Minimizing Conflicts within Complex Plan Transactions via an Independent Fiduciary

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1 Minimizing Conflicts within Complex Plan Transactions via an Independent Fiduciary William E. Ryan III Managing Director & Chief Fiduciary Officer Evercore Trust Company, N.A.

2 1. A representative of the Department of Labor responsible for acting as an ERISA ombudsman for plans 2. A broker-dealer, recordkeeper, or other service provider for your plan, other than the plan sponsor. 3. An individual or entity responsible for acting as a fiduciary on behalf of the plan and its participants, usually in connection with a real or apparent conflict between the plan and the plan sponsor. 4. None of the above. What is an Independent Fiduciary?

3 Table of Contents Table of Contents Types of Pension Settlements Legal Framework for Pension Settlements Settlor v. Fiduciary Roles of Sponsor General ERISA Fiduciary Requirements Procedural Prudence DOL Fiduciary Guidance Legal Risks to Plan Sponsors in Making the Annuity Selection Independent Fiduciaries in Pension Settlements What is an Independent Fiduciary? Should a Sponsor Use an Independent Fiduciary? Independent Fiduciary Best Practices in Annuity Selection Challenges and Opportunities

4 Types of Pension Settlements Types of Pension Settlements Type of Settlement Annuitized Population Plan Termination? Considerations Termination All plan participants Entire plan Interests of plan participants are aligned Spin-Termination Remaining participants in original plan after spin-off Original plan Two plans/participant groups with divergent interests Lift-out A subset of plan participants None Two groups of plan participants with divergent interests

5 Legal Framework for Pension Settlements Settlor v. Fiduciary Roles of Sponsor Creating, Amending, Splitting or Terminating a Plan Decision to offer lump sum payments Decision to terminate plan/annuitize benefits Administering or Otherwise Implementing Settlor Decisions LDI Implementing a lump sum distribution Annuity selection and purchase Significant legal risk if Sponsor s settlor and fiduciary roles are not clearly delineated

6 Legal Framework for Pension Settlements General ERISA Fiduciary Requirements Procedural Prudence Act for the exclusive benefit of plan participants and beneficiaries, and follow a prudent expert standard of conduct. Procedural Prudence: The Prudent expert standard of conduct when acting on behalf of a plan means that Fiduciaries must either possess or retain appropriate expertise Fiduciaries must follow a disciplined (and documented) decision-making process Fiduciaries must avoid being placed in conflict of interest situations where they may put their own interests ahead of those of the plan or participants

7 Legal Framework for Pension Settlements DOL Fiduciary Guidance Interpretative Bulletin 95-1 and the Safest Annuity Available 6 Factors That a Fiduciary Should Consider in Selecting Annuities Quality and diversification of the insurer s investment portfolio Size of the insurer relative to the proposed annuity contract Level of the insurer s capital and surplus Lines of business of the insurer and other indications of an insurer s exposure to liability Structure of the annuity contract and guarantees supporting the annuities, such as the use of insurance company separate accounts Availability of additional protection through state guaranty associations and the extent of the guarantees Issues Not a regulation/not the force of law Requirement of Safest Available Annuity not followed by the courts (Bussian v. RJR Nabisco).

8 Legal Framework for Pension Settlements Should a Sponsor Use an Independent Fiduciary? Significant legal risks in selecting an annuity Managing potential conflicts of interest (settlor v. fiduciary roles) Sponsor CAN consider financial/other benefits to itself, where attendant to settlor decisions Sponsor CANNOT let these considerations impact the implementation of settlor decisions Other Issues What Fiduciary Legal Standard Applies Safest Annuity Available v. Procedural Prudence? How to managing a prudent selection process ERISA statutory liability for annuity selection (ERISA Section 502)(a)(9) and litigation risk

9 Independent Fiduciaries in Pension Settlements What Is An Independent Fiduciary? Independent third party appointed to protect the plan s interests Typically retained to address conflicts of interest, or where specialized expertise is required Most commonly RIAs or institutional trust companies Requirements: Expertise and training Independence Different types of roles Non-discretionary advisor/consultant makes recommendation Discretionary independent fiduciary makes decision

10 Independent Fiduciaries in Pension Settlements Should A Plan Sponsor Consider Hiring an Independent Fiduciary? More common in larger or more complicated transactions Greater risk from potential conflicts of interest Provides specialized expertise Prohibited transaction relief Reduces Sponsor s legal risk Historically less common in certain situations Less complicated or more ordinary course transactions Sponsor has expertise in evaluating annuity purchases Sponsor may not wish to surrender control of the annuity selection process

11 Independent Fiduciary Best Practices in Annuity Selection Three Key Elements Understand Roles and Responsibilities of Parties Develop and Implement a Process for Annuity Selection Document Fiduciary Process and Determinations

12 Independent Fiduciary Best Practices in Annuity Selection Three Key Elements Understand Roles and Responsibilities of Parties Plan sponsor, committees and fiduciaries Actuary, investment consultants and asset managers Independent fiduciary Advisors to the sponsor, plan committee, and independent fiduciary Develop and Implement a Process for Annuity Selection Document Fiduciary Process and Determinations

13 Independent Fiduciary Best Practices in Annuity Selection Three Key Elements Understand Roles and Responsibilities of Parties Plan sponsor, committees and fiduciaries Actuary, investment consultants and asset managers Independent fiduciary Advisors to the sponsor, plan committee, and independent fiduciary Develop and Implement a Process for Annuity Selection Clarify project plan and timeline Review and Document Plan Benefit Features Internal Diligence -- Status of participant data cleanup, offer/timing of lump sum window Communication protocols /Meeting Schedules Participant communication strategy Key steps in annuity selection and responsible parties RFI/Develop the List of Potential Carriers RFP Document Fiduciary Process and Determinations

14 Independent Fiduciary Best Practices in Annuity Selection Three Key Elements Understand Roles and Responsibilities of Parties Plan sponsor, committees and fiduciaries Actuary, investment consultants and asset managers Independent fiduciary Advisors to the sponsor, plan committee, and independent fiduciary Develop and Implement a Process for Annuity Selection Clarify project plan and timeline Review and Document Plan Benefit Features Internal Diligence -- Status of participant data cleanup, offer/timing of lump sum window Communication protocols /Meeting Schedules Participant communication strategy Key steps in annuity selection and responsible parties RFI/Develop the List of Potential Carriers RFP Document Fiduciary Process and Determinations Combination of substantive IB 95-1 considerations and procedural prudence in the selection process Evaluation of final annuity selection

15 Independent Fiduciary Best Practices in Annuity Selection Considerations in Evaluating Annuity Providers and Products Providers Products IB 95-1 Criteria PLUS Concerns re. SIFI status Available capacity Product offerings (separate v. general account, pooled v. single client separate account) Safety Remedies Backstop Single or Multiple State Guaranty Funds Role of Cost Considerations Financial analyses of providers Insurance company regulatory structure Administrative processes Customer service Syndication experience

16 Challenges and Opportunities Challenges and Opportunities Annuity Capacity Post GM and Verizon Syndication In-Kind Transfer of Plan Assets to Fund Pension Settlements The Use of Annuities to De-Risk Outside of a Plan Termination Alternative Annuity Structures Captive insurance companies Synthetic GIC/BICs Reinsurance New Annuity Applications: Annuities in Defined Contribution Plans Exit Strategies for Retiree Supplemental Medical Health Benefits

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