2016 HR INDIANA ANNUAL CONFERENCE

August 29, 2016

Fiduciary Seminar: Best Practices for Retirement Plan Fiduciaries Michael G. Paton Barnes & Thornburg LLP 11 South Meridian Street Indianapolis, IN 46204 (317) 231-7201 [email protected]

Michael G. Paton Partner 317-231-7201 317-231-7433 Fax [email protected] 11 South Meridian Street Indianapolis, Indiana 46204-3535 Michael G. Paton is a partner with Barnes & Thornburg LLP, resident in the firm’s largest office in Indianapolis where he is a member of the Corporate Department and Chairman of the Compensation and Employee Benefits Practice Group. For more than 30 years he has concentrated his practice on the many legal issues surrounding employee benefits. His “full service” practice encompasses a broad spectrum of activities, including drafting and design of both qualified and non-qualified retirement plans, cash balance and other "hybrid" plans, 401(k) plans and employee stock ownership plans (ESOPs). He counsels regional and national clients extensively on legal issues involved in the design and administration of health, “cafeteria,” and other fringe benefit plans, including the HIPAA privacy and security requirements, and most recently on the interpretation of provisions of the Patient Protection and Affordable Care Act (PPACA). His practice also includes counseling clients with respect to executive compensation issues, including compliance with the requirements of Section 409A. As part of his administrative practice he is closely involved with governmental agencies, including the Department of Labor and the Internal Revenue Service. Mr. Paton also advises a number of tax-exempt, higher education and governmental employers on employee benefit matters relating to qualified plans, 403(b), 457(b) and 457(f) plans and 409A compliance. Mr. Paton has been a frequent participant in employee benefit seminars on a variety of topics including PPACA, qualified retirement plans, ESOPs, health benefit plans, fiduciary responsibilities and other employee benefits issues. Mr. Paton received a B.B.A. degree with honors from the University of Notre Dame in 1982. He received his J.D., magna cum laude, in 1985 from Indiana University School of Law-Bloomington, where he was a member of the Order of the Coif. He joined Barnes & Thornburg in 1985. Mr. Paton is admitted to practice in Indiana. Mr. Paton has been named on the Indiana Super Lawyers list by a panel of his peers, and in 2014-2016 was identified as one of The Best Lawyers in America. In 2016, he was recognized as a "Lawyer of the Year" by Best Lawyers for his work in employee benefits (ERISA) law.

Bar Admissions Indiana, 1985 Education B.B.A., University of Notre Dame, with honors, 1982 J.D., Indiana University Bloomington, magna cum laude, 1985

FIDUCIARY BASICS – Who is a Fiduciary? • Section 3(21)(A) of ERISA provides that a person is a fiduciary with respect to a plan to the extent: – he or she exercises any discretionary authority or discretionary control with respect to management of such plan or exercises any authority or control with respect to management or disposition of its assets,

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FIDUCIARY BASICS – Who is a Fiduciary? • Or he or she renders investment advice for a fee or other compensation, direct or indirect, with respect to any money or other property of such plan, or has any authority or responsibility to do so,

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FIDUCIARY BASICS – Who is a Fiduciary? • Or he or she has any discretionary authority or discretionary responsibility in the administration of such plan.

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FIDUCIARY BASICS – Who is a Fiduciary? • No official title needed. Fiduciary status is based on the functions performed for the plan, not just someone’s title.

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FIDUCIARY BASICS – Who is a Fiduciary? • Settlor (business) role: – Acting in the interest of the employer – Offer, expand or modify a plan (plan design) – Freeze or terminate a plan – Determine generosity of the benefit or contribution

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FIDUCIARY BASICS – Who is a Fiduciary? • Fiduciary role: – Acting in the interest of each participant – Ensure compliance with law – Implement settlor decisions – Keep promises made to participants and communicate changes

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FIDUCIARY BASICS – Who is a Fiduciary?

Know which hat you are wearing.

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FIDUCIARY BASICS – Who is a Fiduciary? Possible Plan Fiduciaries include: • Board of Directors – At least with respect to the Board’s ability to appoint other fiduciaries

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FIDUCIARY BASICS – Who is a Fiduciary? Possible Plan Fiduciaries include: • Investment or Administrative Committee. Key considerations are: – Composition of the Committee – Scope of the Committee’s authority • Usually defined in a Committee charter

– Administrative Procedures (for example, frequency of meetings)

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FIDUCIARY BASICS – Who is a Fiduciary? Possible Plan Fiduciaries include: • Individual trustees – It is important to adequately define roles within the trust agreement.

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FIDUCIARY BASICS – Who is a Fiduciary? Possible Plan Fiduciaries include: • Individual employees or company officers.

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FIDUCIARY BASICS – Who is a Fiduciary? Service providers can be fiduciaries if they: • Provide investment advice to plan fiduciaries responsible for selecting investment options; or • Are responsible for actually selecting plan investment options.

Service provider agreements need to define the scope of the provider’s duties

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FIDUCIARY BASICS – Duties of Fiduciaries • Under Section 404 of ERISA, a fiduciary has four basic duties: – Loyalty; – Prudence; – To diversify investments; and – To follow plan documents to the extent they comply with ERISA.

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FIDUCIARY BASICS – Duties of Fiduciaries • Exclusive benefit – Act for the exclusive purpose of providing benefits to participants and defraying reasonable expenses of plan administration

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FIDUCIARY BASICS – Duties of Fiduciaries • Prudence – Act with care, skill, prudence, and diligence – “prudent person” rule

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FIDUCIARY BASICS – Duties of Fiduciaries • Diversification – Diversify plan investments so as to avoid large losses

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FIDUCIARY BASICS – Duties of Fiduciaries • Documents – Follow terms of the plan (unless inconsistent with ERISA)

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FIDUCIARY BASICS • Fiduciaries are personally liable for losses sustained by a plan that result from a violation of the fiduciary’s duties under ERISA.

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FIDUCIARY BASICS • Procedural prudence is key: – Plan management is vital – Prudent, deliberative decision-making process is essential – Careful documentation of decisions is imperative – Investments must be carefully selected and monitored – Only authorized individuals may act on behalf of the plan

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FIDUCIARY BASICS Document, document, document

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FIDUCIARY LITIGATION There have been a number of important cases addressing fiduciary liability for retirement plans.

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ABB v. Tussey • Selecting High-Cost Investments – As much as $136/participant/year

• Failing to Monitor and Renegotiate Recordkeeping Fees • Improper Use of Revenue Sharing • One Plan Subsidized the Cost of Another Plan – ABB employee failed to make a good faith effort to investigate and prevent the revenue sharing from the 401(k) plans from subsidizing other plans

• On appeal, Fidelity was not held liable for having retained float income.

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Abbott v. Lockheed Martin • Poor Management of a “stable value fund” offered in employee retirement plan – Fund produced poor returns due to an emphasis on money market funds rather than a better mix of short and intermediate-term investments • Fund underperformed an index of other stable value funds – the Hueler FirstSource index – and did not keep pace with inflation

• Plan fiduciaries are alleged to have breached their duty of prudence • Plan has $19.8 billion in assets and 93,222 participants CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

Martin v. Caterpillar • Excessive Investment Management Fees • Maintained excessive cash in the company stock investment fund • Breached fiduciary duties by offering Preferred Group of Mutual Funds as plan investment options from 1992 to 2006 – Preferred Group of Mutual Funds were advised by a whollyowned Caterpillar subsidiary – Caterpillar Investment Management Ltd.

• Caterpillar to pay $16.5 Million

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Nolte v. Cigna Corp • Excessive Fees • Imprudent Investments • Proprietary Investments (including $1 billion in a CIGNA stable value account) • Self-Dealing • Settled for $35 Million

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Wal-Mart Settlement • Wal-Mart and Merrill Lynch each settled for $13.5 Million • Wal-Mart and Merrill Lynch agreed for two years to: 1) Retain an independent consultant, with acknowledged ERISA fiduciary status, to provide selection and monitoring of plan investments. 2) Annually assess the independent advisor for conflicts of interest. 3) Eliminate and exclude any retail funds that charge plan participants fees relating to marketing, distribution, and shareholder servicing expenses.

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Wal-Mart Settlement (cont.) 4) Continue to remove and preclude fund options that provide for revenue sharing, agent fees, or other fees to any party in interest. 5) Consider adding, when appropriate, additional passively managed low-cost index funds. 6) Continue to make available web-based investment education tools and resources to participants. 7) Comply with the DOL’s fee disclosure rules and provide participants links to certain DOL and SEC online resources.

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Hecker v. Deere Company • In Hecker v. Deere Company, 556 F.3d 575 (7th Cir. 2009), a class of plaintiffs who participated in the Deere 401(k) plans sued Deere and Fidelity for breach of fiduciary duties alleging primarily that: – Fidelity’s fees were excessive. – Deere failed to disclose that the Fidelity investment manager entity shared fees with the Fidelity recordkeeper/trustee entity.

• The plan’s investment options were Deere stock, Fidelity investment funds and a brokerage account option.

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Hecker v. Deere Company (cont.) • The total fees of each investment fund were disclosed in fund prospectuses, but the revenue sharing arrangement was not disclosed. • Seventh Circuit concluded that: – None of the Fidelity entities was a fiduciary for purposes of the alleged misconduct. – Deere satisfied its fiduciary obligation by disclosing total fees--disclosing the revenue sharing arrangement was not required.

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Hecker v. Deere Company (cont.) – Deere had no fiduciary duty “to scour the market to find and offer the cheapest possible fund.” – ERISA section 404(c) may possibly offer an absolute defense anyway. – Limiting investments to Fidelity products was not per se imprudent.

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Tibble v. Edison International • Tibble involved a class action with numerous fiduciary breach allegations. All claims against the fiduciaries were dismissed on summary judgment except: – allegation that fiduciaries breached duties of prudence and loyalty by selecting retail class shares instead of institutional class,

– allegation that fiduciaries could have negotiated lower fees on money market fund. • Fiduciaries were held liable for violating standard of prudence (but not loyalty) for having invested in retail class shares that had revenue sharing arrangements.

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Tibble v. Edison International (cont.) • No evidence as to whether institutional class shares were considered or why retail class shares were selected. • On appeal, the Ninth Circuit held that retail class shares are not per se imprudent; however, there was no evidence institutional class shares were even considered, and it was not prudent to rely on Hewitt because they did not consider the issue either.

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Dudenhoeffer v. Fifth Third Bank • No presumption of prudence even if the plan requires employer stock as an investment • Plans holding employer stock are not required to evaluate publicly available information • Plans holding employer stock are not necessarily required to utilize insider information

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Anthem • On December 29, 2015, participants in the Anthem 401(k) Plan brought a lawsuit against Anthem, Inc., the Plan's Pension Committee, the Board of Directors of Anthem, and a variety of individuals associated with the Plan for breach of fiduciary duties. • What distinguishes this fee lawsuit is that it goes further than other similar lawsuits in claiming that the Plan's large size necessitated not only that it use institutional share classes of mutual funds, but that it should have investigated and offered non-mutual fund alternatives such as collective trusts and separate accounts. CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

Oracle Corp. • On January 22, 2016, a lawsuit was filed against Oracle Corp alleging excessive recordkeeping fees were paid to Fidelity. • The complaint also alleges that three investment options had underperformed and should not have been selected as investment offerings. • Fund share classes were not cited in this lawsuit.

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Chevron Corporation • On February 17, 2016, a lawsuit was filed by participants of the Chevron Employees Saving Investment Plan against Chevron Corporation and the Chevron Investment Committee. • The allegations include breach of fiduciary duties for offering funds with excessive fees and poor performance, as well as failing to monitor recordkeeping costs. • The lawsuit also alleges Chevron failed to provide a stable value fund as the capital preservation option. Instead, a money market fund that provided a “microscopically small return” was offered. CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

FIDUCIARY BASICS There has been a dramatic increase in audit activity by the U.S. Department of Labor. These audits focus on whether fiduciaries have engaged in or permitted “prohibited transactions.”

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FIDUCIARY BASICS • The most common prohibited transaction is the failure to remit employee contributions to a 401(k) plan on a timely basis. • Key fiduciary duties evaluated by the DOL are: – Notice requirements – Investments and fees – Service provider agreements – Process and documentation CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

FIDUCIARY BASICS It is important to define who the plan’s fiduciaries are and what the scope of their fiduciary duties and responsibilities is.

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FIDUCIARY BASICS The Department of Labor has published guidance on its website emphasizing the importance of process in fiduciary decision making. In selecting service providers, the responsible plan fiduciary must engage in an objective process designed to obtain information necessary to assess the qualifications of the service provider, the quality of the work product, and the reasonableness of fees charged in light of the services provided. All these factors should be considered. In addition, the process should be designed to avoid self-dealing, conflicts of interests and other improper influence.

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FIDUCIARY BASICS Once a service provider has been selected, the plan fiduciary generally may rely on information and advice provided by the service provider as long as prudence was exercised in selecting the service provider. A fiduciary’s reliance on erroneous information or bad advice provided by the service provider does not automatically result in a breach of fiduciary duty. The fiduciary is generally protected if, in the exercise of ordinary care in the situation, he or she had no reason to doubt the competence or integrity of the service provider.

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FIDUCIARY BASICS To meet your fiduciary obligation, you should: • • • •

Have a well-organized and effective committee Select and monitor plan investments regularly Oversee plan administrative operation Be attentive to plan costs

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FIDUCIARY BASICS Committee best practices:

• Have a clear appointment process for fiduciaries • Organize effectively in terms of size, membership, and responsibilities • Hold regular meetings • Ensure all fiduciaries have the necessary qualifications and training • Clearly document your committee organization and meeting minutes

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FIDUCIARY BASICS Administration best practices:

•Ensure plan operation is consistent with the terms of your plan document •Periodically review your documents and processes •Ensure full compliance with nondiscrimination testing •Periodically evaluate service providers

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FIDUCIARY BASICS Additional responsibilities:

• Engage in timely remittance of participant contributions • Follow a claims appeal process • Ensure distribution of appropriate and effective notifications and disclosures to participants

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PROHIBITED TRANSACTIONS In addition to imposing certain fiduciary obligations, ERISA also prohibits fiduciaries from engaging in what are called “prohibited transactions.” Prohibited transactions involve circumstances where a third party benefits (or can potentially benefit) from dealing with a plan. The prohibited transaction rules are designed to ensure that, in those circumstances, there is a process in place to make sure the dealings with the plan are fair, impartial and in the best interest of the Plan.

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PROHIBITED TRANSACTIONS First, a fiduciary may not permit the plan to engage in a transaction involving a “party in interest.” • A “party in interest” includes any fiduciary, a service provider, the employer sponsoring the plan, any union whose employees are covered under the plan and other related entities. • Generally, this is someone with a close tie to the plan, who has the potential to unduly influence the decision-making process.

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PROHIBITED TRANSACTIONS Second, a fiduciary is not allowed to engage in self-dealing. This prohibits the fiduciary from: • Dealing with the assets of the plan in his or her own interest or for his or her own account; • Involving the plan in a transaction on behalf of a third party whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries; or • Receiving any consideration for his or her own personal account from any party dealing with the plan in connection with a transaction involving the assets of the plan.

CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

PROHIBITED TRANSACTIONS There are a number of exceptions to the prohibited transaction rules -- generally that apply to the party-in-interest restrictions. These exceptions look to ensure that there are adequate safeguards in place (and actually used) to ensure that an independent decision-maker determines that a particular transaction that would benefit a fiduciary or party-in-interest is really in the best interest of the plan.

CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

Thank You Michael G. Paton Barnes & Thornburg LLP 11 South Meridian Street Indianapolis, IN 46204 (317) 231-7201 [email protected]

CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

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