The presentation provided an overview of the changing landscape for defined benefit pension plans including higher PBGC premiums, new mortality tables and improved funding status as a result of favorable investment performance. These changing conditions have encouraged plan sponsors to consider “de-risking” defined benefit pension plans through annuitization and lump sum windows. Lori provided insight into legal issues within the context of de-risking including a background of applicable ERISA fiduciary rules, recently issued recommendations from the ERISA Advisory Council, IRS private letter rulings and a pending case involving Verizon’s annuitization of its pension plan.

1. Achieve
Greater Certainty
through
Pension Derisking
Legal Issues
Lori W. Jones
J.D. , LL.M., Taxation
April 4, 2014

2. Key Laws Governing Retirement Plans
 Internal Revenue Code (IRC)
Qualification requirements for favorable tax
treatment.
 ERISA
Imposes fiduciary duties, reporting and disclosure
rules, claims procedures.

3. Settlor vs. Fiduciary Functions
 Settlor functions.
Decisions relating to the establishment, design,
amendment and termination of plans.
Not governed by ERISA.
 Fiduciary functions.
Activities undertaken to implement settlor
decisions.
Administration of plan.
 Must comply with the ERISA fiduciary provisions.

4. Examples of Settlor Functions
 Adoption of plan.
 Plan design.
 Determining who will be eligible.
Determining level of benefits .
 Plan amendments.
 Plan termination.

5. Example of Fiduciary Functions
 Selection and monitoring of investment
options.
 Managing plan investments.
 Determining claims and appeals.
 Selection of service providers and
determining whether fees are reasonable.
 Oversight of service providers.

6. Ways to Become ERISA Fiduciary
 Designated by plan or trust.
 Designated by another fiduciary.
 Actually perform fiduciary functions.
Exercise discretionary authority or control over
plan or plan assets.
Render investment advice to the plan or
participants for a fee.
Exercise discretionary authority over plan
administration

7. ERISA Fiduciary Duties
 Exclusive benefit rule.
Discharge duties solely in the interest of
participants and beneficiaries.
Discharge duties for the exclusive purpose of:
Providing benefits to participants and beneficiaries;
Defraying reasonable expenses of administering the
plan.

8. ERISA Fiduciary Duties
 Prudent person standard of care.
Act with the care, skill, prudence and diligence
that a prudent person acting in a like capacity and
familiar with such matters would use.

9. ERISA Fiduciary Duties
 Diversify plan assets.
Diversify the investments of the plan to minimize
the risk of large losses unless the circumstances
indicate it is clearly prudent not to do so.
 Operate plan in accordance with its terms.
Unless inconsistent with ERISA.

10. ERISA Fiduciary Duties
 Do not cause plan to engage in prohibited
transactions
Transactions between the plan and a party in
interest.
Sale, exchange or leasing of property.
Lending money.
Transfer or use of plan assets to, by or for benefit of,
party in interest.
Parties in interest include fiduciaries, service
providers, employer, related entities.

11. ERISA Fiduciary Duties
 Key exemptions from prohibited transaction
rules.
Participant loans satisfying statutory and
regulatory requirements.
Transactions for services reasonably necessary for
establishment or operation of the plan if fees are
reasonable.

12. ERISA Fiduciary Duties
 No self-dealing or conflicts of interest.
Fiduciary must not:
Deal with plan assets in his own interest or for his own
account (self-dealing).
In transaction involving the plan, act on behalf of a
person whose interests are adverse to the interests of
the plan (conflict of interest).
Receive any consideration in a transaction involving the
assets of the plan.

13. Plan Reporting and Disclosure
 Summary plan description.
 Annual information return (Form 5500).
 Summary annual report.
 Participant request for plan documents.
 Fee disclosure.
 Various notice requirements including
qualified joint and survivor annuity (QJSA)
notices and spousal consents.

14. Fiduciary Liability
 Losses resulting from fiduciary breach.
 Secretary of Labor may impose additional 20%
penalty.
 Criminal penalties in the event of willful
violation.

15. Fiduciary Protection
 Plan sponsor purchases insurance
indemnifying ERISA fiduciaries for
negligence, errors and omissions.

16. Best Practices
 Plan administrator.
In absence of designation, the plan sponsor is the
named fiduciary.
Naming the plan sponsor as fiduciary in the plan
documents may blur the distinctions between
fiduciary and settlor functions.
In whose interest were decisions made?

17.  Identify in writing delegation of fiduciary
duties.
 Plan administrator.
 Investments.
 Administration.
 Claims.

18. Best Practices
 Committees.
Separate fiduciary committee from design committee.
Consider committee assignments.
Two hat” issues (same individual having fiduciary and
settlor functions).
 Likelihood of individuals having inside information.
Skills needed to perform the specific fiduciary
function.
Consider self-perpetuating committee based on titles.

19. Best Practices
 Service providers.
 Document due diligence and selection process.
 Ask for explanation of fees.
 Regularly review performance and fees.

20. Best Practices
 Process is important.
Regular meetings.
Document decisions.
 Investments
Written investment policy.
Review investments on a regular basis and make a
record of review.
If material information is released re investments
(e.g., change of manager of fund), review and
make record of review.

21. Best Practices
Consider retaining independent consultants.
Note rationale for any deviation from policy.

22. Why Derisking?
 Control plan asset volatility.
 Remove pension liabilities from balance sheet.

23. Current Parameters for Derisking
 Active employees.
 Can’t pay lump sums w/out plan termination.
Can’t annuitize without plan termination.
 Term Vested not in pay status.
Lump sums permitted.
Annuitization permitted.

24. Current Parameters
 Retirees in pay status.
Lump sum w/out plan termination; consider
seeking private letter ruling from IRS.
Annuitization w/out plan termination permitted.
Both lump sum and annuitization permitted with
plan termination.

25. ERISA Advisory Council (EAC)
 ERISA § 512 provides for the establishment of
EAC.
Advises and submits recommendations
regarding the DOL’s functions under ERISA.
 In 2013 EAC commenced examination of
issues relating to derisking.
 Hearings in August 2013, Executive summary
of recommendations on November 5, 2013.

26. ERISA Advisory Council
 Originally EAC expected to recommend
derisking regulations.
Pros – Notice and comment procedures allow
input by plan sponsors and practitioners.
Cons – Time-consuming

27. EAC Recommendations
 Enhance IB 95-1 safest annuity available
guidance.
IB 95-1 provides fiduciary standards for selection
of annuity providers.
Confirm that IB 95-1 applies to any purchase of
annuities (and not just plan termination).
Consider implementation of safe harbors for such
purchases.

28. IB 95-1 Guidance on Annuity Purchases
 All fiduciary duties apply.
Act solely in best interest of participants and
beneficiaries.
Act prudently.
Obtain safest annuity available after thorough
review based on following factors:
Quality and diversification of provider’s investment
portfolio.
Size of insurer relative to contract for annuities.

29. IB 95-1 Guidance on Annuity Purchases
 Level of insurer’s capital and surplus.
 Losses of business of annuity provider and other
indications of exposure to liability.
 Structure of annuity contract and guarantees
supporting annuities (e.g. use of separate account).
 Availability of additional protection through state
guaranty association and extent of guaranty.
• May need consultants to determine.

30. IB 95-1 Guidance on Annuity Purchases
 Need not choose safest available annuity
where that option is only marginally safer but
disproportionately more expensive.
 Increased cost or other considerations never
justify putting benefits of annuitized
participants at risk.
 Special care to avoid conflicts of interest.
 Consider engaging independent expert to select
annuity provider.

31. EAC Recommendations (cont.)
 Provide guidance under ERISA §502(a)(9).
Consequences of breach of fiduciary duty in
selection of annuity provider.
What is appropriate relief under §502(a)(9).
When is posting security required.

32. EAC Recommendations (cont.)
 Enhanced disclosure for lump sum windows.
90-day minimum advance notice.
Disclosures similar to plan termination.
Whether early retirement or other subsidies
included.
Compare lump sum to promised benefits under
plan.
Possible impact of tax penalties, if any.

33. EAC Recommendations (cont.)
 Educate and outreach to plan sponsors
concerning derisking.
 Collect data on derisking transactions.

34. IRS Guidance
 Treasury regulations prohibit lump sum for
retirees in pay status unless exception applies.
Generally, under IRC §401(a)(9) payments may
not be changed after commencement of benefits.
Exception to pay increased benefits resulting from
a plan amendment.

35. IRS Private Letter Rulings
 PLR 201228045.
Amendment offered lump sum option during 60-
90 day window.
 Participants in pay status.
Retired participants not yet in pay status.
Term vested participants.
Beneficiaries and alternate payees.
One-time offer to retirees in pay status does not
violate §401(a)(9) because constitutes increased
benefits from plan amendment.

36. IRS Private Letter Rulings
 PLR 201228045 (cont.).
No rulings under §§411, 415, 417 or 436.
 PLR 201228051.
Amendment offered lump sum option during 30-
60 day window.
 Participants and beneficiaries in pay status.
No violation of §401(a)(9).
 Affected participants could elect lump
sum, QJSA, or QOSA.

37. IRS Private Letter Rulings
 Spousal consent required from current spouse
and former spouse if annuitant remarried
after the initial benefit commencement.

38. IRS Private Letter Rulings
 Pending PLRs are being held up; apparently
Treasury is considering policy implications.
 Only taxpayers receiving PLRs can rely on
them.

39. Verizon Case
 Filed by retirees challenging annuitization of
pension.
Ended PBGC insurance protection.
Not described in SPD.
 District Court dismisses case with instructions.
SPD not required to disclose possibility of
annuitization as a circumstance that could lead to
loss of benefits.
Amendment of plan to permit annuitization was a
settlor function and not a fiduciary function.

40. Verizon case (cont.)
No allegation that fees paid to Prudential were
unreasonable or that choice of Prudential was
imprudent.
No discrimination in choice of retirees eligible for
annuitization.
Continuing participants have no standing; no
injury because no sharing of impact on benefit
payments.
Court did not actually approve annuitization.
Plaintiffs given 30 days to reply and allege new
facts.

41. Verizon case (cont.)
 Amended complaint filed on July 12, 2013.
 Verizon filed motion to dismiss on July 25,
2013.
 Various extensions.
 Court heard oral arguments on motion to
dismiss on March 7, 2014.
 More to come.

42. Thank you
The purpose of this slide show is to provide news and information on legal issues and all
content is for informational purposes only and should not be considered legal advice.
Lori W. Jones
Partner
(314) 552-6568
ljones@thompsoncoburn.com