ERISA Update Roberta J. Ufford Groom Law Group March 26, 2012.

ERISA Update Roberta J. Ufford

Groom Law GroupMarch 26, 2012

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Disclosure Regulation Covered Service Providers Participant Disclosure

Regulatory Agenda/Investment Advice DOL Enforcement/Plan Contributions IRA Indemnification/Cross-Collateralization Fiduciary Litigation Trends

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New Pending Disclosure Regulation Service Provider Disclosure

Amendment of Form 5500 Schedule C 72 Fed. Reg. 64710 and 64731 (Nov. 16, 2007)

"Point of Sale" – Final 408(b)(2) Regulation 77 Fed. Reg. 5632 (Feb. 3, 2012)

Disclosure to Participants 75 Fed. Reg. 64910 (Oct 20, 2010) (final regulation) 75 Fed. Reg. 73987 (Nov 30, 2010) (target date funds)

(proposed) Regulatory Agenda – Pension Benefit Statements

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Service Provider Disclosure – Final Regulation

ERISA prohibits a "party in interest" from providing plan services, unless statutory exemption under § 408(b)(2) applies. New regulation defines "reasonable arrangement."

Providers who do not comply may engage in a "prohibited transaction" under Code § 4975. Provider may be liable for excise taxes, possibly

required to return "excess compensation" to plan. Class exemption provides relief for plan fiduciary (not

provider). Requires fiduciary to report provider non-compliance to DOL, and terminate future services, if service provider is non-compliant after 90 days.

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In general, covered service providers to covered plans must disclose the direct and indirect compensation they expect to receive for services before entering into or renewing a plan services arrangement.

Covered Plans - ERISA-covered pension plans excludes IRAs, SEPs, SIMPLE accounts, "top-hat"

plans; separate regulation pending for welfare plans Covered Service Providers (“CSPs”) – a person who:

(1) expects to receive more than $1000 in direct or indirect compensation, and

(2) provides certain fiduciary or non-fiduciary services.Form 5500 Schedule C - similar compensation definitions; covered plans and providers are not the same.

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CSPs – persons who provide: services as a fiduciary or registered investment

adviser (includes “investment product” fiduciaries), recordkeeping or brokerage services to participant-

directed defined contribution plans (e.g., 401(k)) and provide "designated investment alternatives“ (or “DIAs”), or

accounting, auditing, actuarial, appraisal, banking, consulting, custodial, legal, recordkeeping, securities brokerage, insurance, valuation, but only if "indirect compensation" for the services.

Excludes most providers to "investment funds." Consider risk of becoming inadvertently covered.

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“Direct" Compensation – Fees the plan pays directly to a CSP (including affiliates and subcontractors); excludes payments by plan sponsor or employer.

“Indirect" Compensation – Any compensation received by the CSP (or its affiliate or subcontractor) in connection with services provided to the covered plan from a person other than the plan or sponsor/employer. E.g., 12b-1 fees, sub-transfer agency or similar fees

paid by mutual funds, sales commissions, referral fees. Includes “non-monetary” compensation – meals, gifts

and other incentives – exceeding a $250 threshold.

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“Indirect" Compensation DOL “intends that the concept of compensation to be

received by a … [CSP] ‘in connection with’ a particular contract or arrangement for services be construed broadly.”

Non-Monetary Compensation – CSPs may look to Schedule C guidance and methodologies concerning non-monetary compensation. But, $250 threshold for non-monetary compensation

under service provider rule is measured over the term of the contract or arrangement, rather than by a calendar or plan year.

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Required Disclosures description of all services CSP reasonably expects

to provide to the plan; if CSP reasonably expects to provide services as

a fiduciary or RIA, acknowledgement of status; "direct" compensation CSP reasonably expects to

receive in connection with services; "indirect" compensation CSP reasonably expects

to receive in connection with services, including – description of services provided for

indirect compensation, identity of payer and payee, and description of the “arrangement."

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Describing the “arrangement” - The CSP “… must describe its arrangement with the payer of indirect compensation so that the responsible plan fiduciary can analyze why the payer, generally an unrelated third party, is compensating the … [CSP] in connection with the … [CSP’s] contract or arrangement with the covered plan.”

Describing indirect compensation – “Descriptions of indirect compensation for this purpose may be expressed in general terms, provided that the description contains information that is sufficient to permit a responsible plan fiduciary to evaluate the reasonableness of such compensation in advance of the service arrangement.”

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Required Disclosures (con’t) “shared compensation” – payments among

"related parties" (including the CSP, and its subcontractors and affiliates)

ONLY if (1) set on a transaction basis (2) charged against investment and reflected in investment value or (3) commissions or other "transaction-based" compensation,

describe services, payer and payee, and does not apply to employee compensation.

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Required Disclosures (con’t) – Investment Fees “Investment product” fiduciaries provide fee

information for investment products if plan has an equity investment (not only for “DIAs”).

Recordkeepers/brokers required to disclose fees and other information for DIAs selected by plans.

Provide information necessary to comply with the participant disclosure rules (404a-5) (including website content).

For DIAs, investment product fiduciaries are required to disclose fees and other information, unless recordkeeper/broker will provide the information.

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Required Disclosures (con’t) – Investment Fees Recordkeepers/brokers may deliver materials

prepared by an unrelated, regulated entity (mutual fund, insurance company or other financial institution), but must include a disclaimer.

Recordkeepers/brokers may rely on third party database, if contract makes third party responsible to ensure information is passed on accurately.

Investment-related disclosures must be updated at least annually.

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Required Disclosures (con’t) Recordkeeping Cost” - recordkeepers must provide a

"good-faith estimate" of plan cost for recordkeeping, if recordkeeping fee is not separately stated or reduced by indirect compensation.

Termination compensation – compensation provider expects to receive if arrangement terminates.

Manner of receipt - Manner of receipt of compensation (i.e., the plan is billed, amounts deducted from participant accounts) for CSP compensation and investment fees.

On request, information requested by plan for "Title I" purposes (e.g., Form 5500, participant disclosure).

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When is disclosure required? Existing service arrangements

before July 1, 2012 effective date All arrangements

"reasonably in advance" of entering into service arrangement,

as soon as practicable, but within 60 days of service provider knowledge of change (at least annually for investment information), and

within 30 days to correct an error.

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Pre-emption - No preemption of state disclosure laws applicable to service providers.

Electronic Media - Delivery of disclosures by electronic media is permitted. Disclosure must be “readily accessible” and plan fiduciaries must receive “clear notification.”

Summary - Final regulation includes a sample guide that CSPs are encouraged to provide; DOL will propose rules that may require CSPs to deliver a summary or “guide” with initial disclosures.

Existing Class Exemptions – DOL is planning to provide additional guidance.

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Service Provider Disclosure – Fiduciary Responsibility

Independent Prudence Obligation – “…if a plan fiduciary needs particular information to make an informed decision when selecting or monitoring a plan service provider, then ERISA section 404’s duty of prudence requires that fiduciary to request such information.”

Process – “... responsible plan fiduciaries should appropriately review the disclosures made by covered service providers. Fiduciaries should be able to, at a minimum, compare the disclosures they receive from a covered service provider to the requirements of the regulation and form a reasonable belief that the required disclosures have been made.”

Evaluating Potential Conflicts of Interest – “ERISA section 404(a) also obligates plan fiduciaries to obtain and carefully consider … potential conflicts of interest that might affect the quality of the provided services.”

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Service Provider Disclosure – Fiduciary Exemption

Regulatory Exemption for Innocent Fiduciaries Reasonable belief – a responsible plan fiduciary is

exempted from otherwise applicable prohibited transaction restrictions if the fiduciary is unaware of the service provider’s failure and “reasonably believed” that the 408b-2 disclosures had been made.

Written request upon discovery – upon discovery that the covered service provider failed to disclose 408b-2 required information, the responsible plan fiduciary must request the required information in writing.

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Service Provider Disclosure – Fiduciary Exemption

DOL Notification—required where CSP fails to comply within 90 days of plan fiduciary’s written request. Must be filed within 30 days of the earlier of (1) CSP’s refusal to furnish requested information, or (2) 90 days after written request of CSP was made.

Termination– “If the requested information relates to future services and is not disclosed promptly after the end of the 90-day period, then the responsible plan fiduciary shall terminate the contract or arrangement as expeditiously as possible, consistent with such duty of prudence.”

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Service Provider Planning Inventory services and compensation

Direct/indirect (including non-monetary) Inventory existing disclosure; develop new

disclosure if needed; consider a guide or summary Existing clients – comply by 7/1/2012 Ongoing Procedures

Delivery in advance of entering/renewal of contracts or arrangements

Timely notice of changes/corrections Timely reply to requests for information

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DOL interprets ERISA’s fiduciary responsibility rules to require fiduciaries to provide participants in a participant-directed plan "sufficient information" to make informed investment decisions. 75 Fed. Reg. 64910 (Oct 20, 2010) (final

regulation) Disclosures required by 404(c) have been

"optional"– new requirements are mandatory. Consequences of failure to comply – breach of

fiduciary duty and loss of 404(c) protection. Fiduciaries could be liable for losses resulting

from participant investment decisions made without sufficient information.

Participant Disclosure Regulation- Background

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Participant Disclosure Regulation –Comparison to 408(b)(2) Disclosure

Information Recipient

408(b)(2) Regulation

Plan-Level Fiduciary (e.g., Sponsor or Administrator).

Participant Disclosure

Participants/beneficiaries who direct their plan account investments.

Duty to Disclose

Covered Service Providers.

Plan Administrator.

Form and Presentation

Flexible rules, but sufficient to allow evaluation of fees.

Specific form and presentation requirements.

Electronic Media

Requires clear notification and readily accessible.

DOL Tech. Rel. 2011-03R.

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Participant Disclosure Regulation –

OverviewThree “Levels” of Required Information Automatic Disclosures

Provide on or before the date the participant may first give investment instructions.

Provide to all “eligibles” annually, whether not the individual participates.

Website Investment Disclosure “On request” Disclosures

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Participant Disclosure Regulation – Automatic Disclosures

General Investment Information Administrative Expense Information Individual Expense Information Designated Investment Alternatives

Investment performance and fees, presented in comparative format

Glossary Annuity Option Information

Also presented in comparative format Proxy Materials, if participants vote (provided

subsequent to investments)

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General Investment Information Explanation of circumstances under which

participants/beneficiaries may give investment instructions, and any limits on instructions.

Designated investment alternatives (“DIAs”). Designated investment managers. Description of brokerage windows, self-directed

brokerage accounts, or similar plan arrangements. Description/reference to plan provisions relating to

the exercise of voting, tender and similar rights and restrictions on such rights.

Participant Disclosure Regulation –Automatic Disclosures

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Plan-Level Expenses –Annual DisclosuresAdministrative Expenses Explanation of fees and expenses for general plan

administrative services charged against participants’ individual accounts.

Basis on which such charges will be allocated to, (or affect) the balance of each individual’s account.

Individual Expenses Explanation of fees and expenses charged against

participant accounts, on an individual, rather than a plan-wide basis, and which are not reflected in the total annual operating expenses of any investment alternative.


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Plan-Level Expenses – Quarterly DisclosuresAdministrative Expenses The dollar amount of general plan administrative

fees and expenses actually charged during the preceding quarter to a participant’s account.

Explanation (if applicable) that some of the plan’s administrative expenses for the preceding quarter were paid from operating expenses of one or more of the plan’s investment alternatives.

Individual Expenses The dollar amount of fees and expenses charged

on an individual basis during the preceding quarter to the participant’s account and a description of the services to which the charges relate.


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Designated Investment Alternatives Name and category of investment (e.g., money

market, balanced, stocks, bonds, employer stock) Internet Web site for more information Performance (1, 5 and 10 years) and comparable

information for a broad-based index Fees – total operating expenses and "shareholder"

type fees Special rules for investments with fixed or stated

rates of return, annuities, employer securities

*Prospectus delivery no longer automatically required.

Participant Disclosure Regulation – Automatic Disclosures

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Table 1—Variable Return Investments

Name/ Type of Option

Average Annual Total Return

as of 12/31/XX 1yr. 5yr. 10yr. Since

Inception

Benchmark

1yr. 5yr. 10yr. Since

Inception

Equity Funds A Index Fund/ S&P 500 www. website address

26.5% .34% -1.03% 9.25% 26.46% .42% -.95% 9.30% S&P 500

B Fund/ Large Cap www. website address

27.6% .99% N/A 2.26% 27.80% 1.02% N/A 2.77% US Prime Market 750 Index

C Fund/ Int’l Stock www. website address

36.73% 5.26% 2.29% 9.37% 40.40% 5.40% 2.40% 12.09% MSCI EAFE

D Fund/ Mid Cap www. website address

40.22% 2.28% 6.13% 3.29% 46.29% 2.40% -.52% 4.16% Russell Midcap

Bond Funds E Fund/ Bond Index

www. website address 6.45% 4.43% 6.08% 7.08% 5.93% 4.97% 6.33% 7.01%

Barclays Cap. Aggr. Bd. Other

F Fund/ GICs www. website address

.72% 3.36% 3.11% 5.56% 1.8% 3.1% 3.3% 5.75% 3-month US T-Bill Index

G Fund/ Stable Value www. website address

4.36% 4.64% 5.07% 3.75% 1.8% 3.1% 3.3% 4.99% 3-month US T-Bill Index

Generations 2020/ Lifecycle Fund

www. website address

27.94% N/A N/A 2.45% 26.46% N/A N/A 3.09% S&P 500

23.95% N/A N/A 3.74%

Generations 2020 Composite Index*

Participant Disclosure Regulation – Investment Performance

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Table 3—Fees and Expenses

Name / Type of Option

Total Annual

Operating Expenses

As a % Per $1000

Shareholder-Type Fees

Equity Funds A Index Fund/

S&P 500 0.18% $1.80 $20 annual service charge subtracted from investments held in this option if valued at less than $10,000.

B Fund/ Large Cap 2.45% $24.50

2.25% deferred sales charge subtracted from amounts withdrawn within 12 months of purchase.

C Fund/ International Stock 0.79% $7.90 5.75% sales charge subtracted from amounts invested. D Fund/

Mid Cap ETF 0.20% $2.00 4.25% sales charge subtracted from amounts withdrawn.

Bond Funds E Fund/

Bond Index 0.50% $5.00 N/A

Other F Fund/

GICs 0.46% $4.60 10% charge subtracted from amounts withdrawn within 18 months of initial investment.

G Fund/ Stable Value 0.65% $6.50

Amounts withdrawn may not be transferred to a competing option for 90 days after withdrawal.

Generations 2020/ Lifecycle Fund 1.50% $15.00

Excessive trading restricts additional purchases (other than contributions and loan repayments) for 85 days.

Fixed Return Investments

H 200X / GIC N/A 12% charge subtracted from amounts withdrawn before maturity. I LIBOR Plus/ Fixed-Type

Invest Account N/A 5% contingent deferred sales charge subtracted from amounts withdrawn; charge reduced by 1% on 12-month anniversary of each investment.

J Financial Serv Co. / Fixed Account Investment

N/A 90 days of interest subtracted from amounts withdrawn before maturity.

Participant Disclosure Regulation –Fee and Expense Information

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Participant Disclosure Regulation –Website Disclosures

An Internet Web site address that provides access to information for each designated investment alternative: Name of investment issuer Objectives and goals* Principal strategies (including type of assets) and

principal risks* Portfolio turnover rate* Performance data (updated quarterly)* Fees and expenses*

*provided in a manner consistent with SEC rules governing mutual fund disclosures (Form N1-A)

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Participant Disclosure Regulation –Timing

Effective Date – December 20, 2010 Transition Rule –

Initial disclosures required by August 30, 2012 (60 days after the effective date of 408(b)(2) regulation).

Quarterly disclosures required no later than 45 days after end of quarter in which initial disclosures are first required (e.g., Nov. 14, 2012).

76 Fed. Reg. 42539 (July 19, 2011).

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Participant Disclosure Regulation – Changes in Information

In general, changes to required information must be provided at least 30 days, but not more than 90 days in advance of the change. General plan information (including identification

of designated investment alternatives) Administrative Expenses Individual Expenses

An exception for unforeseeable circumstances, in which case notice may be provided as soon as reasonably practicable (e.g., prudence requires a change in a DIA under the plan).

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Participant Disclosure –Use of Electronic Media

Current Rule - May furnish information electronically to two groups of plan participants:

1. “Wired at Work” – participants with electronic access at worksite, if access is an integral part of their duties, and

2. “Affirmative Consent” – participants who affirmatively consent in a manner that reasonably demonstrates individual ability to access electronic information.

And, (a) plan administrator must take reasonable measures to ensure “actual receipt” and confidentiality is preserved, (b) must comply with form and content rules, (c) recipient is informed of importance of document and right to request paper, and (d) on request, paper version is provided.

See DOL Reg. § 2520.104b-1(c).

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Treasury (IRS) Rule - May furnish information electronically if either:

1. Recipient affirmatively consents, or2. Recipient has demonstrated ability to effectively

access electronic information and is advised that a paper version will be provided on request.

FAB 2006-03 – Plans may furnish participant benefit statements (ERISA § 105) in accordance with Treasury rules or post to a website and notify participants of the availability of statements on the website.

DOL Request for Information (76 Fed. Reg. 19285 (Apr. 7, 2011))

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Tech Release 2011-03R – Interim Policy Participant disclosure that may be provided in a benefit

statement may be delivered by electronic methods approved for benefit statements. (But, comparative chart may not be delivered under FAB 2006-03 procedure)

Other disclosure may be furnished electronically following DOL rules; or if the following conditions are met:

Participant voluntarily provided an email address; Written notice to participant that participant disclosure

may be provided electronically; Annual notice to each participant (may furnish this

notice electronically only if participant “interacted” electronically since last notice); and

May use “on file” email addresses, if there was participant interaction within last 12 months.

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DOL Regulatory Agenda Final Regulations

Participant Advice Regulation – implements PPA exemption (under ERISA §§ 408(b)(14) and 408(g)) for advice services provided to plan participants under “level-fee” and “computer model” programs that meet required conditions.

76 Fed. Reg. 66136 (Oct. 25, 2011) Amended exemptions procedures (29 CFR §

2570.30-52) - Among other changes, adopts a 2% compensation limit as a presumption of independence for appraisers and independent fiduciaries.

76 Fed. Reg. 66637 (Oct. 27, 2011)

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DOL Regulatory Agenda Pending Regulatory Projects

Additional Disclosure Rulemaking Guide to 408(b)(2) Disclosures Target Date Disclosures Pension Benefit Statements Annual Funding Notice

Lifetime Income Options Amendment of Abandoned Plan Program Definition of “Fiduciary”

Amendment of Regulatory Definition of Advice

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Pending Regulation – Investment Advice Definition

Under current DOL regulations, "fiduciary" investment advice requires – (1) recommendations, (2) which are (a) individualized, (b) provided on a

regular basis, (c) with mutual understanding that advice will be a "primary basis" for decisions, and

(3) for a fee. Sales presentations, fund menu offerings, and

participant education (IB 96-1) generally are not "fiduciary advice" under this definition.

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Pending Regulation – Investment Advice Definition

DOL proposed amendments to expand definition of "fiduciary" advice. 75 FR 65263 (October 22, 2010).

On September 19, 2011, DOL announced it will re-propose the rule to – Update economic analysis Clarify that advice must be individualized Clarify application to arm’s length commercial

transactions, such as swaps. New or amended class exemptions also may be

issued, to facilitate transactions by service providers who could be fiduciaries under an amended rule.

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Pending Regulation –Investment Advice Definition

Under the proposed regulation, a person provides "fiduciary" advice if the person – provides "advice“ – including (i) recommending

securities/property, (ii) appraisals, and (iii) proxy voting and manager recommendations;

has a “relationship” to the plan - (i) agrees to be fiduciary, (ii) any RIA, or (iii) mutual agreement that advice will be considered and individualized (eliminating "regular basis" and "primary basis" elements of current test); and

receives a fee. Regulations includes “limitations” on scope for sellers,

investment platform providers, asset reporting.

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EBSA –National Enforcement Projects

Delinquent Contributions Plans in Bankruptcy/Abandoned Plans Employee Stock Ownership Plans Consultant/Adviser Project Participant and Beneficiary Complaints 5500 Desk Reviews/Non-Filer Enforcement Health Fraud/Multiple Welfare Arrangements

See http://www.dol.gov/ebsa/erisa_enforcement.html

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EBSA –EnforcementDelinquent Contributions

Contributory Plans Criminal Project

Final Participant Contribution Regulation – provides a 7-day maximum “safe harbor” for plans with under 100 participants. 75 FR 2068 (Jan 14, 2010)

FAB 2008-01 – “… authority over a plan’s assets … including a plan’s legal claim for delinquent contributions, must be assigned to i) a plan trustee with discretionary authority over plan assets, ii) a directed trustee subject to the proper and lawful directions of a named fiduciary, or iii) an investment manager.”

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IRAs – Indemnity Issue DOL Advisory Opinion 2011-09A – an indemnity

relating to a futures brokerage account involved a prohibited “extension of credit” between IRA and IRA owner. Not exempted by PTE 80-26. Follows DOL AO 2009-03A (IRA owner may not

grant broker security interest in non-IRA assets to cover potential IRA indebtedness).

IRS Announcement 2011-81 provides temporary relief pending DOL action to provide exemptive relief, provided that there is no attempt by a financial institution to enforce contractual provisions.

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ERISA Fiduciary Litigation - Trends 401(k) Plans – Employer Stock Drop

401(k) Plans – Investment Fees, Selection, Disclosure Class actions by participants against plan sponsor

fiduciaries (and some plan service providers) Class actions by plan sponsors against financial

institutions

Other participant claims – QDIA investments; disclosure failures; claims for benefits

Actions against consultants/advisors (to address plan losses caused by Madoff and other investment frauds)

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Questions?Roberta J. Ufford, Esq. - (202) 861-6643

Groom Law Group, Chartered1701 Pennsylvania Avenue, NW

Suite 1200Washington, DC 20006

[email protected]

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ERISA Update Roberta J. Ufford Groom Law Group March 26, 2012.

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