Post on 28-May-2020
10/18/2016
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ASPPA National
Conference
National Harbor, MD
October 23, 2016
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
ERISA/QUALIFIED PLAN:
Trends, Lessons, Future
Jeffery Mandell, Esq.
The ERISA Law Group, P.A.205 N. 10th Street, Suite 300 Boise, ID 83702
208.342.5522 866.ERISALAW
jeff@erisalawgroup.com
www.erisalawgroup.com
Attorney Speaker
Trainer Author
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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ERISA Is:
•Behemoth, Messy, Labyrinthine
•Profoundly Effective
•Necessary
•Enormously Successful
•Always Evolving
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
JEFFERY MANDELL, ESQ.
• Founder and President of The ERISA Law Group, P.A.
• Founder and President of Employee Benefit Publications & Seminars
• Over 34 years concentrated practice in ERISA
• Fellow American College of Employee Benefits Counsel
• Co-editor and Architect of the 401(k) Advisor, a nationally distributed monthly publication by Wolters Kluwer (ftwilliam)
• Nationally recognized practitioner, speaker, and author on ERISA topics
• Best Lawyers in America since 1995
• Former Adjunct Professor at University of Wisconsin Law School and University of Idaho College of Law
• His Aspen/Panel Publisher textbook on ERISA plan administration and legal matters published in 1998
• Clients from coast to coast
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Regarding ERISA and Qualified Plans,
Attendees Will Learn:
• Brief pre-ERISA history
• Evolution of Title I & Internal Revenue Code
• Impact of changes on business & fiduciaries
• Lessons to empower you, enhancing your context
• The future?
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
U.S. First Formed Pension Plan
What Year? For What Company?
1875 American Express
1890 Baltimore & Ohio Railroad Company
1891 Grand Trunk railway of Canada
1903 American Great Again Trump, MCMLXXIV
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Why?
Employee
Retirement
Income
Security
Act of 1974, as amended
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Why ERISA? ( one)
John F. Kennedy (Pres. ‘61-‘63)
Studebaker
“Sunlight being the best disinfectant”
NBC
“I will not be ignored, Dan”
All of above None of above
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Pre-ERISA
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Why ERISA?
1954 Studebaker Champion (’39 ‘58)
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Several ERISA Themes
•History repeats itself
•The pendulum swings
•Lessons often not learned
•Things change, but always the
same
•Stakeholder conflicting objectives
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
ERISA has Four
“Titles”
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Title I – Protection of Employee
Benefit Rights
•Reporting
•Disclosure
•Participation
•Vesting
•Administration
•Funding
•Enforcement
•Fiduciary
responsibilities
& standards
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Title II – Amendments to the Internal
Revenue Code relating to Retirement Plans
•Minimum participation, vesting,
funding standards
•Collectively bargained plans
•Deduction & contribution limits
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Title II (continued)
•Miscellaneous “qualification”
provisions
•Taxation, cutbacks
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
•Department of Labor has Title I
jurisdiction
• Internal Revenue Service has Title
II jurisdiction
•Title I = “ERISA”
•Title II (IRC) = “Code”
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Different Objectives of
Code/IRS & Title I/DOL
• Share Some Common Ground Yet
Radically Different
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Code/IRS Objectives
•Establish and enforce federal tax law
for policy purposes
• To encourage employers to establish
plans, with equities to ensure
broader coverage and benefits
▫ Nondiscrimination rules, for example
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Title I/DOL Objectives
•Establish and enforce non-tax ERISA law
•Reporting to the government
•Disclosure to participants
•Establish fiduciary responsibilities and standards
•Private rights of actionEmployee Benefits Publications & Seminars © 2016 Jeffery Mandell
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Title IV – Termination Insurance
•Pension Benefit Guaranty
Corporation
•Multiemployer plans
•Liabilities
•Mergers, transfers between plans
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Title III – Jurisdiction,
Administration, Enforcement
•What agencies are in charge of what?
•Explains oddity of a Form 5500 filing with twogovernment agencies (IRS & DOL)
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Internal Revenue
Code (Code)
Outcome Based
Objective
Mathematical
Title I (ERISA)
Fiduciary Matters
Process Based
Subjective
Meaning of Words
v.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Shift from
Defined Benefit (DB)
Defined Contribution (DC)
Especially 401(k)s (K)
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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The DB K Migration is
Remarkable but Unremarkable
•No impact on savings
•6% savings rate as a % of wages
before and after shift
•Pre and post ERISA - no impact of
employee coverage in retirement
plans
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Growing Failure Leading up to ERISA and
Still Now
• 10% of population covered by a plan
• Woeful coverage among small
business
• Many leaders in government and
retirement plan community cite lack of
coverage as the leading failure of
ERISA
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Most Remarkably
•The DB K shift materially
altered ERISA
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Why 401(k)s?
Because of 1988 Treasury Regulations finally blessing salary reduction contributions
and
the resulting market revolution
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Why 401(k)s? (continued)
In the mid-late 1980s:
•Financial institutions stepped into
that space
•The IRS’ “regional prototype plan”
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
DB K Impact #1
Employer risk Employee risk
•Risk of Investments
•Risk of Retirement
•Costs
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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DB K Impact #2
Materially more focus on and involvement of employee
Pre-401(k):
• Employees only received SPDs, SMMs, a benefit statement, distribution and beneficiary designation forms
• Employees were not investors
• No employee education
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
DB K Explosion of Participant
Notices• QDIA
• Mapping
• Safe Harbor
• 404(c)
• Prospectus or Summary
• Automatic (Enrollment) Contribution Arrangements
• 404a-5
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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DB K Impact #3
ERISA, including DOL and IRS –
statutes, regulations and case law –
are always playing catch-up to
modernization of the industry … as
new battle lines are drawn
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
DB K Impact #4
Explosion of fiduciary regulations
Pre-401(k)
• ERISA §404(c) is one example. One sentence in ERISA ’74 – If a participant “exercises control” over her account, the participant is not a “fiduciary by reason of such exercise” and no (other) fiduciary “shall be liable for any loss or breach which results from . . . the participant's exercise of control.”
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Post-401(k) 404(c) 1993 Regulations
•Long
•Detailed
•Dense
•Complex
Were they necessary?Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
1993-1994 Attorney-Client Initial Meeting
Attorney: So, I understand that when this mutual fund nose-dived your profit sharing account balance plummeted to next to nothing.
Client: That’s right.
Attorney: And that your full account balance was invested in this fund because of its great return.
Client: Uh-uh.
Attorney: And that the mutual fund crashed just two days before you retired, leaving you pretty much with zip.
Client: That’s right.
Attorney: I also understand that under this plan you yourself chose to invest your plan amounts in this fund, that you could have chosen some other investments, and that several times a year you could have changed investments.
Client: That’s right.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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1993-1994 Attorney-Client Initial Meeting
Attorney: So, I understand that when this mutual fund nose-dived your profit sharing account balance plummeted to next to nothing.
Attorney: I see. Well, did your employer, the plan trustee or plan committee encourage or tell you to invest in this fund?
Client: No.
Attorney: Did anyone give you materials that said that you could never lose your shirt with this investment?
Client: No. I just thought it was a really great investment. You see, this broker-friend of mine told me…
Attorney: Excuse me. I guess I am unclear as to why you believe you have a strong lawsuit
against your employer, the trustee and profit sharing plan committee.
Client: Well, you see, my neighbor, Mort Klevan…
Attorney: Excuse me again. So, is my understanding correct that you voluntarily decided to
put all of your eggs in one basket even though there were lots of other investment
opportunities available to you, and that, in hindsight, you think that was not a
prudent thing to do, but now you want your former employer to cough up your loss?
Client: You got it. I read in the Wall Street Journal that….
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Attorney: Well, I’m sorry but I can’t help you. For one, no judge or jury is going to agree with you, for two, the last kind of case I want is an ERISA case, and for three, there is this ERISA provision, §404(c), which says it’s your fault.
Pre-1994 Meeting Conclusion
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Attorney: Excuse me, again. Yes I read that too, but let me ask you just a few more questions. The plan documentation you gave me does
not say that your plan is a “§404(c) plan,” nor that you will be solely responsible for your own decision.
Client: That’s right, and I gave you everything I have.
Attorney: Did you also say that you asked for some updated data regarding this mutual fund that it took the plan two full weeks to get it to
you?
Client: Exactly.
Attorney: I see. It is getting clearer to me. Finally, you told me you could switch out of this fund several times a year…
Client: That’s right, but it was four times a year, once a quarter.
Attorney: Well you know, I am familiar with this fund and its great recent returns. But I would say you’d really need to get in and out of it on
a daily basis to really protect yourself.
Client: Exactly my thoughts, the general volatility rule, you know, that my neighbor Mort…
Attorney: Wait a second. Did you say Mort Klevan? I think he would be the perfect expert witness.
Post-1993 Meeting Conclusion
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Explosion of Fiduciary Law (Impact #4 cont.)
Older & wiser, the §404(c) regulations
were necessary
As were fiduciary level (408(b)(2)) &
participant level (404a-5) disclosures
As were fiduciary conflict of interest
regulations
• Expansion into rollover IRAs
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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401(k) plans plus technology
engendered current fiduciary
interest
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
DB K Impact #5
Material maturation of fiduciary
responsibilities
Now we know more of the meaning
of broad Title I principals of conduct
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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ERISA Sec. 404(a)(1)(B)
A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and…
with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims…
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
DB K Impact #5 (cont.)
Explosion of fiduciary litigation
The neglected amorphous stepchild
of ERISA Title I – fiduciary matters –
stands toe-to-toe with Title II (Code)
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Fiduciary Law
Fa
t
Fr
ee
LI
TE
Pa
LE
AL
e
IP
ASto
ut
Pre-1974 ERISA 1990’s 2000’s 2010’s
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Freddie F. Fiduciary
Pre-1974 ERISA-
1990s
2000’s
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
2010’s
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DB K Impact #6
Radical changes in production and
management of qualified plans
and
in the business of retirement plans
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
DB K
Technological Advances
Plans became more complicated
More moving parts
Fund line-ups/mutual funds
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Pre-401(k) Plan Business Model
Investment
Broker/
Advisor
Tax
Lawyer
Documents &
Advise
• Form 5500
• Financials
• Benefit Statements
• Some testing
CPA Recordkeeper
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Post-401(k) Plan Business Model
Tax
ERISA
Lawyer
Wall Street
CPA
TPA
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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The Business of Plan Production,
Design, Management & Operation
Was: Plodding, deliberative, legally
correct
Is: Pretty, quick, not legally
compliant
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
The historical lines are blurred, unrecognizable, as to what is properly legal, recordkeeping and investment.
Plans are now a commodity, due in part to:
• Technology
• The market
• Internal Revenue Service policies, most notably increased complexities and regarding the IRS’ “qualification” of plans.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Consequences of New Business Model
Changed roles of independent legal counsel
Steady deterioration of legal compliance
Increased value and utility of Employee Plans Compliance Resolution System
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
New Business Model
Automation has become primary in
the plan process
Increasingly exceedingly difficult for
lawyers and employers to move
financial institutions to change
documents and practices to comply
with the law
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Really, What Does an ERISA Lawyer Do?
What value, if any, do they have?
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Independent Legal Counsel--
Protects plan sponsors from plan providers
Making it a fairer playing field
Provides counsel independent of providers
Provides checks and balances
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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ERISA lawyers “fix” problems
arising from the providers,
including:
• Improper beneficiary designation
forms
• Incorrect top-heavy testing and
contributions
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Common Provider Mistakes (cont.)
• Improper preparation of
restatements. Leaving things out,
changing things, etc. (for example,
not properly listing participating
employers or having them adopt,
or to frame as multiple employer
plan).
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Common Provider Mistakes (cont.)
• Amending plan document improperly (e.g., putting in special provisions that are not applicable or could be addressed more precisely in an existing section; inappropriate use/nonuse of defined terms).
• Failure to recognize/monitor controlled group status.
• Failure to recognize/address leased employee issues.
• Poor Form 5500 preparation resulting in incorrect information and completion in conflict with the instructions (and/or needlessly garnering attention of DOL/IRS).
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Common Provider Mistakes (cont.)
• Imprecise legal advice regarding EPCRS corrections.
• Provision of legal advice despite written and oral statements to the contrary.
• Poor advice generally. For example, regarding compliance with fee disclosure last week a provider furnished 408(b)(2) disclosures and strongly implied no need to review, understand, or assess, but rather to just file them.
• Failure to conduct and document discrimination testing.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Common Provider Mistakes (cont.)
• Failure to follow electronic delivery rules.
• Insufficient documentation/process relative to plan mergers.
• Improper exclusion of temporary/part time employees.
• Poor document retention practices.
• Failure to timely amend/restate.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
ERISA, Primarily Code, Evolution
• Prior to 1982, TEFRA, a professional corporation could contribute hundreds of thousands of dollars to a plan, the owner could borrow it all the next day, the owner could repay it over an unlimited number of years, and he or she could take a deduction for the interest payments
• Prior to the Retirement Equity Act of 1984, there were virtually no protections for spouses in plans
• Nor were QDROs recognized
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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ERISA, Primarily Code, Evolution (cont.)
• Prior to the Tax Reform Act of 1986, an employee would be treated as participating in a plan even though he or she received nothing
▫ using “integration” now called permitted disparity
• Doctors and lawyers could have their own extremely generous plans, and no plans for their staff
• Plans were invested in guaranteed annuity contracts, providing enormous returns for the annuity providers
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
“Qualified” Plan Tax
Benefits Are
Uniquely Generous
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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“Disqualification” Has
Five Consequences
1) Employer loss of deductions
for contributions
2) Inclusion of plan benefits in
participants’ taxable income
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Disqualification (cont.)
3) Taxation of gains in trust
4) Contributions treated as wages
for employment tax purposes
(FICA/Medicare)
5) Threat of litigation by
participants
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Disqualification (cont.)
•Why we lawyers are what we are
•Monstrous tax losses
•Plans were being disqualified
leading up to APCRS
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Disqualification (cont.)
No (unique) statute of limitations
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Lessons, Themes, The Future
The Cycle
Law lite, technological advantages, more laws, greater burdens on employers and fiduciaries, more litigation, more financial opportunities for plan providers to help with those burdens, more noncompliance and abuses, more litigation and laws and on and on.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Humility, Recognizing ERISA’s
•Enormity
•Breadth
•Depth
•Complexity
•See a Cry for Revision Reform
(after the slides)
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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ERISA Is Not For The Weak
Will always change, challenge and become more complex
Do you have the appetite and/or tolerance for it?
There will be more additions, not subtractions.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Small Business Will Continue to
Sometimes be Misunderstood
The government is getting better,
but will still think there are more
“bad players” than there are
There will always be bad players
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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The shift away from determination
letters and independent ERISA
attorney involvement will create
greater noncompliance, and thus
greater risk.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
The ying-yang of $$
and creativity
and litigators
and the IRS and DOL
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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“Intent” still does not matter with
the IRS
Agents are people too
Dwindling government resources
affecting quality of agents
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
A failure of ERISA: Individuals will still have the hardest time to be protected
-Normal P. Stein, a law professor at Drexel University School of Law in Philadelphia, reflecting on 40 years of ERISA law, likened a participant’s quest for benefits to Dorothy’s attempt to return to Kansas in “The Wizard of Oz,” where she faced a long road sprinkled with complications that eventually led to a “blustery old gatekeeper” who lacked adequate remedies.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Process, Process, Process, Did I Say
Process, Matters
Employers and fiduciaries must re-
examine their processes, their
documents, and their
documentation
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
Continued attempts to cover more
people in plans and to increase
savings
Continued resistance to change
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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More litigation
Deeper understanding of the meaning of fiduciary
Increased need for fiduciaries to, really, simply be bright, attentive and honest.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
If you pay attention, at least some of
the future is clear, allowing you to
be better, and if you have the
resources, to be successful.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
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What IS the context?
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell
JEFFERY MANDELL
205 North 10th Street, Suite 300
Boise, Idaho 83702
208.342.5522
jeff@erisalawgroup.com
www.erisalawgroup.comEmployee Benefits Publications & Seminars © 2016 Jeffery Mandell
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Disclaimer
This presentation is intended to provide
general information only and does not
provide legal, tax, or investment advice
or create an attorney-client
relationship. This material may be
considered attorney advertising under
rules of certain jurisdictions.
Employee Benefits Publications & Seminars © 2016 Jeffery Mandell