Marcia Wagner Managing Director The Wagner Law Group Paul J. Tolley Chief Compliance Officer Commonwealth Financial Network® Leo Karwejna Managing Director,

Marcia WagnerManaging Director

The Wagner Law Group

Paul J. TolleyChief Compliance Officer

Commonwealth Financial Network®

Leo KarwejnaManaging Director, Chief Compliance Officer

Public Financial Management, Inc.

Integrating ERISA Into Your Compliance Systems

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Agenda

1. Know the Applicable Rules (ERISA)

2. Basic Roles of Providers

3. Types of Advisors

4. Types of Compensation

5. Firm Infrastructure to Support Business

6. ERISA Policies, Procedures and Controls

7. Does ERISA Apply to Your Firm?

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Fiduciary ResponsibilitiesEmployee Retirement Income Security Act of

1974, as amended (ERISA)◦ Plan fiduciaries have a “great responsibility.”◦ Personal liability for fiduciary breaches.◦ Penalties can also apply to non-fiduciary parties.

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Overview of Fiduciary RulesERISA plan must have at least one fiduciary.Plans may also have multiple fiduciaries.

◦ Responsibility and potential liability for co-fiduciary’s actions.

Person is not a fiduciary if only performing ministerial functions.

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Who Is a Fiduciary?Named Fiduciary

◦ Fiduciary named in plan document with principal responsibility over plan.

◦ Typically, the plan sponsor.

Functional Fiduciary ◦ Person with discretionary authority over plan

management;◦ Person with authority over disposition of plan assets;◦ Advisor who provides investment advice for a fee; or◦ Person with discretionary authority over plan

administration.

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Fiduciary StandardsFiduciary standard of care under ERISA.Must act solely in interest of plan

participants.◦ Exclusive purpose of providing benefits to plan

participants.◦ Carrying out duties prudently.◦ Following terms of plan document unless inconsistent

with ERISA.◦ Diversifying plan investments.◦ Paying only reasonable expenses of plan.

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Focusing on Specific DutiesCarry out duties prudently

◦ Must manage plan assets with care, skill, prudenCE and diligence…

◦ …that a prudent person acting in a similar situation…◦ …and familiar with such matters would exercise.◦ Duty of prudence focuses on process.

Paying only reasonable plan expenses◦ Must ensure fees paid to plan’s providers are

reasonable.◦ ERISA 408(b)(2) regulations will require providers to

deliver fee disclosures to plan sponsors (Jul. 1, 2012).

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Prohibited TransactionsERISA Section 406(a) prohibits transactions

between plan and any Party in Interest.◦ Party in Interest includes plan sponsor and providers.◦ Net Result: Exemption needed for even routine plan

transactions.

ERISA Section 406(b) prohibits self-dealing by any plan fiduciary. ◦ Mere disclosure will never cure a PT.

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Fiduciary Liabilities and PenaltiesERISA allows civil actions to be brought

against any fiduciary in breach of duties.◦ Fiduciary is personally liable for plan losses caused by

breach.◦ Other equitable relief may be awarded by court.

DOL Penalty◦ Civil penalty equal to 20% of amount recovered by

DOL on behalf of plan.◦ DOL may waive civil penalty in its discretion.

Additional penalties for prohibited transactions, including IRS excise taxes.

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Co-Fiduciary LiabilityERISA Section 405(a) imposes potential

liability on a co-fiduciary:◦ If he participates knowingly in the other fiduciary’s

breach;◦ If his failure enables the other fiduciary’s breach; or◦ If he knows of the other fiduciary’s breach and does

not make reasonable efforts to remedy the breach.

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ERISA Bonding RequirementERISA Section 412 requires bonding for

fiduciaries who “handle” plan funds.◦ Bond must protect plan against loss due to fraud or

dishonesty. ◦ Non-discretionary advisor not subject to ERISA bond

requirement.

Amount of ERISA Bond◦ 10% of plan assets (Minimum of $1,000).◦ Maximum of $500,000 ($M for plan holding employer

securities).

Broker-Dealer exempt from ERISA if meets SRO’s fidelity bond requirement.

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Agenda








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Basic Roles – Role of PlatformsThree Key PlayersRole of Recordkeeping Platforms

◦ Provide recordkeeping services and also serve as platform for investments.

◦ May include:- Fund Platforms- Insurance Platforms- Third Party Recordkeeping Platforms - Payroll Platforms

◦ May rely on 401(k) trading / settlement platforms

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Third Party AdministratorsRole of Third Party Administrators (TPAs)

◦ Provide administrative services (e.g., plan document, IRS testing, compliance).

◦ Work closely with recordkeeping platforms.◦ TPAs should not be confused with recordkeepers.◦ TPA services may be “bundled” with recordkeeping

services.

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AdvisorsRole of Advisors

◦ Provide investment services to plan sponsor.◦ Assist in selection of recordkeeping platform.◦ Provide other consulting services.◦ May assist participants through model portfolios,

education or advice.

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Definition of “Investment Advice” Fiduciary

Person provides “investment advice” if has discretionary control or provides: ◦ Advice on value or advisability of investments…◦ …is provided to plan on regular basis…◦ …under mutual understanding that advice will be…◦ …primary basis for investment decisions…◦ …and based on particular needs of plan.

Investment “education” is not fiduciary advice.

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Non-Fiduciary AdvisorsBrokers typically do not want to be plan

fiduciaries. ◦ But is broker-dealer providing investment advice? ◦ If so, firm is a functional fiduciary.◦ Ellis v. Rycenga Homes, Inc. (2007)

Producing TPAs may be closely tied to non-fiduciary advisors.

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Types of Fiduciary Advisors3(21) Fiduciary

◦ Provides non-discretionary advice.

3(38) Fiduciary◦ Qualifies as “Investment Manager” with discretion

over assets.◦ Must also be a RIA, bank or insurance co.◦ Must acknowledge fiduciary status in writing.◦ Sponsor responsible for appointment, but not acts of

3(38) fiduciary.

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Compensation for Recordkeeping Platforms and TPAs

Platform compensation◦ “Direct” compensation includes invoiced fees.◦ “Indirect” compensation includes product-based

compensation.

TPA compensation◦ Typically direct compensation, but may include

indirect compensation.

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Compensation Payable to Advisors

Non-fiduciary Broker-Dealers◦ Receive indirect compensation only.◦ Mutual funds pay 12b-1 fees and revenue sharing.◦ Group annuities pay commissions and revenue

sharing.

RIAs and Dual Registrants◦ Direct compensation is typically asset-based fee.◦ May be offset for any indirect compensation received.

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ERISA Restrictions on Variable Compensation

Fiduciary advisor may not engage in self-dealing.◦ Variable compensation created incentive to steer

clients.◦ Mere existence of variable compensation triggers

violation.◦ Group annuities pay commissions and revenue

sharing.

Non-fiduciary Broker-Dealers◦ Must ensure no “investment advice” is provided.◦ RIA receiving level compensation may provide

fiduciary advice.

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408(b)(2) Regulations

Final 408(b)(2) rules become effective, July 1, 2012.◦ Covers platforms, TPAs, advisors and others.◦ If applicable, must state services are fiduciary in

nature.◦ Must describe services.◦ Must disclose amount/formula of direct and indirect

compensation.

Advisors should confirm fee arrangements comply with ERISA

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Agenda








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Firm Infrastructure to Support Business

Interaction of Firm Functions◦Compliance◦Product Development◦Operations

Putting appropriate checks and balances in place

Does independent monitoring occur?

Policies and procedures relevant to activity

Escalation

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Firm Infrastructure to Support Business

Support for Retirement Business (Advisors)◦Template IPS and RFP Proposal Tools◦ Investment Analytic Tools◦Access to In-House Retirement Plan Experts◦Develop Turnkey Marketing Materials ◦Ongoing Training and Education

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Agenda








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Identification of Retirement Accounts

Retirement Accounts◦Leverage Your Record Keeping Partners and

408(b)(2) Service Providers

Processes and Systems◦New Account Processes◦Changes or Amendments

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Qualifications for FAs Offering Fiduciary Advice

Consider policy on whether financial advisors (FAs) can offer fiduciary advice.◦ Consider qualifications for Fas who may serve as plan

fiduciaries.

ERISA prohibitions against variable compensation.◦ Requires plan client to be charged level fee.◦ FA must be IAR of corporate RIA.◦ Must meet requirements to act as IAR (Series 65 or

7/66).

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Suggested Criteria for FAs Offering Fiduciary Advice

Minimum for number of plan clients and plan client assets.◦ FAs with only 1 or 2 plans should not serve as plan

fiduciaries.

Professional Designations◦ Chartered Retirement Plans Specialist (CRPS)◦ Accredited Investment Fiduciary (AIF)◦ PLANSPONSOR Retirement Professional (PRP)

Completion of Internal Education and Training

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Other Considerations for ERISA Policies and Internal Controls

Fee Leveling◦must be based on generally accepted investment theories

that take into account, at a minimum, the historic risks and returns of different asset classes over defined periods of time;

◦must take into account investment management and other fees and expenses attendant to the recommended investments;

◦must take into account, at a minimum, information furnished by a plan, participant or beneficiary relating to age, time horizons (e.g., life expectancy, retirement age), risk tolerance, current investments in designated investment options, other assets or sources of income and investment preferences;

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Fee Leveling (continued)◦ The fiduciary adviser providing investment advice cannot

receive from any party (including an affiliate of the fiduciary advisor), directly or indirectly, any fees (including any commission or other compensation) that vary depending on the investment option selected by a participant or beneficiary; and

◦No employee, agent or registered representative providing investment advice on behalf of the fiduciary adviser can receive from any party (including an affiliate of the fiduciary adviser), directly or indirectly, any compensation (including salary, bonuses, awards, promotions, commissions or other things of value) that varies depending on the investment option selected by a participant or beneficiary.

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New Account Inception ◦ 408(b)(2) Fee Disclosures

Education and Training◦ Structured Program that Matches Your Model◦ ERISA Plan Fiduciary Training◦ Variable Compensation: Prohibited Transactions◦ Vary Training by Function

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Agenda








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Does ERISA Apply to Your Firm? You Might Be Surprised!

401(k) Plans Maintained At PlatformsBrokerage Account Plans

◦ IRA / Keogh Plan Accounts◦ Small Profit-Sharing Plans◦ Defined Benefit Plans

Integrating ERISA Into Your Compliance Systems

A0071798

Marcia WagnerManaging Director

The Wagner Law Group

Paul J. TolleyChief Compliance Officer

Commonwealth Financial Network®

Leo KarwejnaManaging Director, Chief Compliance Officer

Public Financial Management, Inc.

Marcia Wagner Managing Director The Wagner Law Group Paul J. Tolley Chief Compliance Officer Commonwealth Financial Network® Leo Karwejna Managing Director,

Documents

plan fiduciary

fiduciary fiduciary

plan participants

plan sponsor

plan losses

plan administration

behalf of plan

plan management person