ERISA Retirement Plan Investment Management Agreements ...media.straffordpub.com/products/erisa-retirement...Sep 17, 2015 · assets under management. May be permissible under ERISA,

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Presenting a live 90-minute webinar with interactive Q&A

ERISA Retirement Plan Investment

Management Agreements: Guidance

for Plan Sponsors to Minimize Risks Selecting 3(38) Investment Managers, Negotiating and

Drafting Agreements, Monitoring Manager Performance

Today’s faculty features:

THURSDAY, SEPTEMBER 17, 2015

Alexander P. Ryan, Of Counsel, Groom Law Group, Washington, D.C.

Todd A. Solomon, Partner, McDermott Will & Emery, Chicago

Joseph K. Urwitz, Partner, McDermott Will & Emery, Boston

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

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Todd A. Solomon [email protected]

Joseph K. Urwitz [email protected]

What is an Investment Manager?

ERISA § 402(c)(3) provides that a named fiduciary “may appoint an investment manager or managers to manage (including the power to acquire and dispose of) any assets of a plan.”

“Investment manager” defined under ERISA §3(38) as a fiduciary who:

– Has the power to manage, acquire or dispose of plan assets;

– Acknowledges in writing that it is a plan fiduciary; and

– Is an investment advisor, bank or insurance company qualified to manage, acquire or dispose of plan assets.

• Additional rules apply if investment manager is an investment advisor.

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Managed Accounts and Investment

Policies

Investment manager manages “managed account”

– May include all or a portion of a plan’s assets.

Like other plan fiduciaries, investment manager must adhere

to provisions of plan documents except to the extent

inconsistent with ERISA.

Plan documents include plan investment policy.

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Managed Accounts and Investment

Policies (Contd)

Investment policies generally contain a number of provisions

relevant to investment managers, such as:

– Plan objectives and investment philosophies;

– Parameters regarding diversification of plan investments;

– A list of permitted investment and prohibited transactions;

– General guidelines regarding the percentage of assets to be invested

in various asset classes such as equities, fixed income investments,

real estate, etc.

And Many Others!

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Management Fees

Fees to investment advisors at fixed intervals (such as

monthly or quarterly).

Usually a fixed percentage of the fair market value of the plan

assets under management.

Must be reasonable compensation under ERISA § 408(b)(2):

– Services must be necessary for establishment of the plan;

– Arrangement for the provision of services is reasonable; and

– No more than reasonable compensation is paid for the services.

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Management Fees (Contd)

To be reasonable, arrangement must permit termination on “reasonably short notice”:

– Facts and circumstances determination.

– Factors in determining reasonableness of length include:

• The scope and quality of services provided;

• The relationship between the parties to the agreement;

• The cost of services relative to the market; and

• The existence of service providers who could perform similar services.

– I generally advise clients to have a 30 day termination period if possible and that longer than 90 days should generally be avoided.

Investment managers generally must provide plan fiduciaries certain disclosure “reasonably in advance” of entering into, extending or renewing a contract or arrangement.

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Management Fees (Contd)

Disclosure includes:

– Services to be provided;

– Acknowledgement of fiduciary status (and registered investment

adviser status, if applicable);

– Compensation the manager reasonably expects to receive in

connection with the services as direct compensation, indirect

compensation, compensation relating to contract termination and

certain other fees; and

– Certain disclosures relating to recordkeeping, if the investment

manager will also be providing recordkeeping services.

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Incentive Fees

Fees charged based on percentage increase in the value of

assets under management.

DOL concerned that investment managers might “time” sales

to realize a profit leading to an incentive fee.

DOL Advisory Opinions address this concern:

– Incentive fees were based on the increase of the value of assets over

a period (whether or not realized);

– If value of assets decreased, plan would receive a credit against

assets under management fee or refund of previous incentive fees;

– Plans had assets under management of $50 million+.

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Investment Management Agreements – Key Terms and Considerations

Alexander P. Ryan

Groom Law Group, Chartered

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Key ERISA Terms and Considerations – Introductory Comments

Investments are a key aspect of employee benefit plans.

Plan sponsors need to think carefully about how to document their investment management service relationships.

What do the agreements say – and how do they say it?

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Key ERISA Terms and Considerations – Proper “Investment Manager” Appointment

An ERISA “investment manager” appointment is perhaps the most important term in an investment management agreement.

A properly-appointed ERISA section 3(38) “investment manager” provides protection to the plan sponsor.


ERISA section 405(d)(1) provides...”[i]f an investment manager...has been appointed under section 402(c)(3)...no trustee shall be liable for the acts or omissions of such investment manager...or be under an obligation to invest or otherwise manage any asset of the plan which is subject to the management of such investment manager.”

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Keep in mind the requirements of ERISA section 3(38):

Investment manager must be a “registered investment adviser” under the Investment Advisers Act of 1940;

Or must be an investment adviser registered at the state level, or a bank, or an insurance company;

Manager must acknowledge in writing its ERISA fiduciary status; and

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Manager must have discretionary authority over plan assets committed to it (i.e., “...the power to manage, acquire, or dispose of any asset of a plan”).

Practice point: Be sure investment manager does in fact have discretionary authority and is not acting in merely an “advisory” capacity (i.e., solely as a fiduciary under ERISA section 3(21)(A)(ii)).

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Key ERISA Terms and Considerations – ERISA Standard of Care and Fiduciary Duties

ERISA fiduciaries are required to adhere to certain basic duties set forth in ERISA section 404. Apply by operation of law – but good practice to document.

Duty of prudence;

Duty of loyalty;

Duty to diversify; and

Duty to follow plan documents.

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Key ERISA Terms and Considerations – Limitations on Indemnity and Exculpatory Provisions

ERISA section 410 generally prohibits a plan from indemnifying a fiduciary out of plan assets for an ERISA breach.

“...any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty [under Part 4 of Title I of ERISA]...shall be void as against public policy.”

Applies by operation of law, but good practice to document.

Specific vs. general language?

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Key ERISA Terms and Considerations – Avoidance of Prohibited Transactions

Good practice to document that investment manager will not cause plan to engage in transactions prohibited under ERISA or the Code (absent an exemption).

Avoid transactions prohibited under ERISA section 406(a) (“party in interest” transactions) and under ERISA section 406(b) (fiduciary self-dealing/conflict transactions).

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Key ERISA Terms and Considerations – Avoidance of Prohibited Transactions - QPAM

Many investment managers rely on PTE 84-14 (the “QPAM” exemption).

Permits managers to engage in ERISA section 406(a) “party in interest” prohibited transactions, under certain circumstances.

Basic requirements are similar to ERISA section 3(38) “investment manager” qualification, but with some important additional conditions.

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Must be an independent fiduciary that is a registered investment adviser, a bank, an S&L, or an insurance company.

Must satisfy certain capital requirements and, in the case of RIAs, certain AUM requirements.

Must acknowledge fiduciary status in writing.

Must have discretionary investment authority.

Other technical requirements.

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Practice point: QPAM exemption does not cover ERISA section 406(b) prohibited transactions.

QPAM is not “the only game in town.” Managers may (and often must) rely on other statutory or class prohibited transaction exemptions in managing plan assets, e.g., ERISA section 408(b)(17), ERISA section 408(b)(8), PTE 77-4, PTE 86-128.

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Key ERISA Terms and Considerations – Fee Structures

Choice of fee structure has important legal ramifications.

ERISA section 406(a)(1)(D) prohibits an ERISA fiduciary from causing an ERISA plan to engage in a transaction that constitutes a transfer to, or use by or for the benefit of, a party in interest (including the manager), of any plan asset.

ERISA section 406(b)(1) prohibits an ERISA fiduciary from dealing with the assets of an ERISA plan in the fiduciary’s own interest or for its own account.

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DOL has interpreted these provisions to prohibit an ERISA fiduciary from exercising its fiduciary discretion in a manner that would impact the amount or timing of the fiduciary’s compensation – i.e., from taking discretionary actions that could result in an investment manager receiving additional, larger or more frequent management fees.

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These rules generally preclude the use of transaction-based fees, e.g., acquisition fees, disposition fees, financing fees, commissions, etc. – absent an exemption.

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Typical separate account fee structure: manager earns pre-determined percentage of value of assets under management.

May be permissible under ERISA, but manager must not exercise discretion over the value of the account’s assets if doing so would result in the manager receiving a larger management fee (i.e., by inflating the value of the account’s assets to increase fees).

Assets under these arrangements are typically valued independent of the manager, e.g., via publicly-available market information or use of independent valuation service.

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Other Important ERISA Terms and Considerations – Bonding

Generally, anyone handling “plan assets” must comply with the bonding requirements set forth in ERISA section 412.

“Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan...shall be bonded...”

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Other Important ERISA Terms and Considerations – Bonding

Exceptions for broker-dealers, trust companies and insurance companies.

Practice point: Protection under ERISA section 412 is limited: Provides coverage for fraud and dishonesty – but does not provide general liability coverage for ERISA fiduciary breach.

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Other Important ERISA Terms and Considerations – ERISA Fiduciary Insurance

For protection against manager’s general liability, look to fiduciary insurance coverage.

Practice point: Unlike ERISA bonding coverage, fiduciary insurance is not a legal requirement (but many managers carry some amount of coverage).

Practice point: Some managers do not have separate ERISA fiduciary liability policies; good practice to confirm that manager’s general liability policy includes ERISA coverage.

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Other Important ERISA Terms and Considerations – Reporting and Disclosure

Investment managers are “covered service providers” for purposes of the fee disclosure regulation under ERISA section 408(b)(2).

Managers must provide written disclosures to plans describing managers’ services to plans, their ERISA fiduciary status, and what and how they will be paid as a result of the service relationship.

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Practice point: Important to obtain manager’s ERISA section 408(b)(2) disclosure before the investment management agreement is finalized.

“A covered service provider must disclose the information...to the responsible plan fiduciary reasonably in advance of the date the contract or arrangement is entered into, and extended or renewed...”

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ERISA plans are required to submit annual reports to the Department of Labor and other federal regulatory agencies – Form 5500.

Schedules C and H are particularly relevant to investments.

Plan administrators need information from investment managers for this purpose. Good practice to document that manager will cooperate with plan in providing information.

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Other Important ERISA Terms and Considerations – Termination of Contracts

Investment managers are service providers to plan – and, thus, parties in interest under ERISA.

ERISA section 406(a) generally prohibits furnishing goods, services, or facilities (and payment therefor) between plans and parties in interest – including service arrangements.

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But ERISA section 408(b)(2) provides an exemption. Permits “[c]ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”

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DOL regulations under ERISA section 408(b)(2) require that plans be permitted to terminate service provider arrangements on reasonably short notice under the circumstances.

“No contract or arrangement is reasonable...if it does not permit termination by the plan without penalty to the plan on reasonably short notice under the circumstances to prevent the plan from becoming locked into an arrangement that has become disadvantageous.”

Practice point: Avoid termination language in contract that looks like a “penalty” (e.g., required payments of prospective management fees upon termination).

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Other Important Terms and Considerations – Confidentiality

Most investment contracts impose confidentiality obligations on both the manager and the plan.

From plan’s perspective, confirm that manager will protect confidentiality of plan’s identity and information and will not use plan information for marketing and promotional purposes.

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Other Important Terms and Considerations – Confidentiality

Plans need to be able to share and discuss otherwise confidential investment information with plan professional advisers, employees and staff, and trustees.

Confirm in investment management agreement that such disclosures are permitted, without further notice by plan to manager.

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Other Important Terms and Considerations – Jurisdiction and Venue

Investment management agreements typically specify where disputes between the investment manager and the plan will be resolved.

Managers usually prefer that disputes be resolved in the manager’s home state.

Consider requiring that such disputes be litigated in the plan’s home state instead.

May depend on how much bargaining power the plan has relative to the manager.

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Questions?

Alexander P. Ryan

Groom Law Group, Chartered

1701 Pennsylvania Avenue, NW

Suite 1200

Washington, DC 20006

(202) 861-6639

[email protected]

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Documents

ERISA Retirement Plan Investment Management Agreements ...media.straffordpub.com/products/erisa-retirement...Sep 17, 2015 · assets under management. May be permissible under ERISA,