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“Critical ERISA Issues”

Roberta J. Ufford

Groom Law Group, Chartered

March 31, 2010

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Pending Disclosure Regulation Investment Advice 401(k) Fee Litigation Update DOL Enforcement Other New Guidance Tips for Service Providers

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Pending Disclosure Regulation

Amendment of Form 5500 Schedule C requires more disclosure of compensation paid directly and indirectly for plan services, after compensation is paid. 72 Fed. Reg. 64710 and 64731 (Nov. 16, 2007).

“Point of Sale” Disclosure – 2007 proposed amendment of ERISA section 408(b)(2) regulation (services exemption) would require disclosure by “covered” service providers. Final regulation is pending. 72 Fed. Reg. 70988 (Dec. 13, 2007) (proposed regulation).

Proposed rules would enhance disclosures provided to participants in participant-directed pension plans. Final regulation is pending. 73 Fed. Reg. 43014 (July 23, 2008) (proposed regulation).

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Service Provider Disclosure Form 5500 – Schedule C

Report service providers receiving $5000 or more direct and indirect compensation paid by the plan. Applies if plan has more than 100 participants.

Indirect compensation – paid from sources other than plan or plan sponsor and “in connection with services to the plan or the person’s position with the plan,” examples: Finder’s fees, float, brokerage commissions, soft dollars and other

“transaction-based fees” received in connection with plan transactions or services.

Amounts charged to plan investments and reflected in unit value, including management fees and 12b-1 fees, but not “investment fund” operating expenses, e.g., portfolio brokerage expenses.

Meals, gifts and entertainment received by employees of plan sponsors and service providers.

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Participant Investment Advice

ERISA § 408(b)(14) exempts (i) provision of advice to participants of participant-directed plans by a “fiduciary adviser” and (ii) receipt of compensation by fiduciary adviser or an affiliate resulting from the advice, if conditions of ERISA Section 408(g) are met.

ERISA Section 408(g) describes two Eligible Arrangements: Level-fees: Adviser’s fees do not vary based on advice.

Computer Model: Adviser provides advice using a computer model certified by an independent expert.

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Participant Investment Advice Proposed Reg. § 2550.408g-1 generally tracks

requirements under Section 408(g). Plan fiduciary must authorize arrangement for plan. Advice is provided under an “eligible arrangement.” Detailed participant disclosure, including all program

fees and the fiduciary adviser’s compensation arrangement. (proposed rule provides non-mandatory form).

Annual independent audit of services. 75 Fed. Reg. 9360 (March 2, 2010).

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Participant Investment Advice

Compared to 2009 rule (withdrawn), the new proposed rule: Does not provide relief for “off-model advice” if a

computer model is used. For level fee arrangements, (i) requires that entity’s fees

are “level” - even if individual agent/representative’s fees do not change based on advice provided, and (ii) limits fees received by fiduciary advisers from affiliates.

Importantly, does not change EBSA’s other prior regulation, exemptions, interpretative or other guidance addressing participant advice programs.

E.g., dollar-for-dollar offset and ‘SunAmerica’ programs are preserved.

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Litigation – 401(k) Fee Lawsuits Claims by participants against plan sponsors allege:

Service arrangements with “unreasonable,” “hidden” and “excessive” fees are imprudent.

Plan sponsor fiduciaries did not understand/recognize revenue sharing arrangements.

Fiduciaries did not disclose to participants in “proper detail and clarity” fees and expenses, including “revenue-sharing.”

Claims against financial institutions and other service providers (by participants and/or plan sponsors) allege: Service provider is a fiduciary based on selection of plan

options and/or failure to disclose fees, and Breached fiduciary duties by failing to disclose and engaging

in prohibited transactions, e.g.,“using” plan assets, self-dealing, receiving kickbacks.

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Litigation – 401(k) Fee Lawsuits

Hecker v. Deere & Co., 496 F. Supp. 967 (W.D. Wisc. 2007), aff’d 556 F.3d 575 (7th Cir. 2009). Fidelity not a fiduciary because plan sponsor selected

plan investment options. Revenue-sharing not material and need not be

disclosed to participants. Because plan offered a broad selection of funds,

offering allegedly expensive fund options not a fiduciary breach.

ERISA section 404(c) defense also precluded liability for fund selection.

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Litigation – 401(k) Fee Lawsuits

Young v. General Motors Investment Management Corp., 325 Fed.Appx. 31, 2009 WL 1230350 (2d Cir. 2009). 2d Circuit affirmed dismissal because participants did not allege

facts showing excessive fees.

Braden v. Wal-Mart Stores, Inc., 590 F.Supp.2d 1159 (W.D. Mo. 2008), decision vacated 588 F.3d. 585 (8th Cir. Nov. 25, 2009). District court dismissed, but 8th Circuit remanded, holding that

fiduciaries must disclose “material” information to participants, including fund expense and revenue sharing information.

Tussey v. ABB Inc., 2008 WL 379666 (W.D. Mo. 2008). In case similar to Deere, court denied motions to dismiss by ABB

and Fidelity; trial held January 2010.

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Litigation – 401(k) Fee Lawsuits

Columbia Air Services, Inc. v. Fidelity Management Trust Co., 2008 WL 4457861 (D. Mass. 2008). Court granted Fidelity motion to dismiss because plaintiff did

not allege Fidelity was a fiduciary in setting its compensation or selecting plan investment options.

Ruppert v. Principal Life Ins. Co., 4:07-CV-00344 (S.D. Iowa Nov. 5, 2009). Ruling on a motion for judgment on pleadings, court dismissed

claims against Principal. For purpose of its motion, Principal did not disclaim fiduciary status. Court (i) followed Deere, holding that revenue sharing need not be disclosed, and (ii) held that Principal’s fees were not unreasonable, because factored into fees charged to the plan. A motion for reconsideration by 8th Circuit has been filed.

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Litigation – 401(k) Fee Lawsuits

In suits by plan sponsors against insurers offering group annuity contracts to fund 401(k) plans (insurers receive fees from mutual funds offered through these contracts), courts have held that insurers may be, or are fiduciaries. Charters v. John Hancock Life Ins. Co., 583 F. Supp.2d 189 (D.

Conn. 2007); Phones Plus, Inc. v. The Hartford Financial Services Group, Inc., 2007 WL 3124733 (D. Conn 2007); Haddock v. Nationwide Fin. Services, Inc., 419 F.Supp.2d 156 (D. Conn. 2006).

Further, court granted plan sponsor motion for class certification in Haddock, concluding that plan by plan decision on Nationwide’s fiduciary status is not required.

262 F.R.D. 97 (D. Conn. 2009); compare Ruppert v. Principal Life Ins. Co., 2007 WL 2025233 (S.D. Iowa 2007) (denying motion for class certification).

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Litigation – 401(k) Fee Lawsuits

Recent Settlements Charters v. John Hancock Life Ins. Co., Civil Action No. 07-

11371-NMG (D. Mass. Aug. 21, 2009) – Parties settled and plaintiff voluntarily dismissed claims. Discovery revealed that Hancock applied revenue sharing payment to reduce administrative fees charged to plans.

Phones Plus, Inc. v. The Hartford Financial Services Group, Inc.,Civil Action No. 3:06-CV-01835-AVC (D. Conn. Feb. 11, 2010) – Settled for $14 million (about $7 million in attorneys fees proposed).

Martin v. Caterpillar, Inc., Civil Action No. 1:07-CV-01009 (C.D. Ill. November 5, 2009) – Lawsuit settled for $16.5 million ($5.8 million in attorneys fees) plus Caterpillar agreement to certain restrictions on plan operations.

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EBSA Enforcement - 2009

$1.36 billion in total monetary results. 3669 civil investigations closed.

77% resulted in monetary recovery or other correction. 204 referred for litigation;107 cases filed.

287 criminal investigations. 365,457 participant and beneficiary inquiries.

970 investigations opened. See www.dol.gov/ebsa/newsroom/fsFYagencyresults.html

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EBSA Enforcement - Priorities

Delinquent Contributions/Contributory Plans Criminal Project (CPCP)

Employee Stock Ownership Plans Consultant/Adviser Project Participant and Beneficiary Complaints 5500 Desk Review/Non-Filer Enforcement

See www.dol.gov/erisa/erisa-enforcement.html

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Other New EBSA Guidance

DOL Advisory Opinion 2009-04 (Dec. 4, 2009) – Target date or life cycle mutual funds do not hold “plan assets” subject to ERISA.

DOL Advisory Opinion 2009-03A (Oct. 27, 2009) – IRA owner may not grant broker security interest in non-IRA assets to cover potential IRA indebtedness.

DOL Advisory Opinion 2009-01A (Jan. 13, 2009) – Investment of plan assets in bank deposits.

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Other New EBSA Guidance

Definition of Plan Assets – Participant Contributions, 75 Fed. Reg. 2068 (Jan. 14, 2010) – Final regulation establishes 7-day safe harbor for transmitting employee contributions to small plans (100 or fewer employees).

RFI – Lifetime Income Options for Participants and Beneficiaries in Retirement Plans, 75 Fed. Reg. 5253 (Feb. 2, 2010).

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Other New EBSA Guidance

FAB 2010-01 – Annual Reporting and ERISA Coverage for 403(b) Plans

FAB 2009-02 – Form 5500 Reporting by 403(b) Plans

FAB 2009-03 – Use of “Summary Prospectus”

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EBSA Regulatory Agenda

Definition of Fiduciary – EBSA is reviewing the regulatory definition of “investment advice”.

EBSA is concerned that definition allows some consultants/advisers to evade fiduciary responsibility.

Target Date Funds

Working with SEC staff to provide guidance that would address concerns about disclosure and fiduciary standards for selection of TDFs.

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Tips for Service Providers

Minimize, by contract, risk of fiduciary status.

Include clear contractual disclaimers.

Review negative consent process.

Contractual basis for negative consent.

Disclosure, timing and other process issues.

Review activities resulting in unintended fiduciary status, such as advisory or consulting roles.

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Tips for Service Providers

If accepting fiduciary status, review compliance. Avoid potential fee conflicts or review exemption

compliance. Directed trustee responsibilities.

Ensure clear, complete disclosure. Fees plans pay directly All compensation received – “direct” and “indirect” Compensation paid to third parties Notice of potential conflicts Document responsibility and “non-responsibility”

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Questions?

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

Groom Law Group, Chartered1701 Pennsylvania Avenue, NW

Suite 1200Washington, DC 20006

rju@groom.com