disclosures about other accounting firms are required for auditor’s reports

issued on or after June 30, 2017

– Form AP filing deadline is 35 days after the audit report release date

4

ASU 2017-06: Master Trust Reporting

• Effective for fiscal years beginning after December 15, 2018

– Early adoption is permitted

– Applied retroactively to each period presented

5


• Highlights of changes:– Single line reporting of the plan’s interest in a Master Trust on the face of

the plan’s financial statements– Disclose Master Trust investments by general type and other

assets/other liabilities– Removes requirement to disclose the percentage interest in the Master

Trust for plans with a divided interest– Requires all plans to disclose the dollar amount of their interest in the

Master Trust by general type of investment and for other assets/other liabilities

– Present 401(h) disclosures in DB plan only (reference name of DB plan in the H&W plan financial statements)

6


• Illustrative Example of Footnote Disclosure:

7

Recap of Last Audit Cycle

• ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

• ASU 2015-10, Technical Corrections and Improvements

• ASU 2015-12, Plan Accounting

• PCAOB AS No. 18, Related Parties

• Mortality improvement scales

8

ASU 2015-07: Disclosure for Investments in Certain Entities that Calculate NAV per Share

• Effective for fiscal years beginning after December 15, 2016 (December 15, 2015 for public entities)– Early adoption was permitted– Amendment applied retroactively

• Eliminates the requirements to categorize (level) investments for which fair values are measured using the net asset value (NAV) per share practical expedient within the fair value hierarchy

• Also limits disclosure to investment for which the entity has elected to measure the fair value using the practical expedient

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ASU 2015-07

• Requires reconciliation of the fair value of investments in the hierarchy disclosure to the statement of net assets

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ASU 2015-07

• NAV as a Practical Expedient

– Applies only to an investment that meets both the following:

• Investment does NOT have a readily determinable fair value

• Investment is an investment company within the scope of Topic 946

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ASU 2015-10: Technical Correction & Improvements

• Clarified definition of “readily determinable fair value”

– An equity security has a readily determinable fair value if it meets the following:

• The fair value of an equity security that is aninvestment in a mutual fund or in a structure similar to a mutual fund (limited partnership or venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions.

12

ASU 2015-10: Technical Correction & Improvements

• New definition may prevent certain investments from using the fair value NAV practical expedient.

• Assess whether a particular investment meets the new definition of Readily Determinable Fair Value under ASU 2015-10

• The NAV practical expedient can’t be used to value investments that DO have a Readily Determinable Fair Value

13

ASU 2015-12: Plan Accounting

• FASB issued a three-part ASU:– Part I: Fully Benefit-Responsive Investment Contracts (FBRICs)– Part II: Plan Investment Disclosures– Part III: Measurement Date Practical Expedient

• Effective for fiscal years beginning after December 15, 2015• Parts I and II are applied retrospectively• Part III is applied prospectively• Early adoption was permitted

– Plans could have early adopted any of the ASU’s three parts without early adopting the other parts

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Part I: FBRIC

• Affects defined contribution and health/welfare plans• Definition of a fully benefit-responsive investment contract (FBRIC) did not change

– Investment contract (i.e. guaranteed interest contact, guaranteed annuity contract, synthetic GIC with wrapper contract)

• Clarifies that contract value is the relevant measure for FBRICs because that is the amount participants would receive in a transaction– Investment contracts that do not meet the definition of a FBRIC continue to be

presented at fair value• Eliminates requirements to measure fair value and present fair value measurement

disclosures• Investment contracts that do not meet the definition of a FBRIC continue to be

presented at fair value

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Part I: FBRIC

• Investments presented at contract value are not included in the hierarchy table and disclosures related to hierarchy level, fair value measurement techniques and inputs, Level 3 reconciliation and average yields eliminated

• New disclosure to disclose total contract value of each type of FBRIC

• No changes to the Form 5500 and supplemental schedule requirements

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Part I: FBRIC

• Prior to adoption of ASU 2015-12 (Part I) – Traditional & Synthetics:

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Part I: FBRIC

• Marked-up for adoption of ASU 2015-12 (Part I):

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Part I: FBRIC

• Final for adoption of ASU 2015-12 (Part I):

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Part I: FBRIC

• Stable Value Common or Collective Trusts

– Guidance clarifies that indirect investments in FBRICs through investment companies (e.g. stable value CCTs) are not in the scope of the FBRIC guidance

– Plans should report these investments at fair value

– The amount previously presented at contract value is now presented as fair value• Does not change total net assets available for benefits

• The investments are now accounted for consistent with other CCTs

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Part I: FBRIC

• Mark-up for Adoption of ASU 2015-12 (Part I) – SVF:

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Part I: FBRIC

• Final for adoption of ASU 2015-12 (Part I):

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Part I Decision Tree

**For this investmentNote 1: The Plan holds a direct interest in a traditional or synthetic investment contract (contract is directly with an insurance entity). Make no FV adjustment and break the investment out on the Statement of NAAB onto a separate line called “Investment at contract value”. Additional disclosure required and some disclosures eliminated in FNs.Note 2: The Plan holds an indirect investment in a FBRIC through an investment company such as a SVF or CCT. Make no FV adjustment and leave as “Investments at fair value” in the Statement of NAAB.Note 3: If the investment has fund financials and in the accounting policies states the investment is reported as an investment company under Topic 946 and the NAV is not published then can apply ASU 2015‐07 and not level the investment in the FV hierarchy table.

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Part II: Plan Investment Disclosures

• Affects all types of benefit plans• Following changes to investment disclosures:

– Fair value hierarchy table by general investment type– Self‐directed brokerage accounts are one general investment type– No longer required to disclose the significant investment strategies for

an investment in a fund that files a Form 5500 as a direct filing entity when the plan measures that investment using NAV practical expedient

– Eliminates disclosure of net appreciation or depreciation in fair value by investment type

– Eliminates disclosure of investments that were greater than 5% of NAAB– Applies to investments held in a master trust

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Part III: Measurement Date Practical Expedient

• Simplifies accounting for a plan with a fiscal year end (FYE) that doesn’t coincide with a calendar month end

• Allows a plan to measure its investments and investment related accounts using the month end closest to its FYE

– Disclose as an accounting policy

– Disclose financial effects of contributions, distributions and/or significant events that occur between the alternative measurement date and the plan’s FYE

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PCAOB AS No. 18, Related Parties

• Applies only to plans that file on Form 11-K with SEC

• Primary changes include requirements that the auditor:

– Perform expanded inquiries of management, others with the company and the audit committee

– Obtain an understanding of the company’s processes and control for related parties

– Test and conclude on whether related party transactions are complete, accurately accounted for and disclosed

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PCAOB AS No. 18, Related Parties

• Primary changes include requirements that the auditor:

– Communicate findings to the audit committee

– Obtain additional management representations about the completeness of, and availability of information about, related parties

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Mortality Improvement Scales

• Applies only to defined benefit plans

• The Society of Actuaries release new mortality tables in October 2014 called the RP-2014 tables

• MP-2015 improvement scale released October 8, 2015

• MP-2016 improvement scale released October 20, 2016

• Plan funding assumptions use different mortality tables but IRS is now conforming them beginning 2018

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Summary of New Guidance

Guidance Description Effective Plans Affected

Early Adoption

Retrospective application?

ASU 2014-15 Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern

Periods ending on or after December 15, 2016

All Yes Not specified

ASU 2015-07 Disclosures for Investments in Certain Entities that Calculate NAV per Share

Fiscal years beginning after December 15, 2016 (December 15, 2015 for public entities)

All Yes Yes

ASU 2015-10 Technical Corrections and Improvements

Upon issuance, June 12, 2015

All n/a Not specified

ASU 2015-12 Plan Accounting:

Part I Fully Benefit-Responsive Investment Contracts

Fiscal years beginning after December 15, 2015

DC/H&W Yes Yes

Part II Plan Investment Disclosures Fiscal years beginning after December 15, 2015

All Yes Yes

Part III Measurement Date Practical Expedient


All Yes No

ASU 2017-06 Plan Accounting: Master Trust Reporting


All Yes Yes

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Compliance Update

Overview

• 2016 Form 5500 Changes

• Reporting Compliance Enforcement

• Cybersecurity Issues

• Changes to Determination Letter Process

• Changes to Pre-Approved Plans

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2016 Form 5500 Changes

• The instructions have been updated to reflect changes in the maximum civil penalty amount assessed under ERISA section 502(c)(2).The new maximum penalty for a plan administrator who fails or refuses to file a complete or accurate Form 5500 report has been increased to $2,063 a day.

• Schedules H and I. Line 5c is modified to add a new question to the existing question that asks if a plan is a defined benefit plan, is it covered by the PBGC insurance program. The new question asks filers that checked the box “Yes,” to enter the My PAA generated confirmation number for the PBGC premium filing for the plan year.

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2016 Form 5500 Changes

IRS Compliance Questions (optional for the 2016 plan year):– The IRS has decided not to require plan sponsors to enter the “Preparer’s

information”atthebottomofthefirstpageofForm5500forthe2016planyear.Plansponsorsshouldskipthesequestionswhencompletingtheform.

– The IRS has decided not to require plan sponsors to complete questions onSchedules H and I, Lines 4o, and 6a through 6d, for the 2016 plan year and plansponsorsshouldskipthesequestionswhencompletingtheform.

– The IRS has decided not to require plan sponsors to complete questions onSchedules R, Part VII – IRS Compliance Questions for 2016 plan year and plansponsorsshouldskipthesequestionswhencompletingtheform.

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Reporting Compliance Enforcement

• Stop filers

– Recent study found 67% of detected stop-filers are delinquent in filing Form 5500/5500-SF

• Assessing Valuation of Hard to Value Assets

• DFVC Program integrity review

• Missing IQPA reports & completeness of financial information

• Joint DOL/IRS Enforcement Initiatives

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Cybersecurity Issues

Cybersecurity continues to be a hot topic….Scott Auerbach, Interim Chief Accountant of the DOL’s EBSA says Plan Sponsors should:• Review written information security policies, including those regarding

encryption

• Conduct periodic audits to detect threats

• Perform periodic testing of backup and recovery plans

• Determine responsibility for losses, including adequacy of cybersecurity insurance coverage

• Establish training policies to reinforce data security and incident response plans

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Changes to the IRS Determination Letter Program

Individually Designed Plans

• Effective January 1, 2017, the IRS eliminated the staggered 5-year remedial amendment cycle (Cycle A filers had until 1/31/17 to file a final submission) for individually designed plans

• IRS will no longer accept determination letter applications other than for:– Initial plan qualification

– Plan termination (Form 5310)

– IRS makes a special exception

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Changes to the IRS Determination Letter Program (continued)

• IRS will publish a Required Amendment List annually (October of each year)– Must be amended to retain its qualified plan status for each item on the list by

the end of the 2nd calendar year following the year the list is published

• Discretionary amendments are required by the end of the plan year in which the amendment is operationally put into effect

• Eliminating the expiration dates on determination letters

• IRS redesigned the determination forms and even reduced the number of questions

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Pre-Approved Plan Changes

Prototype and Volume Submitter Plans

Defined Contribution Plans:

• Extended the adoption period for certain pre-approved defined contribution plans (April 30, 2017, instead of April 30, 2016) if converting from an individually designed plan

IRC 403(b) Pre-Approved Plans:

• Previously all individually designed

• Opinion letters issued March 31, 2017

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Pre-Approved Plan Changes (continued)

Defined Benefit Pre-Approved Plans:

• Currently all individually designed

• Extended to cash balance plans too

• Opinion and advisory letters- early 2018

ESOPs:

• Currently all individually designed

• Pre-Approved plan program recently extended to ESOPS with applications beginning February 1, 2017

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Questions?

Lessons from the Newest Benefits Lawsuits

20th Annual Employee Benefit Plan Conference

Fort Worth, Dallas & Houston

Jim Griffin

Update From Last Year—Excessive Fee Litigation

• Bernaola v. Checksmart Financial LLC

– Filed July 14, 2016 in Ohio

– $25 million in assets; 1,700 participants

– Motion to dismiss pending.

• Damberg v. LaMettry’s Collision Inc.

– Filed May 18, 2016 in Minnesota.

– $9.2 million in assets; 114 participants

– Voluntarily dismissed June 17, 2016

401(k) and Stock Drop

• Coburn v. Evercore Trust Company

– U.S. Court of Appeals—D.C. Circuit

– December 30, 2016

– Appeal of dismissal of claims

• Donna Coburn sued J.C. Penney for breach of the ERISA duties of prudence and loyalty when JCP failed to take preventative action as the value of JCP stock dropped between 2012 and 2013.

• JCP stock fell from $36.72 per share to $5.92 per share.

• $300 million in total losses.

• Court of Appeals upheld dismissal for failure to meet the pleading requirements announced by the U.S. Supreme Court in Fifth Third Bancorp v. Dudenhoeffer.

• Lawsuit could not be based only on allegations that the fiduciary should have recognized from publicly available information that continued investment in JCP stock was imprudent.

• Lawsuit must also include allegations of “special circumstances” affecting the reliability of the market.

• Special circumstances include:

– Fraud

– Improper accounting

– Illicit conduct

Conflict Between Plan Document and Summary Plan Description

• Lee v. Holden Industries, Inc.

– U.S. District Court

• Northern District of Illinois—Eastern Division

– November 21, 2016

– Ruling on Defendant’s Motion For Summary Judgment

• William Lee is a former participant in the ESOP of Holden Industries, Inc.

• He was employed from December 2007 to August 2012.

• He had 3,770 shares of Holden stock in his ESOP account.

• After Lee’s employment ended, Holden converted his ESOP account to cash.

• Lee elected to receive a cash distribution of $146,832.10 from his cash account in the ESOP.

• Lee argued that his shares should have been bought out at the December 2013 valuation rather than the December 2012 valuation.

• Lee’s argument was based on differences in the wording between the official plan document and the summary plan description (SPD).

• The Court disregarded the SPD and quoted from the US Supreme Court’s decision in Cigna v. Amara:

– . . . the summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan.

• The Court also ruled in favor of Holden on Lee’s breach of fiduciary duty claim.

– Fiduciaries are obligated to provide accurate information under ERISA but negligence in fulfilling that duty is not actionable.

– Instead, there must have been an intent to “disadvantage or deceive” plan participants.

Problems With Increasing Coverage Amounts Under Voluntary Life Insurance

• Prince v. Sears Holdings Corporation

– U.S. Court of Appeals—4th Circuit

– January 27, 2017

– Appeal of dismissal of claims

• Billy Prince worked for Sears and in November 2010 applied for $150,000 in life insurance on his wife, Judith.

• In May 2011, Sears acknowledged Billy’s request and started withholding premiums from Billy’s pay.

• Later in 2011 Judith learned that she had Stage IV liver cancer.

• A year later Billy checked his online benefits summary which confirmed his life insurance election for Judith.

• About a year after that Sears sent Billy a letter advising him that the insurance election never became effective because Billy did not submit an evidence of insurability form.

• In May 2014, Judith died.

• Billy sued Sears in state court alleging constructive fraud, negligent misrepresentation and intentional & reckless infliction of emotional distress.

• Sears removed the case to Federal court and filed a motion to dismiss.

• District Court held that ERISA completely preempted all of Billy’s claims and the Court of Appeals agreed.

Same Gender Spouses and Joint & Survivor Annuities

• Reed v. KRON/IBEW Local 45 Pension Plan


• Northern District of California


– Ruling on Motion to Dismiss

• David Reed and Don Gardner registered as domestic partners in California in 2004 and were married in California in 2014.

• Don worked for KRON TV station.

• Don retired from KRON in 2009 and began receiving his pension as a single life annuity which was the form available to participants who were not married.

• In June of 2014 Don died and his pension ended.

• David filed a claim for survivor benefits but received no response and filed a lawsuit on August 9, 2016.

• David argued that under California law domestic partners have the same status as married persons.

• Arguments:– Don and David were married

– Don was not provided with an opportunity to elect a joint & survivor annuity pension

– David did not consent to Don’s election of a life only pension

• Therefore:– Don’s life only pension election is invalid,

and

– The pension plan must paid a 50% survivor pension to David for the rest of his life.

QDROs and the Non-Employee Spouse

• Patterson v. Chrysler Group, LLC


– January 11, 2017

– Appeal by Chrysler of judgment in favor of Ardella Patterson

• Ardella and Henry Lee Patterson were married on February 15, 1987 and divorced on September 27, 1993.

• The divorce decree awarded Ardella ½ of the pension benefits that Henry Lee earned during the marriage, with full rights of survivorship.

• Benefits were due when they became payable to Henry Lee.

• Henry Lee worked for Chrysler from June, 1965 to January, 1992.

• Henry Lee started receiving his retirement benefits in 1994 in a lifetime annuity, with no surviving spouse option.

• In December, 1994 Ardella (through her lawyer) tried to get her benefits but was told that the divorce decree was not a QDRO.

• Ardella did not follow up with the plan for nearly 13 years, after Henry Lee died in November 2007.

• At this point, the plan administrator once again said that the divorce decree did not meet the QDRO requirements but also that there was nothing left to divide since Henry Lee was now dead.

• Ardella went through four more lawyers to try to get justice and then finally sued Chrysler.

• Chrysler then argued, and the court accepted, that Ardella was simply too late and that her claim was barred by the state of limitations.

ERISA Preemption, Beneficiary Designations, and Slayer Statutes

• Herinckx v. Sanelle

– Court of Appeals—Oregon

– May 17, 2016

– Appeal of Motion to Dismiss

• Plaintiffs are the parents and executors of the Estate of Julianne Lisa Herinckx.

• Julianne lived in Oregon.

• Julianne worked for Standard Insurance Company and was covered under a group life insurance plan.

• Julianne named Paul Sanelle and TerlinPatrick as her life insurance beneficiaries.

• Sanelle and Terlin killed Julianne in an attempt to claim the life insurance proceeds.

• Oregon has a state law called a Slayer Statute that says that proceeds under a life insurance policy that would be paid to the killer of the covered person must be paid to the secondary beneficiary or to the personal representative of the estate of the covered person.

• The question is whether this statute is preempted because it interferes with nationally uniform plan administration.

• The court noted that slayer statutes vary from state to state with

– Different standards of proof in the absence of conviction

– Different treatment of conviction

– Different behavior necessary to result in a forfeiture

• One state—Wisconsin—allows an individual to declare in his/her will that the slayer statute does not apply.

• The court held that the Oregon statute would interfere with uniform plan administration.

• The court allowed Julianne’s parents to amend their lawsuit to assert a claim under Federal law.

Personal Liability for Employee Contributions to Health Plan

• In re: Michael P. Harris

– U.S. Bankruptcy Appellate Panel—For the 8th

Circuit

– January 6, 2017

– Appeal by debtor of summary judgment in favor of the U.S. Department of Labor.

• Michael Harris was a debtor in bankruptcy and was the CEO of his company.

• The US DOL argued (and the District Court found) that Harris breached an ERISA fiduciary duty when his company failed to remit funds withheld from employees’ paychecks for their health insurance plan.

• The DOL argued that the debt was non-dischargeable in bankruptcy.

• Employees paid 100% of the premium for the health plan, via payroll deduction.

• Faribault did not hold employee contributions in a separate account, but allowed them to be held in its general operating account.

• In February, 2009 the health plan TPA information Faribault that its check had bounced. TPA also sent letters to all participants in the health plan.

• In the meantime, Harris directed Faribault to pay other expenses instead of the health plan.

• In April, 2009, the TPA cancelled the health plan retroactively to the beginning of the year.

• Faribault was behind by $55,000 in payments to the plan.

• 42 employees and their families were affected.

• Faribault later went out of business sometime after May of 2009.

• DOL sued Harris for breach of fiduciary duty under ERISA, and the District Court ruled in favor of the DOL because Harris diverted employee funds to the payment of corporate expenses and to his own home equity loan.

• Faribault filed for bankruptcy in November 2015 and DOL contested the dischargeability of the ERISA claim.

• DOL argued, and the Court, found that an individual debtor cannot be discharged from any debt for fraud or defalcation while acting in a fiduciary capacity. 11 U.S.C. Section 523(a)(4).

A Self Funded Health Plan Disaster

• Keokuk Area Hospital, Inc. v. Two Rivers Insurance Company

– U.S. District Court—Southern District of Iowa, Davenport Division

– January 7, 2017

– Order granting Motion to Dismiss

• Keokuk Area Hospital employs about 350 doctors, nurses and staff.

• In 2010, the Hospital adopted a new self funded employee health plan provided by Two Rivers, which cost $50,000 per month.

• Two Rivers did not:

– Perform actuarial analysis of the amount of the reserve needed to start the plan.

– Negotiate provider contracts and discounts.

– Set up separate account for employee contributions.

– Put in place financial and accounting controls.

– Provide disclosures to participants and required filings with IRS.

– Obtain stop loss insurance.

• DOL investigated.

• Plan was running a deficit of more than $400,000 by the end of 2010 and more than $1.3 million by the end of 2012.

• Unpaid claims were $1.8 million by February 2013.

• Hospital sued Two Rivers, alleging:

– Negligence

– Breach of fiduciary duty under ERISA.

• The Court:

– Held that the Hospital’s negligence claim against Two Rivers was preempted because the Hospital sued Two Rivers as a fiduciary and administrator of the plan;

– Allowed a jury trial for the Hospital’s ERISA breach of fiduciary duty claim; and

– Struck the Hospital’s claim for compensatory and punitive damages. Hospital could only recover for harm to the Plan.

ERISA and the U.S. Supreme Court

• Fenkell v. Alliance Holdings--No

– Whether ERISA allows plan fiduciaries to sue other fiduciaries for indemnification or contribution?

• Advocate Health Care Network v. Stapleton—Yes

– Whether large hospitals can use a religious legal exemption to avoid fully funding their pension plans

ERISA and the U.S. Supreme Court

• Clause v. U.S. Dist. Court for E. Dist. of Mo.—No

– Can an employer force lawsuits over workers’ benefits into the employer's preferred court?

ERISA Preemption

• Pharmaceutical Care Management Association v. Gerhart


– January 11, 2017

– On appeal from ruling on Motion to Dismiss in favor of the State of Iowa

• State law in Iowa regulates how pharmacy benefit managers (PBMs) establish generic drug pricing and requires disclosures on drug pricing be made to network pharmacies and to the Iowa Insurance Commissioner.

• The Pharmacy Care Management Association sued the State arguing that its statute impermissibly referenced ERISA and was therefore preempted by ERISA.

• A state law is preempted by ERISA if it has a connection with or reference to an ERISA plan.

• A state law has an impermissible reference to ERISA plans where it acts immediately and exclusively on ERISA plans or where the existence of ERISA plans is essential to the law’s operations.

ERISA and Standing

• Soehnlen v. Fleet Owners Insurance Fund



– Appeal of dismissal for failure to state a claim

• Dan Soehnlen is President and CEO of Superior Dairy.

• In 2014, Superior contracted with Fleet to provide group medical coverage to Superior’s employees.

• Fleet is a multi-employer welfare benefit fund.

• A dispute arose over whether the plan violated ERISA and the Affordable Care Act (ACA) by imposing per participant annual and lifetime dollar limits on benefits

• Fleet argued that it was a “grandfathered plan” and therefore exempt from the ACA requirement to remove those limits.

• Even though a plaintiff may have an ERISA claim, the plaintiff must still have a claim under Article III of the US Constitution.

• Article III limits the judicial power of the United States and enforces the case-or-controversy requirement.

• To satisfy Article III, a plaintiff must show:

– He has suffered an injury-in-fact that is

• Concrete and particularized, and

• Actual or imminent, not conjectural or hypothetical

– The injury is fairly traceable to the challenged action of the defendant

– It is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

Interpretation of Plan Documents and Committee Discretionary

Review

• Vendura v. Boxer

– U.S. Court of Appeals--1st Circuit

– January 11, 2017

– Appeal of Summary Judgment in favor of employer

• Dispute about the number of years of benefit service

• Vendura was hired by TRW in 1993 and went on medical LOA in June of 2000.

• Northrop acquired TRW in 2002

• Northrop tried to lay off Vendura in 2003 but was not successful

• Vendura received long term disability benefits from 2000 to 2013.

• Vendura sought a pension based on 20 years of service.

• Northrop believed that he was only entitled to 12 years of benefit service.

• The Administrative Committee of the pension plan had the authority to interpret and apply the relevant provisions of the plan.

• The Court reviewed the Administrative Committee’s interpretation under a deferential arbitrary and capricious standard; abuse of discretion.

• The Court must defer to the Administrative Committee when it “reasonably” construes ambiguous plan terms.

• Rule of Contract Interpretation:

– Contracts must be construed as a whole and the intention of the parties is to be collected from the entire instrument and not detached portions thereof, it being necessary to consider all of the parts to determine the meaning of any particular part as well as of the whole.

Arbitrary and Capricious Standard of Review

• Geiger v. Aetna Life Insurance Company


– January 6, 2017

– Appeal from ruling on Motion for Summary Judgment in favor of Aetna.

• Aetna terminated Donna Geiger’s long term disability benefits under her employer’s plan.

• Geiger worked for Sprint as an account executive from 2001 to 2009.

• Aetna decided that Geiger was no longer totally disabled from any gainful occupation.

• The plan allowed benefits for up to 24 months in the case of disability from a participant’s own occupation.

• Aetna approved disability benefits after the 24 month period but conducted surveillance on four ocassions.

• Geiger was seen:

– Climbing into and driving an SUV

– Shopping at multiple stores

– Carrying a bag.

• Aetna terminated Geiger’s LTD benefits and Geiger sued claiming that Aetna’s decision was arbitrary and capricious.

• District Court found that Aetna:

– Minimized any conflict of interest stemming from its role as both administrator and insurer

– Presented sufficient evidence supporting its decision to terminate benefits

– Properly considered Geiger’s condition and pain

– Properly considered the surveillance video as part of its decision.

• The Court of Appeals wrote that:

– a plan administrator’s decision may not be deemed arbitrary and capricious so long as it is possible to offer a reasoned explanation, based on the evidence, for that decision.

• Rational support found in the administrative record.

Pension Plan Termination Liability: Meaning of “Controlled Group”

• Pension Benefit Guaranty Corporation v. Findlay Industries


• Northern District of Ohio—Western Division


– Ruling on Defendants’ Motion To Dismiss

• Findlay established a pension plan in 1964 and terminated the plan in 2009.

• This lawsuit involved the PBGC’s claims against the Philip D. Gardner Inter VivosTrust. Gardner was the founder and owner of Findlay.

• Gardner established the trust to provide money to care for Gardner’s sisters.

• The trust also leased real estate to Findlay.

• PBGC argued that the leasing of property was a “trade or business” and that both the trust and Findlay were under common control of Gardner. Therefore the trust was obligated to pay Findlay’s debts.

• The Court looked at the common definitions of “trade” and “business”.

• “Trade” is the business of work in which one engages regularly.

• “Business” is a commercial or mercantile activity engaged in as a means of a livelihood.

• The Court concluded that there was no possibility that the rental activity was being used to dissipate or fractionalize Findlay’s assets.

• According to the Court, no controlled group existed. The trust was not liable for the pension debts.

Pension Plan Termination Liability:Successor Liability

• Board of Trustees vs. Full Circle Group, Inc.


– June 24, 2016

– Reversing District Court’s grant of summary judgment in favor of employer

• Dad had a shipping and shipyard services company called Hannah Maritime Corporation (HMC).

• HMC had a collective bargaining agreement and was required to contribute to a union pension plan.

• Son formed a new company called FCG and bought some land and equipment from HMC.

• HMC subsequently became insolvent and could not pay its withdrawal liability obligation to the union pension plan

• The union pension plan sued to impose HMC’s pension liability on FCG as its successor.

• The district court ruled in favor of FCG, holding that son could not have been aware of HMC’s pension liability.

• The Court of Appeals wrote:– The general common law rule of successor

liability holds that where one company sells its assets to another company, the latter is not liable for the debts and liabilities of the seller.

• In the case of union pension plans, however:– An asset buyer is on notice of, and therefore

subject to, successor liability if he has notice that the seller may be contingently liable for withdrawal liability.

Union Pension Plan:Obligation to Contribute

• Midwest Operating Engineers Welfare Fund v. Cleveland Quarry

– U.S. Court of Appeals--7th Circuit


– Appeal of judgment in favor of Union Plans

• Defendants are 3 completely separate divisions of the same company called Riverstone.

• Riverstone produces crushed stone, sand and gravel.

• The Riverstone divisions were parties to 3 separate collective bargaining agreements that required contributions to pension and welfare funds.

• In 2013, the employees voted to de-certify the union.

• Riverstone stopped contributing to the fund

• The pension and welfare funds sued to collect delinquent contributions that would have been due until the expiration of the collective bargaining agreement.

• The Court held that the decertification of the union did not terminate Riverstone’sobligation to contribute to the pension and welfare plan funds.

• The contribution obligation was not enforceable by the union but could be enforced by the plans.

ERISA: No Claim For Equitable Contribution

• Central States v. American International Group, Inc.


– October 24, 2016

– Appeal of Ruling on Motion to Dismiss against Central States

• Central States sponsors a self-funded health plan for members of the Teamsters Union.

• AIG wrote insurance that covers schools and youth sports leagues.

• The Central States plan sued AIG to recover $343,000 that Central States paid on behalf of beneficiaries who were also covered by AIG.

• Battle between coordination of benefits clauses in the two respective plans.

• Central States sued in Federal Court under Section 502(a)(3) of ERISA to obtain appropriate equitable relief to enforce the terms of the plan.

• The District Court held, and the Court of Appeals agreed, that Central States’ claim was one for damages that could not be brought under Section 502(a)(3) of ERISA.

Lessons from the Newest Benefits Lawsuits

WELLNESS

WORKS

Empower your employees with financial wellness

Keith Blackmon – Vice President

T. Rowe Price – US Intermediaries/DCIO

2

WELLNESSWORKS

Historical objectives of retirement plan education

Increase Participation Increase Deferrals Asset Allocation

3

WELLNESSWORKS

Source: T. Rowe Price Retirement Plan Services, Inc. as of 9/30/2015

Innovations to plan design and investments have helped…

of participants remain in the plan

96%

AUTOMATIC ENROLLMENT

4

WELLNESSWORKS



of participants remain in the service when it’s

offered on an opt-out basis

66%

AUTOMATIC INCREASE

5

WELLNESSWORKS



of participants remain in a default fund such as TDF

96%

AUTOMATIC INVESTMENT INTO A QDIA

6

WELLNESSWORKS …but have not solved the problem completely.

avoid dealing with their

financial situation

55%

expect to run

out of money

26%

can’t afford to contribute

more to their plans

48%

Source: T. Rowe Price Retirement Saving and Spending Study (2015)

7

WELLNESSWORKS There is opportunity to do more.

say they are

financially illiterate1

43%

of wages go to

consumer debt

payments3

24%

say finances are the

largest source of

stress in their life2

64%

don’t have enough

savings to cover a

$1,000 emergency4

64%

1S&P Global FinLit Survey 2015 2American Psychological Association 20153U.S. Census Bureau at al. 20144MarketWatch 2015

Of American adults…

8

WELLNESSWORKS Financial wellness works for everyone

Employees

Financially healthier employees are happier,

healthier, and more productive, which can

translate to greater business success and

increased retirement plan contributions.

C-suite

As healthcare concerns continue to

mount, providing robust financial

wellness solutions could empower

employees to retire on time.

Human Resources

A more robust benefits package can

add a new “R” to the traditional three:

Recruit, Retain, Reward, Retire!

Not FDIC Insured | May Lose Value | No Bank Guarantee

Topic PaperJanuary 2017

“EASY WINS” FOR DC PLAN DESIGN: What we can do better now

For Use with Financial Professionals and Plan Sponsors Only / Not for Use with Plan Participants

Inertia is taking hold in some areas of the Defined Contribution (DC) industry today, and the reasons

are clear. An active litigation environment has many plan sponsors on their heels, and the steady

drumbeat of negative headlines about Americans’ retirement readiness and the overall health of the

DC system can breed defeatism.

While challenges certainly do exist in the system, we shouldn’t let them impede meaningful progress.

We believe there is plenty more that can be done today with the tools we already have to build upon the

tremendous progress made in the 10 years since the Pension Protection Act of 2006 (PPA).

Some plan design proposals are challenging or controversial, but many are not. We believe that when

it comes to plan design, there are a number of “easy wins”—actions that plan sponsors can take today

to help their participants achieve retirement success. How do we define an “easy win”? Simply stated,

they are plan design ideas that are not administratively complex, resource intensive or time consuming,

but can be relatively impactful.

DREW CARRINGTON, CFA, CAIAHead of Institutional DCFranklin Templeton Investments

ELIZABETH HEFFERNANVP – Investment ConsultantFidelity Investments

CHRISTINE LOUGHLIN, CFA, CAIA, AIFPartner NEPC

In this paper based on a nationally-broadcast webcast for the DC plan community, Drew Carrington, Head of Institutional DC at Franklin Templeton Investments, is joined in a roundtable discussion by two

distinguished industry peers to break down three potential “easy wins” for plan sponsors. Christine Loughlin, Partner at NEPC, speaks from her experience working with clients to address these types of

challenges, and Elizabeth Heffernan, Vice President at Fidelity Investments, provides her perspective

on potential administrative hurdles.

2 “Easy Wins” for DC Plan Design: What we can do better now

These “easy wins” are not uniform changes that will benefit every plan participant. They are demographically targeted and objective-driven. We believe it’s important to avoid viewing plan participants monolithically. Our thinking is informed by the work of Harvard University professor Todd Rose, author of The End of Average (2016), who warns that “when it comes to understanding individuals, the average is most likely to give incorrect or misleading results.”1 We ought to acknowledge that the “average” participant often doesn’t really exist, and that each participant has their own goals, and lives within a uniquely individual financial context—particularly for participants approaching or in retirement.

While the ideal is to structure solutions to address participants’ individual needs, it is helpful to recognize that participants enter distinct phases in the plan in which they have some shared demographic characteristics, goals and challenges. The investment and plan design solutions we implement should seek to address those shared challenges to maximize the utility of our efforts.

For the purposes of this discussion, we identify three general phases through which participants evolve as they (1) start making contributions and accumulate balances; (2) transition into retirement; and then (3) complete their drawdown.

Phases

Participants’ financial contexts & needs

General participant objectives

Potential plan sponsor actions

Encourage participants to enroll at a higher savings rate

Target communications to participants ages 50+

Offer flexibility for drawdown of plan assets

Save at a sufficient rate Prepare for retirement Generate income

Accumulation

Retirement transition

Post-retirement drawdown

RELATIVELY

DIVERGING HETEROGENEOUS

HOMOGENOUS

BREAKING DOWN THE PARTICIPANT POOL

franklintempleton.com 3

In our framework, “accumulation” participants are new entrants into the plan with relatively modest balances and (hopefully) long saving horizons in front of them. While every participant’s financial context is unique, as a group, their investment needs are functionally relatively homogenous. In our view, they would be best served by a plan that provides an appropriate qualified default investment alternative (QDIA) paired with auto-enrollment, auto-escalation and an effective communication strategy to encourage positive behaviors that could result in savings rates exceeding the often modest initial default contribution rates.

As participants reach catch-up contribution eligibility at age 50 and enter the “retirement transition” phase, they start to demonstrate different characteristics. With larger plan balances, many of them begin to think about generating income in retirement—sometimes years before they make the retirement leap. Their financial contexts and needs are generally more divergent at this time, and we often see higher levels of engagement (measured in terms of rebalancing and other plan activity) and a trend of diversification away from QDIAs such as target-date funds.2 Regardless of whether their allocation choices are always optimal, we should recognize the message writ large: Participants approaching retirement may no longer perceive the plan QDIA to be meeting their needs as a standalone investment.

Finally, as participants retire and enter the “payout” phase, we see maximum heterogeneity among DC plan participants. Great variance exists with regard to retirement expenses, Social Security claiming strategies, other household financial assets, and bequest plans, to name only a few variables. Two retirees with the same plan balance may need very different things from their DC plan.

The investment options we provide to participants should allow them to fit their plan assets into their broader financial context and help meet their retirement needs, however divergent they may be. In our view, a proactive, targeted approach that seeks to address the changing needs of participants in each stage of the plan is the best strategy to improve retirement outcomes overall.

‘‘The investment options we provide to participants should allow them to fit their plan assets into their broader financial context and help meet their retirement needs, however divergent they may be.”


“EASY WIN” 1Encourage participants to enroll at prior savings rate

Our first “easy win” for plan sponsors is to encourage newly hired employees to enroll at the deferral rate used with their prior employer.

We believe that this action can help increase average deferral rates and keep participants on track toward a financially secure retirement while saving at levels they can afford.

To understand the problem, it’s important to recognize that participants change jobs in the American workforce quite regularly. The median job tenure in the American private sector workforce is just 4.3 years as of 2014, and that is the highest level it’s been over the last 30 years.3 Frequent job changes are not a new phenomenon.

Median tenure levels for private sector wage and salary workersAges 20 and older, 1983–2014

Furthermore, the prevalence of auto-enrollment and auto-escalation in DC plans has skyrocketed in the last decade since the PPA. Larger plans with over $25 million in assets, which include nearly two-thirds of the DC plan participant population, in particular have seen significant uptake of auto features.4 Auto-enrollment and auto-escalation are now more of the rule than the exception. Therefore, as employees change jobs they are increasingly likely to have been enrolled in a plan at a previous job with auto features.

So, with that in mind, we’re increasingly likely to see participants experience what we call “auto-decrease.” They start working at a firm, are automatically enrolled at the default contribution rate and are automatically escalated over time; but when they change jobs, they may start over at a lower default contribution rate in the new plan as a result of auto-enrollment.

In a classic safe harbor design—wherein defaulted participants start at 3% and escalate to 6%—many participants may not actually save around 6% over their career as you might assume. If they were a typical worker averaging the median tenure over their working career, their average deferral rate would be much lower. In the hypothetical scenario shown above, the participant would actually end up saving only 4.85% over his or her career—far below the intended 6%.

Hypothetical illustration: The “auto-decrease” zig-zagConsequences of variable tenure

Source: Franklin Templeton Investments based on Craig Copeland, “Employee Tenure Trends, 1983–2014” EBRI Notes, Vol. 36, No. 2 (Employee Benefit Research Institute, February 2015).

3.7 3.9 3.9 3.9 4.0 4.3 4.3

0

1

2

3

4

5

6

’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’04 ’06 ’08 ’10 ’12 ’14 ’83

Median Years with Current Employer

3.5 3.5 3.6 3.6 3.4 3.5

The scenario depicted is hypothetical and is intended for illustrative purposes only.

0%

2%

4%

6%

8%

10%

1 4 7 10 13 16 19 22 25 28 31 34 37 40

4.85

Employment Years

Defe

rral

Per

cent

age

Average years of tenure with employer

4.3 years

Simulation mean contribution in this hypothetical illustration

4.85%


In our view, this instance provides an opportunity for plan sponsors to enact the behavioral finance concept of “active choice.” That is, instead of a traditional “opt-out” scenario, they can provide a simple decision point that elicits some engagement from the participant.5 Plan sponsors can maintain the safety net of auto-enrollment at the standard deferral rate, but communicate directly with participants to give them an opportunity to increase their deferral rate, so that as they enter the plan, they at least have the opportunity to avoid a potential drop in their savings rate.

ROUNDTABLE DISCUSSIONQ: How could a plan sponsor integrate this concept into their plan design with quick enroll?

Christine: This would be an item to put forward to the administrative or benefits committee. For context, quick enroll generally looks like a donation card you might receive from a charity, or it could be a website that a new hire is directed to. It would say, “Yes, enroll me,” and instead of just using the percent that you may have always used—3% or 5% on that card—you could put in 3%, 5%, 7%, 10% or some other easy amount for a participant to write in or click on. This could help them start saving at the rate they might have saved at before at their prior employer. So with quick enroll, it’s very easy, and I think the nice thing about it is the paper you send is very simple and to the point. What we’re trying to do is get people engaged.

Elizabeth: What we’ve seen is that if you give folks multiple choices, they will definitely react to that, and it is a very simple set of steps to get enrolled. One of the interesting things that [Fidelity’s] research found was that plan sponsors were sometimes concerned about making those choices fairly high—like 8, 10 and 12%. But what we found is that whether you put 3/5/7 or 8/10/12, the higher amounts did not necessarily dissuade folks from enrolling at all or seeking a lower amount. What ended up happening was that people, no matter what the choices were, tended to go for the lower numbers. So I think it reinforces this idea that participants want to be led and given good direction.

Q: How else could this idea be implemented?

Elizabeth: Another idea that could get those savings rates up is to pair quick enroll with auto-enrollment. So if somebody doesn’t use the quick enroll, you still have the auto-enrollment as a backup. But you can get them to higher deferral percentages by giving them a few choices, and making those choices higher than you might be comfortable with as your auto-enrollment default.

Christine: I think that’d be a new concept for most committees or plan sponsors we work with; most think of the two as separate. Roughly 50% of employers don’t auto-enroll at all, so they haven’t really had that conversation about the cost of it or the amount they’re comfortable with. And then for those that do auto-enroll, I think they are very much less concerned with any paper aspects, because they’ve bought into the fact there’s inertia in their plan. So I think in our experience, folks aren’t as concerned about using both concurrently, though it certainly could be interesting.

Q: For plan sponsors that use auto-enrollment with newly hired employees, how could you get new enrollees saving at higher rates?

Christine: I think for those 50% or so of employers that do auto enroll, they could use differentiated auto-enrollment rates. So you could set up an age-based auto-enrollment schedule where new hires ages 20–25 could auto-enroll at 3%, 25–30 could go in at 5% and 30–35 at 7%. I think it’s an easy way to improve your plan tomorrow in a fairly straight-forward way.

Drew: Not everyone knows this, but it is indeed legal for plan sponsors to design their plans with different initial default contribution rates for different groups of employees. Of course, they’ll need to satisfy nondiscrimination requirements, but they do have the ability to auto-enroll and auto-escalate different subgroups as they see fit.

Example of “Active choice”

¨ I would like to contribute to my 401(k) at the same rate as I contributed to a former retirement plan (please provide: ____%)

¨ I would like to contribute to my 401(k) at the default contribution rate of X%.*

¨ I would like to opt-out of making contributions to my 401(k), understanding that this may have an adverse effect on future retirement readiness.

*If no selection is made, you will be enrolled at the default contribution rate.


“EASY WIN” 2Target communications to participants ages 50+

For our second “easy win,” we suggest that plan sponsors focus on specific demographics within their plan and target communications to help those participants plan for retirement.

Increasingly, we’ve seen a decline in the percentage of plan sponsors reporting the use of general communications and broad-based education as a primary means of communication with plan participants, while targeted or even personalized communications have increased.6 Instead of trying to target communications to an “average” participant or thinking about participants as a homogenous population, we see plan sponsors slicing and dicing their participant population data to target specific demographics within plans.

We believe that one subgroup of plan participants is particularly well-suited for targeted communications: participants ages 50 and over. According to the 2016 Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, stress about financial issues related to retirement peaks among Americans ages 45–54.7

Retirement-related stress peaks long before retirement

Study results suggest that financial stress can be a productivity killer at work, and one of the biggest financial stresses among employees is preparing for retirement.8 Targeting communications to participant populations most prone to that anxiety can turn this area of concern into an opportunity, since they have more of a reason to pay attention.

Moreover, the widespread notion of the “disengaged participant” is not as applicable with this group. In Franklin Templeton’s recent survey of plan participants aged 50 and over, more than 9 in 10 reported reviewing in-plan investments at least once per year.9 Nearly two-thirds of them also reported rebalancing or making changes in their plan once per year.10 The behaviors of this particular subgroup challenge many of the assumptions commonly made about the so-called “average” plan participant.

Source: Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, 2016.

0%

10%

20%

30%

40%

50%

60%

70%

18–24 25–34 35–44 45–54 55–64 65–74 75+

Perc

enta

ge o

f res

pond

ents

Age of respondents

Concerned about managing retirement income to meet retirement expenses Retirement savings and investments cause stress (moderate/signi�cant) Concerned about outliving assets or making major sacri�ces to their retirement strategy today


As a specific idea, we propose engaging participants near their 50th birthday about their eligibility for catch-up contributions (if allowed under plan) and also using this milestone birthday as an opportunity to re-engage participants and encourage additional savings.

For participants who have already reached the top of the auto-escalation ladder, this may nudge them to save more. For participants saving well below the 402(g) deferral limit, this can serve as a signal that additional savings may be a good idea.

This idea is only one example of targeting communication to specific participants around a “milestone” event. These moments can serve as effective opportunities to connect with participants and begin a conversation about saving to support retirement outcomes.

ROUNDTABLE DISCUSSIONQ: What should plan sponsors consider as they plan targeted communications around something like catch-up contributions?

Christine: I think a lot of employers focus on a catch-up communication mailing, but it’s the milestone that’s important to highlight. It’s like driving at 16 or drinking at 21. By age 50, we know people are thinking about retirement, so it’s a natural connection point.

Elizabeth: I think that the reference point to the milestone is important, but perhaps more important is making sure that you’re really addressing the right people with the right message. So as you think about your population, if you have employees that, even at 50, are still not contributing to the match level, that’s really where you would still want to start. You can use the milestone as a reminder, but for that group you should really be focused on getting them up to the maximum match level. To me, the important thing is that it’s not just a single message. You can carve people into several groups, and then keep that cadence of messaging growing. Plan sponsors can take advantage of the technology that’s available to send different messages to different people based on their actual behavior.

Q: What are some of the specific subgroups of participants in their 50s plan sponsors should consider, and what would be the appropriate messaging for them?

Christine: I think the easy ones are the two ends of the spectrum. You always want to make sure people are maxing out to their match eligibility, so that’s a message that continues. And then at the other end of the spectrum, if they are near or at the 402(g) deferral limit, it’s good to reinforce their eligibility for catch-up contributions.

Drew: Beyond the two groups Christine mentioned, there are a couple of other categories of participants that the milestone birthday is a chance to reach out to. One would be people who have reached the top of the auto-escalation ladder. If you’re a plan with auto-enrollment and auto-escalation features, you can look at people who have enough tenure, have stayed on the escalation ladder and have topped out at the plan’s maximum, and then communicate with that cohort and invite them to save beyond the top of the escalation ladder. Similarly, target the potentially overlooked participants. Many plans have added auto features since the PPA, but some employees who were auto-enrolled when the plan added auto-enrollment were not auto-escalated. And some employees actually predate both auto-features in the plan. And many plans have been reluctant to do a re-enrollment or sweep, so that’s a category where sponsors can reach out to their participants and invite them to participate at higher levels as well.

Source: Franklin Templeton IRIS Web Survey. The IRIS Web Survey was a 15-minute online survey administered during March 2015. All respondents were working (full-time or part-time) or previously worked for a large employer (1,000 employees or more), with at least $100,000 in DC plan balances (including current or former plans). The survey included 455 DC plan participants, ages 50-80.

review in-plan investments at least once per year

91%rebalance or make changes at least once per year

62%

Participants over 50 are often more engaged with their plans


“EASY WIN” 3Offer flexible payout options for participants in retirement

13%Only 13% of plans allow terminated participants to take ad hoc partial distributions11

Our third “easy win” for plan sponsors suggests structuring the plan in a way that provides flexibility for drawing down plan assets to meet retirement expenses.

If necessary, the plan document can be amended to permit terminated participants—particularly those who are retired—to take ad hoc partial distributions. This would enable participants who are over 59½ and separated from service to choose the amount, timing and source of any plan distributions.

According to one data set, a mere 13% of plans allow for ad hoc partial distributions.11 That means that the vast majority of plans may be pushing participants—particularly those early in retirement—to make suboptimal decisions about how they manage their retirement assets to meet retirement expenses. For instance, limited distribution options may complicate the process of using DC plan assets to meet early retirement expenses and delay filing for Social Security benefits. A lack of flexibility in distributions may also be a significant factor in the high rates of rollovers and “cash outs” soon after separation from service.

Survey results suggest that plan participants generally, but especially those closer to retirement, are looking to their employer for tools and advice on payout strategies.14 As was referenced earlier, a majority of survey respondents in their 50s were concerned about managing retirement income to meet retirement expenses.15

69%

Most plan sponsors agree that participants should leave assets in the plan at retirement and draw down over time12

We consider this issue to be highly important due to the apparent disconnect between plan sponsor intentions and plan realities. Surveys suggest that most plan sponsors believe their plan should continue to serve the needs of retirees. According to a Cerulli survey, 69% of plan sponsors intend for participants to leave assets in the plan and draw down over time.12 Another study reflects a major shift among plan sponsor views over the last few years, as they increasingly believe the core purpose of their plan should be to serve as an income source during retirement.13

Source: “Retirement distribution decisions among DC participants—An update,” Vanguard, September 2015.

Source: The Cerulli Report, “U.S. Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans,” Cerulli Associates. Only plan sponsors to plans with over $100 million in DC assets were surveyed.


A great deal of complexity exists for participants approaching and in retirement, from managing investment risk to Social Security filing strategies to fitting the plan into their combined household retirement income plan. No one solution will be right for everyone, and selecting and implementing in-plan retirement income products is a separate matter. But plan sponsors can take action today and address the plan rules that may unnecessarily limit the options of participants entering the payout phase.

ROUNDTABLE DISCUSSIONQ: How can plan sponsors approach plan changes to allow for more flexible distributions?

Christine: This is generally something that would fall to a benefits committee. It could be quite simple, or it could be a little trickier if it involves amending the plan rules. There are still a fairly significant number of plans today that, in their plan rules, say the distributions from the plan are either lump sum or installment only. So you can make a plan participant-friendly if you have more flexible language in your plan document. We’ve made enrollment easy. We’ve made investment transfers easy. We’ve made loans easy. But the distribution is that last part that is still too hard for participants in too many plans.

Elizabeth: We would suggest a dialogue within your committee and a review of the plan’s rules, because I see that often plan sponsors want the money to stay in the plan, but they often don’t realize they have a disconnect in their plan rules. And then you can make incremental steps. You don’t have to be perfect. The solutions in this space, as in other parts of the DC marketplace, will evolve. And you can just simply make additions as they become available.

Q: What are the fiduciary implications of helping participants take distributions?

Drew: Our focus here is not on advising participants or telling them what the right answer is. We’re talking about adjusting the plan structure to administratively accommodate a variety of payout strategies, which should not result in any increase in fiduciary responsibility.

Elizabeth: I agree with Drew. Making the plan as flexible as possible is not necessarily taking on fiduciary duties. With that said, any specific conversations that start happening with participants about money-out transactions and advising on what they should do will become a fiduciary transaction.

Q: How should plan sponsors think about retired participants and keeping their assets in the plan?

Elizabeth: Today we see plans that have the mindset of participants either staying in the plan or rolling over. But a perfectly appropriate situation for many people might be to do a partial rollover—for instance, if they want to use some of their assets to purchase an annuity but leave the rest in the plan. So those that retire early and need access to this money may also be pigeonholed by a plan that’s too inflexible with distributions.

Christine: As a consultant, we think participants are better off leaving their assets in the plan than rolling it over because of the benefit of institutional pricing and investment oversight.

Drew: Making your plan friendlier to partial withdrawals doesn’t mean you’re stuck with the participant forever. It’s not automatically the case that you’ve entered into some sort of permanent relationship with that participant. Yes, it might make sense for participants to stay in the plan initially, and then at some point they may want to consolidate assets. But we shouldn’t force them into that decision just because they need a partial withdrawal in the early phase of retirement, particularly if our intent is to allow them to be able to retain some assets in the plan.


CONCLUSIONTodd Rose makes a bold claim in The End of Average: “Any system

designed around the average person is doomed to fail.”16 The increasingly

targeted approach we are taking to plan design and participant

communications indicates that we are far from doomed. But as he

explains, it is ingrained in us to think that the average “represents some

kind of objective reality about people.”1 In the DC world, it can perpetuate

unhelpful assumptions about participants that cloud our approach

to them—such as that they are disengaged; unable to save more; or

incapable of handling any complexity. And it masks the reality that no

two participants are identical, and perhaps not a single participant is

truly “average.”

Late-career participants in particular have highly individualized retirement

challenges and sources of retirement savings. No circumstance is

“typical.” The solutions we offer should be flexible enough to account

for this variability, while seeking to address particular shared goals and

challenges among participants.


Important legal informationUnless otherwise noted, the views and opinions expressed are those of the author or individuals quoted, as applicable, as of the date of the article, may change without notice, and will not be updated to reflect subsequent developments. Such views and opinions do not necessarily represent those of Franklin Templeton Investments (“FTI”). Views and opinions expressed by individuals who are FTI employees may differ from those of other FTI employees. Certain individuals quoted may be employees of firms not affiliated with FTI, and such individuals are not authorized to make representations or commitments for FTI. FTI does not endorse or recommend any views or opinions expressed in this article.

FTI does not provide legal or tax advice. This material is general in nature, provided for informational and educational purposes only; it does not provide a complete analysis of every material fact. It should not be considered or relied upon as investment, legal, or tax advice, as a substitute for legal or tax counsel, or as an investment recommendation within the meaning of federal, state, or local law. It is not intended to serve as the primary basis for financial or retirement planning decisions. Laws and regulations are complex and subject to change, which can materially impact results.

This article does not provide fiduciary investment advice to any plan, plan fiduciary, participant or other party. It provides only general educational information and cannot be relied on to provide advice to any particular plan regarding the selection or monitoring of investment options or general plan structure or features. Plan fiduciaries should seek investment advice, legal counsel or other assistance from appropriate, qualified advisers.

Statements of fact are from sources considered reliable, but no representation or warranty is made as to their accuracy, completeness or timeliness. FTI makes no warranties with regard to information in this article or results obtained by its use, and disclaims any liability arising out of the use of, or any tax position taken in reliance on, such information.

Past performance does not guarantee future results. All financial decisions, strategies and investments involve risk, including possible loss of principal.

1. Todd Rose, The End of Average (New York: HarperOne, 2016), 10.2. Source: Franklin Templeton IRIS Web Survey. The IRIS Web Survey was a 15-minute online survey administered during March 2015. All respondents were working (full-time or part-time) or previously worked for a large employer (1,000 employees or more), with at least $100,000 in DC plan balances (including current or former plans). The survey included 455 DC plan participants, ages 50–80.3. Source: Franklin Templeton Investments based on Craig Copeland, “Employee Tenure Trends, 1983–2014” EBRI Notes, Vol. 36, No. 2 (Employee Benefit Research Institute, February 2015).4. Source: Franklin Templeton Investments based on PLANSPONSOR Defined Contribution (DC) Survey, prepared in February 2016. The PLANSPONSOR Defined Contribution (DC) Survey results incorporate the responses of 5,109 plan sponsors from a broad variety of U.S. industries. Of the 5,109 respondents, 4,406 completed sufficient asset level and plan design information to be included.5. For further reference: Carroll, G., Choi, J., Laibson, D., Madrian, B., & Metrick, A. (2009). Optimal defaults and active decisions. Quarterly Journal of Economics, 124, 1639-1676. Available at: https://dash.harvard.edu/bitstream/handle/1/4686776/Laibson_OptimalDefaults.pdf?sequence=26. Source: J.P. Morgan Plan Sponsor Research 2013, 2015. Note: 2015 Total n=756; 2013 Total n=796. Survey response to the question: “Which of the following best describes your plan’s approach to participant communications?” (multiple responses accepted)7. Source: Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, 2016. The 2016 Franklin Templeton RISE survey was conducted online among a sample of 2,019 adults comprising 1,011 men and 1,008 women 18 years of age or older. The survey was administered between January 4 and 18, 2016 by ORC International’s Online CARAVAN®, which is not affiliated with Franklin Templeton Investments.8. Source: PwC. “2016 Employee Financial Wellness Survey.” http://www.pwc.com/us/en/press-releases/2016/pwc-financial-wellness-survey-press-release.html9. Source: Franklin Templeton IRIS Web Survey.10. Source: Franklin Templeton IRIS Web Survey.11. Source: “Retirement distribution decisions among DC participants—An update,” Vanguard, September 2015.12. The Cerulli Report, “U.S. Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans,” Cerulli Associates. Only plan sponsors to plans with over $100 million in DC assets were surveyed.1.3 Source: “Metlife 2016 Lifetime Income Poll,” Metlife, September 2016.14. Source: Franklin Templeton IRIS Web Survey.15. Source: Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, 2016.16. Rose, The End of Average, 234.

For Use with Financial Professionals and Plan Sponsors Only / Not for Use with Plan Participants© 2016 Franklin Templeton Investments. All rights reserved. FTIN WP 12/16

Franklin Templeton Distributors, Inc.One Franklin ParkwaySan Mateo, CA 94403-1906(800) DIAL BEN® / 342-5236franklintempleton.com

Leveraging the power of re-enrollment to drive change

Subtitle/Event name | Date

Name, Title, Group

Name, Title, Group

1

The Pension Protection Act of 2006 laid a strong foundation

Aimed to bolster the U.S. retirement system

Encouraged the use of automatic enrollment and automatic contribution escalation

Offered fiduciary protection for defaulted assets— QDIA

2

And that lack of confidence is warranted…

Do-it-yourselfers’ equity positions vs. J.P. Morgan SmartRetirement glide path

Source: J.P. Morgan retirement research. Representative sampling of 3,000 Do-it-yourself participants; data as of December 31, 2016. For illustrative purposes only.

88% of participants fall outside the range of equity exposure generally considered

appropriate for their age

3

Re-enrollment is one action plan sponsors can take that is aimed at helping move the

needle toward better participant outcomes

What is re-enrollment?

Participants are given the opportunity to review and re-affirm their investment selections.

If they do not make a selection, their existing assets and future contributions are invested into the plan’s qualified

default investment alternative (QDIA) based on their date of birth.

Before conducting a re-enrollment a plan sponsor must engage in a prudent process for determining whether a

re-enrollment is appropriate for the plan and its participants.

4

Misperception #1

“If I conduct a re-enrollment my participants will push back.”

Source: J.P. Morgan Plan Participant Research 2016.

5

Misperception #2

“A re-enrollment is too much of a fiduciary risk”

Source: J.P. Morgan Plan Sponsor Research 2015.

6

Misperception #3

“My plan is well diversified at an aggregate level, so everything is fine.”

Source: J.P. Morgan Plan Participant Research 2016; J.P. Morgan Plan Sponsor Research 2015; J.P. Morgan retirement research 2015.

7

Misperception #4

“I added target date funds to the plan’s lineup but there is nothing I can do about my participants not taking action”

Source: J.P. Morgan Plan Sponsor Research 2015; J.P. Morgan retirement research 2016.

Add-to-menu

Safe harbor protection is only available

for assets that are defaulted into the

target date funds

Re-enrollment

Plan sponsor may receive safe harbor

protection for the assets that are

defaulted into the QDIA

8

Best Practices and Case Studies

9

PLAN LEVEL ASSET ALLOCATION(pre and post re-enrollment)

OVERVIEW

PARTICIPANT LEVEL RESULTS

Re-enrollment case study: Healthcare plan

Source: J.P. Morgan retirement research 2015. The information shown is for illustrative and discussion purposes only.

24%

82% 77% 74%

48%

13% 17% 18%

11%

2% 3% 3%17%

2% 2% 2%

Pre re-enrollment

Post re-enrollment

One year postre-enrollment

Two year postre-enrollment

Risk Based

Stable Value

Bonds

Equity

TDF

93%

% participants in TDF post re-enrollment

4%

96%

Defaulted into TDF Actively selected TDF

Election as a % of TDF investor population

Two years later, 74% of participants who

defaulted into a TDF

are still invested in one.

Plan demographics Industry: Healthcare

AUM: $1.25 Billion

Participants: 29,522

Re-enrollment date: October 2013

10

Conclusion

Key Benefits for Participants:

Potential for improved asset allocation

Help for both new and existing participants

Less emotion in investing when plan QDIA is a target date fund

No restrictions on those who want investment flexibility

Key Benefits for Plan Sponsors:

Potential for stronger protection from investing liability

Greater confidence employees will stay on track to a successful retirement outcome

Enhanced ability to focus on helping participants with the educational basics of saving and financial planning

J.P. Morgan can help with:

Professional guidance through each stage of evaluation and implementation of target date funds

Factors to consider when determining if re-enrollment is a prudent strategy for your plan

Compliant and effective participant communications strategies to support plan sponsors efforts

11

Disclosures

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a

recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended

purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of J.P. Morgan Asset

Management, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all.

Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making

any investment or financial decisions, you should seek individualized advice from your personal financial, legal, tax and other professional advisors that take

into account all of the particular facts and circumstances of your own situation.

TARGET DATE FUNDS: Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally,

the asset allocation of each fund will change on an annual basis, with the asset allocation becoming more conservative as the fund nears the target retirement date. The

principal value of the fund(s) is not guaranteed at any time, including at the target date.

IMPORTANT DISCLOSURES FOR PERSONAL RATE OF RETURN METHODOLOGY. Rate of return is aggregated by investment strategy and calculated based on

the Internal Rate of Return methodology. Ranges of return are based upon the difference between the highest and lowest standardized rate of return associated with

each investment strategy among such participants for the time periods shown. Services associated with the identified investment strategies were available as of the last

day of the measurement period, but may not have been available throughout the measurement period.

Target date fund users are participants with at least 70% of their account balance invested in target date funds as of the first and last day of the measurement period. Do-

it-yourselfers are participants with less than 70% of their account balance invested in target date funds as of the first and last day of the measurement period and also

includes participants using online advice services, if applicable. Self-directed brokerage users are participants with at least $1 in a brokerage account as of the last day of

the measurement period.

Target date fund users are participants with at least 70% of their account balance invested in target date funds as of the first and last day of the measurement period. Do-

it-yourselfers are participants with less than 70% of their account balance invested in target date funds as of the first and last day of the measurement period and also

includes participants using online advice services, if applicable. Managed account users are participants with at least 70% of their account balance managed by a

discretionary investment service as of the first and last day of the measurement period. Brokerage users are participants with at least $1 in a brokerage account as of the

last day of the measurement period.

IMPORTANT DISCLOSURES FOR SCATTERPLOT CHART METHODOLOGY: “Do-it-yourselfers” are participants with less than 70% of their account balance invested

in target date funds as of the day of the measurement period and also includes participants using online advice services, if applicable. The analysis excludes self-directed

brokerage and managed account users.

12

Disclosures

Contact JPMorgan Distribution Services at 1-800-338-4345 for a fund prospectus. You can also visit us at

www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as

charges and expenses of the mutual fund before investing. The prospectus contains this and other

information about the mutual fund. Read the prospectus carefully before investing.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which

are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness.

References to future returns are not promises or even estimates of actual returns a client portfolio may achieve.

J.P. Morgan Asset Management is the marketing name for the investment management businesses of JPMorgan Chase & Co. and its affiliates

worldwide. J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc.; member of FINRA/SIPC.

© 2017 JPMorgan Chase & Co. All rights reserved

Aon Risk Solutions Financial Services Group | A Division of Aon Risk Solutions, Inc. 5555 San Felipe | Houston TX 77056

2017 Whitley Penn Employee benefits Conference - Fiduciary Liability Marketplace Overview

June 8, 2017

Aon Risk Solutions | Financial Services Group Proprietary & Confidential | June 2017 2

Fiduciary Market Snapshot

Ample, highly-rated capacity remains available

Broad coverage continues to expand

Retentions remain stable overall

Overall pricing remains flat to slightly down

Excessive fee litigation is the top underwriting concern

AIG and Chubb continue to lead the vast majority of programs; together, they have approximately 30% of the market share

AXIS, Travelers, CNA, Hartford and XL also have a significant presence

Some insurers are seeking to expand their limits in order to capture more premium

Nevertheless, most Fiduciary Liability markets typically do not offer more than $15M in total capacity on any one program

Broad coverage is led by Berkshire Hathaway’s new primary form

Settlor capacity is now standard among primary insurers

Affordable Care Act “gap” coverage is also readily available (to address a company’s role in advising employees relative to healthcare exchanges, which may not fall within the policy’s definition of Plan)

Base retentions remain low

Many insurers continue to require a higher retention for employer securities claims

Some insurers are beginning to push for higher retentions for excessive fee claims, particularly for Financial Institutions that sponsor plans investing in proprietary funds

Market lags closely behind D&O market

Primary pricing is relatively stable

Excess pricing is extremely competitive

Guaranteed renewals (e.g., AIG) and 2-year deals (e.g., Chubb, CNA, Hartford, Travelers) are becoming more commonplace

Insurers remain concerned over employer stock drop cases, as SCOTUS has ruled that ESOP plan fiduciaries are not entitled to a presumption of prudence when investing in employer securities

However, insurers’ major worry has shifted to the increased frequency and severity of excessive fee litigation

These concerns have been heightened in light of the recent SCOTUS ruling that establishes a “rolling” 6-year statute of limitations under ERISA

Capacity Coverage Retentions Pricing Exposures


Fiduciary Liability Legal Trends – Excessive Fee Litigation

401(k) Plan Fee Litigation 401(k) plan participants have been

paying an increasing share of the administrative fees through asset-based expenses deducted from investment returns. How does an employer know whether the fees in their employees’ 401(k) plans are reasonable?

Many employers choose their 401(k) provider based on an already established relationship with an insurance or payroll company, or an executive’s current financial advisor

A Deloitte Consulting Study found that the typical participant is in a 401(k) plan with annual fees amounting to 0.67% of assets under management – This would amount to $6,700 per

year for a plan with $1M in assets

1.27%

0.82%

0.57%

0.37%

0.00% 0.50% 1.00% 1.50%

$1M - $10M

$10M - $100M

$100M - $500M

$500M+

All-in Fee asPercentage ofAssets

Source: Deloitte Consulting Study for the Investment Company Institute

Median Annual Fees for Plans (by Total Plan Assets)

Sources: “401(k) Excessive Fee Litigation” - Steve J. MacGillivray, Eric F. Gladbach Workplace Class Action Litigation Report - Seyfarth Shaw

4 Aon Risk Solutions | Financial Services Group Proprietary & Confidential | June 2017

Fiduciary Liability Legal Trends – Excessive Fee Litigation

401(k) Plan Fee Litigation Wave of class action lawsuits alleging fees associated with employer 401(k) plans were excessive and in violation of

ERISA were filed by the plaintiff’s bar beginning in 2006; many of these cases are currently being settled – For a listing of recent settlements, see following slide

Financial institutions that offer their own proprietary funds as a 401(k) option are viewed as a greater exposure – Ameriprise and MassMutual were sued on the basis they breached their fiduciary duty to their employees by

profiting from their proprietary funds and recordkeeping charges

In the wake of the Tibble-Edison decision, it seems probable that courts will see more claims alleging that fiduciaries failed to monitor their plan’s internal costs – “We fully anticipate an increase in claims alleging fiduciaries imprudently retained investment options,” the Skadden

law firm stated, “particularly where the original decision to offer the challenged investments under the plan was made more than six years before the filing of the suit.”

Sources: “401(k) Excessive Fee Litigation” - Steve J. MacGillivray, Eric F. Gladbach Workplace Class Action Litigation Report - Seyfarth Shaw


Fiduciary Liability Legal Trends – Excessive Fee Settlements

Case Name Date Settled Settlement Amount

Abbott v. Lockheed Martin 02/2015 $62M

Spano v. Boeing 08/2015 $57M

Nolte v. Cigna Corp. 10/2013 $35M

Kruger v. Novant Health 05/2016 $32M

Beesley v. International Paper 10/2013 $30M

Krueger v. Ameriprise Financial 03/2015 $27.5M

Kanawi v. Bechtel 03/2011 $18.5M

Martin v. Caterpillar, Inc. 11/2009 $16.5M

Will v. General Dynamics Corp. 11/2010 $15.15M

Tussey v. ABB, Inc. 03/2014 $13.4M (note: on appeal to U.S. Supreme Court)

George v. Kraft Foods 06/2012 $9.5M

Beverly Enterprises 04/2010 $6.5M

Braden v. Wal-Mart Stores 03/2012 $3.5M (Merrill Lynch contributed an additional $10M towards settlement)

Sources: AIG; www.fiduciarycounselors.com; Groom Law Group; www.plansponsor.com; Investment News

http://www.fiduciarycounselors.com/

http://www.plansponsor.com/


Fiduciary Liability Legal Trends –

Abbott et al v. Lockheed Martin (Feb. 2015) Lockheed agreed in February to a $62M settlement in a 2006 lawsuit with employees and retirees who claimed the

company breached their fiduciary duty by investing their 401(K) savings in excessively costly funds

The company further agreed to initiatives to improve its plans by: – Filing a notice with the court every year; assuring compliance in the settlement (provide 5500s, amongst other

documents) – Sharing information on assets held and performance of certain funds – Confirming amounts of cash equivalents and money-market-equivalents in company stock funds and stable value

fund, respectively – Filing monthly reports from Morningstar summarizing performance – Seeking bids from at least three third-party record-keepers, each of which need to meet certain criteria – Offering funds with lowest expense ratios and considering use of investment trusts or separately managed

accounts

Both parties agree the settlement (less than 5% of plaintiffs’ claimed damages) is not an admission of wrongdoing

Summary of a Recent Excessive Fee Settlement

Source: Investment News, February 2015


Fiduciary Liability Legal Trends – Statute of Limitations

Tibble v. Edison International (May 2015) Emanating from a 2007 excessive fee lawsuit in a 401(K) plan,

the Supreme Court ruled on May 18th in a rare 9-0 decision, stating that plan sponsors have a continuing duty to review investments in retirement plans and to decide whether or not to keep or sell them

Defendants had claimed the plaintiffs are subject to a statute of limitations, requiring them to bring suit within 6 years of the last action constituting the breach of fiduciary duty

Supreme Court case centered on two legal questions: (1) whether the statute of limitations on fiduciary violations protects fiduciaries from keeping underperforming investments in funds for more than 6 years, and (2) whether fiduciaries violated plan documents by offering higher-cost retail share class funds when lower-cost institutional class investments were available

Vacating the Ninth Circuit’s decision, the US Supreme Court held that plan fiduciaries’ duty of prudence includes a continuing duty to monitor investments and to sell or eliminate the option to select investments that are imprudent for plan participants

The ruling stated that even though the initial investment decision was made outside of ERISA’s six-year statute of limitations, the suit was not time-barred because fiduciaries have an ongoing duty to monitor investments for as long as they are in the plan

Impact for Fiduciaries / Best Practices The plaintiff's bar will be scrutinizing actively managed funds in

retirement plans, regardless of when it was initially included as an investment option; the potential liability to plan sponsors who continue to keep these funds in retirement plans could be huge

Fiduciary Liability insurers now require insureds to answer additional underwriting questions about their fee-related practices

Experts recommend that fiduciaries take the following steps: – Engage in “procedural prudence”; at a minimum, plan

fiduciaries should meet regularly to consider all plan investments, however long-standing or revered, and document such meetings

– Adopt procedure for regular monitoring of plan investment options; procedure should be regular, systematic and reasonable

– Follow adopted procedure closely – Keep a detailed written record of the implementation of and

compliance with that procedure

Sources: Proskauer Rose LLP - “U.S. Supreme Court Says “Regular Review” of ERISA Investments Required” by Anthony S. Cacace AIG - “The Tibble vs. Edison Decision” by Rafael Droz Investment News, February 2015


Fiduciary Liability Legal Trends – “ERISA Tagalong Claims”

ERISA Retirement Plan Stock Drop Cases (“ERISA Tagalong Claims”) 200+ of these cases have been filed

Cases typically rely on the same facts as the parallel D&O securities lawsuits, but with less onerous pleading requirements

ERISA plaintiffs do not need to prove intentional wrongdoing, and they do not need to plead the facts of their case with as much detail as securities plaintiffs

In the past, fiduciaries of retirement plans argued that their decisions were protected by the “Moench Presumption” – i.e., a rebuttable presumption that they acted prudently in offering company stock as an investment option where the plan required (e.g., ESOPs) or strongly encouraged the fiduciaries to offer company stock as an investment option – Many appellate courts applied the Moench Presumption, though at different phases of the litigation

In June 2014, the U.S. Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer, holding that – ESOP fiduciaries are not relieved of the duty of prudence (except as to diversification), thus rejecting the Moench

Presumption. However, the Supreme Court also held that: • Fiduciaries are permitted to rely upon the market’s valuation of a publicly traded stock (absent “special

circumstances”) • Fiduciaries are not required to violate the securities laws when privy to insider information

Sources: Sara Pikofsky, In Re: Citigroup ERISA Litigation: Has the Death Knell Sounded for Stock Drop Cases?, The Metropolitan Corporate Counsel (February, 2012) McGuire Woods LLP, New Life for Stock-Drop Lawsuits: Sixth Circuit Rejects Moench Presumption at Pleading Stage (February, 2012) Troutman Sanders, The Fall of the Moench Presumption: The Supreme Court’s Unfavorable (yet Favorable) Ruling for Fiduciaries in Fifth Third Bancorp v. Dudenhoeffer (July 2014)


Fiduciary Liability Legal Trends – Proposed Definition of Fiduciary

Proposed Expansion of the Definition of Fiduciary The Department of Labor recently proposed substantial revisions to the regulation governing at what point a person

who provides “investment advice” to a benefit plan regulated by ERISA becomes a “fiduciary”

The existing regulation, in place since 1975, includes several provisions that prevented certain financial services firms from becoming “fiduciaries” of their clients’ plans. Historically, to be a fiduciary, “investment advice” must be: – Ongoing – Individualized in light of the plan’s needs – Pursuant to an agreement that it will constitute a primary basis for investment decisions

The revised-definition would treat virtually anyone who receives compensation for making investment-related recommendations to an ERISA plan, IRA, plan participant, or beneficiary as a fiduciary

Impact of the New Definition: – This proposed change could expose investment advisors to more litigation

• The ERISA Exclusion within an investment management professional liability policy should be limited to the Insureds’ plans sponsored for their own employees

– While not directly impacting plan sponsors and in-house fiduciaries, some experts suggest that the proposed rule will place both under increased scrutiny to monitor their investment advisors/managers for any breaches of duty and that the change may increase the plan sponsor’s exposure to co-fiduciary liability

Following a 90-day window for commentary on the new definition, public hearings were held in August 2015; the DOL’s issuance of final rules is pending – The proposed rules will not become effective until 60 days after the final rules are published in the Federal Register,

and the requirements of the final rules will not become generally applicable until 8 months thereafter

Sources: “ERISA’s ‘New’ Definition of Fiduciary” – Richard D. Landsberg, JD “DOL Catches Many in Expanded Fiduciary Net” – Debevoise & Plimpton

10 Aon Risk Solutions | Financial Services Group Proprietary & Confidential | June 2017

Fiduciary Liability – Settlor Capacity Recap

Federal Insurance Co. v. IBM (2012) New York high court held that neither the primary policy

nor Federal’s follow-form excess policy provided coverage for a class action lawsuit because IBM was sued in a “settlor” capacity, as opposed to a “fiduciary” capacity

IBM clearly illustrates the importance of understanding the terms of the policy and any unexpected gaps in coverage

What is Settlor Capacity? When fiduciaries make decisions in their business-like

capacity, rather than in their fiduciary capacity, they are said to be acting in their “settlor” capacity

Examples include: – Establishment of a plan – Determination of group of covered employees – Determination of benefits to be provided and – Determination of plan amendment or plan termination

How can we get coverage? Amend the Definition of Wrongful Act to include

“settlor” acts

Who will provide the coverage? Full coverage: AIG / Berkshire Hathaway / QBE / Chubb

(language is not Aon preferred)

Defense Costs Only: AXIS / Travelers

Most excess insurers are comfortable following-form to this coverage grant


Fiduciary Liability – Best Practices Coverage Review

ABC’s Policy Coverage Provision Recommended Wording

□ Definition of Administration Extend to multi-employer plans (if applicable)

□ Definition of Administration Advice related to health care exchanges under the Affordable Care Act

□ Definition of Application 12-month limitation on publicly available documents

□ Definition of Claim Formal and informal investigations

□ Definition of Insured Plan committee members

□ Definition of Loss Defense cost exception for excluded matters

□ Definition of Plan Qualified and Non-Qualified Plans

□ Definition of Plan No ESOP exception

□ Definition of Wrongful Act Settlor capacity

□ Fines and Penalties Coverage (with no applicable retention)

Voluntary Compliance Loss; Section 502(c),(i) and (l); Pension Protection Act, HIPAA; Healthcare Reform; Section 4975

□ Coverage Extension Independent Fiduciary Fees

□ Coverage Extension Managed Care Coverage


Fiduciary Liability – Best Practices Coverage Review

ABC’s Policy Coverage Provision Recommended Wording

□ Benefits Due Exclusion Investment loss exception

□ Conduct Exclusions Trigger: Final, non-appealable adjudication in the underlying action

□ Discrimination Exclusion Employee benefit law exception

□ Removed Exclusions Contract, pollution, return of assets, failure to collect contributions due

□ Severability of Exclusions Severability applies to all exclusions

□ Severability of Application Full individual severability, limited group imputes to the organization and plans

□ Non-Rescindable For non-indemnifiable loss

□ Advancement Provided within the retention if Plan Sponsor fails or refuses to be provide for any reason

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