Benefits-Related Challenges &

Opportunities Currently

Keeping Employers Busy

Benefits-Related Challenges & Opportunities Currently

Keeping Employers Busy in P.R.

Agenda

1. Life after Elimination of ERISA Fiduciary Regs.

2. Lessons for P.R. ERs from U.S. ERISA/401(k) Cases.

3. Reenergizing 401(k) Plans Post-Maria.

4. Alternatives for Controlling DB Pension Costs.

5. What if “La Junta” Eliminates P.R. Act No. 80?

6. Other Recent Officer/HCE Pay Developments.

7. Q&As

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Life After Elimination of ERISA Fiduciary Regs.

• Fiduciaries » duty of care (prudent expert std.), duty of loyalty

(exclusive benefit rule), and conflicts of interest (prohibited

transactions).

• Personal liability (no bankruptcy protection), federal case,

and potential co-trustee liability.

• Plan sponsor, plan admin. & trustee » Fiduciaries

• Service providers » G.R., No (e.g., actuaries, attorneys, CPAs,

recordkeepers) » Suitability & market standards.

Investment Advisors?

• G.R., No.

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Life After Elimination (cont.)

• ERISA 1975 Regs. » Advisor fiduciary if, among others, (1)

renders investment advice on a regular basis, and (2) under

mutual agreement that it will be primary basis for ER’s investment decisions.

• Thus, no duties of care & loyalty or PTs » Under-performing

and/or expensive investments » Issues with quality, price,

disclosure & conflicts.

DOL 2016 Fiduciary Regs.

• New “Fiduciary Investment Advisor” definition, would have

covered many advisors, brokers, CPAs & insurance agents.

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Life After Elimination (cont.)

• “Fiduciary” » Renders individualized investment advice to ER,

plan or EEs under agreement that recommendation is based

on client’s particular investment needs & receives

compensation.

• “Investment advice” (1) advisability of buying, holding or

selling investments (usual), or (2) recommendations on

investment management, portfolio composition, IPS,

evaluation and selection of advisors, and distribution options

& rollovers (broader).

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Life After Elimination (cont.)

Chamber of Comm. v. Hugler (May 15, 2018) » RIP! » Back to 1975

• 2018 SEC Best Interest Regs. » Retail Investors

What to Do?

• ER remains responsible for provider selection.

• Know the providers and their services & roles.

• Understand service fees (direct & indirect).

• Contractual assumption of fiduciary duties.

• Outsource fiduciary responsibility?

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Lessons for P.R. ERs from U.S. ERISA/401(k) Cases

P.R. » G.R., no ERISA litigation, but lots of bad plans.

Phases:

• First » Stock drop, proprietary funds & primary corporate

benefit (conflicts of interest).

• Then » Excessive fees vs. “comparable plans”, keeping

underperforming & actively-managed funds w/o reasonable

basis, failure to move into lowest share class funds, too many

funds & providers, market value vs. stable value funds.

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Lessons for P.R. ERs (cont.)

• Next » Cybersecurity of plan assets & participant data, Robo

investment advice.

Lessons:

• Understand plan fees/expenses, both direct & indirect (fee

disclosure) & how they compare vs. market/peers

(benchmarking & RFI/RFP).

• Evaluate, decide & document “Why these funds?”

• Talk IT security with Trustee & Recordkeeper (controls,

insurance & contractual terms).

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Reenergizing 401(k) Plans Post-Maria

The Problem

• Around 20% of plan assets gone.

• Lower accounts » Why save? This plan sucks!

• Need money to cover current expenses.

The Challenge

• ER money is also limited.

• Limited effectiveness of increased ER Match.

• Lower tax benefit from possible reduction of business tax

rates.

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Reenergizing 401(k) Plans (cont.)

Alternatives

• Participant Education Campaign

• Importance of retirement planning, different strategies,

emotional aspects for decision making.

• How does my plan works?

• How do mutual funds work?

• Available tools for helping me plan.

• Plan Improvements

• Automatic enrollment (with or w/o auto escalation)

• Company Match (formula or discretionary)

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Reenergizing 401(k) Plans (cont.)

Parting Comments

• Increase EE engagement with plan (e.g., benefits of early &

long-term savings, favorable features of qualified plans, and

financial education basics).

• Higher engagement » participant empowerment » higher

savings rate & better investment decisions.

• Retirement planning ≠ Daily living expenses.

• Time value of $$ (the later the start, the costlier it is).

• Talk with your plan administrator (e.g., BPPR).

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Alternatives for Controlling DB Pension Costs

• The Problem » Drastic increase in pension plan costs.

• PBGC Premiums

– No relation between premiums & protection/benefits

• Updated Mortality Tables

– PPA 2006 » “longer” tables beginning 2018 (~10%)

• Upcoming U.S. Multiemployer Pension Plan Crisis

– PBGC fund likely insolvent by 2025

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Year Per Ppt. Rate Variable Rate

2009 $34 $9

2013 $42 $9

2019 $80 $43

Alternatives for Controlling DB (cont.)

Alternatives

• For P.R.-only qualified plans » Obtain PBGC advisory letter on

ERISA Title IV Coverage.

– https://www.pbgc.gov/prac/other-guidance/advisory-

letters

– Cease PBGC premiums & obtain 6-year refund.

• Voluntary lump-sum election windows

– As interest rates go up, payments go down.

• Annuitization (transfer liability to insurance co.)

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What if “La Junta” Eliminates P.R. Act No. 80?

Usual Suspect

• Companies with lots of Key EEs (e.g., professional services,

STEMs, and complex manufacturing).

• Absent Act 80, no severance pay?

ERISA Severance Plan

• Fort Halifax v. Coyne (U.S., 1987); and Aguirre v. Pfizer (D.P.R.,

2013).

– Ongoing administrative program (ER administrative duties,

determinable ppts & benefit levels, and regular benefit

payments).

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What if “La Junta” Eliminates (cont.)

• Considerations of ERISA-covered Severance Plans

– Plan document/SPD highly recommended.

– No funding requirement or discrimination test, but

benefits may not be discretionary (limited ER discretion).

– Form 5500 if “large plan”, but may include w/i overall

welfare benefits Form 5500.

– ERISA claims & appeals requirements (favorable standard

of review, exhaustion of internal process, federal

preemption & statute of limitations).

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Other Recent Officer/HCE Pay Developments

Problem

• Growing gap between U.S. pre-tax contributions ($18,500)

and P.R. pre-tax contributions ($15,000).

Alternatives

• Adding after-tax contributions

– G.R., voluntary & not eligible for ER match.

– Free from nondiscrimination tests.

• Non-qualified retirement plans and deferred performance

bonus arrangements/LTIP (income deferral vs. extra income).

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