How to Protect the Company and Avoid Personal Liability 2016 In House Counsel Conference

Transcription

1 ERISA FIDUCIARY RESPONSIBILITY & CONFLICTS OF INTEREST How to Protect the Company and Avoid Personal Liability 2016 In House Counsel Conference

2 Presenters: Joel E. Horowitz, Partner McCarter & English, LLP 1600 Market Street, Suite 3900, Philadelphia, PA P: E: Paul Laskow, General Counsel & Secretary AAA Club Partners, Inc. One River Place, Wilmington, DE P: E:

3 Who is Covered By ERISA? Almost all employers Includes most tax-exempt organizations Churches and related religious organizations are exempt Government entities generally are exempt

4 What does ERISA Cover? Employer-sponsored retirement-type plans Pension, profit-sharing, 401(k), etc. Most executive deferred compensation is exempt from ERISA fiduciary rules ERISA doesn t apply to short-term bonus plans, restricted stock or option plans, incentive plans, etc. Employer-sponsored welfare plans Health benefits (insured and self-insured), group life insurance, group disability insurance, severance pay plans

5 Who is an ERISA Fiduciary? Named in the plan document or identified by their function Individuals who perform ministerial functions or directed functions generally are not fiduciaries Example: Claims processors or benefit calculators are not fiduciaries Fiduciaries may be identified by their conduct, i.e., if they undertake decision-making responsibilities Named fiduciary, typically the plan sponsor, has principal responsibility for oversight and management Routinely delegated responsibility to a formal or informal committee

6 Who is an ERISA Fiduciary? Functional test: Any person who Exercises discretionary authority or control over the plan s management Exercises any authority or control over the management or disposition of plan assets Renders investment advice for a fee or other compensation with respect to plan assets; or Has discretionary authority or responsibility with respect to plan administration

7 ERISA Fiduciary Obligations Overall obligation of prudence Fiduciary must act solely in the interest of plan participants and their beneficiaries Avoid specific prohibited transactions Operate the plan in accordance with its terms and applicable laws and regulations Statute is codification of common law, tracks similar rules that apply in other contexts such as limitations on administration of private foundations

8 Prohibited Transactions Prohibited self-dealing Using the plan or plan s assets in the fiduciary s interest Acting for a party whose interests are adverse to those of the plan, i.e., acting on both sides of the transaction Receipt of consideration for the fiduciary s own account, whether or not an overt kickback

9 Prohibited Transactions Transactions with parties in interest (or disqualified persons ) are prohibited to avoid conflicts of interest Basically, a party-in-interest is any party who has a relationship with the plan, and many shareholders, directors, officers, etc. Exceptions for necessary services and similar transactions for the convenience of the plan as long as no more than reasonable consideration is paid for those services and the plan is otherwise protected DOL has issued regulations on disclosure of fees and further conditions for certain service agreements

10 Prohibited Transactions No investment in employer securities or real estate owned or used by the employer Exception: 401(k) and similar savings-type account plans may offer company stock investments, subject to a rigorous administrative scheme designed to ensure that shares are acquired at fair market value. Requires independent valuation of the company stock Does not require a securities filing for a nonpublic company, even if the employees invest voluntarily May require an independent fiduciary

11 Fiduciary Liability and Penalties Who can bring a civil action for breach of fiduciary duty? US Department of Labor Other plan fiduciaries Plan participants Defendant fiduciary may be personally liable for any losses to the plan resulting from his or her breach of duty, and any profits the fiduciary obtains through the use of plan assets must be restored to the plan. Fiduciary is subject to other equitable or remedial relief, including removal of fiduciary.

12 Fiduciary Liability and Penalties Department of Labor may assess a civil penalty equal to 20% of the recovery amount in the event of a breach of fiduciary duty or violation or participation in a breach by another person Excise tax penalties under the Internal Revenue Code equal to 15% of the amount involved. The tax applies to prohibited transactions involving retirement plans and IRAs. If left uncorrected, the penalty increases to 100%. Co-fiduciary liability for knowing breach by a co-fiduciary.

13 Fiduciary Liability and Penalties ERISA Bonding Requirement Each person who handles plan funds must be subject to an ERISA bond. Separate from E&O coverage.

14 Avoiding Conflicts of Interest Satisfying fiduciary duties and avoiding prohibited transactions is a matter of process and good governance Maintain plan administrative and investment committees Adopt and update an investment policy statement Seek advice from independent advisors Brokers Investment advisors and managers Portfolio evaluators Independent valuation experts for company stock

15 Avoiding Conflicts of Interest Maintain committee charters and bylaws Maintain ERISA counsel to the committees Formalize committee procedures Regular meetings Record votes Keep minutes

16 Avoiding Conflicts of Interest Example: Employer accept accepts bids for health insurance brokerage for its employee health plan from three brokers. Employees generally bear 25% of the premium cost. The employer picks the incumbent, knowing that the premiums probably won t be lowest, but the broker offers to provide other services, such as record keeping and help desk services, at no additional cost, that might save the employer several thousand dollars per year. Has the employer engaged in an act of self-dealing? The employees bear a portion of the premiums, which are likely higher than they would be otherwise, while the employer is receiving services at no additional cost.

17 Avoiding Conflicts of Interest Example: The employer s 401(k) plan offers a fixed income investment that pays 3% interest. The employer proposes to permit employees to invest in employer notes that pay 6%. The notes are liquid and the employee may change investments at any time. Is that a general breach of fiduciary duty? Is that a prohibited transaction? Yes. That is a patent violation of the prohibition against extensions of credit between a plan and a party in interest, even if the transaction makes economic sense. There is no applicable exemption.

18 Avoiding Conflicts of Interest Example: Employer proposes to establish a company stock fund in its 401(k) plan. The plan will buy shares from a majority shareholder to provide the plan s investment. Is that a prohibited transaction? Yes unless specific conditions are met. There is a specific exemption for plans that invest in company stock (but not debt or other property). The plan must obtain an independent valuation and the trustee or other fiduciary must deal with the company stock in the interest of participants and not in the direct interest of the company or other shareholders.

19 Avoiding Conflicts of Interest Example: Employer uses the CFO s brother-in-law as its insurance broker for property and casualty insurance, D+O insurance and related business insurance. Over Thanksgiving dinner, the brother-in-law mentions that he has an array of mutual fund portfolios available that the employer can offer under its 401(k) plan and that they have been getting terrific returns.

20 Avoiding Conflicts of Interest Example (continued): Employer moves the 401(k) funds from an array of Vanguard (only) funds to the portfolios arranged by the brother-in-law. In fact, the brother-in-law arranges to have a national insurance company introduce its investment portfolios, and the brother-in-law is paid a fee by the insurance company for introducing the new client. Is that a prohibited transaction? Is that a fiduciary violation? Is there something the employer can do to make sure the move complies with ERISA?

21 Current Fiduciary Issues New guidance on who is a fiduciary Applies primarily to investment and financial advisers Default investments in 401(k) plans Is a money market fund a permissible default fund? How about stable value funds, or target date funds? Qualified Default Investment Alternatives 401(k) investment fees Just how much are your employees really paying for the mutual fund investments in your plan? Adequate disclosure and education about fees

22 Conclusions Employee benefit plan governance requires singleminded devotion to the interests of participants and beneficiaries, even when those interests might conflict with those of the employer. Plan administrators including corporate officers--should be aware of their fiduciary obligations, and should recognize that certain transactions, especially those involving the plan or plan assets and interested parties should be approached with caution. Plan investments and investment procedures should be reviewed at least annually.

23 Conclusions Plans administrative and investment committees should be formally constituted, subject to formal delegation and appointments, and operate according to rules, charters and/or bylaws. Fiduciary and administrative committee action should be documented. Details of compliance are evolving, but the law is generally a matter of common sense fiduciary compliance.

24 Questions?

25 Presenters: Joel E. Horowitz, Partner McCarter & English, LLP 1600 Market Street, Suite 3900, Philadelphia, PA P: E: Paul Laskow, General Counsel & Secretary AAA Club Partners, Inc. One River Place, Wilmington, DE P: E: