Conquer Retirement Plan Challenges in 2019-Part II

How to Address Current Legal Issues Facing Fiduciary

Origins of ERISA

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ERISA Lawsuits*

•6,700 lawsuits filed under ERISA

•Top 10 ERISA settlements in 2017 totaled $927.8 million •Highest rate in class action certifications – 77% of claims were

certified as actions

•15 – excessive fee cases were settled * Seyfarth Shaw, Workplace Class Action Litigation Report

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DOL 2017 Activity•EBSA restored over $1.1 Billion to Employee Benefit Plans

•Enforcement (investigations) - $682.3 Million •VFCP - $10 Million •Participant Complaints - $418.7 Million •Abandoned Plan Program - $27.9 Million

•Civil Investigations •1,707 cases- 1,114 resulting in monetary results (65.3%) •Litigation referrals - 134; Cases filed - 50

•Criminal Investigations •79 cases closed with guilty pleas/convictions •113 Individuals indicted

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ERISA - Basics

•Who is a fiduciary? •ERISA 3(21); de facto fiduciaries

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ERISA Basics (continued)

•Fiduciary Duties – ERISA 404 •Eye single to Participants & Beneficiaries •Diversification •Prudence •Follow plan documents, unless contrary to ERISA

• Personal Liability – ERISA 409

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ERISA Basics (continued)• Prohibited Transactions – ERISA 406

• (a) Violations – Plan and Party-In-Interest • Furnishing goods or services

• Extension of credit or loans • (b) Violations – Fiduciaries

• Self-dealing • Kickbacks

• Exemptions – ERISA 408 • Contract or arrangement is reasonable • Services are necessary for the establishment or operation of the Plan • No more than reasonable compensation is paid for services

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Prudent Investments• "All that is required of a trustee to invest is, that he shall conduct

himself faithfully and exercise sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.“ Harvard Coll. v. Amory, 26 Mass. 446, 461 (1830)

• CARE, SKILL, PRUDENCE under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character with like aims.

• What a hypothetical prudent fiduciary would do under comparable circumstances?

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Prudent Investments• Risk of Loss • Opportunity for Return • Diversification • Liquidity • Current Return/Projected Return

• MFs, ETF, Target Date, Alternatives, Bit Coin

• Fee Disclosures, Indirect Compensation

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Fee Litigation Craze• Plaintiffs’ Bar Interest

•Smaller plans now exposed •Recruiting Plan participants

•Demand for plan documents • “instrument under which the plan is established or operated” • Minutes?

• Tibble v. Edison •Ongoing duty to monitor the prudence of plan investments

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Fee Litigation Craze (continued)•Complaint

• Record keeping fees too high for the size of the plan • Fiduciaries failed to have RFPs to ensure reasonableness

•George v. Kraft Foods (7th Cir. 2011) •An independent opinion is not a magic wand that a fiduciary may simply waive over a transaction to ensure their responsibilities are fulfilled (citing to Donovan v. Cunningham)

• Record keepers paid through revenue sharing • Share of classes used more expensive than others

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Fee Litigation Craze (continued)•Settlements

•American Airlines (N.D. Tex., 2017) - $22M •Northrop Grumman (C.D. CA., 2017) - $16.75M •Mass Mutual (D. Mass., 2016) - $30.9M •Novant Health (M.D. N.C., 2016) - $32M •Boeing (S.D. Ill., 2015) - $57M •Ameriprise (D. Minn., 2015) - $27.5M •Lockheed (S.D. Ill., 2015) - $62M

•Subsequent remedial measures? •Negotiating reductions in fees from IMs and record keepers

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RFP?George V. Kraft Foods, 641 F.3d 786 (7th Cir. 2011) Selection: Soliciting bids among SP at the outset is a means by which the fiduciary can obtain the necessary information relevant to the decision-making process. Monitoring: • fiduciary's knowledge of a service provider's work product • the cost and quality of services • fiduciary's knowledge of prevailing rates for the services • cost to the plan of conducting a particular selection process.

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DOL Investigation – Why?• National or Regional Initiative

• Delinquent Contributions • ESOPs • Fiduciary Service Provider Compensation Project

• Computer Targeting • Based on the information on the Form 5500s (debt/equity ratio,

cash, fees and expenses, real estate). • Geographic region, plan size

• Participant Complaint • Agency Referrals (IRS, SEC, etc) • News/media

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DOL Investigation – Investigation Subjects• All types of Employee Benefit Plans – retirement, health,

apprenticeship, etc. • Plan Sponsors • Plan Trustees • Named Fiduciaries • De facto (functional) fiduciaries • Plan Administrators • Service Providers

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DOL Investigation – Request for Documents

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DOL Investigation – Request for Documents

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DOL Investigation – Request for Documents

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DOL Investigation – Request for Documents

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DOL Investigation – Administrative Subpoenas. Statutory Authority - ERISA Section 504(c). For the purposes of any Title I ERISA investigation, the provisions

of sections 9 and 10 of the Federal Trade Commission Act are applicable to the jurisdiction, powers, and duties of the Secretary or any officers designated by him. These provisions give the Secretary 1) the authority to administer oaths, 2) the power to compel the attendance of witnesses, and 3) the access to and the right to copy documentary evidence.

• Subpoena Duces Tecum. A subpoena duces tecum is a command to a person or organization to appear at a specified time and place and to bring certain designated documents, to produce the documents, and to testify as to their authenticity as well as any other matter concerning which proper inquiry is made.

• Subpoena Ad Testificandum. A subpoena ad testificandum is a command to a named individual or corporation to appear at a specified time and place to give oral testimony under oath. A verbatim transcript is made of this testimony.

• Accommodation Subpoena. An accommodation subpoena is a subpoena issued to persons or entities who are willing to testify or to produce the documents requested but are concerned about protecting themselves from any potential adverse consequences of doing so without a legal requirement.

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DOL Investigation - Interviews• Generally – location, who will be present

• Who, what, where, when and how?

• LIMITED SCOPE. Use of Authority: ERISA Section 504 – The Secretary shall have the power, in order to determine whether any person has violated or is about to violate any provision of Title I of ERISA

• Body language? • Types of Questions- direct/closed, open-ended, leading

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DOL Investigation– Interview Questions• General

❑ Name, SS#, Title and duties and responsibilities? How long in this role?

❑ How long have they been in the industry? Any formal fiduciary training? ❑ Tell me about the history of the plan?

❑ How many employees working for the plan?

❑ How many participants in the plan? When are they eligible to participate in the plans?

• Plan Administration ❑ Who does what under the plan documents? Who does what in practice? ❑ Are there organizational structures, administrative manuals or guidelines as to allocation of administrative

responsibilities?

❑ Who appoints whom? Who supervises whom? ❑ Claims procedures in operation?

❑ Complaints from participants - who is designated to handled complaints and/or inquires? Any written responses? Who reviews this persons decisions? Appeals process?

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DOL Investigation– Interview Questions• Plan Expenses

❑ Proper services for which payment can be made by a plan?

❑ Review procedure for monitoring any such expenses.

❑ many participants in the plan? When are they eligible to participate in the plans?

• Plan Investments

❑ Review Plan Investment Structure. Are there investment guidelines, funding and proxy voting policies in writing and in effect?

❑ Are they being followed? Review minutes of trustee meetings.

❑ How is adherence to guidelines and policies, etc. being monitored-- use of outside advisors?

❑ Alternative Investments (hard to value assets)

• Service Providers

❑ who are your service providers? What service do they perform? How were they selected?

❑ Any request for proposals? Who prepared the RFP and under what guidelines?

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DOL Investigation - Conclusion• VC Letter – Findings • Settlement – ERISA 502(l) penalty • Referral to Solicitor’s Office

• DOL’s Voluntary Fiduciary Correction Program (VFCP)

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Missing Participants• Use Certified Mail • Check Related Plan and Employer Records • Check With Designated Plan Beneficiary • Use Free Electronic Search Tools

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Participant Education• Mobile Applications • On Site Seminars • Mailings • Plan SPD • In Office Private Consultations • Addition of Financial Advisory Services • Initial education upon Enrollment

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Fiduciary Liability Coverage

•Notice Requirements •Failure to provide timely notice

• no coverage •Various scenarios:

• Demand letter (pre-litigation) • Complaint • DOL “Investigation” • ERISA 510 claim (notice to EPL but fail to notice Fiduciary Policy or vice-versa)

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Fidelity Bond• ERISA 412

•REQUIRES every person who “handles” plan assets be bonded • Who has authority to sign checks, disburse funds?

•Purpose • To protect against misappropriation by persons handling plan assets

•Amount Required • Amount equal to 10% of a plan’s assets – max. required bond is $500,000 - can purchase with plan assets

• If include employer securities - $1M - can purchase with plan assets

•Exclusion for Cyber Crime?

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Biography

Darren Cohen Regional Director, U.S. Department of Labor, Employee Benefits Security

Administration, New York Region

Darren Cohen is the Regional Director of the U.S. Department of Labor’s New York Regional Office of the Employee Benefits Security Administration (EBSA). He is responsible for overseeing the Regional Office’s civil enforcement program, which seeks to obtain compliance with the fiduciary, reporting, and disclosure provisions of Title I of ERISA. He is also responsible for the Office’s criminal enforcement program which is handled in conjunction with the US Attorney’s Offices as well as state and local prosecutors. Prior to joining EBSA, Mr. Cohen was the Deputy Regional Solicitor and ERISA Counsel in the New York Office of the U.S. Department of Labor, Office of the Solicitor. Prior to joining the U.S. Department of Labor, Mr. Cohen worked at two New York law firms and clerked for the Honorable Cecilia M. Altonaga, U.S. District Judge for the Southern District of Florida. Mr. Cohen received his J.D. from Yale Law School and his B.A. from Columbia University.

Tobias Spruill-Lewis Senior Counsel - Employment Law Group Legal, Regulatory and Compliance QBE North America Email: Tobias.Spruill-Lewis@us.qbe.com

Tobias Spruill-Lewis is Senior Counsel - Employment Law Group at QBE Americas, Inc. and advises on issues regarding employment law, employee benefits and executive compensation. His responsibilities include drafting employee policies and agreements, serving as the legal advisor to the ERISA Benefits Committee and HIPAA Security Team, counseling on employee relations matters, advising on HR-aspects of mergers and acquisitions, presenting HR-related trainings and handling employment/benefits administrative charges, litigation and audits. Prior to his current role, he practiced at the law firms of Latham & Watkins LLP and Willkie Farr & Gallagher LLP. He holds: (1) a Bachelor of Science in Applied Economics and Management from Cornell University, (2) a Master of Business Administration (with concentrations in Marketing and Strategy) from New York University (NYU), (3) a Master of Laws in Taxation from NYU, and (4) a Juris Doctor from NYU.

Biography

José Jara has over 20 years of ERISA and employee benefits law experience and is a partner and the ERISA and Employee Benefits Practice Group Leader at CKR Law. In the field of employee benefits law, he provides innovative solutions to his clients by incorporating into his guidance a business and practical perspective.

Biography Jose M. Jara

Partner, ERISA and Employee Benefits Practice Group Leader CKR Law LLP

1330 Avenue of the Americas, 14th Floor New York, NY 10019 Phone: (212) 259-7338 Fax: (212) 259-8200

jjara@ckrlaw.com www.ckrlaw.com

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