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Frequently Asked Ques6ons
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Steve J. Friedman Shareholder and Cochair of the Employee Benefits Prac<ce Group Li$ler Mendelson
Re6rement Plans Under A:ack by Plan Par6cipants and Government Agencies:
An Ac6on Plan for Employers
Re6rement Plans Under A:ack by Plan Par6cipants and Government Agencies – An Ac<on Plan for Employers
Steven J. Friedman • New York
Current Regulatory Environment – IRS Employee Plans Examina<on Program
IRS imposes monetary sanc<ons on employer plan sponsors for: • Failure to operate 401(k)/403(b) plans in accordance with Internal Revenue Code requirements
• Failure to follow the terms of the plan documents even if plan opera<on is within compliance with Internal Revenue Code requirements
Issuance of IRS Revenue Procedures establishing Employee Plans Compliance Resolu<on System: • Requires review of internal controls to qualify for IRS self-‐
correc<on program and mi<gate the amount of IRS monetary sanc<ons
• Sanc<ons imposed by IRS on audit even if failures are uninten6onal discrepancies between plan opera<on and plan documents that result in no harm to plan par<cipants
• Sanc<ons are based on a percentage of plan assets and can be quite substan<al
Current Regulatory Environment – IRS Employee Plans Examina<on Program
Current Regulatory Environment – IRS Employee Plans Examina<on Program
Substan<al increase in enforcement ac<vi<es: • Significant increase in number of audits in the last several years
• IRS audits have well exceeded 11,000 • Significant changes to IRS Plan Determina<on Program
• IRS examina<on ac<vi<es increases importance of annual review of internal controls to qualify for self-‐correc<on
Current Regulatory Environment – IRS Employee Plans Examina<on Program
Closing agreement = sanc6ons and fines
in addi6on to IRS required correc6ons
Fact: every re<rement plan
has disqualifying defects
DOL Inves<ga<ons
Focus on • Timeliness of Contribu<ons • Expenses
– Should they be paid by the plan? – Are they too high? – Vendor Choices
• Services
• Fiduciary Prac<ces – Commi\ee Mee<ngs – Minutes of Mee<ngs – Investment Policy – Costs of Investments – RFPs/RFIs – Confiden<ality Policy (Employer Stock
Funds) – Vendor Contracts
• Disclosures – SPDs/SMMs – Summary Annual Reports – Fees/Services – Mapping/Blackout – QDIAs – Auto enrollment
Screening Reviews
• Replicate IRS and DOL Audits • Discover Defects • Adopt Best Prac<ces • U<lize IRS and DOL Voluntary Correc<on Programs • It is best accomplished through an independent PRIVILEGED legal review that affords protec<on
401(k)/403(b) Plan Screening Review
The Opera<onal Screening Review would cover one or more problem areas, for example:
– Plan eligibility and entry (with a focus on re-‐hires) – Automa<c Enrollment/Increase – Limits on elec<ve deferrals – Timely deposits of par<cipant contribu<ons – Alloca<on of employer and matching contribu<ons – Nondiscrimina<on tes<ng and controlled group – Par<cipant loans and hardship withdrawals, and plan distribu<ons
– Composi<on of eligible compensa<on – Spousal consent – 5500 Repor<ng – Corporate ac<on and Plan governance
401(k)/403(b) Plan Screening Review
• Gather all Plan documenta<on • Interview company employees who administer the
Plan to make sure they’re following the Plan; if necessary conduct training
• Review vendor contracts and interview vendors for compliance with the Plan documents
• Review Par<cipant disclosures and enrollment materials
• Review Plan procedures for compliance with the law (e.g., are all required no<ces being given)
• Do some sample tes<ng of par<cipant records (e.g., look at plan loans processed over the last year or two)
• Correct any errors
Plan Draeing and Opera<on – Top 10 Errors
1. Automa<c Enrollment/Automa<c Increase – No<ces – QDIA
2. Compensa<on – Overstated – Understated
3. Eligibility of Employees – Too early – Too late – Ineligible Altogether
4. Employee Exclusions – Non Discrimina<on pigalls – Seasonal, part-‐<me, per diem
5. Ves<ng – Elapsed <me or hours pigalls
Plan Draeing and Opera<on – Top 10 Errors
6. Forfeitures – Timing – Reduce or reallocate
7. Safe Harbor Contribu<ons – No<ces – Alloca<ons – Amendments
8. In-‐Service Distribu<ons – Loans – Hardship – Illiquid assets
9. Distribu<on Types – Lump Sum – Installment
10. Matching True-‐up
IRS Voluntary Correc<ons
• Self-‐Correc<on Program – Insignificant failures – Significant failures if corrected quickly enough
• Voluntary Correc<on Program – Significant failures – Retroac<ve plan amendment
Who are the Plan Fiduciaries?
• If any of the following – – Discre<onary responsibility for administra<on
– Exercises discre<onary authority or control over plan assets
– Provides investment advice for a fee
• DOL’s expansion of fiduciaries
Iden<fying the ERISA Fiduciary
• Named fiduciary – a fiduciary who is named in the plan document or who, pursuant to a procedure specified in the plan, is iden<fied as a fiduciary. Common named fiduciaries are the sponsoring employer and the employer’s board of directors.
• Deemed fiduciary – an individual or en<ty that performs a fiduciary func<on regardless of whether such individual or en<ty is actually named as a fiduciary – For late deferrals, this would be
the person who approves the ACH transfer of contribu<ons to the trust or signs the contribu<on check
Fiduciary Func<ons
• Plan administra<on, including claims • Plan investments • Plan expenses paid from plan assets • Selec<on and monitoring persons performing fiduciary du<es
• Par<cipant communica<ons
Which Hat Are You Wearing?
• ERISA allows employers to wear “two hats”
• It is important to know which hat you are wearing because ERISA’s fiduciary rules may apply
Which Hat Are You Wearing?
Se\lor • Plan Design • Amendment or Termina<on • Employee Communica<ons
about corporate issues • A\orney-‐Client Privilege
applies
Fiduciary • Plan Administra<on • Implementa<on of
Amendment/Termina<on • Holding/Inves<ng Plan Assets • Appoin<ng a fiduciary • Par<cipant Communica<ons • A\orney-‐client privilege may
not apply
General ERISA Fiduciary Du<es
• Exclusive Benefit Duty • Prudent Person Duty • Diversifica<on Duty • Plan Adherence Duty • Disclosure Duty • Duty to Monitor • Co-‐Fiduciary Liability
How the Commi\ee Implements Procedural Prudence
• Selec<on of providers • Request compe<ng bids from
service providers • Evaluate creden<als and
capabili<es • Understand compensa<on
arrangement • Evaluate contract terms for
reasonableness (e.g., termina<on penal<es)
• Check references • Regularly monitor and adjust
when appropriate
Diversifica<on Requirement: Fiduciary Protec4on
• ERISA Sec<on 404(c) provides some fiduciary relief for investment losses resul<ng from par<cipant elec<ons in par<cipant directed plans
• Plan which complies with ERISA Sec<on 404(c): – Opportunity to Control: Par<cipant must be provided an opportunity to control assets of his or her individual account
– Diversified Choice: Par<cipant must be en<tled to choose from a broad range of diversified investment alterna<ves
– Actual Control: Par<cipant must actually exercise independent control
Managing Fiduciary Responsibility Plan Commi\ee Opera<on
• Set a structure for opera<ons, such as guidelines for reviewing investment alterna<ves or for handling claims
• Select service providers to assist with Commi\ee func<ons (e.g., investment advisor, accountant, fiduciary advisor)
• Determine how plan-‐related expenses will be evaluated and, if permi\ed under the plan, paid out of plan assets
• Set up regular mee<ngs • Set up procedure for documen<ng all mee<ngs held and
ac<ons taken and providing minutes to monitoring fiduciary
Breach of Fiduciary Rules Protec<ons from Fiduciary Liability
• Monitor other fiduciaries/service providers
• Conduct plan self-‐screening reviews
• U<lize IRS/DOL compliance programs to correct plan and fiduciary failures when they occur
• Procure liability coverage for fiduciaries
DOL Voluntary Correc<on Programs
• Voluntary Fiduciary Correc<on Program – Online calculator
• Delinquent Filer Program – Large Plans – Small Plans
Recent Li<ga<on
• 401(k) Fee Cases – ERISA breach of fiduciary duty lawsuits were filed against large publicly traded companies and several 401(k) service providers
Recent Li<ga<on
• The suits included a variety of allega<ons, including: – Fees and expenses paid by the plans were unreasonable – Plan fiduciaries failed to monitor the fees and expenses, and did not understand the fees
– Plan fiduciaries failed to properly disclose fees – Plan fiduciaries failed to select lowest investment class
– Plan fiduciaries were conflicted – Plan fiduciaries failed to have procedures to properly iden<fy, review, and monitor fees and expenses
What to Do to Prevent Errors?
• Communicate with Vendors • Communicate within organiza<on (Payroll/HR/Legal)
• Read and Retain Documents and Contracts
• Review Regularly – Plan Document and Opera<on Review
– Fiduciary Compliance Review
Fiduciary Compliance Review
A Fiduciary Compliance Review would examine: – Prudent selec<on and monitoring of plan investments – “Reasonable” Plan fees and costs – Par<cipant disclosures and communica<ons – Timely deposits of par<cipant contribu<ons – Poten<al conflicts of Company and plan interests – Plan governance and procedural due diligence – Adequacy of fidelity bonds, fiduciary liability insurance, and indemnifica<ons
Fiduciary Compliance Review
• Review Plan documenta<on (i.e., including the “boilerplate”) to determine who does what
• Iden<fy all the Plan fiduciaries and their intended func<ons
• Make sure all delega<ons are in place
• Interview fiduciaries who are Company employees to make sure they’re doing what they’re supposed to do (especially payroll)
• Establish and conduct periodic fiduciary training
• Review vendor contracts for extent of fiduciary liability
• Interview third-‐party service providers (e.g., investment managers) for compliance with the Plan
• Review Plan fiduciary mee<ngs and minutes for adherence to DOL guidance
• Correct any errors
Ques<ons?
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