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Fireside Chat
Your Monthly Update from KCS
March 2017
Fiduciary Frenzy
INSIDE THIS ISSUE
1 Fiduciary Frenzy
1 Back to Basics
2 Significance of Being a
Fiduciary
3 Participants Focus on
Fees
3 Only the Big Plans
Need to Worry – Right?
On the Offensive
4 Sponsors Need to Act
It seems that a week doesn’t go by where there is some type of legal
action being pursued against a plan sponsor regarding a breach of
fiduciary responsibility. As we highlighted in our recent Fireside
Chat, it is ironic that many corporations have eliminated the use of
traditional DB plans because of the volatility in funding the plan’s
liability, only to be facing potential liabilities as a result of fiduciary
breaches within their defined contribution offerings.
In a recent Pensions & Investments article, FMC Corp. and Walt Disney
Company are two plan sponsors who are cited as having an issue
because of their investment in Sequoia Corporation. Target and Wells
Fargo are referenced because of their company stock funds within the
plan lineup. Furthermore, there are dozens of pending lawsuits
involving fees, fund offerings, disclosure, etc. that will negatively
impact the DC space for quite some time to come. In fact, given the
seriousness of this issue and the breadth of potential legal troubles,
we feel it is a great time to provide our readers with a fiduciary
responsibility refresher course.
Back to Basics - Who is a Fiduciary?
The Department of Labor published a guide addressing fiduciary
responsibilities (see www.dol.gov/ebsa). The guide states that many
of the actions involved in operating a plan make the person or entity
performing them a fiduciary. Using discretion in administering and
managing a plan or controlling the plan’s assets makes that person a
fiduciary to the extent of that discretion or control. Thus, fiduciary
status is based on the functions performed for the plan, not just a
person’s title. A plan must have at least one fiduciary (a person or
entity) named in the written plan, or through a process described in
the plan, as having control over the plan’s operation. The named
fiduciary can be identified by office or by name. For some plans, it
may be an administrative committee or a company’s board of
directors.
A plan’s fiduciaries will ordinarily include the trustee, investment
advisers, all individuals exercising discretion in the administration of
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KCS Fireside Chat
the plan, all members of a plan’s administrative committee (if it has
such a committee), and those who select committee officials.
Attorneys, accountants, and actuaries generally are not fiduciaries
when acting solely in their professional capacities. The key to
determining whether an individual or an entity is a fiduciary is whether
they are exercising discretion or control over the plan.
“The duty to act
prudently is one of a
fiduciary’s central
responsibilities under
ERISA. It requires
expertise in a variety
of areas, such as
investments.”
A number of decisions are not fiduciary actions but rather are business
decisions made by the employer. For example, the decisions to
establish a plan, to determine the benefit package, to include certain
features in a plan, to amend a plan, and to terminate a plan are
business decisions not governed by ERISA. When making these decisions,
an employer is acting on behalf of its business, not the plan, and,
therefore, is not a fiduciary. However, when an employer (or someone
hired by the employer) takes steps to implement these decisions, that
person is acting on behalf of the plan and, in carrying out these actions,
may be a fiduciary.
Significance of Being a Fiduciary
Fiduciaries have important responsibilities and are subject to standards
of conduct because they act on behalf of participants in a retirement
plan and their beneficiaries. These responsibilities include:
• Acting solely in the interest of plan participants and their
beneficiaries and with the exclusive purpose of providing
benefits to them;
• Carrying out their duties prudently;
• Following the plan documents (unless inconsistent with ERISA);
• Diversifying plan investments; and
• Paying only reasonable plan expenses.
The duty to act prudently is one of a fiduciary’s central responsibilities
under ERISA. It requires expertise in a variety of areas, such as
investments. Lacking that expertise, a fiduciary will want to hire
someone with that professional knowledge to carry out the investment
and other functions. Prudence focuses on the process for making
fiduciary decisions. Therefore, it is wise to document decisions and the
basis for those decisions. For instance, in hiring any plan service
provider, a fiduciary may want to survey a number of potential
providers, asking for the same information and providing the same
requirements. By doing so, a fiduciary can document the process and
make a meaningful comparison and selection.
Participants Focus on Fees
It seems that a majority of the recent cases have related to fund
selection and fees. According to Pension & Investments, a judge has
allowed a fiduciary breach case against Franklin Templeton’s
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“After careful
evaluation during the
initial selection, the
plan’s fees and
expenses should be
monitored to
determine whether
they continue to be
reasonable.”
KCS FiresidePage
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401(k) plan to continue. A former employee and plan participant
sued the $1.1 billion 401(k) plan, the parent company and plan
executives in late July, arguing that “better-performing and
lower-cost funds were available” and that the 401(k) plan should
have offered a stable value fund instead of a money market fund.
The plaintiff said “defendants were motivated to cause the plan
to invest in Franklin funds to benefit Franklin Templeton's
investment management business. The Franklin Templeton plan
is one of several DC plans that were sued in 2015 and 2016
alleging they offered too many of their parent companies'
investment products, and arguing that the plans could have
offered less-expensive and/or better-performing options among
other fund providers.
In another case reported in Pensions & Investments, participants
in Northrop Grumman Corp.'s 401(k) plan have filed a lawsuit
alleging plan executives and corporate executives violated
fiduciary duties, and that the plan improperly paid fees to the
corporate parent and paid “unreasonable” record-keeping fees.
The complaint alleged the 401(k) plan paying the corporate
parent for administrative services was a “scheme to direct plan
assets to Northrop that were not payments reasonably related to
the service the plan need or was provided.” The complaint also
argued that payments to the plan's former record keeper, Aon
Hewitt, were excessive. Aon Hewitt was the record keeper from
Jan. 1, 2007, until April 1, 2016, when it was replaced by Fidelity
Investments. “Defendants failed to properly monitor (Aon)
Hewitt's total compensation from all sources in light of the
services that Hewitt provided,” said the complaint, adding that
the plan paid “unreasonable” administrative expenses to Aon
Hewitt.
In regard to fees, the Department of Labor guide states that fees
are just one of several factors fiduciaries need to consider in
deciding on service providers and plan investments. When the
fees for services are paid out of plan assets, fiduciaries will want
to understand the fees and expenses charged and the services
provided. While the law does not specify a permissible level of
fees, it does require that fees charged to a plan be “reasonable.”
After careful evaluation during the initial selection, the plan’s
fees and expenses should be monitored to determine whether
they continue to be reasonable.
Only the “Big” Plans Need to Worry – Right?
Sponsors of smaller DC plans may think that the situations discussed
above only relate to the “big” plans with many participants. Not
true! If your DC plan is subject to ERISA, compliance is required –
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size does not matter! Many small and medium-sized companies focus on
running their business. They provide a DC plan as an employee benefit,
but they may not have the internal resources to manage the process.
Retirement plans are heavily regulated and it can be very difficult for
any company not large enough to have a dedicated staff to hit every
hurdle correctly.
“Retirement plans are
heavily regulated and it
can be very difficult for
any company not large
enough to have a
dedicated staff to hit
every hurdle correctly.”
When plans are out of compliance - and according to Department of
Labor data, the problem is growing each year - employers or their
employees are stuck paying taxes and penalties. Most employers and
employees don't realize that serious violations can cause a DC or
pension plan to lose its tax qualified status. When a plan loses its tax
qualified status, all of the money in the plan becomes taxable to the
plan participants.
Sponsors Need to Act
The procedures discussed below are related to areas where plan
fiduciaries often receive less support regarding their fiduciary
obligations which may create potential risks arising from DOL rules and
regulations. Be sure your organization is in compliance to prevent any
potential legal action:
● Ensure that all plan parties understand fiduciary responsibilities
and the scope of personal liabilities
● Ensure members of the retirement plan committee are suited
for their roles and responsibilities
● Evaluate and document the plan’s arrangements with service
providers
● Review the fee disclosure documents and develop policies and
procedures to respond to inquiries
● Review document file and ensure a formal documentation
process is in place to help manage any potential audits
By taking a proactive approach to all fiduciary requirements, especially
in the areas of plan fees and expenses, a plan sponsor may help limit
the scope of any potential examinations which can expedite the
conclusion of any plan audit, along with heading off any potential
participant legal actions. Concerned that your plan may not be
compliant? Let our experts perform a fiduciary review for you.
Kamp Consulting
Solutions, LLC
@ KampConsulting
@ RussKamp
@SaveDBPlans
Kamp Consulting Solutions LLC
34 Third Street
Office: 973-509-4616
www.kampconsultingsolutions.com
kampconsultingblog.com
Midland Park, NJ 07432
Fax: 201-670-4454