Fiduciaries of Governmental Retirement Plans in Virginia Marc Purintun Partner and Chair of Employee Benefits Practice Discussion Overview > Who is a Fiduciary? > Sources and Standards of Fiduciary Duties > Overview of Litigation 22 Who is a Fiduciary? 3 Fiduciary Defined > An entity or individual may be a fiduciary either by designation or by function: – An individual or entity specified in the plan as a fiduciary responsible for plan administration and/or management and control of plan assets. • Plan Sponsor • Plan Administrator • Investment Committee • Trustee – A person who exercises discretionary control over investment decisions or plan administration. • Claims administrators. • Anyone who chooses, evaluates, or monitors service providers. – An individual or entity who provided advice for a fee with respect to plan assets. - Internal Revenue Code § 4975(e)(3); ERISA § 3(21) 44 Who is Not a Fiduciary? > The settlor establishes the terms of the plan, and amends or terminates the plan. – The settlor = The Commonwealth or the Municipality. – Settlor functions include establishing, amending, and terminating the plan. > Unless plan or statute provides otherwise, the settlor is not a fiduciary, but determines the scope of authority of the fiduciary. – The fiduciary must administer the trust and the plan for the benefit of the participants and their beneficiaries in accordance with the role assigned. – The fiduciary must implement decisions made by settlor in accordance with fiduciary duties. 55 Who is Not a Fiduciary? > Entities or individuals that solely perform administrative functions: – Receives contributions and applies to accounts, – Distributes educational materials, – Implements rules, and/or – Processes forms. 66 Sources and Standards of Fiduciary Duties 7 Sources of Fiduciary Duties Fiduciaries are held to extremely high standards of conduct under the law. Plan and Plan- State and Local Federal Law Common Law Related Law Documents • Internal Revenue • State • Restatement • Municipal Code Code Constitution (Third) of Trusts • Administrative • ERISA (not • Statutory (collection of Code directly applicable • Municipal code common law) • Plan Documents to governmental • Policies and • Uniform • Trust plans, but regulations Management of Agreements excellent Public Employee resource) Retirement Systems Act (UMPERSA) (not adopted by Virginia, but an excellent resource) 88 ERISA > Employee Retirement Income Security Act (ERISA) requires fiduciaries of private sector plans to discharge their duties with respect to a plan: – solely in the interest plan participants, – for the exclusive purpose of providing benefits to participants and defraying reasonable expenses of administering the plan, – with the care, skill, prudence, and diligence under the circumstances then prevailing, – that a prudent man acting in like capacity and familiar with such matters would use. 99 ERISA (cont’d) > Adopts a "prudent expert" rule. > ERISA does not apply to governmental plans. – However, ERISA derives from the common law of trusts, which does apply to governmental entities, and imposes standards similar to those under ERISA. – Courts often look to ERISA to determine if non-ERISA plan sponsors satisfied their fiduciary duties. – Non-ERISA plan sponsors sometimes defend against breach of fiduciary claims on the grounds that their conduct satisfied ERISA standards. 1010 Code of Virginia Title 51.1. Pensions, Benefits, and Retirement – Provides fiduciary standards of care and relief for certain plans. – Is a complex statute that provides for retirement and other benefits for employees of the Commonwealth, its agencies and authorities, as well as political subdivisions. – The key retirement benefits of the Commonwealth are maintained by the Virginia Retirement System (VRS) and the retirement systems of localities. 1111 Code of Virginia Title 51.1 authorizes the VRS Board of Trustees and its committees and agents to establish and maintain the VRS, which includes: – The Pension Plan; – The Hybrid Retirement Program; – The Deferred Compensation Plan; – The Cash Match Plan; – The Optional Retirement Plans; and – A 415(m) excess benefit plan. 1212 Code of Virginia Title 51.1 authorizes the counties, cities and towns to establish and maintain a local Retirement System, which can include: – A defined benefit pension plan; – A 403(b) plan for public school employees; – A 457(b) deferred compensation plan; – A cash match plan; and – A 415(m) excess benefit plan. 1313 Code of Virginia Section 51.1-124.30 provides for funds of the Retirement System. > The VRS Board is the trustee of the Retirement System. – The Board shall discharge its duties with respect to the Retirement System solely in the interest of the beneficiaries thereof and shall invest the assets of the Retirement System with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Board shall also diversify such investments so as to minimize the risk of large losses unless under the circumstances it is clearly prudent not to do so. 1414 Code of Virginia This standard of care is almost word-for-word the applicable standard for ERSIA fiduciaries, frequently called the prudent person standard. – Fiduciaries acting within the standard of care are relieved of liability for losses. – Such fiduciaries are also relieved of liability with respect to participant-directed investment, including default investments, and the selection of automatic rollover IRAs for mandatory cash-out distributions, provided the Board’s selection is made in accordance with guidelines similar to the DOL guidelines. 1515 Code of Virginia Section 51.1-803.A provides a substantially similar standard of care for investments of the local retirement system. – The statute does not explicitly relieve fiduciaries acting within the standard of care of liability for losses to the local retirement system. – “The selection of services related to the management, purchase, or sale of investments authorized by this section, including but not limited to actuarial services, shall be governed by the standard of care set forth in this section and shall not be subject to the provisions of the Virginia Public Procurement Act.” – Such fiduciaries are, however, relieved of liability with respect to the selection of automatic rollover IRAs for mandatory cash-out distributions, provided the Board’s selection is made in accordance with guidelines similar to the DOL guidelines. 1616 Code of Virginia Section 51.1-169 provides the terms of the Hybrid Retirement Program. > The Hybrid Program includes both a defined benefit component and a defined contribution component. > As the Hybrid Program is maintained by VRS, it is subject to the standard of care in section 51.1-124.30. Subparagraph G of this section applies to the defined contribution component for a political subdivision that has adopted a 403(b) plan. > Eligible employees may contribute the defined contribution portion of the Hybrid Program to the 403(b) Plan. 1717 Code of Virginia This subsection provides the following relief from liability and the applicable standard of care: In the case of a 403(b) plan or local cash match plan administered by a political subdivision that provides individual accounts permitting an employee or beneficiary to exercise discretion over assets in his account, the political subdivision shall not be liable for any loss resulting from such employee's or beneficiary's (i) investment of voluntary contributions in the political subdivision's 403(b) plan or matching contributions in the political subdivision's 403(b) plan or local cash match plan, (ii) exercise of discretion over the assets in any of his accounts, or (iii) inaction with respect to the assets in any of his accounts that results in such assets being placed in a default investment option selected by the political subdivision, provided that the investment options for the affected individual account and the particular default investment option for such individual account are selected in accordance with subsection A of § 51.1-803, applied mutatis mutandis. 1818 Code of Virginia Section 51.1-603 provides for local deferred compensation plans, i.e., 457(b) plans, of counties municipalities and other political subdivisions. – Rather than remit deferred compensation contributions to the VRS 457(b) plan, eligible entities can establish a local 457(b) plan. – The locality “may” adopt a trust for the assets of the 457(b) plan – federal tax rules require that governmental 457(b) plans hold the assets in trust. – The locality may adopt an automatic enrollment feature for the 457(b) plan. – The statute does not provide an explicit standard of care. 1919 Common Law of Trusts The Fiduciary rules in ERISA, which are incorporated into Title 51.1, are based on the common law of trusts. >The Restatement (Third) of Trusts is essentially a collection and summary of the common law trust rules. >The Restatement is not binding authority, but is highly persuasive because it provides a compilation of how the law has developed through relevant case law and in many ways is considered a recitation of what the law is. >Adopts a “prudent investor” standard. 2020 Affirmative Fiduciary Duties > Internal Revenue Code requires that the assets of 401(a) and governmental 457(b) plans be held in trust. > All powers held as a trustee – express and implied