Stay on the ball with your fiduciary duties

Transcription

1 A Fiduciary Guide for Plan Sponsors Stay on the ball with your fiduciary duties MassMutual ERISA Advisory Services SM insure Retirement invest Strategies retire FOR PLAN SPONSOR USE ONLY.

2 Contents 1 About this guide 2 Your current plan information summary 4 Your role as plan fiduciary 8 ERISA do s and don ts 14 ERISA 404(c) 15 Specifics on prohibited transactions 17 Correctional programs

3 About this guide As a plan fiduciary, you have the leading role in maintaining your company s Employee Retirement Income Security Act of 1974 (ERISA) retirement plan. MassMutual Retirement Services has organized this guide to help you fulfill your fiduciary duties. The information is designed to assist you in meeting your fiduciary duties. But remember, the laws affecting plans and fiduciaries are constantly evolving. That s why it s advisable to consult with your pension attorney and/or tax attorney regarding your Plan.* Your current plan summary Your ERISA retirement plan is governed by documents consistent with Title I and II, and for defined benefit plans, Title IV of ERISA. As a plan fiduciary, you are responsible for numerous functions with respect to the plan and its participants. Here are a few of the key functions: Meeting the reporting obligations to federal agencies, such as the Department of Labor ( DOL ), Internal Revenue Service ( IRS ), and the Pension Benefit Guaranty Corporation ( PBGC ) Determining whether the plan documents are consistent with ERISA Keeping participants informed about the plan and any changes Making timely contributions Monitoring plan investments for prudence and diversification Ensuring proper funding of the plan. To do it all, you need to keep the plan documents organized and at your fingertips. A current plan information summary has been provided to serve as the cover sheet to be stored with copies of your most important plan documents, such as: Your most recent favorable determination letter Summary Annual Report Summary Plan Description and Summaries of Material Modifications Form 5500 annual return And others. The current plan information summary form is on the next two pages. *If the administration of your plan is handled by a Third Party Administrator (TPA), it is also advisable to consult with your TPA regarding change in fiduciary law as it relates to your plan. 1

4 Your current plan information summary Current plan information summary DB DC Plan Name: Plan Serial Number: Plan Type: Prototype (Non-Standardized) Version (date): Executed: Opinion Letter (attach copy), date: Determination Letter (attach copy), date: Prototype (Standardized) Version (date): Executed: Opinion Letter (attach copy), date: Determination Letter (attach copy), date: Plan Year: Beginning Date Ending Date Volume submitter Version (date): Executed: Advisory Letter (attach copy), date: Determination Letter (attach copy), date: Individually designed Version (date): Executed: Cycle for Plan Document Restatement: Determination Letter (attach copy), date: Executed amendments: Pending amendments: #: Eff. Date(s): Executed: Proposed Effective Date(s): #: Eff. Date(s): Executed: Description: #: Eff. Date(s): Executed: Attach Additional Sheet (if needed): Yes No Investment advisor: Summary Annual Report (SAR) Distribution Due Date: Distribution list prepared/filed with SAR Fidelity bond: Summary Plan Description (SPD) Insurance Company For amend./restatement eff.: Amount: Period: Distribution Due Date: Fiduciary Insurance (not required): Distribution list prepared/filed with SAR Most recent Form 5500: Plan Year: Summary of Material Modifications (SMM) Due Date (w/o extension): For amend./restatement eff: Extension due date (if applicable): Distribution Due Date: Complete copy filed in notebook Distribution list prepared/filed with SMM 2

5 Additional data for DB plans only (that are subject to PBGC oversight) PBGC Annual premium payment PBGC Form 1-ES (for plans with 500 or more participants in prior plan year) Plan Year: Form Due Date: Premium Amount: Participant Count: Form 1 (Annual premium payment) (for all size plans) Plan Year: Premium Amount: Form Due Date: Participant Count: ERISA 4010 filing No If YES, then Date Provided to PBGC C:

6 Your role as plan fiduciary MassMutual, of course, does not give legal advice and this guide should not be treated or construed as such. You should discuss your responsibilities as a fiduciary under ERISA with your pension attorney and/or tax attorney. ERISA regulates the fiduciary s duties in managing and administering the plan and its assets. ERISA imposes upon plan fiduciaries an exacting standard of care that requires that a fiduciary discharge duties with respect to a plan with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matter would use in the conduct of an enterprise of like character. This means that a plan sponsor has a fiduciary duty for the manner in which it carries out its fiduciary responsibilities and delegates its fiduciary duties to a third party. To ensure compliance with the stringent standards to which ERISA holds fiduciaries, ERISA imposes personal liability on fiduciaries for any losses to the plan resulting from a breach of fiduciary duties regardless of whether or not the breach was intentional. Quite often, named fiduciaries delegate certain non-fiduciary, administerial functions to others. Typically, the individuals to whom these functions are delegated are not considered a fiduciary of the plan. A person is a non-fiduciary if the person does not meet the definition of a fiduciary as described below (e.g. a lawyer, auditor, accountant, actuary or Third Party Administrator who performs ministerial rather than discretionary functions). Current case law indicates that ERISA provides no cause of action for damages against non-fiduciaries who knowingly participate in a breach of fiduciary duty. However, the courts have also ruled that a non-fiduciary may be liable for participating in a prohibited transaction. As the plan fiduciary, you have authority over the plan and its assets. At your direction, MassMutual Retirement Services provides administrative services to the plan and invests the plan s assets. Yours is a role of leadership; MassMutual s, of stewardship. Together, we work to give your employees an opportunity to save for their future financial security. 4

7 The following information covers the general standards of conduct for the fiduciary of a company s ERISA-qualified retirement plan. It s intended to answer your questions about the details of your fiduciary responsibilities. Governmental and non-electing church plans are not subject to ERISA s requirements. If you sponsor such a plan, this guide will help you communicate information about the plan. Generally, under ERISA, you are a fiduciary if you: Exercise any discretionary authority or control over plan management and administration. Conduct amounting to the exercise of discretionary authority or control is determined by a facts and circumstances analysis. Performing ministerial functions such as applying rules to determine participant eligibility, preparing employee communications, maintaining employment records and calculating benefits does not confer fiduciary status upon the individual performing them, so long as such rules, practices and procedures are created or adopted by a fiduciary. A fiduciary is the individual with authority or control to create or adopt the rules, policies, practices and procedures by which the plan is maintained and administered. Remember: Having discretionary authority is enough to raise one to the level of fiduciary, even if such discretionary authority is not actually exercised. Exercise any discretionary authority or control over the management or disposition of plan assets. (or its Board of Directors) may delegate fiduciary control over plan assets to a plan committee, the employer will still have a fiduciary duty to choose the committee prudently and continually monitor its activities. Additionally, in plans where participants direct the investment of their own account assets among the available investment options, fiduciary responsibility still arises in determining the initial investment options to be offered by the plan and monitoring those investment options for ongoing prudence. Render investment advice for a fee or other compensation with respect to plan funds or property. A person will be a plan fiduciary if the person: (1) renders investment advice with respect to any property of the plan, or has any authority to do so, (2) for compensation, direct or indirect. A person renders investment advice if the person: makes recommendations as to the advisability of investing in, purchasing or selling securities or other property with the understanding that such recommendations will be the primary basis for investment decisions with respect to plan assets; or has discretionary authority or control over purchasing or selling securities or other property for the plan. Similar to the guidelines for conferring discretionary authority of the plan s management, conduct amounting to discretionary authority over plan assets is determined by a facts and circumstances analysis. Generally, the plan trustee has authority and discretion to manage and control plan assets, thereby making the trustee a fiduciary. Similarly, in a plan for which there is no trustee, an employer assumes fiduciary status by exercising discretionary authority over plan assets. While an employer 5

8 Your role as plan fiduciary (cont.) Fiduciary standards A fiduciary meeting any of the above criteria must be familiar with several legal obligations. The fiduciary must act solely in the interest of plan participants and beneficiaries. Therefore, ERISA, along with related Department of Labor regulations, requires plan fiduciaries to discharge their duties in accordance with the following standards: A fiduciary must act for the exclusive purpose of providing benefits to those participants and beneficiaries and defraying reasonable expenses of administering the plan. A fiduciary is required to act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with such matters would use in the conduct of a similar enterprise. This provision defines the standard of competence to which a fiduciary will be held responsible with respect to plan decisions. Diversification For plan assets that are not participant-directed, a fiduciary must diversify the plan s investments to minimize the risk of large losses unless the fiduciary determines that it is not prudent to diversify the investments. Whether a fiduciary has complied with the duty to diversify is a facts and circumstances test, which requires consideration of the purpose of the plan, the amount of plan assets, financial and industrial conditions, the type of investment, geographic distribution of investments, distribution among industries and distribution of maturity dates. A fiduciary must act in accordance with the documents governing the plan insofar as such documents are consistent with Labor (Title I) and PBGC (Title IV) (if applicable) provisions of ERISA. The fiduciary has a duty to determine if the terms of the documents are consistent with ERISA and is subject to the prudence standard when making this determination. If the terms of the plan documents are contrary to ERISA, the fiduciary must act in accordance with the ERISA requirements. Investments Normally, responsibility for investment of plan assets resides with the plan fiduciary. To help you meet this responsibility, a plan fiduciary has three options: Appoint one or more investment managers with discretionary authority to control the investment of all, or a specified portion, of the plan assets, or For defined contribution plans, establish an arrangement authorized by regulations under ERISA 404(c) by which plan participants exercise control over the investment of their accounts For defined contribution plans, select a qualified default investment alternative for automatic enrollment plans. 6

9 A plan fiduciary must consider the following in connection with selecting the available investment alternatives: (1) Each investment must be evaluated as part of the overall group of available investments; (2) The investment alternatives offered must be reasonable for the purposes of the plan; (3) The risk of loss and opportunity for return for each alternative should be favorable (relative to alternative similar investments); and (4) Diversification of the available investment alternatives. In the context of investing plan assets, including choosing available alternative investments, a fiduciary must: (1) Employ proper methods to evaluate investments, including retention of professional advisors if necessary; (2) Act in a manner in which others who act in a like capacity and are familiar with such matters would act; and (3) Exercise independent judgment when making investment decisions. 7

10 ERISA do s and don ts Qualified default investment alternative To ensure that the plan is being maintained in compliance with ERISA and the Internal Revenue Code, you should: Develop written policies and procedures for the proper administration of the plan; Follow these procedures; Monitor Fiduciaries and Services Providers (Seek the advice of others regarding matters for which you must become more familiar or that contain complex legal, financial or other considerations relevant to the plan, participants or your fiduciary duties.); Perform an ongoing review of the plan to ensure its continual compliance with all regulatory changes; Maintain a written record of the results of reviews; and Take action to correct any deficiencies. Plans may offer default investment options where participants do not make an affirmative election to invest qualified plan contributions. If your plan has adopted, or you are considering adopting, a qualified default investment alternative (QDIA), there are several requirements that must be met in order for fiduciaries to receive protection from liability for the investment performance of the default investment option, including: a. Default investment option selected must satisfy the QDIA definition and may be one of the following: 1) life-cycle or targeted retirement date investment options, 2) balanced investment options or 3) managed accounts. With limited exception, stable value and other capital preservation investment options do not satisfy the definition of a QDIA on a stand alone basis. b. Participants must have had an opportunity to direct the investments in their accounts but did not direct the investment of the assets. c. An initial and annual notice to participants is required, notifying them about their rights with respect to such default investment. d.any material provided to the plan relating to participant s investment in a QDIA is provided to the participant. e. Participants must have an opportunity, consistent with the terms of the plan (but not less frequently than once within a three month period), to transfer assets to any other investment alternative under the plan without financial penalty. 8

11 Initial notice must be provided either: (A) at least 30 days in advance of the participant s eligibility date, or at least 30 days in advance of any first investment in a QDIA; or (B) on or before the eligibility date, provided the participant has the opportunity to request a withdrawal within the first 90 days after the initial default contribution without penalty as allowed for eligible automatic contribution arrangements under the Pension Protection Act. Thereafter, annual notice must be provided at least 30 days prior to the beginning of each plan year. Such notice may not be part of the plan s SPD or SMM but may be part of a plan s automatic enrollment notice or safe harbor notice, if applicable. Fiduciaries are still responsible for prudently evaluating and monitoring the investments under the plan, including the QDIA. In the case of QDIAs, the sponsor must also ensure that the level of risk associated with a QDIA is appropriate for participants of the plan as a whole in the case of balanced QDIAs or for individual participants in the case of target-date or managed account QDIAs. However, the regulations do not require fiduciaries to evaluate which type of QDIA is the most prudent for their plan. It is not necessary for a plan to be an ERISA 404(c) plan to obtain relief under this regulation. No restrictions, fees or expenses (other than investment management and similar types of fees and expenses) may be imposed during the first 90 days of a participant s defaulted investment in a QDIA. Fiduciary bond ERISA 412 generally requires that every fiduciary of an employee benefit plan be bonded. The plan may obtain a single bond to cover several fiduciaries. The amount of the bond must be at least 10% of the amount of the funds managed or handled by the fiduciary up to a maximum bond amount of $500,000. For plans that hold employer securities, the maximum bond amount is $1,000,000. Fiduciary liability insurance Pursuant to ERISA 410(b), a plan, employer or fiduciary may purchase insurance to cover liability or losses arising from a breach of fiduciary duty. If the plan purchases such insurance, the policy must permit recourse by the insurer against the breaching fiduciary. Typically, this insurance is provided by the employer. While fiduciary liability insurance may cover losses necessary to make the retirement plan whole as a result of a fiduciary breach, several types of claims are typically not covered, including fines and penalties, punitive damages, taxes and claims alleging dishonesty, fraud or illegal acts, among others. ERISA claims are generally an exception from normal director and officer liability insurance policies unless a specific rider is purchased. Actions against the Plan Determine whether audits, investigations, claims or litigation relating to the plan, other than routine claims for benefits, are pending or threatened. 9

12 ERISA do s and don ts (cont.) Employer and employee contributions Employers should transfer employee contributions withheld from employee paychecks to the plan as soon as the contributions can reasonably be segregated from the employer s general assets, but no later than the fifteenth business day after the end of the month the employee would have received the deferral in wages. The DOL has proposed a special safe harbor for plans with fewer than 100 participants. Contributions transferred to the plan within seven business days of being withheld from employees pay will satisfy the safe harbor. Transfers beyond seven business days will not satisfy the safe harbor but may still be considered to be timely so long as the timing is considered reasonable based upon the particular facts and circumstances. Employers should confirm that any employer contributions are made no later than the employer s tax filing deadline, plus extensions. Also, in order for employer contributions to be credited as annual additions, for Code 415 limitation purposes, contributions must be actually made no later than 30 days after the employer s tax filing deadline, plus extensions. The DOL has stated that collecting employer and participant contributions is a trustee responsibility and that the plan s named fiduciary with the authority to hire and monitor trustees is responsible for ensuring that all trustee responsibilities (including collecting delinquent contributions) are properly assigned. Alternatively, the named fiduciary may assign this function to the plan s investment manager. If neither a trustee nor investment manager is assigned this task, the named fiduciary may be liable for plan losses due to a failure to collect delinquent contributions because the named fiduciary failed to assign this responsibility. As always, the named fiduciary is responsible for monitoring the performance of the trustee and/or investment manager. Certain persons holding office ERISA 411 prohibits any person who has been convicted of robbery, bribery, extortion, embezzlement, fraud, grand larceny, burglary, arson or certain other crimes, from serving as a fiduciary of (or consultant to) an employee benefit plan within 13 years of the date of conviction or termination of imprisonment, whichever is later (unless the sentencing court sets a lesser period of at least three years). Intentional violation of this section entails a criminal penalty of a $10,000 fine, five years imprisonment, or both. Perform a background check of all fiduciaries to confirm they have not been convicted of or released from prison for any of the above crimes. Indemnification agreement Agreements that relieve fiduciaries from liability arising from breaches of their fiduciary duties are void as against public policy. An indemnification agreement that does not relieve a fiduciary of liability but merely permits another party (such as an employer) to satisfy the fiduciary s liability is permitted. Therefore, you should confirm that the appropriate indemnification agreement from the employer (covering fiduciaries and administrators who are employees of the employer) remains in effect. Service provider compensation ERISA considers it a prohibited transaction for a plan to pay a service provider more than reasonable compensation for all goods and services it is acquiring. Written records ERISA is a process law, which means that if a fiduciary establishes reasonable and prudent procedures for fulfilling its fiduciary obligations and it follows those procedures, courts and the DOL will not find that the fiduciary has breached its fiduciary duties, regardless of the outcome of the fiduciary s 10

13 actions. For example, if a fiduciary establishes and follows its procedures for evaluating and selecting plan investment options and the fiduciary can document compliance with its procedures, courts and the DOL typically will not find a fiduciary breach. For this reason, you should confirm that all fiduciaries and administrators are maintaining adequate and accurate written records of their process, deliberations, decisions and actions. Notices Confirm that all required notices are being provided to participants and beneficiaries in a timely manner. Daily trading Mutual funds and other plan investment options have adopted restrictions designed to prevent frequent trading that is financially detrimental to the investment options. Subject to those trading restrictions, for defined contribution plans, plans should provide participants with the option of changing their investment mixes on a daily basis. This may help to avoid any assertion by participants that they suffered losses during a bear market because the plan permitted trading too infrequently (i.e., quarterly). Investment options Defined contribution plans intending to comply with ERISA 404(c) requirements must offer a well-diversified selection of core investment options. (But also be aware that offering too many investment options could overwhelm the participants.) To comply with ERISA 404(a) all retirement plans must diversify plan investments so as to reduce the risk of loss to plan participants. Retirement plans must also adopt procedures to establish and carry out a funding policy in a method consistent with the plan s objectives. Self-directed brokerage Defined Contribution plans may offer a self-directed brokerage option as an investment option. Essentially, brokerage accounts allow participants to invest in almost any publicly traded security, including individual stocks, instead of being limited to a group of pre-selected investments. There has been much discussion surrounding the offering of the brokerage window as an investment option, and what type of fiduciary responsibility rests with the plan fiduciary who chooses to offer this investment option. The utility of the brokerage window depends upon the sophistication of the participants to whom the investment option is being offered. Generally, the more sophisticated and investment savvy the group of participants, the more such participants will benefit from the brokerage window. Typically, these types of participants have a secure knowledge of investments and require greater investment freedom, making the freedom of a brokerage window a real asset to the plan. In short, they can handle and thrive on relatively unlimited investment choice. Participants with less sophisticated knowledge of investments may not benefit from the brokerage window. They may not have the investment savvy or background to be able to make wise investment choices in an unlimited investment option environment. Such participants may make poor investment choices due to the fact they may be overwhelmed with information and choice. Plan fiduciaries have a duty to prudently choose which investment options will be available in the plan. They should closely examine the investment sophistication of their plan participants in determining whether the brokerage window is an appropriate option to offer. 11

14 ERISA do s and don ts (cont.) With respect to fiduciary liability for participant investment decisions under the brokerage window, the more predominant school of thought believes that offering the brokerage window as an investment option eliminates much of the plan fiduciary s potential liability. Generally, investments fall into two categories designated or nondesignated. For designated investment options, plans can comply with Section 404(c) and reduce potential fiduciary liability by: disclosing each option s investment objectives, risk and return characteristics disclosing expenses chargeable to participant accounts providing copies of prospectuses and other materials requested by the participant. The investment options available through the brokerage window are considered nondesignated and, therefore, such detailed information is unnecessary. Others believe, that by offering the brokerage window, the fiduciary becomes as responsible for providing participants with information regarding each investment option available through the window as the fiduciary is with respect to the designated investment options offered through the plan. Both sides of the issue agree that plan fiduciaries must consider the sophistication of the plan s participants in determining whether a brokerage window is an appropriate option to offer in the plan. Monitor composition of investment options Over time, the underlying investments that make up a fund may change. As a result, the investment style of a particular fund today may be different from the investment style it had when you decided to add it to the plan as an investment option. A fund that started out as a conservative investment option may now be characterized as a more aggressive fund because it invests outside of its original investment strategy. In addition to choosing a well-diversified portfolio of investment options, plan fiduciaries should continually monitor the composition of the investment options they have chosen for the plan in order to ensure each investment option has maintained its original investment style and the plan s investment options remain diversified. Plans intending to comply with ERISA 404(c) requirements must offer a well-diversified selection of core investment options. (But also be aware that offering too many investment options could overwhelm the participants.) Investment advisors If your plan(s) utilizes the services of investment advisors, prudently monitor the activities of your investment advisors. Conduct reviews at reasonable intervals to determine if the advisor is performing its duties in a satisfactory manner or whether the investment advisor should be replaced. Document any changes in investment advisors. Education Make sure participants are fully informed when it comes to their retirement plan. Provide them with plenty of information about the plan, its investment options, and its services. If the market experiences a downturn, or participants begin to lose money, a threshold argument may be that they were not properly informed. Proper participant education is a good defense against participant claims if a lawsuit arises. 12

15 Monitoring fees and expense Type of expenses: Some expenses incurred by your plan may be paid directly from plan assets ( plan expenses ), while others must be paid by the employer and cannot come from the plan ( settlor expenses ). The DOL requires that fees be appropriately allocated to either the plan or the employer. It is important to distinguish these two forms of expenses because, as stated in the previous section, plan assets must be held for the exclusive benefit of its participants. Improperly paying expenses out of plan assets that should be paid by the employer violates this rule. In determining whether an expense is a settlor versus plan expense, the general rule is that a settlor expense relates to the establishment, design or termination of a plan (i.e., whether to start a plan, terminate a plan, etc.), while a plan expense relates to those expenses incurred as part of the necessary operation and administration of the plan (i.e., administrative fees that become necessary after the decision to establish, amend or terminate a plan has been made). The Department of Labor has indicated that the following are generally considered plan expenses: expenses related to the implementation of a settlor decision, the cost of maintaining a tax-qualified plan (including non-discrimination testing), amendments required purely due to a change in the law, requesting IRS determination letters, recomputing assets or benefits due to a merger activity or downsizing, participant communications, and start-up fees related to outsourcing plan administration. See the Guidelines for Settlor v. Plan Expenses chart (RS2056e) for more information. Reasonableness of expenses: Even if an expense is a plan expense, it can only be paid from plan assets if the plan fiduciary determines that the expense is reasonable. One way to confirm that an expense is reasonable is to compare the expense to those of other comparable products. The plan fiduciary should document that a comparison was performed and the results of the comparison. Service providers Choosing a service provider is a fiduciary responsibility. A plan fiduciary must act with prudence and in the best interests of the plan in making the choice. If you decide to utilize the services of a service provider, be sure to do your homework. The process you use to select service provider(s) should be designed to elicit information that will allow you to assess the service provider s qualifications, services, and fees. The service provider you are considering should have a sound, long-standing reputation for providing quality services. Also, make sure that the potential service provider is financially solvent and charges reasonable fees for plan administrative services. Remedies for fiduciary breaches With so many complex rules covering such a broad range of fiduciary responsibilities, circumstances may arise in which a fiduciary breach occurs. The Department of Labor (DOL) has established the Voluntary Fiduciary Correction Program, permitting plan fiduciaries to correct fiduciary breaches or possible breaches without having to pay penalties, if such breaches occur as a result of the good faith maintenance of the plan. For more information on this program, contact your MassMutual Retirement Services Representative or the DOL. 13

16 ERISA Section 404(c) What is ERISA Section 404(c)? ERISA 404(c) provides that if a plan allows participants to exercise control over their investments, the plan s fiduciary will not be liable for losses arising from the participants investment elections. Due to uncertainty over whether participants have exercised control over their investments, the DOL published a regulation interpreting ERISA 404(c). The regulation sets forth a safe harbor, satisfaction of which relieves the plan fiduciary from liability. However, the ERISA 404(c) regulation safe harbor does not relieve plan fiduciaries of their normal fiduciary duty with regard to investments. Plan fiduciaries are still responsible for choosing available investments prudently and monitoring those investment choices to ensure that they continue to meet the plan s funding policy and are prudent investments for the participants in the plan. Some plan sponsors feel that if they allow for participants to exercise control over their own investments in a qualified plan, they automatically meet the requirements of the ERISA 404(c) regulation safe harbor. However, that is not the case. The ERISA 404(c) regulation provides roughly 25 different criteria that must be satisfied to ensure compliance under the safe harbor. If we don t satisfy the requirements of the ERISA 404(c) regulation safe harbor, are the fiduciaries liable for investment losses by the participants? Not necessarily. ERISA 404(c) protection is transaction based, meaning that the plan could satisfy the ERISA 404(c) regulation safe harbor on some investment transactions but not on others. If a transaction does not meet the ERISA 404(c) regulation safe harbor, it does not automatically cause a breach in a fiduciary s duty nor does it automatically result in fiduciary liability. However, it will not provide the automatic relief on investment losses that are incurred as a result of participants investment direction of their own account. What are the requirements of the ERISA 404(c) regulation safe harbor? Plan sponsors can use the ERISA 404 checklist from MassMutual to help determine if they meet the requirements of the ERISA 404(c) regulation safe harbor. The plan would need to answer Yes to all the questions to ensure compliance with the ERISA 404(c) regulation safe harbor. (The term participant is used to define participants and beneficiaries ). 14

17 Specifics on prohibited transactions By avoiding the following transactions, you can further minimize or limit the potential for exposure to liability under ERISA. ERISA prohibits certain transactions between a plan and a party-in-interest. Likewise, the Internal Revenue Code (the Code ) prohibits certain transactions between a plan and a disqualified person. Under ERISA, a party-in-interest includes any fiduciary, person providing services to the plan, an employer or employee organization whose employees or members are covered by the plan, the owner of 50% or more of an employer or employee organization, a relative of the above, or a 10% shareholder, partner or joint venturer of any of the above. This definition is nearly identical to the definition of disqualified person, with only slight differences that stem from distinctions between ERISA and the Code. The most important distinctions between the prohibited transaction provisions of ERISA and the Code are that, pursuant to Code 4975, a disqualified person is taxed for engaging in a prohibited transaction, whereas under ERISA, the party-in-interest is and the Code does not contain all the prohibited transactions contained in ERISA. ERISA 406(a) prohibits party-in-interest transactions between a plan and a party-in-interest that constitute (i) the sale, exchange or lease of property; (ii) the lending of money or other extension of credit; (iii) furnishing goods or services; (iv) transferring to or permitting a party-in-interest to use plan assets and certain investments in securities of the employer; or (v) under certain circumstances, an acquisition or retention by the plan of employer securities or employer real property. 15

18 Specifics on prohibited transactions (cont.) ERISA 406(b) prohibits self dealing transactions by fiduciaries. Self-dealing involves the receipt by a fiduciary of consideration for his personal account from any party dealing with the plan in connection with a transaction involving plan assets or dealing with plan assets for his own account. In addition, a fiduciary may not represent or act in a transaction involving the plan on behalf of anyone whose interests are adverse to those of the plan, participants or beneficiaries. If a prohibited transaction occurs, the Code imposes a 15% penalty tax applies on any disqualified person who participates in the transaction each year until the transaction is corrected by reversing the transaction to the extent possible without harming the plan. This may be done by completing and filing Form 5330 with the Internal Revenue Service to reflect the prohibited transaction that occurred and paying any applicable penalties pursuant to the filing. If the correction is not completed before the IRS identifies the prohibited transaction and mails a notice of deficiency, the penalty tax is equal to 100% of the amount involved. The prohibited transaction is reportable on Form Needless to say, conduct by a plan fiduciary that may cause the fiduciary to become involved in a transaction with a plan should be carefully considered. ERISA 408 and Code 4975(d) provide, however, that certain types of transactions are statutorily exempt from the prohibited transaction rules and the Department of Labor may grant individual and class exceptions, thereby permitting specific transactions that might otherwise be prohibited. Under ERISA 408(b), subject to certain requirements, the following is permissible: loans to participants the furnishing of necessary services by a party-in-interest to a plan loans to employee stock ownership plans, bank deposits and other ancillary services where the bank is a fiduciary the purchase of insurance from an insurance company that is also an employer of employees covered by the plan conversion of securities and transactions between a plan and pooled insurance and bank investment funds. If there is a transaction involving the plan in which you may become a party-in-interest, and it is questionable whether such a transaction would be prohibited, a prohibited transaction exemption may be sought from the Department of Labor on an individual basis. As part of submitting any prohibited transaction exemption request, you should review the guidelines set forth in previous prohibited transaction individual or class exemptions similar to the transaction in question. 16

19 Correctional programs It is almost inevitable to have at least one mistake or administrative defect during the life of a retirement plan. Both the IRS and DOL have provided guidance on how to correct such errors in plan administration. The Employee Plans Compliance Resolution System ( EPCRS ), issued by the IRS, is a comprehensive system of correctional programs. The EPCRS provides examples that plan sponsors may utilize in order to retroactively satisfy regulations pertaining to their retirement plans and to correct qualification defects. Depending upon the type of corrections required, the EPCRS consists of several corrective variations, including the Self Correction Program (SCP), the Voluntary Correction Program with IRS approval (VCP) and the Correction on Audit (Audit Cap), which provide plan sponsors the opportunity to correct plan violations while keeping the qualified status of the plan intact. In addition, the DOL published its Voluntary Fiduciary Correction Program (VFCP), designed to help plan sponsors correct certain fiduciary violations or prohibited transactions. The VFCP is a DOL self-correction program that permits plan fiduciaries and/or plan sponsors to correct certain fiduciary violations with respect to ERISA retirement plans. A correction of fiduciary breaches under the VFCP relieves plan fiduciaries of penalties imposed under Section 502(l) of ERISA and generally avoids civil actions initiated by the DOL for breaches of Title I of ERISA. Compliance As a plan fiduciary, you are responsible for meeting the reporting obligations to federal agencies, such as the Department of Labor, Internal Revenue Service, and the Pension Benefit Guaranty Corporation, and to plan participants. To help you stay on top of your reporting duties, you should be aware of the various reports you may need to file with various agencies and participants as well as a list of forms to be filed. MassMutual s experienced, dedicated team is ready to help you. Contact your retirement services professional or call for questions or more information. 17

20 The information contained in this guide is not intended or written as specific legal or tax advice and may not be relied on for purposes of avoiding any federal tax penalties. Neither MassMutual nor any of its employees or representatives are authorized to give legal or tax advice. You must rely on the advice of your own independent tax counsel. Securities offered through registered representatives of MML Investors Services, Inc., member FINRA and SIPC ( and State Street, Springfield, MA Massachusetts Mutual Life Insurance Company, Springfield, MA. All rights reserved. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) [of which Retirement Services is a division] and its affiliated companies and sales representatives. RS C: