Business of Benefits

Business of Benefits

Tax Code Will Permit Merger of 403(b) and 401(a) Church Plans

Posted in 403(b)
Muckross Abbey

Much has happened since we’ve last posted a blog-upon some of which we could hopefully lend some helpful comments. The press of year end business (a problem which we are delighted to have!) and spending precious family time around the holidays made it difficult to get to those things thoughtfully. We look forward to working through that “issues stack” over the next few months.

Yes, we have had the DOL issue guidance on state MEPS, and on state mandated IRAs; there has been a notable SEC No-Act on 403(b) plans; there has been continued church plan litigation; and even a few 457(b) issues. 2015 really did have a notable fourth quarter.

It is, however, an extraordinary and fundamental changes introduced to church 403(b) plans by the PATH Act is worth first noting: the Tax Code will now permit the merger of 401(a) and 403(b) plans of churches; and the “transfer” of assets between the two types of plans will be permitted.

403(b)/401(a) mergers has been an ongoing issue in the tax-exempt marketplace: consultants and advisors trying to clear up the often messy retirement plan structures of their not-for profit clients continue to be stymied by the inability to merge these two types of plans. Not only could these plans not be merged, but there is no way to do a “plan to plan transfer” between them. The only way to accomplish any sort of “transfer” was for there to be a distribution from one of the plans which could be “rolled” into the other. One preferred method is to terminate the 401(a) plan with a default “deemed” rollover election (yes, this is permitted by 1.401(a)(31), Q7) into the 403(b) plan.

The PATH Act will eventually change all of that for church Plans. “Under rules prescribed by the Secretary,” church 403(b) and 401(a) plans (of the same church) will be able to either merge or transfer assets between them, effectively using the same “merger and transfer” rules currently in place for 401(a) plans. The good news is that this rule uses the the broad definition of “church” under 414(e)(3), which includes “steeple” churches and organizations associated with or controlled by churches-which will include such organizations as hospitals and universities.  (see our church plan blog for a description of the types of churches).

Don’t go racing to merge your church plans yet, however. We will need to wait for the IRS to issue guidance before that can be done.  But the door will  be open at some point.

One of the questions that the IRS will need to answer in guidance is how the Rev Proc 2007-71 applies. That revenue procedure permitted employers to exclude from its plan certain pre-2005 contracts (and, under certain circumstance, certain pre-2009 contracts), so it will be important to see if the IRS excludes those old contracts for merger purposes. Note also that there will be some serious complications under ERISA for those “electing church plans,” which have elected to be covered by ERISA. What really makes the new rules work so well is that the typical 414(e)(3) church will not be governed by ERISA, which will make the merger/transfer much simpler.

The PATH Act also introduced a few more changes to church 403(b) plans. It preempted state payroll laws which may otherwise prevent a church from auto-enrolling participants in a 403(b) plans (the existing auto-enroll rules did not cover church 403(b) plans); there is a controlled group/aggregation rule clarification; collective trust guidance; and grandfathered 403(b) DB guidance. Click here for a copy of  the  PATH Act Church Rules .

On a personal note, Conni took the picture above, of the 600 year old Muckross Abbey in Killarney National Park in Ireland. We were surprised when we happened upon some very old gravestones there of part of my Irish half’s family (I’m also half Hungarian).

MEP and the Common Paymaster: A Siren’s Call

Posted in Multiple Employer Plans
Siren's Call

There’s a continual siren’s call in the marketplace, enticing many to believe that the DOL’s seminal MEP Advisory Opinion, 2012-04 has limited applicability to arrangements like a PEO sponsored MEP. Like the siren’s call, such statements by these promoters are alluring, but potentially dangerous.

In that Advisory Opinion, the DOL made it clear that the Opinion would apply to MEPs the limited definition of what constitutes an “employer” that the DOL had historically applied to MEWAs (which are “multiple employer welfare arrangements,” which had been the source of long standing abuses).  2012-04 stands for the proposition that employers participating in a MEP must have a both a common employment bond between them, and that those employers must directly or indirectly control the MEP. There seem to be a number of arrangements which will have that bond, such as industry associations that were not formed for benefits purposes; franchise arrangements; commonly owned companies that don’t quite constitute a controlled group; and industry focused employment arrangements in a limited geographical area.

But the siren’s song’s lyrics are that the AO left open the question of whether or not a MEP is available under a PEO without these sorts of bonds, even claiming that making a PEO’s MEP available on an a la carte basis (the so-called “ASO” business) is permissible. The most recent version of that “song” which demonstrates the lengths to which parts of the market will go involves common paymaster services.  Employers, the siren says, that each hire the same company to serve as its payroll agent each then form a DOL-compliant common employment bond with the others of that payroll agent’s customers.

This is a pretty absurd argument. It would be similar to an attorney claiming that clients which each appoint the lawyer as agent to deal with the IRS on retirement plan matters  under a Power of Attorney have a common employment bond.

MEPs are very valuable tools for the right circumstances, and there can be some PEOs which do fit within the DOL’s guidelines.  There remains a possibility for legislative relief as well. Even better, though, is that there are non-MEP aggregation arrangements which can be a valuable alternative to MEPs.  It is risky behavior, however, to attempt to manufacture an employment bond that doesn’t really exist-especially when there are viable alternatives.

I will be speaking at ASPPA’s Annual Meeting next week at the Gaylord in National Harbor.  Adam Pozek and I will doing a presentation on Taking Over a MEP on Tuesday at 4:15; I will be manning the Speaker’s Corner at 6:15 on Sunday; and facilitating a PEO session at 10 on Tuesday and a “when you should offer a MEP” at 2:30 on Tuesday. Come by and say hi!


Website Privacy Policies and the Federal Trade Commission’s Authority over Retirement Plans

Posted in Cybersecurity, Fiduciary Issues, General Comment, Plan Administration

As if there aren’t all ready far too many acronyms in our business with which to deal, a recent third circuit court case on website privacy policies and cyber security tells us we may yet have another.

Remembering that ERISA does NOT preempt the application of other federal law (like the SEC, Anti-Money Laundering, and the Patriot Act rules-just to name a few), which we continue to learn to integrate into our practices, we now may find ourselves needing to deal with the Federal Trade Commissions standards as well.

The issue arises from something as innocuous as the website privacy policies which are so commonplace on retirement plan vendor websites (you know, those things know one ever reads or pays attention to). Well, it appears to matter to the Federal Tead Commission.

Cybersecurity and data privacy issues are a growing concern for retirement plans and their vendors. There has been much written about these issues recently, and we have always felt that there really is an ERISA  fiduciary standard that applies to the handling of a plan’s data.

Well, it looks like the federal courts now will recognize the FTC’s authority to govern such matters as well.  Here’s how it works:

  • The Federal Trade Commission Act prohibits “unfair or deceptive acts or practices in or affecting commerce,” under 15 U.S. Code § 45.
  • An unfair trade practice is one which “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”
  • The FTC has taken the position that cybersecurity practices fall within its jurisdiction under this clause.

This all came to head in the case of FTC-v.-Wyndham-Worldwide, where the FTC brought suit against Wyndham for its misleading data privacy policy, and its faled data privacy practices. These failed practices lead to serious data breaches. In the court’s ruling , they found that Wyndham “unreasonably and unnecessarily” exposed consumer’s electronic data to unauthorized data and theft, while misrepresenting their security practices in its privacy policy.

There is quite a “list of horribles” in which Wyndham engaged, including its failing to

  • adopt “adequate information security policies and procedures;”
  • use “readily available security measures”—such as firewalls—to limit access between Wyndham’s other corporate networks; and
  • employ “reasonable measures to detect and prevent unauthorized access” to its computer network.

What should we take from all of this, on the retirement plan side? Consider knowing what’s in your privacy policy;  do what you say you are doing in the policy; and consider adopting reasonable cybersecurity practices.


Employee Asset Protection and State Auto-IRA Programs

Posted in Auto-IRA, Complex Prohibited Transactions

State based auto-IRA programs continue to pick up steam, and may soon become prominent features of the retirement security landscape. Granted, there are a number of legal and logistical issues which need to be resolved before they can be fully implemented, but things are moving quickly.

So it is timely to discuss participant protections under these programs. A successful program must necessarily incorporate ways to protect employee deposits. The holding of employee deposits are not much of a concern, as employee deposits will be held in IRAs protected by highly regulated, commercial custody companies-as in any IRA program.  The real challenge will be the protection of employees’ payroll based deposits in getting to the IRA.  Any payroll based deposit program is subject to the vagaries of an employer’s cash flow, and this will be a particularly acute problem in the small employer marketplace (which just happens to be the target market of the state auto-IRA efforts).

States, however, resist the application of ERISA (and its attendant protections) to their auto-IRA arrangements. It is generally believed in the States that the burdens imposed by full fledged ERISA regulation would make auto-IRA virtually impossible to implement, and would be their death knell.  The DOL has pledged its support in finding a workable solution to this problem, and it has a proposed reg pending at OMB.

Does this mean that auto-IRA participants then would be left unprotected if ERISA doesn’t apply? Actually, I think not. There is a variety of state law criminal and civil causes of actions which can be taken against bad acting employers who don’t make timely deposit of auto-IRA. But, almost surprisingly, there is the possibility that the DOL and the IRS still may have jurisdiction over these deposits under (of all things) the Tax Code’s prohibited transaction rules-even if ERISA does not apply.

This is how it may work:  IRAs are subject to the prohibited transaction rules under Code Section 4975.  This shouldn’t concern an employer who timely deposits auto-IRA contributions to the custodian. At some point, however, it may be possible that an employer who delays making the IRA deposit might be will be actually be deemed to be holding an IRA asset- under the same rules that an employer holding onto 401(k) deposits for too long will be deemed to be impermissably holding onto plan assets. Why? because the DOL has jurisdiction over the prohibited transaction rules (even those under Tax Code Section 4975), and there really doesn’t appear to be any basis for a  legal distinction under its rules between holding on to 401(k) deposits for too long and holding on to IRA deposits for too long.

If the the employer is still holding on to IRA payroll deduction at the time it becomes an IRA asset,  the employer then would become become a custodian of the IRA asset.  This, in turn, makes the employer a “disqualified person” under 4975, and makes it liable for the prohibited transaction taxes for using those late deposits for its own purposes.

Yes, this is strange territory, and there will be those who will reasonably disagree with whether or not the PT rules should apply in this manner. But it is also a reasonable position, and one which lends an important element of ERISA-like protection without some of the unnecessary burdens.


A 403(b) Collective Trust? A Note of Caution…..

Posted in 403(b), B/D-IA Issues

Collective trusts have seemingly become all the rage in plan  investment circles, and for some  very good reasons. Bonnie Treichel (of her and Jason Robert’s Retirement Law Group) will discuss the “ins and outs” of dealing with collective trusts in a guest blog to be posted shortly.

But what of a 403(b) plan purchasing collective trust interests? Surely, the CIT advantages can be made available to these plans, especially since the IRS specifically approved the commingling of 401(a) assets and 403(b) assets in something called 81-100 trusts under Rev Ruling 2011-01! (“81-100 Trusts” refers to the Revenue Ruling 81-100 which recognized the tax exempt status of a collective trust which holds the assets of unrelated 401(a)-and now (since 2011-1) 403(b) plans).

Well, as seems to be with all things 403(b), there’s trouble in the details. Two issues need to be addressed  with a 403(b) plan’s purchase of the collective trust interests of the sort that are typically sold to 401(k) plans.

Code Section 403(b) only permits investments in mutual funds and annuity contracts.* The CIT interests purchased by 401(a) plans, however, are “unitized.” This means that the commingled value of all the assets in the trust are valued every night, like a mutual fund, and each unit given a net asset value. But the problem is that the typical CIT is NOT a mutual fund registered under the Investment Company Act of 1940, and the interest which is being purchased is therefore not a mutual fund share (note that there are exceptions: some CITs WILL actually be registered under the 40 Act, but these are not trusts in which 401(k) typically invest).  It is therefore unlikely that the Code would permit its purchase under a non-403(b)(9) arrangement.

To get around this problem, you could try to design a CIT in such a way to “look through” the CIT to the underlying mutual fund in order to qualify under 403(b).  This, however, would require share accounting of the investments of the CIT. Legal niceties aside, this would be virtually impossible to do from the practical standpoint given the manner in which CITs operate (for example, they typically hold a percentage of their assets in cash, which then screws up share accounting).

But even if you could do share accounting and overcome the legal and logistical challenges to making this work for the Tax Code’s 403(b) rules , there is a serious securities law problem.  403(b) investments do not qualify for the exemptions from registration under the Investment Company Act of 1940 or the Securities Act of 1933, while 401(a) plans do enjoy that exemption.  The collective trust with 403(b) funds would likely have to be registered under the ’40 Act as a mutual fund or, at least, the CIT shares registered as securities under the ’33 Act. Unless the plan sponsor otherwise has security law exemptions (think government and certain church plans), this then would be a non-starter.The 81-100 trust for 403(b) plans of organizations without a security law exemption will, it would seem, have limited usefulness.

What does this all mean? It means that if you have a 403(b) plan which is investing in collective trusts, you probably need to sit down and talk with your lawyers or compliance staff. It will be very interesting to see how many of the 403(b) prototypes which the IRS is currently reviewing will specifically authorize collective trusts without a thought to these issues…..

*Note that 403(b) does have an exception: 403(b)(9)  permits church retirement income accounts to invest in vehicles other than annuity contracts and mutual funds.



Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, including advice on Securities Laws, nor to create an attorney client relationship with any party.

DOL Provides Key ERISA Guidance on QLAC/DC Lifetime Income

Posted in Fiduciary Issues, Lifetime Income

Sláinte! to Mr. Hauser and Company at the DOL. OK, admittedly I’m still recovering from our recent trip to Ireland where, yes, I attempted to drive on their country “roads.” “Sláinte is one of the Gaelic terms for Cheers! And, yes, that is a pint from the Blind Piper in County Kerry.

SlainteThe DOL just published its first serious guidance on supporting lifetime income with the publication of FAB 2015-2, guidance which is very necessary for the success of the Qualified Longevity Annuity Contracts, as well as DC lifetime income income.

The FAB is an initial, but substantial, step in addressing one of the most pressing of the ERISA issues related to providing lifetime income from defined contribution plans: concerns by employers and their advisors regarding the potential of a substantial “tail” of liability related to buying an annuity. Who wants to purchase an annuity if some 30 years after the purchase of an annuity, an insurer becomes insolvent while the annuity is in its payout stage, after which the fiduciary can be held liable for that long ago decision?

Addressing this “fiduciary anxiety,” the DOL helpfully described the manner in which ERISA’s six-year statue of limitations serves to restrict the “window of liability” related to those purchases.

The DOL also discussed the manner in which it views that the ongoing obligation to monitor a chosen annuity vendor will apply. The fiduciary will need to periodically review the chosen insurer, but will not need to do so before the purchase of each annuity. The obligation to review ceases should annuities no longer be able to be purchased under the plan or, with regard to any particular carrier, that carrier’s annuities cease to be  an option under the plan.

It is also very helpful that the distribution of the annuity was recognized as a distribution option under the plan.

Through two simple examples using the QLAC type of annuity upon which the Treasury has issued guidance, the DOL stated that:

“Thus, for example, if the plaintiff bases his or her claim on the imprudent selection of an annuity contract to distribute benefits to a specific participant, the claim would have to be brought within six years of the date on which plan assets were expended to purchase the contract.”

This helps forms the basis upon which much more work can now be done. Next up will be guidance on a safe harbor, for the steps the fiduciary should take in choosing an annuity carrier. This is a project upon which the DOL is currently working. The FAB gave an important clue regarding the DOL’s approach to that ‘work-in-progress,” which is likely to help shape that safe harbor:

“Consistent with this statutory language, the prudence of a fiduciary decision is evaluated with respect to the information available at the time the decision was made – and not based on facts that come to light only with the benefit of hindsight. The conditions of the Safe Harbor Rule embody this general principle of fiduciary prudence. A fiduciary’s selection and monitoring of an annuity provider is judged based on the information available at the time of the selection, and at each periodic review, and not in light of subsequent events.”

This will be a critical element of the safe harbor, demonstrating that what is required is prudence, not prescience, as I had noted in a previous blog.

Evan Giller and I testified before the ERISA Advisory Council this past May, where we suggested the DOL work to ease fiduciary anxiety with this sort of guidance. We also suggested in the Testimony the factors which a safe harbor should require-noting that the burden to provide the information should be on the insurers in a competitive circumstance. Let the insurers’ poke at the accuracy of their competitors’ data; and let the fiduciary rely upon that.

You may find our written Testimony with its specifics related to what should be sought by the fiduciary helpful.

As with the Treasury’s guidance in Rev Rule 2012-3, this will help form the fundamental basis for making lifetime income work.

Fiduciary Liability for 403(b) Non-ERISA Plans?

Posted in 403(b), Fiduciary Issues

A number of us have been arguing about the extent of fiduciary liability for non-ERISA 403(b) plan sponsors for years now. This was caused by the 2007 changes to the 403(b) tax regulations, which  significantly increased employer responsibility for the maintenance of 403(b) plans. This greater level of employer involvement lead to our ongoing discussions on the sort of liability could these plans cause for the non-ERISA plan sponsor. Of particular concern to me was that of school districts which sponsored 403(b) plans. Those districts had typically viewed themselves as having minimal, if any, exposure to the operation of a 403(b) plan. This was in large part because of the lack of exposure to ERISA and its fiduciary obligations.

What school districts had never paid close attention to was their potential liability under non-ERISA, state law based legal claims, such as breach of contract, negligence, and other similar duties. ERISA, by the way, would preempt the assertion of these claims if they related to the operation of an ERISA plans, but public schools have no such protection.

Though these discussions (yes, Richard!) had always taken the nature of a nerdish argument between lawyers who really needed to get a life, a Wisconsin court has shown us that this could be a matter of very real concern to public schools.


The Wisconsin Court of Appeals has recently decided a matter in what appears to be one of the first reported appeals court cases involving school district liability under state law related to a wrongfully administered 403(b) plan. The case was technically one under which the issue was whether the federal tax code preempted a claim for participant tax losses related to errors in 403(b) plan administration.

What the Court found was that an action alleging a failure to exercise ordinary care in the administration of a 403(b) plan…, if proven, may entitle the Retirees to relief in state court.  Scary. Now it seems all so very real.

The facts won’t be unfamiliar to many school districts. In negotiating a layoff of teachers during the recession, the school district agreed to continue to make post severance contribution to the laid-off employees for 10 years following their termination of employment. The problem is that 403(b) only permits such post-severance payments for 5 years.

The IRS audited the school district’s plan,  found the error, and entered into a settlement agreement with the district under which the district agreed to pay $60,000 to the federal government.  The IRS agreed to treat the first five and one-half years of the plan’s payments as compliant with 403(b). The district then sought reimbursement from those former employees for amounts that it claimed it had paid to the IRS for the “employee share” of FICA taxes.

Those former employees didn’t take it laying down. They  filed a lawsuit against the district and its 403(b) third party administrator, claiming breach of fiduciary duty under Wisconsin law (not ERISA), breach of contract, misrepresentation, a federal civil rights violation, negligence, and unjust enrichment on the part of the district and breach of fiduciary duty, misrepresentation, and negligence on the part of the TPA.

The trail court first found against the former employees, finding that this was merely a “tax situation,” under which the former employees should make claims for tax refunds against the IRS.

The Court of Appeals disagreed, in no uncertain terms. The Court found, instead, that the suit could proceed if the former employees could prove they were erroneously promised that they could avoid FICA taxes and defer income taxes by use of a ten- year payment period in the 403(b) plan that the District was charged with administering (and the TPA was responsible for structuring). The Court agreed with the former employees, that the case is “essentially no different than an action against an accountant who commits malpractice and whose client, as a result, incurs additional tax obligations and costs that the client would not have incurred had the accountant not been negligent in the performance of his or her duties.”

The Court went on to find that the school district could be held liable for the tax exposure if it failed to use the degree of care, skill, and judgment that reasonably prudent administrators would exercise under like or similar circumstances.

This finding may well be the first step in establishing an “ERISA fiduciary-like” cause of action against school districts and plan administrators in the improper handling of non-ERISA 403(b) plans.

The case is Ann Cattau v. National Insurance Services of Wisconsin, Midamerica Administrative & Retirement Solutions, Neenah Joint School District, and Community Insurance Corporation; Appeal No. 2014AP1357, State of Wisconsin.


The 403(b) QLAC

Posted in Lifetime Income, Uncategorized

I went into quite a bit of detail on the value of the the Qualified Longevity Annuity Contracts” (the “QLAC”) last year in a  posting right after the QLAC regs were finalized.What the QLAC does is remove a logistical problem caused when you purchase an annuity to provide lifetime income, while creating a minor tax break for participant electing to annuitize.

As a quick update, here’s how it works: a participant can use up to 25% (or, if less, $125,000) of their 403(b) account balance to purchase a straight life annuity which becomes payable no later than age 85. If that annuity qualifies as a “QLAC”, the participant will not have to use the value of the annuity (which will effectively be the premium pad for it) in computing the required minimum distribution payments which may otherwise payable under the 403(b) contract after age 70 ½.

A QLAC can be purchased and held within a plan, or it can be purchased by a plan and distributed to the participant, depending on plan design. The QLAC is really intended to be used in conjunction with a systematic withdrawal program from a participant’s account balance: the systematic withdrawal program will cover the retirement needs until the date the QLAC’s annuity payments begin.

There are some very specific rules governing the QLAC:

It must be an annuity contract. Though a participant can take systematic withdrawals from their custodial account until the lifetime annuity kicks in, the QLAC itself can’t be the custodial account.

  • It must be an annuity contract. Though a participant can take systematic withdrawals from their custodial account until the lifetime annuity kicks in, the QLAC itself can’t be the custodial account.
  •  The annuity contract itself must state that it’s a QLAC, beginning January 1, 2016.
  •  There can be no account balance or surrender value (other than the return of premium), and the only death benefit is a lifetime annuity in favor of the joint annuitant. This means there can be no GMWBs in a QLAC program; and that a 403(b) account balance –even if in a 403(b) contract-will need to be transferred to a QLAC for it to work.
  • Payments must start no later than age 85, though earlier payment can be elected.
  • The insurer must act as the administrator, and comply with “IRA-like” annual reporting obligations. The employer doesn’t have these reporting obligations. The annual report to the participant includes
    • Information about the issuer, including contact information.
    • Information on the individual for who contract is purchased.
    • If still part of the plan, plan information.
    • Starting date of annuity, if not yet commenced
    • For the year purchased, the amount of premium and date paid
    • Total premiums paid for contract over time
    • The fair market value of the QLAC at close of year
  • No Roth funds can be used to purchase the contract.

Now, we see the marketplace beginning to offer some products, but it appears that insurers are mostly offering them as IRA products as opposed to being purchased by plans and distributed to participants. Which then causes us to pause some and consider how you do a 403(b) QLAC.

The QLAC seems to be in the 403(b) “sweet spot”, considering that 403(b) annuities were originally designed to provide lifetime income in the first place. However, as with all things 403(b), however, there are a few unusual twists when trying to put a QLAC in a 403(b) arrangement. Here are a few of the things to consider:

  •  For existing 403(b) individual annuity contracts, or certificates under a group contract, it does not appear that a new contract will actually need to be issued. It seems like the insurer can issue a rider to an existing contract which provides that a portion of the account balance can be used to partially annuitize the contract. This, however, will be the choice of the vendor.
  • Where the vendor will require a rollover to another contract, there can be issues for those 403(b) contracts which have been distributed from a plan: a vendor may be reluctant to do so for these contracts, given the 403(b) tax regulation requirements of employer control. If there is no employer, the vendor may not be willing to arrange for a QLAC.
  • An employer’s approval of a 403(b) QLAC may trigger ERISA status for a non-governmental, non-ERISA plan.
  • The 403(b) plan document will need to provide for a QLAC, to the extent that the 403(b) contract still is in the plan.

As we implement, I suspect we will be flushing out a few more concerns-some of them related to the manner in which we combine 403(b) contracts for purposes of having a single 403(b) QALC.  But this is the beginning of an exciting time.


ERISA and Mom

Posted in General Comment

This is our “Annual Mother’s Day” posting, our attempt to put a very personal twist to the things we do, hopefully putting a larger and hopeful light on many of the mundane tasks that make up much of our business.

On the rare morning when the breeze would blow in from the east, from the river, the orange dust from the prior night’s firings of the open hearth furnaces at Great Lakes Steel would settle onto the cars parked in the street. My Mom’s father worked there; my Dad’s father was a furnace brick mason at Detroit Edison; my father a tool and die maker at Ford’s Rouge Plant, not far down the road. Yes, a native Detroiter.

ERISA wonks such as ourselves tend to get lost in the press of details which seem to flow non-stop from our regulators and legislators in D.C. It is this background that reminds me that it is sometimes helpful to step back and see the personal impact of the things we do, even on the plant floor.

A few years back, a good friend of mine who ran the retirement plan operations of a large insurance company asked me to speak about ERISA to a meeting of his administrative processing staff. At the time, they were still struggling with some of the more difficult administrative processes related to the QJSA and QPSA rules. Here’s what I told them:

My father died at the Rouge Plant in 1970, after 20 years with the company. Back then, the normal form of benefit under a defined benefit plan was a single life annuity, covering the life of only the employee. There was no such thing yet as a qualified joint and survivor annuity or a qualified pre-retirement survivor’s annuity. This meant that my father’s pension died with him. My mother was the typical stay-at-home mother of the period who was depending on that pension benefit for the future, but was left with nothing. With my father’s wages topping at $13,000 annually and five kids at home, there was also little chance to accumulate savings.

The Retirement Equity Act of 1984 (a copy of which I still keep in my office) was designed to change all of that. By implementing the requirement of a spousal survivor annuity, a whole class of non-working spouses received protection which was desperately needed. So in that speech to my friend’s administrative staff, I asked them to take a broader view-if just for a moment- of the important task they were being asked to implement. It was valuable social policy with real, human effect which they were responsible for pulling off, and they should take a measure of pride in the work they were doing.

Things have evolved much over the years, and some of those same rules which provided such valuable protection have become the matter of great policy discussions centering on whether they are appropriately designed, and whether they can be modified in a way to accommodate new benefits like guaranteed lifetime income from defined contribution plans. But the point is that Congress sometimes gets it right, and there is very valuable social benefit often hidden in the day to day “grunge” of administering what often seems to be silly rules.


Mom has yet now recovered from her sixth stroke, at the end of 2014. She is doing well, though her dementia has been exacerbated by her latest episode, and she still can amazingly maintain in Assisted Living. As I noted last year, “doing well” takes on a whole different set of meanings. She is still healthy, does still know all of us, and remembers well many important things from a very precious past. We come more fully to the understanding that blessings truly come in many different forms.

Happy Mother’s Day

Bob and Conni

DOL’s Proposed Fiduciary Rules May Unexpectedly Open Lifetime Income Door, If…….

Posted in DOL Proposed Fiduciary Regs, Fiduciary Issues, Lifetime Income

I don’t remember a bolder regulatory move in my career that compares to what the DOL has undertaken with its issuance of its new fiduciary rules. Regardless of what one may think of the new set of rules in substance, EBSA’s organizational courage needs to be appreciated. I have little doubt that this comment will garner more than a few guffaws from those who have been engaged in this emotional battle for the past few years. For those cynics, however, I invite you to step back for a moment to see what has been done.  EBSA has been willing to conduct an extensive  self-review of the sort I have never seen in any organization (other than those private companies on the verge of collapse), in the face of tremendous (and often conflicting) political pressure, with the full knowledge that it will be open to incredible  scrutiny during the public comment period. It has really broken the bureaucratic mold in a way that I expect not to see again in my practice.

Complicated4This effort represents a fundamental change in a very broad regulatory scheme which will ultimately have some effect on most every part of the ERISA marketplace, many of which we will never really know until we bump into them in the years that follow their eventual finalization. Though the rule changes themselves are not particulalry complicated, they will affect ERISA plan relationships in so many different ways that it really will be hard to judge its ultimate impact-other than it will be substantial.

There is much to like in the new rules; some troubling things;  and, I think, perhaps a mistake or two which will be all flushed out in the coming months.

In my own, small world, I think there are a couple of technical points which I think are worthwhile sharing because they represent what we can expect of the “unexpected” as we work through the changes’ impact.

The first has to do with our old friend, the provision of lifetime income from defined contribution plans. Lurking in the shadows of the implementation of these programs is a problem to which none of us has given much attention yet: ultimately, participant decisions to use a portion of account balances to purchase any annuity (because, remember, guaranteed lifetime income still requires an annuity of some sort) are very personal decisions. They are based on the individual participant’s circumstance, not the least of which being age, marital status, and other assets.  This, then would make any counseling by an advisor clearly the provision of fiduciary advice, even under existing rules.  In the small to mid size markets, where there is a lack of employer staff to assist in these decisions, this advice will often only be able to be given by advisers many who, by the way, may also receive potentially conflicted compensation from the purchase of the annuity.

I wasn’t sure how we were going to able to solve this problem, as there has been bigger fish to fry in the regulatory scheme (such as insurer insolvency risk and education) before we even got to this point. Quite unexpectedly, the new rules will permit annuity contracts under commission arrangements be sold as long as the adviser is willing and able to “pay the piper” and comply with the Best Interest Exemption, as it really expands the current state of affairs as provided under PTE 84-24. The “if” is that it will be dependent on the DOL working out some of the quirks and potentially fatal logistical challenges in some of the proposed terms of that exemption. But that is the purpose of the comment process, which will flush out the most legitimate of these issues, and hopefully cause appropriate changes. This will be a robust comment process, no doubt.

The second is an example of what I truly hope is merely unfortunate drafting.  In Section VI of the Best Interest Exemption, the DOL flatly states that :

“In addition to prohibiting fiduciaries from receiving compensation from third parties and compensation that varies on the basis of the fiduciaries’ investment advice, ERISA and the Internal Revenue Code prohibit the purchase by a Plan, participant or beneficiary account, or IRA of an insurance or annuity product from an insurance company that is a service provider to the Plan or IRA….purchases of insurance and annuity products are often prohibited purchases and sales involving insurance companies that have a pre-existing party in interest relationship to the Plan or IRA.”

The DOL then goes on to say that the Best Interest Exemption will apply to plans with less than 100 employees to permit such sales. What this appears to say is that an insurance company with an existing relationship with a plan, cannot provide a new annuity (such as those for providing lifetime income) to a plan participant without it being a prohibited transaction or, for small plans, using the Best Interest Exemption or,  for large plans, apparently using the large plan carve-out rules.

What is troubling about this broad statement is that it seems to ignore the statutory exemptions for the purchase of annuities under ERISA Sections 408(b)(2) and 408(b)(8), and unnecessarily forces annuity purchases into the burdens of the Best Interest Exemption or the large plan carve out rules. But even worse, before these new rules come into play, the DOL seems to be saying that plans cannot purchase lifetime income annuities-including QLACs- from insurers from whom they have already purchased a contract or which is serving the plan unless they somehow comply with PTE 84-24 for more than just commission payment. Please say it ain’t so!