fiduciary compliance checklist...fiduciary compliance checklist september 2015; updated may 2016 8...

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Fiduciary Compliance Checklist

For ERISA and Non-ERISA Code Section 403(b) Plans Anne Tyler Halli Hall Benefits Law Updated May 2016

Fiduciary Compliance Checklist September 2015; updated May 2016

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The primary purposes of this fiduciary checklist (“Checklist”) are:

To assist plan sponsors of Internal Revenue Code of 1986 (“Code”) Section 403(b) plans

(“403(b) Plans”) in determining whether their plan is subject to applicable Employee

Retirement Income Security Act of 1974 (ERISA) requirements; and

To provide guidance to ERISA and non-ERISA 403(b) Plan sponsors with respect to the

identification of fiduciaries and their responsibilities. Sections 1 through 8 of this Checklist

cover the legal requirements applicable to fiduciaries of ERISA 403(b) Plans. Sections 9

through 11 of this Checklist cover non-ERISA 403(b) Plans.

This Checklist provides general guidance and does not address each plan sponsor’s individual

facts and circumstances that may impact fiduciary compliance requirements. For purposes of

this Checklist, “you” refers to the 403(b) Plan sponsor (or employer) and defined terms are

italicized.


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Table of Contents

403(b) Fiduciary Checklist for ERISA Plans .................................................................... 7

Section 1: When is a 403(b) Plan an ERISA Plan? ..................................................... 7

Overview ..................................................................................................................................7

403(b) Plan ERISA Status Checklist ........................................................................................7

403(b) Plan Investments ........................................................................................................ 8

Potential Penalty ..................................................................................................................... 9

Section 2: Who is an ERISA 403(b) Plan Fiduciary? ................................................. 10

Identifying ERISA Fiduciaries Checklist ...............................................................................10

ERISA 3(21) Fiduciaries ........................................................................................................10

ERISA 3(16) Plan Administrator ....................................................................................... 11

Investment Committee ...................................................................................................... 11

Allocating Fiduciary Responsibility and Co-Fiduciary Liability ....................................... 11

Recommended Ongoing Compliance Measures .................................................................... 12

Section 3: What Are An ERISA 403(b) Plan Fiduciary's Duties? .............................. 13

Prudent Man Standard of Care .............................................................................................. 13

Exclusive Benefit Duty ....................................................................................................... 13

Prudent Expert Duty .......................................................................................................... 14

Diversification Duty ........................................................................................................... 15

Plan Adherence Duty ......................................................................................................... 15

Disclosure Requirements ................................................................................................... 15

Section 4: Is a 403(b) Plan Fiduciary Personally Liable for a Breach? ..................... 16

Overview ................................................................................................................................ 16

Limiting Liability ............................................................................................................... 17

Fiduciary Liability Insurance ............................................................................................. 17

Indemnification ................................................................................................................. 18

Recommended Ongoing Compliance Measures .................................................................... 18

Section 5: What Potential Penalties Apply to a 403(b) Plan Fiduciary? .................... 18

Overview ................................................................................................................................ 19


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Summary of Applicable Law .................................................................................................. 19

Prohibited Transaction Liability ........................................................................................ 19

Prohibited Transactions with Parties in Interest .............................................................. 19

Fiduciary Self-Dealing Prohibited Transactions .............................................................. 20

Party in Interest ................................................................................................................ 20

Penalties ............................................................................................................................. 21

Prohibited Transaction Exemptions .................................................................................. 21

DOL Civil Penalty .............................................................................................................. 22

Criminal Liability .............................................................................................................. 22

Recommended Ongoing Compliance Measures ................................................................... 22

For a 403(b) Plan sponsor: ............................................................................................... 22

For a 403(b) Plan Fiduciary: ............................................................................................ 23

Section 6: Overview of Pitfalls from Fiduciary Breach Cases ................................... 23

Summary of Applicable Law ................................................................................................. 23

Tatum v. RJR Pension Inv. Committee ............................................................................ 23

Tussey v. ABB, Inc. ........................................................................................................... 25


Section 7: Distinction Between Settlor (Non-Fiduciary) and Fiduciary Activities ........ 27

Overview ............................................................................................................................... 27


Settlor Functions............................................................................................................... 27

Ministerial Functions ........................................................................................................ 28

Investment Decisions........................................................................................................ 29

Fiduciary Functions .......................................................................................................... 30


Section 8: Best Practices for Avoiding a Fiduciary Breach ........................................ 31

Section 9: Non-ERISA 403(b) Plans .......................................................................... 32

403(b) Checklist for Non-ERISA Plans ................................................................................ 32



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DOL Safe Harbor .............................................................................................................. 32

Reasonable Choice ............................................................................................................ 33

FAB 2007-02..................................................................................................................... 33

FAB 2010-01 ..................................................................................................................... 34


Section 10: Updates to 403(b) Plan Requirements for Non-ERISA 403(b) Plans ...... 35


403(b) Regulation Changes .............................................................................................. 36


Section 11: Overview of Pitfalls from non-ERISA 403(b) Plan Breach Case ............. 37



Section 12: 403(b) Plan Sponsor and the New Fiduciary Standard ........................... 39


New Definition of Fiduciary................................................................................................... 41

Rollovers to IRAs from Participants Leaving the 403(b) Plan ............................................. 42

Exceptions Within the Final Rule ......................................................................................... 42

Investment Education ....................................................................................................... 42

403(b) Plan Sponsor Employees ...................................................................................... 43

Platform Providers ............................................................................................................ 44

Selection and Monitoring Assistance ............................................................................... 44

Sales Pitches to 403(b) Plan Fiduciaries with Financial Expertise .................................. 44

Best Interest Contract Exemption .................................................................................... 45

Adviser Must Be a Fiduciary ............................................................................................. 45

Impartial Conduct Standards ........................................................................................... 46

Warranties by the Financial Institution ........................................................................... 46

Required Disclosures ........................................................................................................ 47

Financial Institution Cannot Disclaim Fiduciary Responsibility ..................................... 49

Exclusions ......................................................................................................................... 50


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Summary of the BICE ....................................................................................................... 50

Timing of Final Rule ............................................................................................................. 50


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403(b) Fiduciary Checklist for ERISA Plans

Section 1: When is a 403(b) Plan an ERISA Plan?

Overview

Included in Title I of ERISA are numerous fiduciary requirements that a 403(b) Plan subject to

ERISA must follow. 1 Generally, ERISA is a federal law that is designed to protect employees

who are enrolled in an employer pension or retirement plan. The fiduciary requirements under

ERISA are enforced by the Department of Labor (DOL). ERISA contains numerous well-

established fiduciary requirements that a 403(b) Plan subject to ERISA must follow. The

fiduciary rules are designed to help ensure that employers (and those appointed by the

employer) who administer the 403(b) Plan are acting in the best interest of the employees and

participants in the plan.

Only plans that are subject to ERISA are subject to the ERISA fiduciary rules. Generally, a

403(b) Plan is subject to ERISA if the plan sponsor is not a church or governmental entity, and

the sponsor makes employer contributions or otherwise exercises discretion in administering

the plan. However, even if a 403(b) Plan is not subject to ERISA, ERISA-like fiduciary rules may

apply to the plan. In addition, all 403(b) Plans are subject to requirements under the Code that

govern 403(b) Plans.2

403(b) Plan ERISA Status Checklist

Generally, a 403(b) Plan is subject to ERISA if the plan is "established or maintained" by an

employer or employee organization.3 The main exception to this general rule includes plans that

are governmental plans,4 church plans,5 and plans established to comply with workers’

compensation or disability insurance laws.6 If a 403(b) Plan is established by a church or a

governmental entity, it generally is not subject to ERISA.7 The determination of whether an

employer is a “church” or “government,” as defined by ERISA, involves a complex analysis. It is

1 See, e.g., ERISA § 404(a). 2 Note that certain rules may apply differently to church and governmental 403(b) plans. 3 ERISA § 3(2)(A). 4 As defined under ERISA § 3(32). 5 As defined under ERISA § 3(33). 6 ERISA § 4(b). 7 Note that churches can elect ERISA coverage.


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recommended that plan sponsors consult with an ERISA attorney when making such a

determination.

If a 403(b) Plan sponsor is not a “church” or “government,” in order to avoid being subject to

ERISA, the plan sponsor (i.e., employer) may not have responsibility for, or make, discretionary

determinations in administering the 403(b) Plan.8 The checklist below incorporates factors

outlined by the DOL that determine ERISA status for plans that are not church or governmental.

If the answer to any of the following questions is “yes,” it is an ERISA plan.9

Yes No

Do you authorize plan-to-plan

transfers?

Do you process distributions?10

Do you make determinations regarding

hardship distributions?

Do you make determinations regarding

qualified domestic relations

orders (QDROs)?

Do you determine eligibility for, or

enforce plan loans?

Does the 403(b) Plan have automatic

enrollment provisions, or is

enrollment otherwise not completely

voluntary?

403(b) Plan Investments

8 29 CFR § 2510.3-2(f). 9 29 CFR § 2510.3-2(f); Field Assistance Bulletins (FABs) 2007-02 and 2010-01. 10 This includes signing off on a third party’s distribution paperwork.


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A plan sponsor’s involvement with respect to management of 403(b) Plan investments must also

be significantly limited to avoid ERISA status.11 If the answer to any of the following is “yes,” the

plan is subject to ERISA.

Yes No

Do you negotiate with vendors to change the

terms of their products?12

Do you unilaterally move employee funds from

one provider to contracts or accounts of

another provider?

Do you hire a third party administrator (TPA)

to make discretionary determinations on your

behalf?

Do you limit service providers and investment

products available under the 403(b) Plan?13

As outlined above, even limited employer involvement may implicate ERISA status for a 403(b)

Plan. Section 9 of the Checklist provides a comprehensive overview of permissible employer

functions for a non-ERISA 403(b) Plan.

Potential Penalty

If a 403(b) Plan is subject to ERISA, one of the most significant non-compliance penalties is the

failure to file a Form 5500. The penalty is equal to $1,100 a day (no maximum) for a plan

administrator that fails to file a complete and accurate Form 5500. The IRS may also impose a

penalty for failing to timely file a complete annual return equal to $25 for each day a plan

11 For plans that are neither church nor government plans. 12 For example, establishing conditions for hardship withdrawals. 13 Because the new contract exchange rules under the final 403(b) regulations newly restrict participant's ability to move 403(b) investments, FAB 2007-2 noted that nonprofit entities “may” be required to “offer a wider variety of products in order to afford employees a reasonable choice in light of all relevant circumstances” for purposes of maintaining non-ERISA 403(b) Plan status.


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administrator fails to file a Form 5500 (up to $15,000).14

In addition, and as described in more detail below in Section 5 of this Checklist, an ERISA

403(b) Plan sponsor may be subject to liability for breach of fiduciary duties. Actions can be

brought by the DOL, participants, beneficiaries, or other fiduciaries. Remedies include the

potential for substantial monetary damages. In addition, the DOL may assess a civil penalty15 on

a fiduciary for breach of his or her fiduciary duties.

Section 2: Who is an ERISA 403(b) Plan Fiduciary?

Identifying ERISA Fiduciaries Checklist

In order to avoid the potential stringent ERISA penalties associated with breach of fiduciary

responsibility (and set forth in Section 1 above), it is important to understand who is included as

an ERISA 403(b) Plan fiduciary. Generally, individuals who are employed by the 403(b) Plan

sponsor and are involved with day-to-day plan administration are defined as an ERISA Section

3(21) fiduciary.

ERISA 3(21) Fiduciaries

Individuals involved in 403(b) Plan administration who respond "Yes" to any of the following

are included in the ERISA 3(21) definition of a fiduciary with respect to the 403(b) Plan.

Yes No

Do you exercise any discretionary authority or

discretionary control over management of the

403(b) Plan?

Do you have any discretionary authority or

responsibility with respect to administration of

the 403(b) Plan?

Do you exercise any authority or control with

respect to management or disposition of the

14 Code § 6652. 15 ERISA § 502(l); the civil penalty is equal to 20% of the “applicable recovery” amount.


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403(b) Plans assets? 16

A 403(b) Plan’s fiduciaries will typically include the trustee, investment advisers, and any

individual exercising discretion in the administration of the plan. The key to determining

whether an individual or entity is a fiduciary is whether he or she is exercising discretion or

control over the 403(b) Plan.17

ERISA 3(16) Plan Administrator

An ERISA 3(16) plan administrator is typically given discretionary authority to administer the

plan. Consequently, a plan administrator is included as an ERISA 3(21) fiduciary. A plan

administrator is defined as:

1. a person specifically named in the 403(b) Plan; or

2. the plan sponsor if a plan administrator is not named.18

Investment Committee

A 403(b) Plan sponsor may designate an investment committee to help select contracts for

403(b) Plan investments. Members of the 403(b) Plan investment committee, including those

who select investment committee officials, are plan fiduciaries. Additionally, any third party

who renders investment advice for a fee or other direct or indirect compensation is an ERISA

3(21) fiduciary.19 In the absence of an investment committee, any individual with authority to

select 403(b) Plan investments is also considered a 403(b) Plan fiduciary.

Allocating Fiduciary Responsibility and Co-Fiduciary Liability

A 403(b) Plan may include procedures for allocating administrative and other fiduciary

responsibilities among named fiduciaries or other unnamed fiduciaries.20 However, under

ERISA, the act of designating other fiduciaries is itself a fiduciary act for which the appointing

16 ERISA §3(21)(A)(i) and (iii). If a 403(b) Plan has a trust, the trustee is a fiduciary and should be named in the trust and/or plan document. 17 DOL, Employee Benefits Security Administration, Meeting Your Fiduciary Responsibilities, available at http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html (last visited September 10, 2015). 18 ERISA § 16(A). 19 ERISA § 3(21)(A)(ii). 20 In most 403(b) Plans, the plan administrator is given broad authority to designate responsibilities.

http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html


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fiduciary can be held liable.21 Consequently, if a third party (i.e., investment manager) does not

adhere to the prudent man standard of care (as described in Section 3 below), the 403(b) Plan

fiduciaries who selected such investment manager may be held liable for the investment

manager’s acts or omissions.

ERISA limits delegating fiduciary liability exposure, except to the extent that such delegating

fiduciary:

does not adhere to the prudent man standard of care (as described in Section 3 below) with

respect to the allocation or designation of the fiduciary responsibility;

does not adhere to the prudent man standard of care with respect to the establishment and

implementation of 403(b) Plan procedures for delegating fiduciary responsibility; or

continues to allocate responsibility to another fiduciary that in any way violates the prudent

man standard of care.22

Additionally, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility,

conceals the breach, or does not act to correct it, that fiduciary is also liable.23

Recommended Ongoing Compliance Measures

The criteria set forth above should be closely monitored in order to determine who is a fiduciary

for an ERISA 403(b) Plan. Generally, if an individual has discretionary authority over the

management, administration, or assets of a 403(b) Plan, he or she is a fiduciary of such plan

(even if not named in the 403(b) Plan document). It is recommended that 403(b) Plan sponsors:

identify 403(b) Plan fiduciaries at least annually and upon any change in Plan sponsor

management structure or staffing;

educate 403(b) Plan fiduciaries on their responsibilities (as is described in this checklist) at

least annually and upon fiduciary (i.e., staff) changes;

establish a 403(b) Plan investment committee that meets at least annually to facilitate a

formalized process for evaluating 403(b) Plan vendors and investments; and

21 ERISA § 405(c)(2). 22 ERISA § 405(c)(2)(A)(i)-(iii). 23 ERISA § 405(a)(1).


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ensure 403(b) Plan procedures are expressly stated and followed with respect to allocating

fiduciary responsibility.

Section 3: What Are An ERISA 403(b) Plan Fiduciary's Duties?

Prudent Man Standard of Care

ERISA sets forth a general standard of care that fiduciaries must follow in order to avoid

liability. Under the prudent man standard of care, a 403(b) Plan fiduciary must act in the best

interest of the participants and beneficiaries, and ensure that 403(b) Plan assets are diversified,

plan expenses are reasonable, and the terms of the plan and ERISA are followed. The following

description of the standard of behavior demanded of fiduciaries has been cited frequently in

ERISA fiduciary duty cases:

“Many forms of conduct permissible in a workaday world for those acting at arm’s length, are

forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the

morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive,

is then the standard of behavior…the level of conduct for fiduciaries [is] kept at a level higher

than that trodden by the crowd.”24

The following provides an overview of the fiduciary duties inherent in the prudent man standard

of care.

Exclusive Benefit Duty

Generally, a fiduciary must discharge his or her 403(b) Plan duties solely in the interest of the

participants and beneficiaries, and for the exclusive purpose of:

1. providing benefits to participants and their beneficiaries; and

24 See, e.g., Edmonds v. Hughes Aircraft Co., 145 F.3d 1324 (4th Cir. 1998) quoting Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928) (Cardozo, J.).


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2. covering reasonable expenses of administering the plan.25

Pursuant to the exclusive benefit duty, a 403(b) Plan fiduciary should perform the following

functions:

review proposals from multiple service providers before selecting a 403(b) Plan vendor;

benchmark (or compare), at least annually, 403(b) Plan fees to ensure amounts paid are

reasonable; and

replace service providers whose fees are excessive, or document other bona fide business

reasons for retaining such service providers.

Prudent Expert Duty

Under the prudent expert requirement, a 403(b) Plan fiduciary must operate the plan in

accordance with the care, skill, prudence, and diligence that a prudent man acting in a like

capacity and familiar with such matters would use.26 Of special concern is the prudent expert

requirement that a 403(b) Plan fiduciary act as someone, “familiar with such matters.”27 This

means that lack of expertise in a particular area is not a valid defense for a 403(b) Plan fiduciary.

To avoid non-compliance with the prudent expert requirement, a 403(b) Plan fiduciary should

adhere to the following guidelines:

hire a third party with the professional knowledge to carry out investment and other

functions if the 403(b) Plan fiduciary lacks expertise in a particular area;

implement guidelines and procedures for 403(b) Plan fiduciary decision-making;

document the basis for each 403(b) Plan fiduciary decision;

ensure proper oversight of third parties who are delegated certain 403(b) Plan administrative

duties (i.e., processing contributions and distributions, ensuring timely remission of

participant contributions, calculating eligibility, and vesting); and

carefully review all 403(b) Plan service provider contracts to ensure you understand what

services the vendor is, and is not, providing.

25 ERISA § 404(a)(1)(A)(i)&(ii). 26 ERISA § 404(a)(1)(B). 27 Id.


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Diversification Duty

Under the plan investment diversification requirement, a 403(b) Plan fiduciary must diversify

investments with the aim of minimizing the risk of large losses.28 Generally, a 403(b) Plan’s

fiduciary prudence, with respect to diversification of plan investments, is evaluated at the time

of purchase, rather than in hindsight.29 Under the plan diversification requirement, a 403(b)

Plan fiduciary should adhere to the following guidelines:

consider each plan investment in the context of the 403(b) Plan’s total investment portfolio;

scrutinize each investment alternative in comparison with other available alternatives;

consider whether the rate of return on an investment is commensurate with the prevailing

rate, and whether the investment permits sufficient liquidity for the 403(b) Plan to discharge

its current financial obligations; and

document, at least annually, investment evaluation and decision-making factors.

Plan Adherence Duty

The plan adherence duty requires a 403(b) Plan fiduciary to discharge his or her duties in

accordance with all documents and instruments governing the plan, unless 403(b) Plan terms

are inconsistent with ERISA. Under the plan adherence duty, a 403(b) Plan fiduciary should

perform the following functions:

decline a participant’s request to take a withdrawal (i.e., loan or hardship) if the 403(b) Plan

does not permit it; and

review the 403(b) Plan document, at least annually, to ensure it remains up-to-date with

current changes in the law.

Disclosure Requirements

ERISA requires the 403(b) Plan administrator to furnish plan information to participants and

beneficiaries and submit reports to government agencies. Accordingly, the following documents

28 ERISA § 404(a)(1)(C). 29 Tittle v. Enron Corp., 284 F.Supp.2d 511 (S.D. Tex. 2003).


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must be furnished to participants and beneficiaries:

a summary plan description within 90 days of the date an individual becomes a 403(b) Plan

participant and then every five years after;30

a summary of material modifications if the 403(b) Plan is amended within 210 days after the

end of the plan year in which the change is adopted;31

a Summary Annual Report, which must be provided annually;32

a quarterly statement that shows actual dollar amounts of fees and expenses charged to the

participant's accounts if the 403(b) Plan allows participants to direct the assets in their

accounts; and

participant notices, including automatic enrollment and Qualified Default Investment

Alternatives (QDIAs).

ERISA requires the 403(b) Plan administrator to submit the following report to the DOL:

Form 5500 Annual Report, filed within 210 days after the end of the 403(b) Plan year. A large

403(b) Plan (generally a plan with 100 participants or more) is required to have an

independent qualified public accountant prepare an audit of the plan's assets as a part of the

annual filing.33

Section 4: Is a 403(b) Plan Fiduciary Personally Liable for a Breach?

Overview

Generally, fiduciary liability is personal, absolute, and unlimited.34 A 403(b) Plan fiduciary who

breaches any of his or her ERISA responsibilities, obligations, or duties is personally liable to

restore any losses resulting from such breach. A 403(b) Plan fiduciary who breaches his or her

responsibilities under ERISA may also be subject to such other relief as a court may deem

30 ERISA § 104(b)(1) 31 Id. 32 29 CFR § 2520-104b-10. 33 ERISA § 103(a). See 29 CFR § 2520.103-1(d) for certain limited exceptions to the 100 participant large plan threshold. 34 ERISA § 409(a).


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appropriate, including removal of such fiduciary. For example, if an investment is not

adequately diversified, and a 403(b) Plan fiduciary responsible for selecting the provider is

found to have made imprudent investment choices, such fiduciary may be held personally liable

for the losses to the participants and beneficiaries. A 403(b) Plan fiduciary’s personal assets may

be used to restore plan losses resulting from such breach.35

Limiting Liability

Although a 403(b) Plan fiduciary may be held personally liable for plan losses, such liability can

be limited in certain situations. A 403(b) Plan can be designed to allow participants control over

their account investments and thereby limit a fiduciary’s liability for the investment decisions

made by the participants, or “ERISA 404(c) Safe Harbor.”36 Generally, the ERISA 404(c) Safe

Harbor requires:

a 403(b) Plan investment menu that includes diversified funds from equity, fixed income and

capital preservation asset classes;

investments under the 403(b) Plan that allow participants to control both the potential

returns and the degree of risk; and

three core options under the 403(b) Plan that are diversified and have materially different

risk and return characteristics.37

If a 403(b) Plan satisfies the ERISA 404(c) Safe Harbor, fiduciaries will not be liable for losses

that are the direct result of a participant’s exercise of control over the investment, or his or her

plan account.

Fiduciary Liability Insurance

Another alternative for a 403(b) Plan fiduciary to limit personal exposure to a fiduciary breach is

fiduciary liability insurance. Generally, any provision in an agreement that implies relief from

fiduciary responsibility or liability for any fiduciary responsibility, obligation, or duty, is invalid

under ERISA.38 Nothing, however, precludes:

a 403(b) Plan from purchasing insurance for its fiduciaries or for itself to cover liability or

35 Id. 36 ERISA § 404(c). 37 DOL, Employee Benefits Security Administration, Meeting Your Fiduciary Responsibilities, available at http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html (last visited September 10, 2015). 38 ERISA § 410(a).

http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html


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losses occurring by reason of the act or omission of a fiduciary, as long as such insurance

permits recourse by the insurer against the fiduciary;

a fiduciary from purchasing insurance to cover liability for his or her own account; or

an employer or employee organization from purchasing insurance to cover liability of one or

more persons who serve in a fiduciary capacity with regard to an employee benefit plan.

Indemnification

A 403(b) Plan sponsor may elect to include language in the 403(b) Plan document39

indemnifying fiduciaries for any negligence in the performance of their duties. However,

indemnification typically covers only a 403(b) Plan fiduciary’s negligence, or failure to take

proper care in his or her acts. Gross negligence, or recklessness (acts done with complete

disregard of the outcome) by a 403(b) Plan fiduciary are typically not indemnified.


To limit exposure to 403(b) Plan fiduciary liability, the following actions are recommended.

For a 403(b) Plan sponsor:

consider a 403(b) Plan design that allows participants control over their investments (and

thereby limits the liability of fiduciaries with respect to participant investment losses); and

if the 403(b) Plan includes indemnification language, consider purchasing fiduciary liability

insurance to cover losses with respect to any fiduciary breach claim.

For a 403(b) Plan Fiduciary:

consider purchasing fiduciary liability insurance to avoid personal asset losses; and

document decision-making processes and procedures to avoid fiduciary breach claims of

gross negligence or recklessness.

Section 5: What Potential Penalties Apply to a 403(b) Plan Fiduciary?

39 Indemnification language could also be found in a separate agreement with the fiduciary, a plan amendment, etc.


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Overview

Many 403(b) Plan fiduciaries are unaware that they can be subject to excise taxes, penalties, and

a potential lawsuit as a result of engaging in certain prohibited transactions. A key to avoiding

such liability is understanding the categories of prohibited transactions, along with the

individuals who are included as a party in interest. In addition to potential prohibited

transaction liability, a 403(b) Plan fiduciary may also be subject to a DOL civil penalty in the

event of a fiduciary breach, and is described in more detail below.

Summary of Applicable Law

Prohibited Transaction Liability

In addition to any excise tax penalty that may be imposed by the DOL or IRS for a prohibited

transaction, ERISA specifically grants the right to sue a fiduciary that causes a plan to enter into

a prohibited transaction with a party in interest.40 ERISA also authorizes the right to sue non-

fiduciary parties in interest.41 Both ERISA and the Code prohibit certain listed transactions,42

unless a statutory or administrative exemption applies to permit the transaction. There are

generally two categories of prohibited transactions. One category focuses on transactions with

parties in interest, or various persons or entitles that are related to an ERISA plan. The other

focuses on actions by plan fiduciaries. The prohibitions apply even if a transaction is fair or

beneficial to the 403(b) Plan, and regardless of whether the plan suffers a loss.

Prohibited Transactions with Parties in Interest

The first prohibited transaction category covers transactions between a plan and a party in

interest. Specifically, ERISA prohibits a fiduciary from causing a 403(b) Plan to engage in a

transaction if the fiduciary knows or should know the transaction constitutes a direct or indirect:

sale, exchange, or leasing of any property between the plan and party in interest;

lending of money or other extensions of credit between the plan and a party in interest;

furnishing of goods, services, or facilities between the plan and a party in interest;

transfer to, or use by or for the benefit of, a party in interest of any assets of the plan; or

acquisition on behalf of a plan, of any employer security, or real property in violation of

40 ERISA § 502(a)(3). 41 Harris Tr. & Sav. Bank v. Soloman Smith Barney, Inc., 530 U.S. 238 (2000). 42 ERISA § 406; Code § 4975.


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ERISA.43

Fiduciary Self-Dealing Prohibited Transactions

The second prohibited transaction category focuses on actions taken by a 403(b) Plan fiduciary

with an improper motivation. The fiduciary self-dealing prohibited transaction prohibits a

403(b) Plan fiduciary from:

dealing with plan assets in the fiduciary’s own interest or account (the self-dealing provision);

acting in any plan transaction involving the plan on behalf of a party whose interests are

adverse to those of the plan or the interests of its participants or beneficiaries (the conflict-of-

interest provision); and

receiving any consideration for the fiduciary’s personal account from any party dealing with

such plan in connection with a transaction involving the assets of the plan (the anti-kickback

provision).44

Party in Interest

A party in interest is defined to include not only entities that have a direct relationship to the

403(b) Plan (i.e., administrators, trustees, custodians, and plan counsel), but also indirect

parties in interest, or entities that have no direct relationship to the plan, but are related to

direct parties in interest. ERISA defines a party in interest to include:

plan fiduciaries;

plan service providers;

the employer sponsoring the plan;

an employee organization whose members are covered under the plan;

employees, officers, directors, or 10%-or-more owners of the employer sponsoring the plan;

and

relatives or 10%-or-more owners of any other party in interest.45

43 ERISA § 406(a)(1). 44 ERISA § 406(b). 45 ERISA § 3(14).


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Penalties

ERISA authorizes the DOL to assess a civil penalty against any party in interest who engages in a

prohibited transaction.46 Prohibited transactions may trigger civil monetary penalties which

provide the DOL authority to assess a penalty against a party in interest of up to five percent of

the amount involved for each year or part thereof during which a prohibited transaction

continues. This penalty, however, does not apply to any 403(b) Plan subject to an excise tax

under the Code, which imposes a 15 percent excise tax against disqualified persons who engage

in prohibited transactions with tax-qualified retirement plan assets.47 This is substantially

similar to the ERISA definition of parties in interest. A second level tax of 100 percent of the

amount involved is imposed if the transaction is not corrected in a timely fashion.

Even though a 403(b) Plan fiduciary can correct a fiduciary violation under the Voluntary

Fiduciary Correction (VFC) Program, participation in the program does not eliminate the

possibility of an excise tax under the Code. Moreover, when a plan participates in the VFC

Program, the DOL is obligated under ERISA48 to refer any non-exempt prohibited transactions

to the IRS, thereby increasing the likelihood that the IRS would impose the excise tax on those

responsible for the transaction.49 However, under the DOL’s prohibited transaction class

exemption, the IRS will not impose excise taxes under the Code with respect to any correction

covered by the exemption, provided all the exemption’s requirements are satisfied.50

Prohibited Transaction Exemptions

Certain party in interest transactions may be exempt from prohibited transaction rules, either

because they are permitted by a statutory exemption in ERISA, covered under a class exemption

issued by the DOL, or the DOL has granted an individual exemption. Generally, ERISA gives the

DOL access to grant individual or class exemptions from the prohibited transaction rules where

an exemption is:

1. administratively feasible;

2. in the interests of the plan, plan participants, and plan beneficiaries; and

46 ERISA § 502(i). 47 Code § 4975(a). 48 ERISA § 3003(c). 49 VFC Program, 71 Fed. Reg. 20261, § 2(c)(6)(ii). 50 PTE 2002-51, § I.


22

3. protective of the rights of plan participants and beneficiaries.51

DOL Civil Penalty

In addition to potential liability for engaging in a prohibited transaction, a 403(b) Plan fiduciary

may also be liable for a DOL civil penalty. In the case of any breach of duty by a 403(b) Plan

fiduciary, or any knowing participation in such breach by any other person, the DOL is required

to assess a civil penalty.52 The penalty may be assessed against the fiduciary, or any other

person, in an amount equal to 20 percent of the amount recovered by the DOL in a settlement or

adverse court decision. This civil penalty can be avoided in certain specified circumstances by

participating in the VFC Program.53

Criminal Liability

A 403(b) Plan fiduciary with control over plan assets may also be criminally liable.

Embezzlement, conversion, or stealing of any money, funds, or any other employee pension

benefit plan assets are all criminal offenses.54 The government will pursue a 403(b) Plan

fiduciary for egregious violations of their fiduciary duties under federal criminal laws.55


To avoid prohibited transaction liability and DOL civil penalties, the following actions are

recommended.

For a 403(b) Plan sponsor:

educate 403(b) Plan fiduciaries on parties in interest so that they have a general

understanding of the entities that are included under such definition;

educate 403(b) Plan fiduciaries on the different categories of prohibited transactions (i.e.,

prohibited transactions with parties in interest and fiduciary self-dealing prohibited

transactions); and

Submit a self-correction application under the VFC Program if a prohibited transaction is

discovered.

51 ERISA § 408(a). 52 ERISA § 502(l). 53 VFC Program, 71 Fed. Reg. 20261 (Apr. 19, 2006). 54 18 U.S.C. §§ 664, 1027 and 1954. 55 See, e.g., United States v. Whiting, 471 F.3d 792 (7th Cir. 2006).


23

For a 403(b) Plan Fiduciary:

review and ensure that such activity is not included as a prohibited transaction category prior

to engaging in any 403(b) Plan fiduciary activity;

verify that no parties in interest are involved, or that an exemption applies to the activity if an

activity does involve a prohibited transaction category; and

carefully document that each decision regarding 403(b) Plan assets is made for the exclusive

benefit of participants and beneficiaries. To avoid claims of self-dealing, make sure that no

personal benefit will accrue on your behalf as a result of such decision.

Section 6: Overview of Pitfalls from Fiduciary Breach Cases


Two recent fiduciary breach cases highlight the importance of understanding and adhering to

the fiduciary duty requirements when making 403(b) Plan fiduciary decisions.

Tatum v. RJR Pension Inv. Committee

In Tatum v. RJR Pension Inv. Committee,56 an employee who participated in the parent

company’s defined contribution plan brought a class action against the employer, benefits

committee that served as plan administrator, and investment committee that managed plan

assets. The plaintiff in Tatum alleged breach of fiduciary duty under ERISA with regard to an

amendment to an employer retirement plan. Such amendment resulted in the liquidation of two

funds held by the plan, which caused substantial loss to the plan.

In March 1999, fourteen years after a merger of Nabisco and R.J. Reynolds Tobacco into RJR

Nabisco, Inc., the merged company decided to separate its food business, Nabisco, from its

tobacco business, R.J. Reynolds. Prior to the spinoff, RJR Nabisco sponsored a 401(k) Plan (the

Plan), which offered its participants the option to invest their contributions in the Nabisco

Common Stock Fund and the RJR Nabisco Common Stock Fund (the “Nabisco Funds”). The

Plan at issue in the case (the “Post-Spinoff Plan”) was created on June 14, 1999, the date of the

spinoff, by amendment to the existing RJR Nabisco Plan (the “Pre-Spinoff Plan”). The Plan

56 761 F.3d 346 (4th Cir. 2014).


24

expressly provided for the retention of the Nabisco Funds as “frozen” funds in the Plan.57

Notwithstanding the requirement in the governing Pre-Spinoff Plan document that the Nabisco

Funds remain frozen in the Plan, RJR determined to eliminate them from the Plan. RJR was

further determined to sell the Nabisco Funds approximately six months after the spinoff. These

decisions were made in March 1999 by a working group, which had no authority or

responsibility to implement any decision with respect to the Pre-Spinoff Plan, nor was it later

given authority to make or enforce decisions in the Post-Spinoff Plan.58

According to testimony from members of the working group, the group spent only 30 to 60

minutes considering what to do with the Nabisco Funds in the Pre-Spinoff Plan. The working

group agreed that the Nabisco Funds should be frozen at the time of the spinoff and eventually

eliminated from the Post-Spinoff Plan. In terms of the timing of the divestment, there was no

documentation as to why six months was determined to be an appropriate time frame.59 The

members of the Benefits Committee agreed with the working group’s recommendation.

However, the district court found that there was no evidence that the Benefits Committee met,

discussed, or voted on the issue of eliminating the Nabisco Funds or otherwise signed a required

consent in lieu of a meeting authorizing an amendment that would do so.60

In the months immediately following the June 1999 spinoff, the Nabisco Funds declined

precipitously in value. In early October 1999, various RJR human resources managers,

corporate executives, and in-house legal staff met to discuss possible reconsideration of the

decision made by the working group in March to sell the Nabisco Funds.61 They decided against

changing course, however, largely because they feared doing so would expose RJR to liability

from employees who had already sold their shares of the Nabisco Funds in reliance on RJR's

prior communications.

In October 1999, RJR sent a letter to Plan participants, informing them that it would eliminate

the Nabisco Funds from the Plan as of January 31, 2000.62 The letter erroneously informed

participants that the law did not permit the Plan to maintain the Nabisco Funds. No lawyer

57 761 F.3d 346 at 352. 58 Tatum v. R.J. Reynolds Tobacco Co., 926 F.Supp. 2d 648, 656-658 (M.D.N.C. 2013). 59 Id. at 655. 60 Id. at 657. 61 Id. at 661. 62 Id.at 663-664.


25

reviewed the letter before it was sent to participants. As the district court found, the statement,

“was never corrected, even after responsible RJR officials were informed that it was wrong.”63

Instead, a second letter, sent in January 2000, repeated the incorrect statement. By that time,

the district court found, RJR had become aware that the statement was false, but nevertheless

permitted the communication to be sent to participants.64 Within a year after the Nabisco Funds

were liquidated from the Post-Spinoff Plan, they experienced a significant increase in value.

The district court ruled in favor of RJR. However, the Fourth Circuit Court of Appeals vacated

the district court’s decision in favor of RJR, and held that RJR breached its duty of procedural

prudence. The Appellate Court for the Fourth Circuit ordered that the case be remanded to the

district court to determine whether RJR’s divestment caused substantial losses to the Plan. The

Fourth Circuit Court of Appeals implemented a more stringent standard of proof, requiring that

RJR must prove by a preponderance of evidence that a procedurally prudent fiduciary would

have made the same decisions.65

Tussey v. ABB, Inc.

In Tussey v. ABB, Inc.,66 ABB, Inc. (“ABB”) sponsored two defined contribution plans. Fidelity

was the record keeper for both plans. Initially, Fidelity was paid a flat fee for each plan

participant. However, beginning in 2000, Fidelity was paid through revenue sharing for one of

the plans. An outside consulting firm (Mercer) advised ABB that it was overpaying for record

keeping services, and cautioned that the revenue sharing Fidelity received under one of the

plans may have been subsidizing other corporate services Fidelity provided to ABB. However,

ABB did not act upon this information.67

The investment policy statement (IPS) for the plan at issue in Tussey required:

1. “rebates” (i.e., revenue sharing) to be used to offset administrative costs;

2. use of least expensive share classes; and

63 Id. 64 Id. 65 761 F.3d 346 at 364. 66 746 F.3d 327 (8th Cir. 2014). 67 Id. at 331.


26

3. negotiation of the most favorable rates based on plan size and bargaining power.

In 2006, the plaintiff plan participants sued ABB fiduciaries and Fidelity, alleging various

fiduciary breaches, including:68

failure to monitor recordkeeping costs;

failure to negotiate rebates to offset administrative expenses;

selection of more expensive share classes when less expensive share classes were available;

and;

payment to Fidelity in an amount that exceeded market costs for plan services.69

Against the ABB fiduciaries, the district court awarded $13.4 million for failure to monitor and

control record keeping costs, and $21.8 million for losses the district court believe the plan

suffered as a result of improper fund selection and replacement.70 The district court also held

ABB fiduciaries and Fidelity jointly and severally liable for more than $13.4 million in attorney

fees and costs.71 The Eighth Circuit Court of Appeals upheld the failure to monitor the award,

but vacated and remanded the award for losses the plan suffered as a result of improper fund

selection and replacement.72


To avoid fiduciary breach pitfalls highlighted in Tatum, the following is recommended:

ensure that final 403(b) Plan decision-making is performed only by those individuals with

authority and responsibility to implement such decisions;

review the terms of the plan document to ensure that decisions do not conflict with specific

68 This Checklist includes some, but not all, of the alleged fiduciary breaches alleged by the plaintiffs in Tussey. 69 746 F.3d 327 at 333. 70 2012 WL 5386033 (W.D. MO 2012). 71 Id. 72 746 F.3d 327 at 338. On remand, the district court held that the ABB defendants breached their fiduciary duties. Ultimately, however, the district court found in favor of the ABB defendants because the plaintiffs failed to present the damages calculation as required by the Eighth Circuit Court of Appeals, Tussey v. ABB, Inc., No. 2:06-cv-04305-NKL (July 9, 2015). Plaintiffs are permitted to appeal the district court’s recent decision and the Eighth Circuit Court of Appeals is required to hear such appeal.


27

plan terms;

engage ERISA counsel to review all participant communications prior to disbursement; and

document comprehensive processes and procedures for all 403(b) Plan fiduciary decision-

making.

To avoid fiduciary breach pitfalls highlighted in Tussey, the following is recommended:

annually review the 403(b) Plan IPS to ensure that the 403(b) Plan is being administered and

decisions are implemented in accordance with (and not in contradiction of) the IPS;

annually benchmark service provider costs to ensure that the plan is not paying above-

market costs for service providers; and

implement processes and procedures for monitoring recordkeeping costs. When possible,

negotiate lower fees.

Section 7: Distinction Between Settlor (Non-Fiduciary) and Fiduciary Activities

Overview

Whether a decision should be considered fiduciary or non-fiduciary is not always clear.

Generally, the process of designing and adopting a 403(b) Plan is considered a settlor function,

and is not subject to the fiduciary duty requirements that could otherwise require a 403(b) Plan

sponsor to act solely in the interests of participants and beneficiaries. Decisions to amend and

terminate a 403(b) Plan are also settlor functions.73 Once a 403(b) Plan is adopted, however,

implementation and management of the plan often involves fiduciary conduct.


The following provides an overview of some common settlor and fiduciary functions.

Settlor Functions

The adoption, amendment or termination of a 403(b) Plan is considered a business activity, and

is sometimes referred to as the “business decision” exception to ERISA’s fiduciary rules.74

73 DOL Advisory Opinion 2003-04A (Mar. 26, 2003); DOL Advisory Opinion 2001-01A (Jan. 18, 2001). 74 See King v. Nat’l Human Res.Comm., Inc.,218 F.3d 719 (7th Cir.2000).


28

Additionally, the following activities are settlor functions:

whether to establish a 403(b) Plan (i.e., an employer’s review of the feasibility of a 403(b)

Plan);

whether to include certain 403(b) Plan features (i.e., whether to include both matching and

profit-sharing contributions);

whether to amend the 403(b) Plan (i.e., the decision to amend your 403(b) Plan to provide

only for elective deferrals because you can no longer afford to provide matching

contributions); and

whether to terminate the 403(b) Plan.

Settlor activities are not considered reasonable plan expenses, and therefore should not be paid

out of 403(b) Plan assets.

Ministerial Functions

Generally, a person who performs purely ministerial functions within a framework of policies,

interpretations, rules, practices, and procedures made by other persons is not a fiduciary.75 For

example, clerical functions that do not require the exercise of discretion are settlor functions. A

person performing purely ministerial functions:

1. will not have the necessary discretionary authority or control respecting management of

the 403(b) Plan;

2. will not exercise any authority or control respecting management or disposition of

403(b) Plan assets;

3. will not consider investment advice with respect to any plan funds or other property; and

75 See, e.g., Tucker v. Kraft Foods N.A., Inc. Ret. Plan, 2012 WL 3711343 (2nd Cir. 2012) (concluding that a manager, who was two steps below the VP of HR, did not have “unfettered discretion” to bind the company and the administrative committee; rather, the manager’s actions were taken at the behest of senior management).


29

4. will not have any authority or responsibility to do so.76

The following types of ministerial and administrative functions do not fall within the ERISA

fiduciary definition:

applying rules to determine eligibility for participation or benefits;

calculating service or compensation credit for benefits;

preparing employee communication materials;

maintaining participant service records;

preparing government agency reports;

calculating benefits;

orienting new participants and advising participants of their rights and options;

collecting and transmitting contributions as provided under the 403(b) Plan; and

making recommendations to others for decisions about plan administration.77

Generally, attorneys, accountants, actuaries, or consultants who render legal, accounting,

brokerage, actuarial, or consulting services to a plan (other than investment advisory services)

will not be considered fiduciaries solely by performing their usual professional functions.78 The

power to act for the plan is essential for fiduciary status. Providing professional services does

not give professionals any decision-making authority over the 403(b) Plan or its assets.

Investment Decisions

An investment decision may be fiduciary or non-fiduciary, depending upon how it is handled.

For example, the decision to have participant-directed investments is generally considered an

exercise of discretion relating to plan formation that is non-fiduciary. However, if the 403(b)

Plan document allows a plan fiduciary to permit participant direction, the exercise of that

discretion may be characterized as a fiduciary act.79

76 29 CFR § 2509.75-8, Q/A D-2. 77 29 CFR § 2509.75-8,Q/A D-2. 78 29 CFR § 2509.75-8, Q/A D-1. 79 ERISA § 3(21).


30

Fiduciary Functions

Decisions and actions required to adopt, amend, or terminate a 403(b) Plan are generally not

fiduciary functions and cannot be challenged by employees or plan participants on fiduciary

grounds. Although, other theories of liability such as breach of contract and estoppel may be

available. However, implementation of these decisions usually involves fiduciary functions, such

as:

communicating with participants;

hiring 403(b) Plan service providers;

obtaining a favorable IRS determination letter for a 403(b) Plan;80

limiting or designating investment options; and

deciding whether to pay expenses out of plan assets.

Fiduciary functions, including activities related to the implementation of settlor functions,

constitute reasonable 403(b) plan expenses, and may be paid from plan assets.


Any 403(b) Plan committee should maintain a written record of its meetings, actions, and

decisions. The written record should separately record the following:

settlor functions including, for example, plan studies and other processes relating to plan

design; and

fiduciary functions, including benefit claim denials and other fiduciary decisions.

Additionally, a 403(b) Plan sponsor should:

analyze and document borderline decisions as if they are subject to ERISA’s fiduciary

obligations; and

Ensure that the 403(b) Plan document does not create discretion where none was necessary

or intended if a decision is intended to have settlor function status.

80 DOL Advisory Opinion 2001-01A (Jan. 18, 2001).


31

Section 8: Best Practices for Avoiding a Fiduciary Breach

The following fiduciary checklist is based upon guidance provided at the September 2014

Southern Employee Benefits Conference by Counsel for ERISA and Employee Benefits at U.S.

Department of Labor:

Yes No

Have you identified your plan fiduciaries and are they

clear about the extent of their fiduciary duties?

If participants make their own investment decisions, have

you provided the plan with the investment-related

information participants need to make informed decisions

about the management of their account?

Have you provided sufficient information for them to

exercise control in making investment decisions?

If you hire third party service providers, have you reviewed

a number of service providers, given each potential

provider the same information, and considered whether

the fees are reasonable for the services provided?

Have you implemented processes and procedures for

continually monitoring your plan’s service provider?

Have you reviewed your plan document in light of current

plan operations and made necessary updates?

After amending your plan, have you provided participants

with an updated SPD or SMM?

Have you ensured that those individuals handling plan


32

funds or other plan property have a fidelity bond?

Section 9: Non-ERISA 403(b) Plans

403(b) Checklist for Non-ERISA Plans


DOL Safe Harbor

The DOL provides a safe harbor rule (“Safe Harbor”) for plan sponsors, including schools,

seeking to maintain non-ERISA 403(b) Plan status.81 The Safe Harbor stipulates that in order

for a 403(b) Plan sponsor to avoid "establishing and maintaining” a 403(b) Plan, certain

requirements must be satisfied. The checklist below includes some of the permissible activities

for non-ERISA 403(b) Plan sponsors. If the answer to any of the following questions is “no,” the

403(b) Plan is an ERISA plan.

Yes No

Is participation completely voluntary for

employees?

Are rights under the plan enforceable solely

by employees?

Is employer involvement limited to the

following:

permitting vendors to publicize products to

employees, summarizing/compiling

information regarding vendors’ availability;

81 29 CFR § 2510.3-2(f).


33

collecting salary reductions and remitting to

vendors;

holding group annuity contracts in the

employer's name; and

when limiting vendors available to employees

to a number and selection designed to afford

employees a reasonable choice in light of all

relevant circumstances, are factors listed in

the regulation?

Reasonable Choice

Pursuant to the Safe Harbor, a 403(b) Plan sponsor may limit the funding media, products

available, or annuity contractors who may approach employees, to a number designed to afford

employees a reasonable choice without subjecting the plan to ERISA. Relevant circumstances

may include, but would not necessarily be limited to, the following types of factors:

the number of employees affected;

the number of contractors who have indicated interest in approaching employees;

the variety of available products;

the terms of available arrangements;

the administrative burdens and costs to the employer; and

the possible interference with employee performance resulting from direct solicitation by

contractors.

FAB 2007-02

Subsequent to the release of the 403(b) Regulations, 82 the DOL issued Field Assistance Bulletin

82 72 Fed. Reg. 41128 (Jul. 26, 2007).


34

2007-02 (“FAB 2007-02”) to further clarify permissible activities for non-ERISA 403(b) Plans.83

Pursuant to FAB 2007-02, a 403(b) Plan sponsor can perform the following functions and

maintain non-ERISA status:

duties as necessary to ensure tax compliance, e.g., non-discrimination testing, ensuring

maximum contribution limits are not exceeded;

403(b) Plan adoption, which the DOL expects would consist largely of the separate contracts

and related documents supplied by the annuity providers and account trustees or custodians;

information collection and compilation duties, e.g. certification to an annuity provider a

statement of facts within the employer’s knowledge, such as employee addresses and

compensation levels); and

403(b) Plan termination.

Pursuant to FAB 2007-02, a non-ERISA 403(b) Plan sponsor is also allowed to decline to

include 403(b) contracts and accounts with optional features, such as participant loans. This

activity is permitted only if such limitation is intended to reduce the 403(b) Plan sponsor's costs

in offering the plan, or if it is designed to remove features that in operation could result in the

403(b) Plan sponsor being forced to take steps that would exceed the employer involvement

permitted under the Safe Harbor.

FAB 2010-01

In 2010, the DOL further clarified permissible activities for non-ERISA 403(b) Plan sponsors in

Field Assistance Bulletin 2010-01 (“FAB 2010-01”). Pursuant to FAB 2010-01, a non-ERISA

403(b) Plan sponsor may perform the following functions while maintaining non-ERISA 403(b)

Plan status:

allow optional features, such as loans, if the 403(b) Plan service provider, and not the 403(b)

Plan sponsor, is responsible for making any discretionary determinations;

discontinue a vendor relationship if such vendor is not complying with all applicable Code

83 The 403(b) Regulations included several new requirements for ERISA and non-ERISA 403(b) Plans, including adoption of a written plan document. The written plan document requirement raised the question of whether a plan can avoid being “established” if it is written and adopted by a 403(b) Plan sponsor.


35

requirements; and

delegate discretionary determinations to an annuity provider who may, in turn, hire a third

party administrator (TPA).

The FAB 2010-01 also clarifies that a non-ERISA plan may not unilaterally move from one

service provider to another. If it performs this function, the plan will become subject to ERISA.

Additionally, an employer who hires a TPA to make discretionary decisions will convert a non-

ERISA 403(b) Plan into an ERISA plan.


There are a number of additional requirements, including fiduciary standards, that a 403(b)

Plan sponsor becomes subject to if a 403(b) Plan inadvertently becomes subject to ERISA.

Therefore, it is important to adhere to the permitted Safe Harbor activities outlined above. A

403(b) Plan sponsor seeking to maintain non-ERISA 403(b) Plan status should avoid the

following activities:84

authorizing plan-to-plan transfers;

processing distributions;

satisfying qualified joint and survivor annuity requirements;

making hardship determinations;

determining eligibility for or enforcing loans;

adding an automatic enrollment feature to the 403(b) Plan; and

negotiating with annuity providers or account custodians to change the terms of their

products, such as setting conditions for hardship withdrawals.

Section 10: Updates to 403(b) Plan Requirements for Non-ERISA 403(b) Plans


Generally, the non-ERISA status of a 403(b) Plan is premised on employer “non-involvement”

in the plan. However, the 403(b) Regulations included several new requirements for non-ERISA

84 As outlined in FAB 2007-02.


36

403(b) Plans. Such increased responsibility has made it difficult for a non-ERISA 403(b) Plan

sponsor to exercise the authority needed to comply with the 403(b) Regulations without also

triggering ERISA 403(b) Plan status.

403(b) Regulation Changes

The 403(b) Regulations impose the following additional compliance requirements for non-

ERISA 403(b) Plan sponsors.

Written Plan Document. The 403(b) Regulations require 403(b) Plans to have a written

plan, with no exemption for governmental, church, or non-ERISA plans.85

Universal Availability. While salary-reduction-only (i.e., non-ERISA) plans are exempt

from the statutory non-discrimination requirements that apply to 401(k) Plans (i.e., ADP and

coverage testing), participation in such 403(b) Plans must be universally available to any

employee willing to contribute at least $200 a year to the plan.86

Excludable Employees. The 403(b) Regulations narrowed the categories of employees

who are excludable from a 403(b) Plan. Nevertheless, the universal availability rule still

permits exclusion of the following employees:

o employees who are eligible for a governmental 457(b) plan;

o employees who are eligible for a 401(k) or another 403(b) Plan of the employer;

o nonresident aliens;

o student employees; or

o part-time employee who normally work fewer than 20 hours per week. 87

Withdrawal Restrictions. Under the 403(b) Regulations, statutory withdrawal

restrictions (i.e., amounts may not be paid to a participant until the participant has had a

“triggering event,” such as a disability, severance from employment, or the participant

reaching age 59 ½) apply to employer contributions to a 403(b) annuity. Additionally, only

salary reduction contributions, not earnings, can be distributed on account of hardship.88

Timing of Contribution Deposits. The 403(b) Regulations added a timing requirement

85 Treas. Reg. § 1.403(b)-3(b)(3). 86 Treas. Reg. § 1.403(b) -5(b)(1)-(3). 87 Treas. Reg. § 1.403(b)- 5(b)(4)(ii)(A)-(E). 88 Treas. Reg. § 1.403(b)-6(d)(2).


37

for non-ERISA 403(b) Plans’ remission of participant contributions. Under the 403(b)

Regulations, elective deferrals must be remitted by the earlier of:

o 15 business days following the month in which the amount was withheld from the

employee’s pay; or

o the earliest date on which it is administratively feasible to remit the

contributions.89

One of the primary purposes of the 403(b) Regulations was to lessen some of the differences in

the rules that apply to 403(b) Plans and (k) Plans. Nevertheless, non-ERISA 403(b) Plan

sponsors must be careful to ensure compliance with the 403(b) Regulations, while avoiding

activities that would jeopardize ERISA exemption status.


The following activities are recommended for non-ERISA 403(b) Plan sponsors to avoid non-

compliance with the 403(b) Regulations:

annually review your written plan document to ensure that it complies with all of the 403(b)

regulatory requirements;

annually review the underlying 403(b) annuity contracts and custodial agreements to

confirm that they are consistent with the underlying 403(b) Plan document;

annually review the 403(b) Plan document and administration to ensure that no

impermissible class of employees is excluded from the plan in form or operation; and

implement procedures/checklists to ensure annual compliance with all 403(b) Regulation

requirements.

Section 11: Overview of Pitfalls from non-ERISA 403(b) Plan Breach Case


Prior to the 403(b) Regulations, school districts were typically viewed as having minimal, if any,

liability risk with respect to 403(b) Plan administration. This was due, primarily, to the lack of

89 Treas. Reg. § 1.403(b)-8(b).


38

exposure to ERISA and its fiduciary obligations. School districts have not typically been

concerned about potential liability under non-ERISA, state law-based legal claims, such as

breach of contract, negligence, and other similar duties. However, a recent Wisconsin Court of

Appeals decision is the first case to establish an ERISA “fiduciary-like” cause of action against a

school district for the improper handling of a non-ERISA 403(b) Plan.

In Ann Catau v. National Ins. Services of Wisconsin,90 a school district, in negotiating a layoff of

teachers, agreed to continue to make post-severance contributions to former employees for ten

years following their termination of employment. However, Code Section 403(b) only permits

such post-severance payments for five years. The IRS audited the school district’s plan,

discovered the error, and entered into a settlement agreement with the district under which the

district agreed to pay $60,000 to the federal government. The IRS agreed to treat the first five

and one-half years of the plan’s payments as compliant with Code Section 403(b). Following the

settlement, the federal and state government assessed income taxes and interest against the

remaining for the four and one-half years’ worth of stipends that fell outside of the permitted

term under Code Section 403(b). The school district sought reimbursement from the former

employees for amounts that it claimed it had paid to the IRS for the “employee share” of FICA

taxes.91

The former employees filed a lawsuit against the school district and claimed breach of fiduciary

duty under Wisconsin (not ERISA) law, breach of contract, misrepresentation, a violation of

federal civil rights, negligence, and unjust enrichment on the part of the school district.92 The

trial court initially ruled against the former employees, finding that the matter involved a “tax

situation,” under which the former employees should make claims for tax refunds against the

IRS. The Wisconsin Court of Appeals disagreed and found, instead, that the suit could proceed if

the former employees could prove they were erroneously promised that they could avoid FICA

taxes and defer income taxes by use of a ten-year payment period in the 403(b) Plan that the

school district was charged with administering.93 The Wisconsin Appellate Court agreed with the

former employees that the case was essentially no different than an action against an accountant

who commits malpractice and whose client, as a result, incurs additional tax obligations and

90 Appeal No. 2014AP1357, available at https://www.wicourts.gov/ca/opinion/DisplayDocument.pdf?content=pdf&seqNo=140739 (last visited on September 22, 2015). 91 Id. at P.4. 92 Id. at P.5. 93 Id. at P.2.

https://www.wicourts.gov/ca/opinion/DisplayDocument.pdf?content=pdf&seqNo=140739


39

costs that the client would not have incurred had the accountant not been negligent in the

performance of his or her duties.94

In Ann Catau, the court found that the school district could be held liable for the tax exposure if

it failed to exercise the degree of care, skill, and judgment that reasonably prudent

administrators would exercise under similar circumstances.95 The Wisconsin Appellate Court

concluded that the former employees in Ann Catau incurred costs, interest expenses, and other

damages, including state taxes, above and beyond the taxes they owe to the IRS as a result of the

school district’s improper management of the 403(b) Plan.96 The court therefore reversed and

remanded the matter to the district court for reconsideration of applicable damages.97


The following is recommended to avoid a fiduciary-like cause of action highlighted in Ann

Catau:

provide comprehensive training for non-ERISA 403(b) Plan decision-makers with a focus on

understanding applicable legal requirements;

engage ERISA counsel to review 403(b) Plan decisions prior to implementation; and

implement processes and/or a legal compliance checklist that must be used prior to

implementation of 403(b) Plan decisions.

Section 12: 403(b) Plan Sponsor and the New Fiduciary Standard


On April 6, 2016, the DOL issued the final fiduciary standard (the “Final Rule”). The DOL

intends the Final Rule to modernize the rules governing retirement advice and enforce a best

interest standard for those receiving retirement investment advice.98 According to the DOL, the

Final Rule will reduce conflicts of interest by financial advisers, which cost investors billions of

dollars each year in the form of sub-optimal investments and hindered investment

94 Id. at P.9. 95 Id. 96 Id. at P.10. 97 Id. at P. 12. 98 29 CFR 2510.3-21 and ERISA 3(21)(A).


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performance.99

The DOL simultaneously released the Best Interest Contract Exemption (the “BICE”), which

allows advisers to use otherwise disallowed compensation structures. To qualify for the BICE,

advisers must act in the 403(b) Plan or investor’s best interests, follow strict conduct guidelines,

enact certain policies and procedures, and make specific disclosures in connection with affected

transactions.

The DOL acknowledged the important role investment professionals play in guiding employer-

sponsored retirement plans’ investment decisions. However, the DOL is concerned that

professional advisers often are compensated in ways that create conflicts of interest which can

bias investment advice and erode plan and IRA investment results.100 The Final Rule is intended

to protect beneficiaries and plan fiduciaries from the effects of information imbalances, whereby

the adviser has an expert-level knowledge of investments and the plan fiduciary or investor has

insufficient financial knowledge to detect or deter fraud or malfeasance. In releasing the Final

Rule, the DOL seeks to mitigate conflicts of interest within the retirement investment advice

industry by requiring investment advisers to be held to the fiduciary standard when giving

investment advice.101 With the Final Rule, the ERISA fiduciary standard now applies to

investment advisers who advise 403(b) Plan fiduciaries and 403(b) Plan participants and

beneficiaries.

The Final Rule is expansive in the scope of activities that qualify as investment advice. However,

there are a number of activities excepted from fiduciary obligation. These include investor

educational activities102, marketing103, and certain communications with 403(b) Plan fiduciaries

with financial expertise.104 These exceptions are described in greater detail below.

The Final Rule primarily affects ERISA 403(b) Plans. The Final Rule does not change the

obligations of in-house 403(b) Plan fiduciaries to act in the best interest of the 403(b) Plan and

99 The DOL released a Regulatory Impact Analysis with the Final Rule detailing how much conflicts of interest cost investors and estimating the beneficial impact of the Final Rule. The Regulatory Impact Analysis can be found at http://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf (last visited May 6, 2016). 100 Definition of the Term Fiduciary, Conflict of Interest Rule—Retirement Investment Advice, 81 Fed. Reg. 20946, 20949 (April 8, 2016) (amending 29 C.F.R. Parts 2509, 2510, and 2550). 101 Id. 102 29 CFR 2510.3-21(b)(2)(iv). 103 29 CFR 2510.3-21(b)(2)(iii). 104 29 CFR 2510.3-21(c)(1).

http://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf


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its beneficiaries. However, under the Final Rule, investment advisers now also owe fiduciary

obligations when providing most types of investment advice to 403(b) Plans, 403(b) Plan

fiduciaries, and 403(b) Plan participants and beneficiaries.105 These plan fiduciaries are

considered investors under the Final Rule because they select the investment alternatives which

are featured within a 403(b) Plan.

New Definition of Fiduciary

Under the Final Rule, fiduciary status is determined based on the function a person serves at the

time. The Final Rule applies fiduciary status to any person who (i) renders investment advice (as

described below), (ii) to a plan,106 plan fiduciary, plan participant, beneficiary or IRA, and (iii)

for a fee or other compensation, direct or indirect.107 An individual provides investment advice

with respect to a retirement plan or an IRA if the person provides the following two general

types of advice:

Investment Recommendations. Recommendations to buy, hold, or sell

investments, including recommendations made after securities or investment property

are rolled over or transferred; and108

Investment Management Recommendations. Recommendations as to the

management of investments, including recommendations on investment policies or

strategies; portfolio composition; selection of another person to provide management

services; and selection of investment account arrangements or recommendations with

respect to rollovers, transfers, or distributions from a plan or IRA.109

A recommendation is defined as a communication that, based on its content, context, and

presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or

refrain from taking a particular course of action.110 Whether a recommendation has been made

is an objective inquiry rather than a subjective one.

105 29 CFR 2510.3-21(a). 106 A plan includes health savings accounts (HSAs), Archer MSAs, Coverdell Education Savings Accounts, and ERISA 403(b) plans. 107 ERISA § 3(21)(A)(ii). 108 29 CFR 2510.3-21(a)(1)(i). 109 29 CFR 2510.3-21(a)(1)(ii). 110 29 CFR 2510.3-21(b)(1).


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To invoke fiduciary status under the Final Rule, the adviser must do one of the following: (i)

present or acknowledge that the adviser is acting as a fiduciary pursuant to ERISA or the

Code;111 (ii) provide investment advice under a written or verbal agreement, arrangement, or

understanding that the advice is based on the particular needs of the advice recipient;112 or (iii)

direct the advice on the advisability of a particular investment or investment management

decision to a specific recipient.113

Rollovers to IRAs from Participants Leaving the 403(b) Plan

Many 403(b) Plan participants roll over their 403(b) Plan accounts into an IRA. The Final Rule

affects advisers who render advice in these situations. Given the enhanced obligations advisers

face under the Final Rule, 403(b) Plan fiduciaries should anticipate fewer terminated employees

rolling over their investments into IRAs. A 403(b) Plan fiduciary should consider these

participants in 403(b) Plan design and investment lineup.

Exceptions Within the Final Rule

The Final Rule provides a number of specific examples where fiduciary obligations do not

apply.114 A 403(b) Plan fiduciary should exercise caution when dealing with these exceptions. In

these situations, the financial adviser or service provider is not obligated to a fiduciary standard,

but the in-house 403(b) Plan fiduciary is still held to the ERISA fiduciary standard with respect

to monitoring these activities. The Final Rule provides the following five general fiduciary

exceptions for advisers.115

Investment Education

Under the Final Rule, advisers are generally free to educate investors on Plan information,

provide general financial, or investment information. This includes information about financial

concepts such as risk and return, diversification, dollar cost averaging, and how to estimate

future retirement income needs. It also includes information about distributions, including

111 29 CFR 2510.3-21(a)(2)(i). 112 29 CFR 2510.3-21(a)(2)(ii). 113 29 CFR 2510.3-21(a)(2)(iii). 114 29 CFR 2510.3-21(b) and (c). 115 The Final Rule also makes an exception for swap and swap transactions. A summary of this exception is not included in this Checklist.


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rollovers, annuities, and other forms of lifetime income payment options. These are excepted

functions so long as advisers do not use investor education as an opportunity to promote

particular investment products. The Final Rule, with respect to investment education, provides

the following:

Plan Information. Advisers may educate investors on plan information so long as

they do not comment on the appropriateness of investment products for individuals.116

General Financial, Investment and Retirement Education. Education

regarding general investment, retirement, and financial information does not invoke

fiduciary obligations so long as the adviser does not use the investment education to

market specific investment products, plans, and investment alternatives.117

Asset Allocation Models. Advisers may use hypothetical asset allocation models to

educate if they do not feature any specific investment product and do not reflect the

particular situation of any investor. Essential facts and assumptions underlying the

models must accompany the models, and investors must be told to consider their other

assets, income, and investments.118

Interactive Investment Materials. Advisers may also use interactive investment

materials such as questionnaires, worksheets, and software to assist investors in

estimating future needs and evaluating different allocation options. As with the asset

allocation models, all material facts and assumptions underlying the materials must be

disclosed, and the materials may not include references to any specific investment

product or distribution option available under the Plan.119

403(b) Plan Sponsor Employees

Employees of a 403(b) Plan sponsor, 403(b) Plan, or 403(b) Plan fiduciary are generally exempt

from the Final Rule when performing their normal job duties. To qualify for this exemption, the

employee must receive no additional fee or compensation beyond his or her normal

compensation when providing advice to a plan fiduciary.120

116 29 CFR 2510.3-21(b)(2)(iv)(A). 117 29 CFR 2510.3-21(b)(2)(iv)(B). 118 29 CFR 2510.3-21(b)(2)(iv)(C). 119 29 CFR 2510.3-21(b)(2)(iv)(D). 120 29 CFR 2510.3-21(c)(3)(i) and (ii).


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Platform Providers

Service providers may market and provide investment platforms to 403(b) Plan fiduciaries

without invoking fiduciary obligations, so long as the platform is not individualized to the needs

of the plan or its participants.121 This applies to platforms that 403(b) Plan fiduciaries use to

select and monitor investment alternatives made available to 403(b) Plan participants.

Participants also use these platforms to direct and invest their assets. To satisfy the

requirements of this exception, the marketers or providers must disclose in writing that they are

not providing impartial advice or advising in a fiduciary capacity.

Selection and Monitoring Assistance

Generally, services that merely identify investment alternatives meeting objective criteria

specified by a 403(b) in-house Plan fiduciary do not constitute investment advice.122 Likewise,

services providing objective financial data regarding available investment alternatives, including

expense ratios, size of fund, type of asset, or credit quality, are not considered rendering

investment advice. To satisfy the requirements of this exception, the providers of the data must

disclose in writing whether they have any financial interests in any of the funds or products

identified and the nature of the interest.

Sales Pitches to 403(b) Plan Fiduciaries with Financial Expertise

The seller’s exception is aimed at allowing sellers to sell their products to 403(b) Plan fiduciaries

with financial expertise. To qualify, the 403(b) Plan fiduciary must be an independent plan

fiduciary managing $50 million or more in assets123or fall into a specific category of independent

plan fiduciary,124 which includes banks,125 insurance carriers,126 and investment advisers.127 The

seller must also know or reasonably believe that the 403(b) Plan fiduciary has sufficient

121 29 CFR 2510.3-21(b)(2)(i). 122 29 CFR 2510.3-21(b)(2)(ii). 123 29 CFR 2510.3-21(c)(1)(i)(E). 124 29 CFR 2510.3-21(c)(1)(i). 125 29 CFR 2510.3-21(c)(1)(i)(A). 126 29 CFR 2510.3-21(c)(1)(i)(B). 127 29 CFR 2510.3-21(c)(1)(i)(C).


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expertise to independently evaluate investment risks, both in general and with regard to

particular transactions.128 The seller must inform the 403(b) Plan fiduciary that he or she is not

attempting to provide impartial investment advice or provide advice in a fiduciary capacity.129

Upon finalizing a deal, the seller cannot receive a fee or other compensation directly from the

403(b) Plan or 403(b) Plan fiduciary in connection with the transactions.130 Finally, the seller

must know that the 403(b) Plan fiduciary is a fiduciary under ERISA who is responsible for

acting in the best interest of the plan and its participants/beneficiaries.131

Best Interest Contract Exemption

Certain compensation arrangements are prohibited by ERISA and the Code when a financial

adviser gives advice to employee benefits plans and IRAs.132 These schemes include (i)

compensation that varies based on the investment advice rendered and (ii) receiving

compensation from third parties in connection with the advice rendered. The DOL released the

Best Interest Contract Exemption (BICE) in connection with the Final Rule to address these

otherwise prohibited compensation arrangements. The BICE permits investment advisers to use

these otherwise disallowed compensation agreements provided they follow specific rules

designed to protect the 403(b) Plan or IRA.133 Under the BICE, an adviser must accept fiduciary

status regarding the recommendations, and the material elements of the transaction must be

transparent to the 403(b) Plan fiduciary or investor. The BICE requirements are different for an

ERISA 403(b) Plan fiduciary than non-ERISA 403(b) Plans and individual investors.134 The

BICE does not require a separate contract for ERISA 403(b) Plans. Instead, the BICE

requirements may be incorporated into other opening documents. This section provides an

overview of those requirements as they apply to ERISA 403(b) Plan fiduciaries.

Adviser Must Be a Fiduciary

Under the BICE, a financial institution which employs advisers (such as banks, brokers,

insurance companies, etc.) must affirmatively state in writing that the financial institution and

its adviser act as fiduciaries under ERISA, the Code, or both.135 This fiduciary status only

128 29 CFR 2510.3-21(c)(1)(ii). 129 29 CFR 2510.3-21(c)(1)(iii). 130 29 CFR 2510.3-21(c)(1)(v). 131 29 CFR 2510.3-21(c)(1)(iv). 132 See ERISA § 406(b) and Code § 4975(c)(1). 133 BICE Section I(b). 134 Compare BICE Section II(a) and Section II(g). 135 BICE Section II(b).


46

pertains to investment recommendations rendered regarding the 403(b) Plan or 403(b) Plan

participants and beneficiaries.136

Impartial Conduct Standards

The BICE requires that the financial institution and adviser agree to follow strict standards

regarding conduct known as the Impartial Conduct Standards (the ICS). The financial

institution must affirmatively state that it and its advisers will follow the ICS, and must adhere

to that statement.137 The ICS includes:

Best Interest Standard. The adviser must render advice that is in the best interest of

the investor at the time it is given. Recommendations must reflect the care, skill,

prudence, and diligence that a prudent person would apply given similar circumstances,

including consideration of the needs of the investor.138

No Excessively Large Fees. Compensation to the financial institution (including

related entities) and adviser must be reasonable as defined in ERISA and the Code.139

No Misleading Statements. Statements to the investor regarding the recommended

transactions, fees, compensation, material conflicts of interest, and any other matters

relevant to the investment decision must not be materially misleading.140

Warranties by the Financial Institution

The financial institution also must make and comply with certain warranties regarding its

policies and procedures controlling its dealings with the 403(b) Plan fiduciary.141 These

warranties include:

136 Id. 137 BICE Section II(c). 138 BICE Section II(c)(1). 139 BICE Section II(c)(2), see also ERISA § 408(b)(2) and Code § 4975(d)(2). 140 BICE Section II(c)(3). 141 BICE Section II(d).


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Policies Supporting Impartial Conduct Standards. The financial institution

must adopt and comply with written policies and procedures reasonably and prudently

designed to ensure advisers adhere to the ICS.142

Material Conflicts of Interest Policies. The financial institution must have policies

to specifically identify its material conflicts of interest and adopt measures reasonably

and prudently designed to prevent material conflicts of interest from causing violations

of ICS.143

No Incentives Conflicting with Best Interest Recommendations. The financial

institution (and any affiliates) must enact policies preventing use of incentives for

advisers which conflict with the duty to make recommendations in the best interest of

the investor. Such incentives can include quotas, appraisals, performance or personal

actions, bonuses, contests, special awards, differential compensation, or any other

incentives which might deter advisers from making recommendations in the best interest

of the investors.144 The financial institution may still use the listed incentives, but when

viewed as a whole, the programs must avoid a misalignment of advisers’ interests.

Required Disclosures

The financial institution must make certain disclosures in writing to the 403(b) Plan fiduciary

before or at the time of the transaction.145 These disclosures must be clear and prominent. The

disclosures must include:

A statement of the best interest standard of care.146

The services provided.147

How services are paid for.148

Material conflicts of interest.149

Any fees or charges imposed by the financial institution, its affiliates, or the adviser.150

142 BICE Section II(d)(1). 143 BICE Section II(d)(2). 144 BICE Section II(d)(3). 145 BICE Section II(d). 146 BICE Section II(e)(1). 147 Id. 148 Id. 149 BICE Section II(e)(2). 150 Id.


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The state and type of compensation received from third parties by the financial

institution, its affiliates, or its adviser.151

The 403(b) Plan fiduciary’s right to obtain copies of the written description of policies

and procedures the financial institution is required to adopt.152

A specific description of costs, fees, and compensation, including third party payments

regarding the recommended transaction described in dollar amounts, percentages, or

formulas or other means reasonably designed to present materially accurate disclosure

of their scope, magnitude, and nature in sufficient detail to permit the 403(b) Plan

fiduciary to make an informed judgment about the costs of the transaction and about

the significance and severity of the material conflicts of interests.153

A description of how the 403(b) Plan fiduciary can get the information free of charge (if

the request is made after the recommended transaction, such information must be

provided within 30 days of request).154

Whether the financial institution offers proprietary products or receives third party

payments with respect to any recommended investments and whether and to what

degree the financial institution limits recommendations to proprietary products or

investments that generate third party payments.155

Limitations placed on the universe of investment the adviser may offer. The disclosure

is insufficient if it merely states that the financial institution or adviser “may” limit

investment recommendations based on whether the investments are proprietary

products or generate third party payments without specific disclosure of the extent to

which recommendations are, in fact, limited on that basis.156

A telephone number and email address for a representative of the financial institution

that the 403(b) Plan fiduciary may use to contact the financial institution with any

concerns about the advice or service received; and, if applicable, a statement explaining

that the 403(b) Plan fiduciary can research the financial institution and its advisers

151 Id. 152 BICE Section II(e)(3). 153 Id. 154 Id. 155 BICE Section II(e)(5). 156 Id.


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using FINRA’s BrokerCheck database or the Investment Adviser Registration

Depository (IARD) or other database maintained by a governmental agency or self-

regulatory organizations.157

Whether the adviser or financial institution will monitor the Plan’s investments and

alert the 403(b) Plan fiduciary of any recommended change to those investments, and

the frequency with which any monitoring will occur, and reasons for which the 403(b)

Plan fiduciary will be alerted.158

That the financial institution will not fail to satisfy the BICE requirements regarding

disclosures, or violate any contractual provision based thereon, solely because it, acting

in good faith and with reasonable diligence, makes an error or omission in disclosing the

required information, provided the financial institution discloses the correct

information as soon as practicable, but not later than 30 days after the date on which it

discovers or reasonably should have discovered the error or omission.159

The disclosures must include a link to the financial institution’s website which informs the

403(b) Plan fiduciary that (i) the model contract disclosures (updated on a quarterly basis) are

maintained on the website, and (ii) the financial institution’s written description of its policies

and procedures adopted in accordance with the warranties section are available free of charge

on the website.160

Financial Institution Cannot Disclaim Fiduciary Responsibility

Neither the financial institution nor the adviser may disclaim fiduciary responsibilities in any

contract, instrument, or communication.161 Any attempt to disclaim fiduciary responsibility is

void pursuant to ERISA.162 Further, the right of 403(b) Plan participants to participate in a class

action may not be waived or qualified.163 The financial institution may not require arbitration or

mediation or otherwise unreasonably limit the ability of the 403(b) Plan investors to assert the

claims safeguarded by the BICE.164

157 BICE Section II(e)(6). 158 BICE Section II(e)(7). 159 BICE Section II(e)(8). 160 BICE Section II(e)(4). 161 BICE Section II(g)(5). 162 ERISA § 410. 163 Id. 164 Id.


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Exclusions

The BICE contains several exclusions. First, the BICE is generally inapplicable where the

adviser is an employee of the Plan sponsor or fiduciary (referred to as in-house advice).165 This

exception is unlikely to apply to 403(b) Plans. The BICE also does not apply to principal

transactions where the financial institution engages in the transaction for its own account.166

Third, the BICE is not available where the adviser has or exercises any discretionary control with

respect to the transaction.167 Last, “robo-advice” is excluded from the BICE. This involves

advice provided by a website, without interaction or advice from a personal adviser, based on

personal information entered by the investor.168

Summary of the BICE

The BICE permits compensation schemes that are otherwise excluded under ERISA and the

Code. Financial institutions and advisers are permitted to use the prohibited compensation

arrangements only if strict protections are established to ensure the adviser is acting in the best

interest of the 403(b) Plan. Pursuant to contract law, the BICE preserves rights to claims for

violations of the BICE. The ICS sets minimum standards of conduct for the advisers regarding

transactions with a 403(b) Plan. These standards ensure the best interests of the 403(b) Plan

are observed in any recommended transactions, that unreasonable fees are not collected from

the Plan, and that no materially misleading communications are made. The BICE establishes

standards for the policies and procedures for the financial institution which ensure the best

interests of the 403(b) Plan are observed, conflicts of interest do not cause violations of ICS, and

incentives which might misalign the interests of advisers do not impact the recommendations of

advisers. Finally, the BICE prevents financial institutions from disclaiming or contracting

around these protections, securing 403(b) Plan participant rights to participate in a class action

suit and to bring claims.

Timing of Final Rule

Various aspects of the Final Rule will be phased in from April 2016 until 2018. This includes a

temporary definition of fiduciary, which is effective on June 7, 2016, and phases out on April 10,

165 BICE Section II(c)(1). 166 BICE Section II(c)(2). 167 BICE Section II(c)(4). 168 BICE Section II(c)(3).


51

2017. This temporary definition states that a person is deemed to be rendering “investment

advice” if the person (i) renders advice to the Plan as to the value of securities or other property;

or (ii) makes recommendations as to the advisability of investing in, purchasing, or selling

securities or other property, and the person has discretionary authority or control over

purchasing or selling securities or other property for the Plan, or regularly renders advice to the

Plan which serves as the primary basis for investment decisions. The permanent definition of

“investment advice” will take effect after the temporary definition lapses. The BICE will take full

effect on January 1, 2018.


When the Final Rule is fully implemented, financial advisers will generally be required to act in

the 403(b) Plan or 403(b) Plan participant’s best interest. Generally, a 403(b) Plan sponsor that

works with an investment adviser who acts as a fiduciary will be impacted less by the Final Rule

than those sponsors who currently work with non-fiduciary advisers. Key points for 403(b) Plan

sponsors to consider are:

For persons providing investment advice to the 403(b) Plan, confirm whether they

satisfy the requirements of:

o The Final Rule or

o The BICE.

Request confirmation from vendors and advisers providing any investment services to

the 403(b) Plan as to whether they are acting as (or will become) fiduciaries. Obtain

responses in writing where possible.

If a vendor or adviser indicates that he or she is not a fiduciary, verify that he or she is

not providing specific investment recommendations to 403(b) Plan fiduciaries, 403(b)

Plan participants, and beneficiaries.

Encourage 403(b) Plan participants and beneficiaries to ask advisers if they are acting as

fiduciaries.


52

Notify 403(b) Plan participants and beneficiaries of the changes under the Final Rule

and the timing of these changes (full implementation effective January 1, 2018).

An adviser has no fiduciary obligation with respect to the following activities. 403(b) Plan

sponsors are advised to verify that an adviser satisfies the exemption criteria set forth below:

If the adviser is performing an educational role, confirm that he or she is not promoting

particular investment products.

If the adviser is using asset allocation models and interactive investment materials,

confirm that disclosures accompany the models or materials and such disclosures

include essential facts and assumptions underlying the models or materials; and that

investors are told to consider their other assets, income, and investments.

If one of your employees provides investment advice to a 403(b) Plan fiduciary, confirm

that such an individual will receive no additional compensation for this advice.

When a seller claims that he or she owes no fiduciary duty due to the seller’s exception,

verify that the 403(b) Plan fiduciary is of the type that qualifies for the exception, and

ensure that the seller states in writing that no fiduciary duty exists.

Where platform providers or sellers claim no fiduciary duty, confirm that such providers

are not offering platforms individualized to the needs of the Plan.

Where providers assist with selection and monitoring of 403(b) Plan investments, ensure

that such providers disclose in writing any financial interest they have in the selected

products.


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When advisers utilize the otherwise-prohibited compensation arrangements under the

BICE, ensure that the adviser acknowledges fiduciary status, follows ICS, enacts policies

and procedures ensuring that ICS is followed, and makes the extensive disclosures

regarding affected transactions.

DISCLAIMER REGARDING TAX ADVICE - IRS CIRCULAR 230 DISCLOSURE:

To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax

advice contained in this communication, including any attachments, is not intended to be used,

and cannot be used, for the purpose of:

avoiding penalties under the Internal Revenue Code; or

promoting, marketing, or recommending to another party any transaction or matter

communicated to you.

i Anne Tyler Hall is the founder of Hall Benefits Law. HBL offers employers comprehensive legal guidance on the ACA, executive compensation, health and welfare benefits and retirement plans. More information is available at www.hallbenefitslaw.com.

http://www.hallbenefitslaw.com/

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