The Ledger—Defined Contribution PlansThird Quarter 2014

Summary of Legislative, Judicial, and Regulatory Retirement News

Issued by Lockton® Retirement Services

DEFINED CONTRIBUTION COMPLIANCE CALENDARS

Pages 10-11

INSIDE THIS ISSUE

BEACON ALERTSPage 8

RETIREMENT SERVICES GUIDANCE

Page 9

LEGISLATIVE UPDATE, REGULATORY UPDATE, AND

COURTS UPDATEPages 1-7

JESSICA SKINNER, J.D.Compliance AttorneyLockton Retirement Services816.960.9295 | jskinner@lockton.com

SAM HENSON, J.D.Senior ERISA CounselLockton Retirement Services816.751.2245 | shenson@lockton.com

AUTHORS

L O C K T O N R E T I R E M E N T S E R V I C E S

FIDUCIARY TRAINING MODULEPages 12-15

LEGISLATIVE UPDATE

Senate Examines Retirement Security

All is quiet as Washington prepares for the fall elections, but on September 16, 2014 the US Senate Finance Committee heard testimony on Retirement Savings 2.0: Updating Savings Policy for the Modern Economy, which comprised a panel of retirement policy experts and academics. The meeting is a result of the Joint Committee on Taxation recently released report to Congress asserting that the collective tax incentives provided to retirement plans constitute the second-highest federal tax expenditure (i.e., loss of revenue to the federal government) for the next five years (more than $800 billion, including defined contribution plans, defined benefit plans, and IRAs). Numerous proposals to curtail the value of these tax incentives have been proposed over the past several years, placing a large target on employer-sponsored retirement plans.

In the hearing, Finance Committee Chairman Ron Wyden (D‑OR) was critical of the existing system, saying “the incentives for savings in the American tax code are not getting to those who need it.” In particular, he suggested that the wealthy primarily benefit from retirement plans and that measures may be needed to help part-time workers, younger workers, and women save more effectively for retirement. Ranking Republican committee member Orrin Hatch (R‑UT) said he would view with skepticism any

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assertion that retirement savings tax incentives are “upside down” without hard evidence. Hatch stressed the importance of a bipartisan approach to retirement policy and urged support for his Secure Annuities for Employee (SAFE) Retirement Act, which includes provisions facilitating greater use of electronic communication and automatic enrollment.

During the question‑and‑answer period, Senators covered a wide range of topics:

� Hatch discussed the motivations for employers to establish a plan, asking if tax incentives influence an employer’s decision to sponsor a plan.

� Sen. Charles Grassley (R‑IA) followed on Hatch’s inquiry with questions about whether small businesses would be more likely to sponsor a plan if the nondiscrimination rules were relaxed and whether a shift to “Roth” (i.e., after‑tax) accounts would pose concerns for employers.

� Sen. Sherrod Brown (D‑OH) raised the possibility of mandatory automatic enrollment and escalation into index funds.

� Sen. Cardin (D‑MD) suggested that the benefit plan nondiscrimination issue needs to be resolved. He also cited his Church Plan Clarification Act (S. 952) as a measure that would help retirement coverage.

� Sen. Rob Portman (R‑OH) discussed possible reforms of the minimum distribution rules and the creation of a universal savings vehicle, as had been proposed by the George W. Bush administration.

Third Quarter 2014 • The Ledger—Defined Contribution

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REGULATORY UPDATE

IRS Finalizes Rules Governing Longevity Annuity Contracts

The Internal Revenue Service (IRS) finalized the first part of its “lifetime income” regulatory initiative with the release of final rules on longevity annuity contracts. These final regulations will be effective for contracts issued on or after July 2, 2014. The final regulations allow for the purchase of a qualifying longevity annuity contract (QLAC)—a deeply deferred annuity that meets certain requirements—in a qualified defined contribution retirement plan or IRA, if premium payments for the QLAC do not exceed the lesser of $125,000 or 25 percent of the individual’s benefit (determined as of the most recent valuation date). The final regulations also include several new provisions that may make QLACs more attractive to plan sponsors and their employees, such as allowing return‑of‑premium provisions. This allows repayments to a beneficiary equal to the amount of premium payments, minus all of the benefit payments, following the death of the participant (or the participant and beneficiary, if a joint and survivor annuity was selected). The final rule also eliminates the need for an initial disclosure (except for a statement that it is intended to be a QLAC), allowing the initial disclosure to be governed by state law or ERISA. This could be an appealing option for participants who fear outliving their assets, but unless employers see the need, its unlikely to see much use. Remember, QLACs are optional. Employers will need to weigh the benefits to participants with the fiduciary risk of vendor selection.

DOL on Target Date Fund Proposal

The US Department of Labor (DOL) is considering new target date fund (TDF) disclosure requirements based on a risk analysis of the funds, and has reopened a regulatory project addressing TDFs as a qualified default investment alternative (QDIA). This all originates from several years ago when the DOL initially issued proposed regulations that would amend the QDIA rules to require fund providers to furnish an explanation of a TDF’s asset allocation, how that asset allocation changes over time (the “glide path”), and additional disclosures to participants.

Not to be left out, the Securities and Exchange Commission (SEC) is undertaking a concurrent project to amend its advertising rules to require TDFs’ marketing materials to provide investors enhanced information. The SEC is not new to TDF disclosure, having proposed regulations back in 2010 and 2013. On April 9, 2014, the SEC reopened its project to gather comments on broadening disclosures to include an analysis of a standardized measure of risk.

The DOL has been very careful to opine negatively on TDFs, given their widespread adoption in defined contirubtion plans as QDIAs, particularly in conjunction with automatic enrollment programs. The DOL was not specific as to why they are reopening the project with respect to any new proposals, but it seems very likely that a risk‑based disclosure requirement is coming.

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GAO Reports Target Managed Accounts and the Form 5500

The Government Accountability Office (GAO) released a report titled 401(k) Plans: Improvements Can Be Made to Better Protect Participants in Managed Accounts recommending that the DOL consider provider fiduciary roles, require disclosure of performance and benchmarking information to plan sponsors and participants, and provide guidance to help sponsors better select and oversee managed account providers. Managed accounts are investment services under which providers make investment decisions for specific participants to allocate their retirement savings among a mix of assets they have determined to be appropriate for the participant based on their personal information. Because managed accounts have become increasingly common investment options in 401(k) plans, the GAO was asked to explore the advantages and disadvantages of such accounts and how they are structured. The report was based in part on a survey of plan sponsors and

interviews with government officials, industry representatives, other service providers, and 12 plan sponsors of varying sizes. The report ultimately found that participants in managed accounts receive improved diversification and experience higher savings rates compared to those not enrolled in the service. However, these advantages can be offset by paying additional fees over time. Plan sponsors, meanwhile, are challenged by insufficient guidance and inconsistent performance information when selecting and overseeing managed account providers which has led to inconsistency in procedures for selecting and overseeing providers.

Another report from the GAO titled Private Pensions: Target Revisions Could Improve Usefulness of Form 5500 Information, described problems with the Form 5500 Annual Return and suggested revisions to improve the usefulness, reliability, and comparability of Form 5500 data are needed. The Form 5500 is the annual report that employee benefit plans file with the federal government and the primary source of information on retirement plan assets. The report is based on the results of a GAO online survey of 43 nongovernment stakeholders and the responses from plan sponsors, service providers, representatives of plan participants and researchers, as well as interviews of agency officials. Of particular note, the GAO report recommended that Congress consider granting Treasury authority to require Form 5500 data be filed electronically. This is significant because when the DOL began requiring electronic filing of the Form 5500, Treasury had to remove certain questions and schedules from the form. Treasury has tried to modify rules to get the return information it needs, but it is currently prohibited from requiring this kind of filing to be made electronically.

Third Quarter 2014 • The Ledger—Defined Contribution

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COURTS UPDATE

Reverse Stock Drop—Tatum v. R.J. Reynolds

Most stock drop cases involve the breach of fiduciary duty for not selling company stock soon enough to avoid losses. Now, we have a case in which plan fiduciaries are sued for selling such stock “too quickly,” resulting in the plan missing out on windfall gains. Tatum v. RJR Pension Inv. Comm. involved the decision-making process for the elimination of a company stock fund following a corporate spin-off.

In 1999, RJR Nabisco, Inc. (Nabisco), spun off its tobacco business, which became R.J. Reynolds Tobacco Company (Tobacco) from its Nabisco food business to reduce the negative impact that tobacco litigation was having on Nabisco’s stock price. The Tobacco 401(k) plan expressly provided for the retention of Nabisco stock funds as “frozen” funds, meaning that participants could retain existing investments in the Nabisco stock but could not make additional investments. Following the spin‑off, a special “working group” of employees was convened and decided to eliminate the Nabisco stock from the Tobacco Plan and selected a divestment timeline of six months. That working group:

1. Had no authority or responsibility under existing Tobacco Plan documents.

2. Spent only 30 to 60 minutes discussing what to do with the Nabisco stock.

3. Could not later explain how six months was determined as the appropriate divestment timeline.

There was no evidence that the committee met, discussed, or voted on the issue, or otherwise signed a required consent in lieu of a meeting authorizing an amendment to eliminate the Nabisco stock. The Nabisco stock was liquidated in January 2000 when shares were trading at all-time lows despite a favorable outlook. A few months after the funds were liquidated, a takeover offer for Nabisco by a substantial investor sparked a bidding war and by the end of the year, Nabisco stock was trading at all‑time highs. Participants filed suit alleging Nabisco and the Tobacco Plan fiduciaries breached their fiduciary duties under ERISA by eliminating the Nabisco stock from the Tobacco Plan on an arbitrary timeline without conducting a thorough investigation, and that the fiduciary breach caused substantial loss to the Tobacco Plan by forcing the sale of Nabisco stock at its all‑time low, despite the strong likelihood that Nabisco’s stock prices would rebound.

After a district court ruling in favor of the employees, the appellate court held the employer breached its fiduciary duty of prudence. The court explained that the fiduciary duty of procedural prudence requires fiduciaries to:

1. Employ appropriate methods to investigate the merits of a particular investment.

2. Engage in reasoned decision-making processes consistent with that of a prudent man acting in a like capacity.

3. Monitor the prudence of an investment decision to ensure that it remains in the best interest of plan participants.

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It emphasized that there is no uniform checklist for procedural prudence. Instead, the duty requires a totality‑of‑the‑circumstances inquiry. In the end, there was no process by which the Tobacco Plan fiduciaries investigated, analyzed, or considered circumstances regarding the Nabisco funds and whether it was appropriate to divest.

There are several important lessons here. Companies whose stock is an investment option in a 401(k) plan need to consider the settlor and potential fiduciary decisions likely to arise when the company spins off a subsidiary, and that other company’s shares will be held by the plan following the spin-off. To the extent possible, these issues should be considered well before the spin‑off transaction occurs. In addition, a properly‑adopted plan amendment is an important way to reduce the likelihood of ERISA litigation over a divestment decision or its timing. Nabisco’s failure to properly amend its plan led to the fiduciary claims that have been in litigation for more than 12 years. Finally, the decision whether or not to divest and the timing of divestiture should be carefully made, based on consideration of the interests of plan participants and beneficiaries. The fiduciaries should seek objective expert financial and legal advice. Careful documentation of the reasoning for the decisions is necessary. Remember, investment decisions are always subject to review in hindsight. In the absence of a crystal ball, the only alternative is to exercise procedural prudence. This is especially important for decisions involving company stock, where the potential for allegations of fiduciary breach are magnified.

Third Quarter 2014 • The Ledger—Defined Contribution

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Proprietary Fund Litigation Continues

Investment companies who are also plan sponsors are learning hard and costly lessons about offering bad deals in their own plans on their proprietary funds. The proprietary fund litigation will continue to grow until employers learn that fleecing their own employees is bad business.

Brown v. SunTrust Banks, Inc. is the third lawsuit challenging SunTrust Banks Inc.’s inclusion of proprietary mutual funds in its own company 401(k) plan and will be heard in Georgia federal court. All three cases allege that the proprietary funds included in SunTrust’s 401(k) plan carried higher fees and performed poorly compared with funds offered by other financial institutions. The participants allege that these failures cost them about $92 million in retirement savings due to the failure to monitor and remove the proprietary funds. Participants pointed to the funds’ worsening performance histories as changes in circumstances that caused the funds to become imprudent investments.

Fidelity has settled two lawsuits, Bilewicz v. FMR LLC and Yeaw v. FMR LLC, filed last year by its own employees over allegations that it violated ERISA in the administration of its own 401(k) plan by charging excessive fees and committing prohibited transactions. These settlements resulted in $12 million paid back to participants, and forced Fidelity to make available a wide selection of both Fidelity and non-Fidelity mutual funds, with certain Fidelity share classes being offered at no cost to participants. Finally, the plan had to provide that revenue sharing attributable to non-Fidelity mutual funds shall be credited to participants in the same way as revenue attributable to Fidelity mutual funds. Fidelity’s settlement of these cases is somewhat surprising as it has vigorously defended other excessive fee litigation. It is likely that it realizes defending here would have been multiples of the $12 million paid to settle. For plan sponsors that have Fidelity, the affirmative relief should be of particular interest, as it may serve as a road map of what kind of services are considered best-in-class when provided by Fidelity (such as K share classes or offering funds from multiple families).

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BEACON ALERTS, YEAR-TO-DATE

Six Years and You’re In the Clear— October 2, 2014On October 2, 2014, the US Supreme Court announced it will review the

restoration of certain claims made by the class in Tibble v. Edison Int’l.

The main issue at hand is whether plan fiduciaries breach their duties by

offering higher cost retail-class mutual funds when identical lower-cost

institutional-class funds are available, and if so, how long participants

have to sue.

Supreme Court Decision Exposes Retirement Plans with Employer Stock—June 30, 2014The Supreme Court has handed down its long awaited opinion in Fifth

Third Bancorp v. Dudenhoeffer (Dudenhoeffer), a case involving fiduciary

liability for retirement plans offering employer stock. The unanimous

decision found that Employee Stock Ownership Plan (ESOP) fiduciaries

are subject to the same duty of prudence that applies to fiduciaries of all

Employee Retirement Income Security Act (ERISA) plans when deciding

to offer employer stock in a retirement plan. The case represents a

significant shift in the protections afforded to fiduciaries offering employer

stock.

IRS Simplifies Process for Validating Rollover Acceptance—April 4, 2014On April 3, 2014, the Internal Revenue Service (IRS) released Revenue

Ruling 2014-9, which simplifies the process used by plan sponsors to

accept rollovers from other qualified plans. Accepting plan rollovers can

be beneficial to both the employer and employee.

New Limit on 60-Day IRA Rollovers: One Rollover Allowed Per Year—March 26, 2014A recent tax court case has given the IRS the opportunity to apply a new

limit on 60-day Individual Retirement Account (IRA) rollovers.

President Unveils Retirement Reforms During the State of the Union—January 29, 2014Recognizing a significant deficiency in retirement readiness, the President

has set his sights on a solution. In the State of the Union address,

President Obama unveiled several initiatives in a plan to encourage

Americans to save for retirement.

Third Quarter 2014 • The Ledger—Defined Contribution

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RETIREMENT SERVICES GUIDANCE, YEAR-TO-DATE

DOL Issues Guidance on Locating Missing Participants—August 21, 2014The United States Department of Labor (DOL) issued Field Assistance

Bulletin 2014-01 (FAB 2014-01) providing guidance on the steps plan

fiduciaries must take to find missing participants prior to rolling funds into

Individual Retirement Accounts (IRAs) when a plan is terminated.

SEC Reforms Rules for Money Market Funds—July 30, 2014In a 3-2 split decision on July 23, the Securities and Exchange

Commission (SEC) adopted final amendments to the rules governing

money market funds (MMFs). The new rules will require institutional

prime MMFs to use a floating net asset value (NAV) and allow boards of

non-government MMFs to impose new liquidity fees and/or redemption

gates (gates) in certain circumstances.

IRS Provides Guidance for Amending Safe Harbor 401(k) Plans to Comply with US v. Windsor—May 16, 2014On May 15, 2014, the IRS issued Notice 2014.37, which provides

guidance to safe harbor 401(k) plans on making midyear amendments to

comply with the Supreme Court’s decision in US v. Windsor.

President’s Budget Impacts Retirement Savings—March 5, 2014On March 4, 2014, President Obama released his 2015 fiscal year budget

proposal, which includes several provisions that impact retirement

savings.

Republican Tax Reform Proposal Impacts Retirement Savings—February 27, 2014House Ways and Means Committee Chairman Dave Camp (R-Mich.)

just released a 979-page proposal to overhaul the current tax system.

Camp calls it “a comprehensive plan that reflects input and ideas

championed by Congress, the Administration, and most importantly, the

American people.”

New Rules Provide Relief for Defined Benefit Plans—February 10, 2014On January 28, 2014, the Pension Benefit Guaranty Corporation (PBGC)

issued proposed rule RIN 1212-AB13 that would amend regulations

governing multiemployer plans in hopes of encouraging potentially

beneficial plan merger transactions.

Senate Retirement Proposals Are Here—An Employer Mandate and Defined Contribution Reforms—January 31, 2014Following the President’s proposed myRA in his State of the Union

address (See Beacon: “President Unveils Retirement Reforms During

State of the Union”), Senators have begun introducing their own plans to

address the millions of Americans who are not saving for retirement.

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DEFINED CONTRIBUTION PLAN COMPLIANCE CALENDARThird Quarter 2014

October 2014

When Due Description Sent to/Filed With Action

October 15 Initial QSLOB notice. IRS. If election of QSLOB is desired, initial notice is filed on a Form 5310-A.

October 15 File Form 5500 if extension obtained.

IRS. Form 5500 extensions are available by filing a Form 5558 on or before the filing's initial due date. Also available to employers under certain circumstances when tax and plan years are the same.

October 15 Form 8955-SSA (if extension filed).

IRS. Annual registration statement identifying separated participants with deferred vested benefits.

October 15 Coverage/Nondiscrimination Failure Amendment.

No filing requirement. Deadline for adopting a retroactive amendment to correct an internal revenue code (IRC) Section 410(b) coverage or Section 401(a)(4) non discrimination failure for 2012.

November 2014

When Due Description Sent to/Filed With Action

November 14 Distribute 2014 plan year third quarter benefit statements.

Participants and beneficiaries who may direct investments. No filing requirement.

Statement informing participants of their accrued benefit at normal retirement age and, if not vested, when vesting will occur. Must describe any permitted disparity or floor-offset provision. For individual account plans, must also note value of each investment.

Third Quarter 2014 • The Ledger—Defined Contribution

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DEFINED CONTRIBUTION PLAN COMPLIANCE CALENDARThird Quarter 2014

December 2014

When Due Description Sent to/Filed With Action

December 1 Annual Notice of Intent to Use Safe-Harbor Formula (for safe harbor 401(k) plans).

Sent to participants and all employees eligible to participate in plan. No filing requirement.

Notice to participants describing their rights and obligations under a 401(k) plan, including a description of safe harbor matching or safe harbor nonelective employer contribution formula, how and when to make deferral elections and other required information. Plan sponsor may supply "contingent" notice of a possible 3% QNEC for the year, preserving the right to adopt such a safe harbor design during the ensuing plan year.

December 1 Supplemental notice for safe harbor plan.

Sent to participants and all employees eligible to participate in plan. No filing requirement.

Supplemental Notice for safe harbor plan that issued Contingent Notice at beginning of year as to whether 3% safe harbor will be made for the current year.

December 1 EACA/QACA notice (for DC plans using automatic enrollment).

Sent to participants and each employee eligible to participate for year. No filing requirement

Notice describes rights and obligations under a 401(k) plan with automatic enrollment arrangement, including right to elect not to have salary deferrals made on employee’s behalf, right to elect a different percentage and how contributions will be invested in absence of an investment election.

December 1 Annual QDIA notice (for DC plans with participant-directed investments).

Sent to participants and beneficiaries. No filing requirement

Notice describes right to direct investments, how accounts will be invested in the absence of participant direction and opportunity to invest outside QDIA in a broad range of investment alternatives. Notice may be combined with QACA, EACA or other ERISA §404(c) notices.

December 15 Extended SAR deadline.

Sent to participants and beneficiaries. No filing requirement.

Narrative summary of financial information reported on Form 5500 and statement of right to receive annual report. Model notice language is provided by the DOL.

December 31 Required minimum distributions for 2014

Affected Participants. No filing requirement.

Applies to participants whose minimum required distributions have already commenced.

December 31 Discretionary amendments.

Sent to participants and all employees eligible to participate in plan. No filing requirement.

Deadline for amending plan for discretionary changes implemented during plan year (certain exceptions apply, e.g., adding salary deferrals, cutback accrued benefits).

December 31 ADP/ACP corrective distributions.

Affected Participants. No filing requirement.

ADP/ACP corrective distributions (for 2013 plan year) if not already distributed by March 15, 2014. A 10% excise tax applies to the plan sponsor if the corrective distributions are not made by March 15.

December 31 Formal Safe Harbor conversion amendment for 2015 plan year.

Sent to participants and all employees eligible to participate in plan. No filing requirement.

A sponsor who desires to amend a 401(k) plan to provide for a safe harbor design for their 2015 plan year should amend the plan by the last day of the 2014 plan year to reflect the safe harbor provisions. Similarly, a sponsor of a safe harbor plan who desires to remove the plan from safe harbor status for their 2015 plan year should amend the plan to remove such provisions.

Fiduciary Training ModuleQ3 2014

L O C K T O N R E T I R E M E N T S E R V I C E S

INSURANCE FOR ERISA FIDUCIARIES

Business is a risky venture, and for those businesses sponsoring retirement plans, the added responsibility can

result in added risk. Fiduciary risk has evolved significantly over the last decade with employers facing claims of

inappropriate investment selection, misrepresenting the risks of employer securities, permitting excessive fees

and expenses to be charged to plans, and failing to properly administer plans. Not only has the risk of litigation

increased, but enforcement efforts of the Internal Revenue Service and Department of Labor have never been

higher. To mitigate these risks, several different insurance products are in the market. While some types of

insurance are required of employers sponsoring retirement plans, others are purely discretionary, but should be

considered.

Fidelity Bonding

The Employee Retirement Income Security Act (ERISA) requires all persons who handle assets of employee benefit plans to be covered by a fidelity bond. Plans that are exempt from ERISA (governmental plans, church plans, workers’ compensation, unemployment, disability insurance, and excess benefit plans) are exempt from the fidelity bonding requirements. The purpose of a fidelity bond is to protect a plan—and indirectly the participants—against losses sustained due to acts of fraud or dishonesty by anyone whose position requires them to come in direct contact with, or exercise discretion over, the assets of the plan.

If someone’s activities create a risk that plan assets could be lost in the event of fraud or dishonesty—by that person acting alone or in collusion with others—they must be bonded. The bond will reimburse the plan for the loss it may suffer. ERISA requires every person with the authority or discretion to handle plan funds be bonded, unless the person falls under an exemption.

Handling plan assets means not only having physical contact with plan assets but also includes having the:

� Ability to transfer assets in and out

of the plan.

� Ability to use plan assets to make

purchases.

� Ability to direct or authorize

distributions.

� Ability to sign checks from the plan.

� Supervisory or decision-making

responsibility over anyone with the

abilities above.

It is also important to understand that in most plans, an administration committee has authority to direct a trustee to pay benefits to plan participants; in this case, the committee members are considered to be handling plan funds if their decisions are not subject to anyone’s approval. Thus, each committee member must be bonded. For plans in which an investment committee makes investment decisions for the plan that are final, each committee member must be bonded. Bonding is also required for anyone providing discretionary investment management services.

October 2014 Lockton® Retirement Services

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On an annual basis, a plan sponsor should take inventory of anyone involved in the administration and investment of the plan’s assets, officers and directors with oversight authority, committees overseeing investment selection and monitoring, and anyone involved in the process of getting money into the plan. The majority of fidelity bonds cover only the plan sponsor’s fiduciaries, because ERISA does not require bonding for outside service providers. However, any reputable investment manager or service provider will obtain their own bond. Before hiring any investment manager or service provider, you should specifically request a representation that they are bonded.

A bond must cover anyone handling plan funds, and in the amount of at least 10 percent of the amount of funds handled by the person in the previous year. The bond amount cannot be less than $1,000 and does not need to be more than $500,000 ($1 million for plans that hold employer securities). You may obtain a bond in a greater amount, which may be advisable for very large plans. For sponsors of multiple plans, a sponsor can obtain one bond for all of its plans; however, recovery to one plan can not decrease the coverage available to another plan covered under the bond. It should also be noted that because the bond protects the plan directly, the plan may pay for the bond out of plan assets.

Fiduciary Liability Insurance

In addition to the fidelity bond, many employers will purchase fiduciary liability insurance for plan fiduciaries or for the employer itself to cover liability or losses arising under ERISA. An individual fiduciary may also purchase a policy to cover its liability. Unlike a fidelity bond, fiduciary liability insurance is not required by ERISA. Generally, a fiduciary liability policy will protect fiduciaries from claims involving:

� Breaches of fiduciary duty arising under ERISA.

� Imprudent administration of the plan.

� Litigation costs including defense, settlements and judgments.

Fiduciary liability insurance may be purchased using a plan’s assets; however, any policy paid for by the plan must permit recourse by the insurer against the fiduciary if a breach of fiduciary duty occurs. A fiduciary may also purchase protection against the insurer's recourse rights at its own expense. Generally speaking, an employer will purchase fiduciary liability insurance through either a stand-alone policy, or as a rider to its general liability coverage. Fiduciary liability insurance can also include errors and omissions insurance if the acts that are covered are defined broadly.

When choosing to purchase fiduciary liability insurance, the selection of a carrier is extremely important. As with any insurance product, you should examine a carrier’s financial strength and claims-paying ability, pricing, limits, deductibles, terms, extensions and exclusions.

October 2014 Lockton® Retirement Services

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A fiduciary should review: � Coverage of litigation defense costs.

� Coverage of prior acts and any restrictions.

� Right of recourse language. A right of recourse gives the insurer the right to collect from the insured for causing the loss due to its negligence. Either attempt to remove this language or purchase a waiver.

� Duty to defend language. A fiduciary should make sure that in the event a claim is made against the insured for an alleged wrongful act, the insurer has a duty to defend the claim, even if it is groundless, false or fraudulent.

� Look for extended reporting periods which give an insured the right to present claims after a policy has expired or been canceled.

� Determine if the policy provides coverage for punitive damages.

� Attempt to limit any hold-harmless language, which agrees to hold another entity free from the responsibility for any liability or damage that might arise out of the transaction involved.

Errors and Omissions Insurance

Plan sponsors generally cannot delegate their entire fiduciary responsibility, but they may retain third parties with expertise to oversee certain fiduciary obligations to a plan such as investment advisory services or administration. If done properly, a plan sponsor may minimize its own liability by retaining only the fiduciary liability to properly select and monitor its service providers. However, a plan sponsor should consider whether its service providers also have coverage for their own fiduciary breaches. Errors and omissions insurance (E&O) is specialized coverage typically shielding a plan’s third-party service providers from liabilities for their own negligent acts, errors or omissions committed during the performance of services. E&O coverage typically does not cover claims arising from an ERISA fiduciary breach, unless specific language is included that affirmatively extends to ERISA claims. E&O policies with this language may be called “Professional Liability,” “Investment Advisor E&O” or some other subset of general E&O coverage.

A plan sponsor should question a service provider representing its E&O insurance as its ERISA fiduciary coverage and whether its policy contains specific additions covering ERISA fiduciary liability.

© 2014 Lockton, Inc. All rights reserved. Images © 2014 Thinkstock. All rights reserved.

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October 2014 Lockton® Retirement Services

The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute U.S. federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.

This document contains the proprietary work product of Lockton Financial Advisors, LLC, and Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.

Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member of FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.

For Plan Sponsor Use Only

Directors and Officers Liability Insurance

Yet another type of insurance product that may be considered is Directors and Officers insurance or (D&O). D&O covers directors and officers from losses suffered because of their service to a company. D&O insurance will protect directors and officers from personal loss resulting from conduct arising out of their duties to the company, as well as reimbursing the company for indemnifying directors and officers for claims made against them or for certain claims made directly against it. As with E&O insurance, most D&O insurance will exclude ERISA-based claims unless a rider is purchased.

Money Well Spent

There may be no money better spent than a good fiduciary liability policy. The cost of coverage is far outweighed by the significant costs of defending litigation out of pocket. Regardless of what type of product you choose to purchase, pay particular attention to ensure proper coverage and terms that will protect your interests. Any fiduciary should take time to confirm their employer’s indemnification provisions—typically contained in corporate bylaws and resolutions—are aligned with the terms of its ERISA fiduciary and D&O policies to ensure they are properly protected. The importance of understanding your liabilities, creating good plan governance and insuring against your potential risks can be the most important action steps an ERISA fiduciary will take.

Our Mission

To be the worldwide value and service leader in insurance brokerage, employee benefits, and risk management

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www.lockton.com

© 2014 Lockton, Inc. All rights reserved. Images © 2014 Thinkstock. All rights reserved.

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The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute US federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter

addressed herein to another party.

This document contains the proprietary work product of Lockton Financial Advisors, LLC, and Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.

Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member of FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.

For Plan Sponsor Use Only