fiduciary responsibilities in u.s. apprenticeship plans · occurrence = $100k recovery 4-10....

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Fiduciary Responsibilities in U.S. Apprenticeship Plans

Paul O. CatenacciPartner

Novara Tesija, P.L.L.C.Southfield, Michigan

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Topics for Discussion

• Understanding Your Fiduciary Responsibility

• Legal Framework for Apprenticeship Plans• Essential Trust Documents• Becoming a Priority at Fund Meetings• Prohibited Transactions to Avoid• Managing your Professionals

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Your Fiduciary Responsibility

The Employee Retirement Income Security Act (ERISA) requires plan fiduciaries to act prudently and solely in the interest of the plan's participants and beneficiaries, prohibits self-dealing, and provides judicial remedies when violations of these standards cause harm to plans. In enacting ERISA, Congress recognized that the “security of America's employee benefit plans depends on their fiduciaries.”

From: Department of Labor, Fact Sheet 2011. http://www.dol.gov/ebsa/newsroom/fsfiduciary.html

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• In general terms, the duties of loyalty and prudence are the foundation of your fiduciary responsibility

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• Act solely in the interest of the planparticipants; your exclusive purpose is tooperate the program for their benefits (i.e. noself dealing, no conflicts of interest)

• Act prudently based upon the facts andcircumstances as you know and understandthem to be

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• Hire qualified professionals through the use ofa organized and documented request forproposal (RFP) process (discussed in moredetail later)

• Pay for the reasonable and necessary costsof operating the apprenticeship plan

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• Plan documents (including all policies andprocedures) must be followed

• Establish strong internal controls policies andprocedures (reimbursement, ethics, conflicts,whistleblower and collections)

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Fiduciary Responsibility

Fidelity Bonds• ERISA 412• Protects against crimes of

theft/dishonesty• Various types (blanket/schedule)• No deductibles permitted

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Fidelity Bonds• Amount = 10% of assets handled• Minimum = $1k Max = $500k • Persons with criminal record excluded

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Example from DOL FA Bulletin 2008-04• 2 employees combine to steal $300k • Plan has $1M in assets and 9 employees• Blanket bonds pay per occurrence one

occurrence = $100k recovery

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Example from DOL FA Bulletin 2008-04• A schedule bond = separate coverage for

each individual 200k recovery• Either form ok, schedule bond costs more• Trustees to decide on appropriate form

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Fidelity Bonds• Handling assets? Must be covered.

Handling includes authority to:– Sign checks/transfer/access funds– Authorize benefit payments– Access bank accounts/petty cash– Negotiate for, or power over, fund assets

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Fidelity Bonds• Assets, not just cash, but also—

– Checks/negotiable instruments– Bank accounts– Land/mortgages/buildings– Securities/investments

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Fiduciary Liability Insurance• Not required but recommended!• Covers losses from fiduciary breaches• Purchase is a fiduciary act• Amount reasonable given plan size/risk

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Other Insurance• General liability • Workers compensation • Auto insurance • Builders risk

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Legal Framework

ERISA/DOL IRC/IRS Civil Rights Laws Age (ADEA) Disability

(ADA) State laws Tort/Contracts

There are a variety of laws that affect the operation of Apprenticeship Plans which are connected to and overlap with the Plan’s operations.

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Legal Framework

• The National Apprenticeship Act of1937/Fitzgerald Act

• Established the Department of Labor'ssupervisory role over apprenticeship programs

• The Employment and Training Administration= Registration of apprenticeship programsand administration of the NationalApprenticeship System.

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Legal Framework

• Various State and Federal Laws• State and Federal Civil Rights Laws• Age discrimination laws (ADEA) and state

equivalents• Laws protecting persons with disabilities

(ADA) and state equivalents• General liability laws that affect property

(torts/contracts/auto insurance/landlord-tenant/workers compensation)

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Essential Trust Documents

• Agreement and Declaration of Trust• Apprenticeship Standards• Acceptance of Trust/Letters of Appointment• Determination Letter• Notice of Compliance with DOL Regulation

2520.104-22• Insurance/Bonds (see prior slides)

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Agreement and Declaration of Trust• Basic components:

– Board composition– Quorum rules– Deadlock rules– Trustee discretion/powers/duties– Officers (Chairman/Secretary rotation)– Successorship of sponsors

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Apprenticeship Standards• Content will vary by industry and trade• DOL requirements• Clarity is key!• Affirmative action plans

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IRS Determination Letter• A “must have” document• All providers should have a copy

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2520.104-22 Notice• Filed once, good idea to update periodically• By filing, no requirement to:

– File 5500– Prepare SPDs and SMMs

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Becoming a Priority at Meetings

• Per ERISA, the “security of America‘semployee benefit plans depends on theirfiduciaries.”

• This means YOU!• Starting point be there and be

prepared

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Tips• Review agenda in advance• Get provider reports in advance• Prepare questions• Get to know the apprentices

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Tips• If you don’t know, ask• Identify areas for improvement and act• Stay educated on current trends• Follow up on complaints

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Prohibited Transactions to Avoid

• Transactions between training trusts andparties in interest (i.e. unions, employers,employer associations, service providers,and other plans) exemption required

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Sections of ERISA Implicated• 406(a)(1)(A): bans the sale, exchange or

leasing of property between the plan anda party in interest

• 406(a)(1)(D): bans any transactioncausing plan assets to be transferred to,used by, or for the benefit of, a party ininterest

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Sections of ERISA Implicated• 406(b)(1): prohibits fiduciary from dealing

with plan assets for his or her owninterest, requires discretion

• 406(b)(2): prohibits fiduciary from actingin an individual or other capacity whendealing with assets of the plan, duty ofloyalty

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• Common situations requiring exemption:– Leasing of office and classroom space from or

to a party in interest– Leasing of real property from or to a party in

interest– Sharing of employees

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Prohibited Transaction Exemptions

Two Types• Statutory = Text of ERISA• Administrative = DOL granted

– Apply to all who meet its criteria– Individual granted on a case by case basis,

apply only to specific group asking for it

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Prohibited Transaction Exemptions

• Relief from PT meet exemption criteria• Written opinion from legal counsel• Penalties Personal liability, reversal of

transaction • Self dealing never excused

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Common Trustees

Class Exemption 77-10• Use where transaction involves inherent

conflicts trustees hold positions with the union, employer, or employer association

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Common Trustees

Class Exemption 77-10• Excuses 406(b)(2)/duty of loyalty violation• Self/dealing/406(b)(1) never excused,

need to recuse, or • Use an independent fiduciary or seek

individual exemption

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Leasing Office Space from a Party in Interest

Statutory Exemption 408(b)(2)• Relief = Reasonable transaction • Rent must be FMV, no more, no less• Independent appraisal• Written agreement

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Leasing Classroom Space from a Party in Interest

Statutory Exemption 408(b)(17)• The 408(b)(2) exemption office space

only• Per DOL 408(b)(17) allows for classroom

space to be leased

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Leasing Classroom Space from Party in Interest

Statutory Exemption 408(b)(17)• Relief = Reasonable transaction • Rent must be FMV, no more, no less• Independent appraisal• Written agreement

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Leasing of Space Example

• Space leased: Classroom and office space • From: Union to training trust • Rent: A bit less than FMV• Conflicts: 1 labor trustee is an officer of

the union, but recuses himself

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• Legalese summary: Lease of office and classroom space by the training fund, from a party in interest, with a common trustee

=• Potential violations of 406(a)(1)(A)+(D);

406(b)(1)+(b)(2)

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• The recusal of the union officer relieves the training fund from a violation of 406(b)(1) and PTE 77-10 and excuses the violation of 406(b)(2)

However . . .

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AnalysisRental rate not FMV Failure to meet 408(b)(2) and 408(b)(17) Violation of 406(a)(1)(A) and 406(a)(1)(D)

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Leasing Real Property

PTE 78-6• Allows party in interest whose employee’s

work results in contributions (i.e. union or contributing employers) to lease real property other than office space to a training fund

• Still need FMV lease and independent assessment

• Exception does not excuse lease from service provider

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Leasing To a Party in Interest

PTE 76-1 • 408(b)(2)/408(b)(17) one-way

exemptions• Provider relief for leasing from a party in

interest, not when the training trust is leasing property it owns to a party in interest

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Leasing To a Party in Interest

PTE 76-1 • Use for leasing space or selling

goods/services to the union, employer association, or another plan

• Same requirements as other PTEs• FMV lease or reasonable compensation

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Employee Sharing

• Need written sharing agreement• Track time worked for each• To meet 76-1: Written agreement for

reasonable compensation

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Prohibited Transactions—Final Thoughts

• Meeting the PTE criteria is not the end• Duties of loyalty and prudence still apply• Ongoing duty to monitor as well

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Managing your Professionals

• Two steps—selection and monitoring• Both are fiduciary functions

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• RFPs and RFIs• Treat each candidate equally• Direct and indirect must be disclosed• Research each provider • Document your selection process

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• Hiring is not the end of your fiduciary duty!

• You still have to monitor your providers

Don’t rely on me!

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Tips: Duty to Monitor• Stay educated and informed• Review their performance (RFPs and RFIs)• Read their reports• Verify the fees being charged• Ask about internal controls• Follow up on participant

comments/complaints

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Key Takeaways

• Training trusts are among the most complex plans to operate

• Don’t be penny wise but pound foolish when it comes to compliance

• Use common sense • Process = Doing your due diligence

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ATE04 - Fiduciary Responsiblities in U.S. Apprenticeship Plans

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