Business of Benefits : Employee Benefits Lawyer & Attorney : Law Office of Robert J. Toth, Jr. : 403(b) Plans, Annuity & Insurance Law : Business of Benefits Blog

• Comments
• Trackbacks
• Print This
• Email This

With the passing of another year, I first must express my heartfelt appreciation for the support that you have given this blog over the years.  Nick Curabba and I first set it up in 2008, following the lead and advice of Jerry Kalish. There never seems to be a shortage of interesting things about which to write. Thank you.

One of the things which has been keeping us very busy lately is  something very unusual: we have been doing substantial research into the allocation of fiduciary obligations. 

• Comments
• Trackbacks
• Print This
• Email This

• Comments (1)
• Trackbacks
• Print This
• Email This

A number of friends, and other commentators, had suggested to me that I was perhaps “overstating” the position I had discussed on my last blog regarding the delivery of 404a-5 notices to non-electing participants in an elective deferral plan. It was a very kind way of saying that I was wrong. After looking at the way I wrote the blog, I’d have to agree. I have retracted the posting. This is the first time I have had to do this in nearly five years of postings, but I strongly suspect it will not be the last. As one of my early mentors once exclaimed to me: “Toth, this stuff’s hard!” -though he did NOT use the word “stuff….” 

• Comments
• Trackbacks
• Print This
• Email This

The DOL has long treated the revenues sharing programs (such as 12b-1 and sub-transfer agent fees) related to investment funds in the same manner as the SEC:  as an integral part of the funds’ operating expenses. This choice, however, has the side effect of the actual amount of the revenue sharing not ever having to be disclosed under ERISA’s various disclosure schemes. So, for example, the actual amount of revenue sharing generated by the vast majority of plan investments is exempt from disclosure under Schedule C as long as the prospectus describing the revenue sharing formula is delivered to the trustee; 404a-5 exempts disclosure of these amounts from the other disclosures required on participant statements as long as the revenue sharing is part of the fund operating expenses under the model disclosure chart; and the 408b-2 regulations and PTE 84-24 only require disclosure of the formula used upon which the compensation will be based.

• Comments
• Trackbacks
• Print This
• Email This

Pension funds and insurance companies share a little discussed attribute, one which I have mentioned from time to time on this blog: they are both great drivers of capital formation.  One of the unique aspects of capital formation through these entities is the function of time: it takes time, to quote the bankers from the movie Mary Poppins in the infamous "Fidleity Fiduciary Bank"  scene, to “build railways through Africa” (or even California, for that matter). Pension funds and insurance general accounts are of a nature uniquely suited to such investment, the commitment to which often may span decades.

• Comments
• Trackbacks
• Print This
• Email This

A couple of decades ago, I attended an ERISA litigation conference where one of the topics of discussion was the potential for lawsuits from participants who were placed in stable value (then known as "fixed funds") investment funds in a 401(k) plan, who would claim somehow that it was a fiduciary obligation to optimize gains in such plans. I scoffed at those comments then, as I do now.

I bought my first shares of stock when I was 16, using $300 of savings from my Detroit News paper route collections to buy into Continental Telephone, American Airlines and Georgia Pacific.  I had studied these (and other) companies under the tutelage of my stepfather, a civil servant in Wayne County, whose passion was the stock market. At that time, Merrill Lynch had a broker in its Downtown Detroit office which specialized in small, odd lot sales. And yes, I ordered delivery of the stock certificates, and enrolled in those companies' dividend reinvestment programs.  Ahh, the days of Lou Rukeyser and Wall Street Week.

It is this long familiarity with the equity market which had caused me to challenge the wisdom of the QDIA regs when they were first proposed. Though I very much understand those who are concerned about the importance of smart investing in retirement plans, I remember more than one conversation with Ann Combs about the concerns I had about a default fund being equity based. Markets do go down, and employees tend to trade investments in defined contribution plans at inopportune moments. As I've noted in a past blog, ERISA Section 404 demands that the funds be invested in such a way to minimize the risk of large losses, not to optimize gains for adequate retirement. Optimization may be a laudable public policy position, but a fiduciary standard it is not.

Even today, I advise clients about the downside of choosing an equity based investment as a default.  I actually don't  think the QDIA, as currently designed, is necessarily prudent.   But for the QDIA reg granting relief, choosing a default investment fund based on equities could cause fiduciaries some exposure. And even though an employer may have a legal defense to the participant losing money on a default fund because of the QDIA rules, it is the employer, not the regulators, who have to deal with the bitter employee who has lost funds under such an election. It may be legally defensible, but it isn't necessarily right-or the right thing for participants.

So finally we have the Bidwell case, involving a platform I helped design.  An employer changed its default fund from a insurance guaranteed account type of fund to an equity based QDIA just as the market was entering into the Great Recession's downturn.  Those participants who's funds were moved lost substantial value. They sued, but the employer prevailed. In that the employer had complied with all of the particulars of the QDIA rules, there was no fiduciary breach, and the employer was not held liable for those losses.

Though we legally applaud the ruling, and the affirming status it gives to the QDIA regs, there really are a couple of "darker side" takeaways from this case: if you are doing a QDIA, make sure you are doing it right. Otherwise, there may be exposure, as there is nothing inherently prudent about target date or lifecycle funds as a default investment fund. The second is to not discount the thought that  "prudence" as a standard still applies to other default investments, and that the QDIA may actually be putting participants at a disadvantage.

  __________________

• Comments
• Trackbacks
• Print This
• Email This

One of the more difficult questions that has arisen under the 404a-5 participant disclosure rules is related to those pesky "old" 403(b) contracts. In the multiple vendor ERISA world, where a number of vendors have been in and out of the plan over decades, the question becomes whether-and to what extent-the 404a-5 disclosures have to be made under those contracts into which deposits could no longer be made.  I had heard of a number of practitioners and consultants who had hoped that these disclosures would not have to be made for such contracts.

The DOL's FAB 2012-2 answered this question in two parts. The first is in Q2, where the DOL exempted from coverage those "old" contracts which are also excluded from 408b-2 and Form 5500 treatment (that is, those contracts issued before Jan 1 2009,and into which no deposits were made after 12/31/2008; the rights under the contracts run solely to the participant without any involvement by the employer; and the amounts in the contract are fully vested).

The second part is in Q15. Here's what Q15 says:

"Q-15: Must a plan administrator furnish the disclosures required under paragraph (d) for a designated investment alternative that is closed to new investments, but that allows participants and beneficiaries to maintain prior investments in the alternative and to transfer their interests to other plan investment alternatives?

A-15: Yes. A plan administrator must furnish the disclosures required by paragraph (d) of this regulation to participants and beneficiaries for each designated investment alternative on the plan’s investment platform even if the alternative is closed to new money. In the Department’s view, the required disclosures are as important for deciding whether to transfer out of a designated investment alternative as they are for deciding whether to invest in a designated investment alternative. Consequently, participants and beneficiaries are entitled to, and have the same need for, information about a designated investment alternative that is closed to the inflow of new money as a designated investment alternative that is accepting new money. The plan administrator is not required, but may choose, to provide the disclosures required by paragraph (d) about the closed alternative as part of a comparative document furnished only to those participants or beneficiaries that remain invested in that alternative."

This means that, for those "old" 403(b) contracts not excluded under Q2, the 404a-5 disclosures will still need to be made, even though the only act participants can take is to move money from those contracts. This Q15 also makes it clear that the disclosure only needs to be made to those who hold those contracts, if the plan administrator so elects to do so.

What really comes into play here is 408(b)(2). 403(b) plan sponsors have all, by now, been told by vendors which of these "old" contracts are not excluded from the plan for these purposes. This means that, unless the plan sponsor disagrees with the vendor, they now have a list of contracts for which 404a-5 disclosures will need to be made. Often times the employer will not have the contact information for former employees holding these contracts, but these former employees are still considered plan participants. Sponsors will need to work with their old vendors to get the data they need in order to make the participant disclosure, which those old vendors seem to be required to give.

And there really isn't an easy answer for these sorts of circumstances, given Q21:

"Q-21: Must a plan administrator furnish a single, unified comparative chart or may multiple charts, supplied by the plan’s various service providers or investment issuers, be furnished to participants and beneficiaries?

A-21: Plan administrators may furnish multiple comparative charts or documents that are supplied by the plan’s various service providers or investment issuers, provided all of the comparative charts or documents are furnished to participants and beneficiaries at the same time in a single mailing or transmission and the comparative charts or documents are designed to facilitate a comparison among designated investment alternatives available under the plan. However, as stated in the preamble, permitting individual investment issuers, or others, to separately distribute comparative documents reflecting their particular investment alternatives would not facilitate a comparison of the core investment information and therefore would not satisfy the plan administrator’s obligations under paragraph (d)(2)."

For all the noise which arose under 408(b)(2), these kinds of issues demonstrate that the more difficult challenge for 403(b) plan sponsors swill be 404a-5.

• Comments
• Trackbacks
• Print This
• Email This

Now that the initial 408(b)(2) disclosures are out, the challenge becomes understanding them. Beyond just understanding whether or not the fees disclosed are reasonable (a challenge in itself), the disclosures do something arguably more important: they take us behind the looking glass, opening a window to a world with which most are not familiar, but which is critical to the operation of 401(k) and 403(b) plans. The disclosures provides hints to, and sometimes disclose, the complex series of relationships and financial arrangements which make possible the daily trading and investing of the assets in individual account plans, on both NAV and insurance platforms, and the manner in which those parties involved in those relationships are paid for those services.

• Comments
• Trackbacks
• Print This
• Email This

It has been quite a time the past few weeks, with working through the details of MEP transitions to the 408(b) 2 July 1st effective date. With a little break to come up for air, I’d like to comment on something for post July 1 consideration, the variable non-registered group annuity contract.

This type of contract remains one of my favorite products in the 401k space. It can, if so designed, serve merely as an efficient investment platform, or serve as a complete package of financial and administrative services, with flexible pricing and compensation. Most of these contracts have within them the fixed account, which typically has enhanced guaranteed returns of the sort never available out of money market funds or the non-insurance “stable value” funds. Wirehouses and their reps typically have a great deal of disdain for these products, which I could never quite understand. Biases, though, often do get in the way of sound businesses judgments.

These contracts, however, are not simple investments. They have a number of moving pieces , which can make them a challenge to review for 408b2 purposes. And many of the insurance company disclosures I’ve seen are far more complicated than need be.

So I offer the following list for these who need to look at the disclosure related to these products under 408(b)-2:

-Trust or not. These contracts do not need to be held by a trustee, but sometimes they are. You need to know if they are so held, because the trustee will be a CSP, and their fees will need to be disclosed and understood.

-Fixed account or not. Most of the contracts have a fixed account into which variable account assets can be transferred. The fixed account, if one which is based on the insurer’s general account, will have no separate 408b2 disclosure. So don’t look for one.

-Variable separate accounts. The assets in these accounts are plan assets. If they hold mutual funds, you typically will not find an investment management fee, but you may find a sort of account fee. Take a look at it. If the funds in the account are actively managed outside of a mutual fund, look for a separate investment management fee.

-Fiduciary status. Depending on the structure of the separate accounts, the insurer may be a fiduciary of the separate account (they’ll never be one with regard to the fixed account). Look for whether or not, and to what extent, they have fiduciary status.

-Allocation models. Many insurers are offering asset allocation and management programs to plans and participants, for managing the separate account investments. Look to see if there is fiduciary status involved in these programs, and the fees related to them.

-Contract charges. Most of these contracts have separate contract or administrative charges. These are related to the fact that they really are providing a package of financial services (such as free trading between a wide range of mutual funds, and in active monitoring those funds). In assessing this fee, make sure you understand the sorts of services you are getting for that fee.

-Termination provisions. Look for surrender charges and market value adjustments. Sometimes, they are worth it given the rate of return being paid under the general account, and for payment of services from your insurance agent. But understand them.

-Commissions. Look to the amount of commissions being paid, and whether you are getting the support you need. Commissions are not bad things; as a matter of fact, they are necessary for many plan sponsors to get the kind of information and support they need in order to adopt and maintain the plan. Just make sure they are reasonable.

-Annuity disclosure. Virtually all of these contracts offer the right to annuitize at a certain prce. You will likely receive this disclosure, but they rarely have a significant  impact on the fees charged on the investment portion of the contract. Unless you are cnsidering offering anutization, don't spend a lot of tme on this.

By the way, the issues related to a registered group annuity contract, which are typically offered in the 403(b) space, can be different. I will handle those in a separate posting. 

• Comments
• Trackbacks
• Print This
• Email This

Dave Walters, a partner from Bodman, and I led a rousing discussion on ERISA Accounts at the last meeting of the Great Lakes TEGE Council. It was an eye-opening discussion, with the Council members exploring a number of significant issues which many of us had not previously considered. Not only are there a number of ERISA rules to be considered, but our conversations also uncovered a few tax qualification rules as well.

"ERISA Account" is really not a defined term-anywhere-which is a problem in and of itself. So, for purposes of this piece, I refer to it as either an asset pool, or identifiable credits, that can be used at a plan's direction for plan purposes.   It is interesting what happens when you take time to discuss things openly with other professionals; a lot gets flushed out.  One of the important things we discussed was the differences in ERISA Accounts depending on the funding source. Working the details of the ERISA Account really involves working the details of the underlying investment product.  

Just take just one iteration of how ERISA Accounts can be funded, 12b-1 fees from mutual funds, for example. Though plan assets are used to purchase investment company shares, the actual assets within the mutual fund are not considered plan assets because of very specific ERISA rules (the shares owned by the plan are actually the plan assets; the underlying investments of the mutual fund itself are not). The mutual fund is governed by a board of directors, which is responsible for adopting any 12b-1 program that the fund has, and the program determines whether or not such funds are even payable to a plan to fund an ERISA Account. Any 12b-1 fees are paid by the mutual fund itself, not by the investment manager of the fund or the rep selling/advising-on the fund (though those parties may, themselves, be able to create ERISA Accounts if done properly, but not from mutual fund assets).  Though these 12b-1 fees may be considered indirect compensation for 408b-2 purposes, and even though they may be subtracted from the fund's value in determining the daily Net Asset Value of the shares held by the plan, the payment of the 12b-1 fee itself would not, generally be considered the payment of a plan asset.

One of the issues discussed was whether, if the plan had the legal right to that payment, whether that payment is a plan asset (or is the right to the payment an asset?).

If the 12b-1 payment is made to the plan's trust, it is a plan asset. But what if, instead, it is paid directly to the TPA, who uses it to offset administrative costs under its contract with the plan? Is it a plan asset? What about the advisor, or the plan's investment manager (particularly if it also manages the underlying mutual fund?).

This is just one example. Even within mutual funds, there are a variety of ways to handle the ERISA Account, and just wait until we discuss annuity contracts and collective trusts.  Determination of the plan asset status is just one of the issues (albeit a critical one) for any iteration of an ERISA Accounts, and we understand there is a pending DOL Advisory Opinion request somehow dealing with this sort of issue.  But then there are the questions of its accounting and treatment under the plan, the allocation issues, the forfeiture account issues, and even whether or not "definitely determinable benefit" becomes an issue if too much discretion on allocation is granted under the plan document. 

The only thing really clear is that there are a number of issues to resolve and, like prohibited transactions, the answers to them will lie in the specifics of the design of the ERISA Account; what type of entity funds it (and its relationship to fiduciaries and other parties in interest); how it is used; how it is terminated; what kind of contract commitment is involved; how is it documented and substantiated; how does it work in 403(b);  and others.

Whew. Here we go again......

• Comments
• Trackbacks
• Print This
• Email This

With the current attention being paid to annuities by the recent activity of Treasury, those plan sponsors and their advisors who may be interested in annuities in their 401(k) plans may also be tempted to take a close look at the wide array of annuities that are available for the IRA and individual marketplace for their selections. After all, there seems to be a lot of different choices that are available out there, and some of the features offered look pretty good. These include a wide array of guarantees and and other things which may well seem appropriate for many 401(k) plans.

Think twice, however, before attempting to purchase what I call a "retail," or "nonqualified" annuity for a qualified plan. Annuities which are designed to be purchased by individuals outside of qualified plans, or are designed for IRAs, may actually cause a number of difficulties for the 401(k) plan. They really should only be used in small, specialized arrangements where the plan sponsors are cognizant of the special challenges presented by these products.

These retail products are typically designed to be sold individually by insurance agents and registered reps to what is sometimes called the "high net worth" (HNW) market. The are often sold as part of complex estate planning efforts, or for business succession. What generally makes these things inappropriate for the typical 401(k)plan is that:

 -They are complex. Simple annuities can be complicated enough, but the terms and conditions for the sometimes exotic guarantees within the typical GMWB contract or GMAB contract can make your head spin. As a fiduciary, it will be difficult to explain these complications on a mass basis, and many of them are just inappropriate for the smaller account balance.

-They can be expensive. In part because they are so complex, and can take a bit of effort to fit into the financial scheme of the policyholder, their fees are can be a bit "salty."  The mortality and expense charges are generally well above those you will find in a 401(k) plan, and the commissions paid on these products can be significant.

-Lack of ERISA compliance support.  Financial service companies are interesting places. Products sold to individuals typically are on different systems, and administered by different staffs, than those sold to retirement plans.  Administratively, even if one comes to terms with the complexity and the expense, the insurance company may not be set up to provide the 408b(2) disclosures; the 404a-5 information; Schedule C or Schedule A information; and may not even have the suitable SSAE-16 opinion.

-Minimum premium. These retail products can have hefty minimum premium requirements which, if applied in the qualified plan context, could cause serious Benefits, Rights and Features discrimination issues.

 -Harris trust.  And, of course, our old friend "Harris Trust." Products sold to the individual marketplace never had to deal with the issues related to protecting the general account assets of an insurer from being considered "plan assets" subject to ERISA governance. Many of these retail products do have a "fixed fund" based upon the investment in an insurer's general account. If the terms related to that general account benefit are not designed properly, the insurer may have some challenges.

Should your client really want the retail product, the solution then is to purchase it as a part of a rollover into an IRA.

  __________________

• Comments
• Trackbacks
• Print This
• Email This

Freedom and liberty are not merely themes sounded by politicians in political campaigns, or in rousing marches by military bands (though I am personally  particularly fond of them!), nor are they ideas which you will typically see being discussed in a piece about retirement issues. But they are themes woven into the fabric of our our everyday life, without our often even even being aware of them. They form not only the basis of our own civil society, but (believe it or not) are deeply embedded in the holy texts of the major religions. 

But there is a risk nowadays in even referencing these two grand ideas in today's political environment: instead of being viewed as the firm basis of how the vast majority of us quietly operate, they seem to have been outrageously hijacked by political extremists (such as of the libertarian/Ron Paul/ Tea Party sort-of which I am not so inclined) for some specific end.

In spite of all that, there is something well worth mentioning along these lines about the striking impact of the work we do, something we are not prone to see while working the fine minutiae of our chosen profession.

If we step back for a minute, we can see the extraordinary policy underlying 408(b)(2), the prohibited transaction rules and the exclusive benefit rules (which apply even to non-ERISA plans).  These rules seek to set aside and protect from others the individual wealth of those who accumulate benefits under these plans. It became pretty plain to me while reading Absolute Monarchs, by John Norwich (a history of the Catholic Popes, which really is a brief history of the absolute power of royalty as well as the church over individuals), where, historically, an individual's financial well being was wholly dependent on the whims of powers that be.

We now have something very odd in man's modern history. The value of the funds which are now protected for participants in retirement plans by the Code, ERISA or both approximates 85% of the value of publicly traded securities in the United States.  Though this seemingly huge amount is not yet adequate to establish broad retirement security, it is material enough to take note: these pooled funds are outside of the legal reach of the unaccountable "whims" of those who have something other than the best interests of the participants at heart.  Imagine that. A significant and growing portion of society's wealth is institutionally dedicated in funded pools to the individual's well being, which are difficult to access by an abusive use of power which has so often corrupted society-and jeopardized freedom and liberty-in the past. 

The only way this really works, however, is by things like 408(b)(2); by enforcement of the prohibited transaction rules; and by giving serious attention to the exclusive benefit rules. And all of this is dependent on what appears to be non-sensical minutiae upon which we daily work.

There is a reason I like doing what I do......

• Comments
• Trackbacks
• Print This
• Email This

 I’ve had a number of responses to my “Timing and the ERISA Account” blog of last week: this topic seems to be front and center with a number of folks right now. Given the sorts of comments I received, I thought I’d expand a bit from that initial, almost cryptic, blog.

“ERISA Accounts,” or “Fee Recapture Accounts,” or “ERISA Budgets” are growing in popularity, and are becoming a frequent feature in the 401(k) and 403(b) space. They take two forms: a “credit” with the plan vendor, where the vendor pays up to a certain, agreed-upon amount for plan administrative services as part of the vendor ”package;’ or the “funded” sort where the vendor actually makes a cash payment to the plan, usually based on some sort of revenue sharing schedule. These typically include 12b-1 fees generated from mutual funds, but may also include such things as surrender charge reimbursements or other negotiated items.

In 2007, the ERISA Advisory Council’s Working Group on Fiduciary Responsibilities and Revenue Sharing Practices issued a report which did a nice job on lying out a number of key issues related to this practice. It also recommended that the DOL issue guidance regarding the treatment of revenue sharing received by a plan, specifically regarding the allocation of revenue sharing received by a plan. The DOL has had its hands full in the past few years, so it is little wonder that it has yet to act on providing this guidance.

There all sorts of issues which come up related to these accounts, but the most pressing of them appears to be associated with the funded accounts: the structure of these accounts within the plan (are they like forfeiture accounts?); the method of the allocation of those funds to participant accounts once expenses have been paid; and the timing of those allocations. My previous blog just addressed the timing issue.

The structure of these funded accounts is actually interesting: recordkeepers aren’t generally accustomed to establishing an employer level account, and many recordkeeping systems are not well suited for this function.  The employer level accounts that do exist are typically forfeiture accounts, and the rules governing them can differ from the ERISA Account-which also means that there are a number of different reasons you want to somehow account for ERISA Account deposits differently than forfeitures. These Accounts probably need to be adopted by some formal action of the plan’s fiduciary, in accordance with the authority it is (hopefully) granted in the plan document, which also discuss how they will be used and eventually allocated. Absent that, the general fiduciary authority within the document will need to be relied upon.

With regard to how these funds may be allocated to participant accounts (particularly where there is an “excess” left after certain plan expenses have been paid. Remember, at least in the funded accounts, they cannot be used for settlor expenses. There are interesting prohibited transaction issues as well if the unfunded credits are used for settlor functions), there seems to be a growing sense that ERISA requires that there be some sort of “matching up” of these allocations with the assets which generated them. There is little doubt that this could be an acceptable method of allocation, and there is at least one vendor which I know of which, very nicely,  closely tracks this.

What seems to be getting lost in the discussion related to these allocations is the fundamental rule that participants only have a beneficial interest in the plan. They have no right to any asset, and they only have the right to direct the investment of their accounts because the employer has decided to let them do so instead of the fiduciary. Any funds generated by those investments are due to the plan, not necessarily to any particular participant. Whatever allocation method is chosen by the fiduciary need only be prudently made. It is telling that in Field Assistance Bulletin 2006-01, the DOL stated that (in addressing the allocation of class action settlement proceeds):

“…. a fiduciary’s decision must satisfy the “solely in the interest of participants” standard of section 404(a)(1) of ERISA. In this regard, a method of allocation would not fail to be “solely in the interest of participants” merely because the selected method may be seen as disadvantaging some affected participants or groups of participants. In deciding on an allocation method, the plan fiduciary may properly weigh the competing interests of various participants or classes of plan participants (e.g., affected versus current participants) and the effects of the allocation method on those participants provided a rational basis exists for the selected method and such method is reasonable, fair and objective.”

In short, though “tying back” the ERISA Account payment to the participant account which generates them will generally be considered prudent (though I can see circumstances where it would not be, such as if it were expensive to do so), and can be a good "market differentiator" for a vendor, I think it is a mistake to claim that this is the result demanded by ERISA.

For all these Accounts, there are also a number of interesting 408(b)(2), Schedule C and Schedule A issues with which plan sponsors and vendors must cope-and which I will not address here.

__________________

• Comments
• Trackbacks
• Print This
• Email This

It is not often that one gets to hearken back to the very basic law governing 401(a) plans in addressing an issue, but one of the key questions related to the funding of “ERISA Accounts” provides just such an opportunity. One of the most fascinating of the issues related to these accounts (and there are a number of them coming out of the woodwork as their popularity grows, as well as a number of thoughtful papers being written on these accounts) is the question of how long can the funds can remain in the ERISA Account before needing to be allocated to participant accounts.

We know that the IRS has taken a clear position on the timing of the “spend down” of a forfeiture account, and that funds in the forfeiture account must generally be allocated within the plan year that forfeiture is made (this rule, by the way, would not apply to 403(b) plans). But this is based on 401(a)(8) and the required treatment of forfeitures of contributions under 1.401-7(a)- and the ERISA Account deposit is not a forfeiture. We also know that the DOL has, at least on one occasion, deferred to the prudence standard (see, for example, FAB 2006-1) in managing these accounts.

We do know that a plan document needs to contain language outlining the management of the ERISA Account (and that the Account should be accounted for separately from the forfeiture account), unless the fiduciary is otherwise able to establish procedures under its general fiduciary authority. But what should be the standard under the Code that the plan should adopt?

I think the answer goes back to the “exempt purpose” rules which govern tax-exempt organizations. If I recall my research as a first year associate in Detroit with the good Rasul Raheem, Dr. Willard Holt, Richard Smart and Roland Bessette, under the tutelage of the fine Stan Kirk, the trust of a 401(a) plan is, after all, an exempt organization under 501(a), and the assets of a tax exempt organization are to be used in the fulfillment of the organization’s exempt purpose.  The exempt purpose of a 401(a) trust is, of course, to provide a pension or profit sharing benefit exclusively for employees or their beneficiaries. So, hanging on to the funds in this ERISA Account for too long and not using them for providing this benefit or supporting the operation of the plan would be a failure to use the assets of the "exempt organization" in furtherance of the trust’s exempt purpose. This, ultimately, really leaves you with that “reasonable” period that the DOL suggests to be the standard.

This may also mean that there may not be a standard for a non-ERISA 403(b) plans (as they are neither not subject to 401(a) or the fiduciary standards of ERISA). Any effort to impose a standard would have to be related somehow to the failure to purchase an annuity for an employee. But that may not even matter, for the tax exempt organization would not be otherwise taxed on that amount anyway, and it is not an event which would disqualify the plan.

With 403(b) plans in mind, by the way, make sure the 403(b) ERISA Account is invested in mutual funds or in an annuity account, not just to some holding account at a financial institution. See my blog on “The Trouble With 403(b) Cash.”

I knew that research I first did years ago when trying to figure out how a pension fund worked would eventually turn out to be useful sometime…….

__________________

• Comments
• Trackbacks
• Print This
• Email This

In the summer of 1999, I left my position as in-house counsel for an insurance company and returned to the private practice of law. As a result, I rolled the funds held in my 401k plan into an IRA. I was a complete novice when it came to investing at the time but had recently heard a commentator on NPR claim the rise of the Internet represented a paradigm shift in the global economy. Based upon this information, I moved half of my retirement funds into a “New Economy Fund” and the other half into a “ContraFund.”   When the dot.com bubble burst a year later, I realized I could have fared just as well if I had flushed half of my money down the toilet and stuck the other half under my mattress.

Several years later, one of my friends – a Vice President in the Claims Department of my prior employer – decided to retire. The company was owned by General Electric at the time, and its 401(k) plan offered a surprisingly paltry array of investment options - most of which were dogs. Because the price of GE stock had skyrocketed under Jack Welsh’s leadership, my friend chose to roll all of his retirement plan funds into GE stock. A year later, he too would have been in about the same shape as if he had flushed half his funds down the toilet. 

Needless to say, my friend and I would have benefited greatly from the counsel of an investment professional at the time we made these decisions. However, no advisor reached out to us and, now that I have spent the past several years providing legal counsel to advisors in the retirement plan industry, I understand why.

• Comments
• Trackbacks
• Print This
• Email This

• Comments
• Trackbacks
• Print This
• Email This

By now it should be apparent the Department of Labor (“DOL”) has opened a proverbial can of worms by proposing to expand the category of service providers who will be subject to ERISA’s fiduciary standard. Not only has the proposal been met with a tidal wave of negative comments from industry insiders, but Members of Congress from both parties have also weighed in with their objections.

While it may come as a surprise that an attorney who works with retirement plan professionals would support the DOL’s attempt to expand the fiduciary standard, I actually agree with the assertion that a change in the law is needed. As in-house counsel for a broker-dealer that supported the nation’s largest network of independent retirement plan professionals, I pushed hard to require our registered representatives to adopt the principles that form the basis for the proposed rule. Specifically, I encouraged our registered representatives to consider moving their practice to a fee-based advisory platform and affirm their fiduciary status. For those unwilling to make the switch, I pushed to require client agreements that affirmatively stated the representative was not intending to act in a fiduciary capacity. Like the DOL, I have my share of battle scars from the effort.

However, while I agree with the DOL’s goal, I cannot support its methodology for bringing about this change. Specifically, I believe the proposed rule (as currently drafted) violates the constitutional separation of powers by permitting an executive branch agency to rewrite existing law rather than interpreting the law as it is currently written.

• Comments
• Trackbacks
• Print This
• Email This

I would think that it is a basic law of physics that, whenever you attempt to apply a number of different and complicated principles to a single object, that the consequences on that object will be hard to predict, or even readily ascertained.

So it is with a potential impact 408(b)(2) may have on many 501(c)(3) sponsors of ERISA 403(b) plans. It shows up when you take an 403(b) ERISA plan, impose a fundamentally new set of basic principles (by way of the 2007 403(b) tax regulations); revoke its exemptive relief  from reporting requirements (the Form 5500); while nearly simultaneously superimposing a tremendous new disclosure scheme (participant and service provider disclosures);  there are inevitably going to be some unusual results.

Take a typical example. A hospital sponsors an ERISA 403(b) plan with 10,000 current employees. Over time, it has merged with a number of different hospitals, each which had separately maintained its own 403(b) arrangements in the past with a wide number of vendors. The hospital, in anticipation of the problems with the 2007 tax regulations, consolidated all the affiliates plans into a single platform on 1/1/2009.

Over its history, though, it and its affiliated hospitals had selected and deselected a number of other vendors (no one is quite sure how many) many with whom they have long lost contact.

All of these contracts over the history of the plans have been owned by the individual participants. Though the employer did have an audit done, it did not report many of those "lost" deselected vendor contracts, as it didn't know much about them or the vendors. They reported those old plans as merging with the 2009 Form 5500.

The deselected vendors all still have some old contracts that participants have hung onto,  even after those participants have left the employee of the hospital. The records of the vendor shows that these were ERISA contracts, and that they earn a "mortality and expense", or some other contract charge, and they are indeed "recordkeepers" for the investments in those contracts as defined by 408(b)(2). In order to prevent that compensation from being prohibited, and from the need to be prudent, the vendor decides to make the required disclosures to the hospital's "responsible plan fiduciary-" with whom they have not had contact for many years.

Imagine that fiduciary's surprise when it receives these "blasts from the past," the ghosts of decisions made long ago, often by folks with which they were never affiliated with at the time decisions were made. 

The hospital never knew about these contracts for which they are receiving disclosures, but can't ignore them.  They have just completed all of their work with regard to participant fee disclosures, but now someone is telling them that there may be a dozen more companies' investment products upon which they have to report. They also just filed their 2010 Form 5500, and didn't report many of these contracts as assets of the plan.  

Now what? This is just one scenario, they are others which may be likely once vendors seek to comply with 408(b)(2) on their books of old ERISA contracts. Though the regulator view may be that this flushing of old contracts is a good thing, it can actually be quite a mess to sort through-including whether or not you still have relief and can exclude them from compliance responsibility under Rev Proc.2007-71, and just at a time when the IRS is beginning their 403(b) 2009 audits. I suspect that the management of the problems can only resolved by closely looking at all of the particular facts which will apply to the plan.

I leave it to your imagination as to the myriad of difficulties this may cause; as there are potentially many. I also may be wrong, and this may never happen.......

• Comments
• Trackbacks
• Print This
• Email This

I drafted the following article for the DCPI Weekly Exchange as part of an ongoing series of comments on fiduciary issues.  DCPI's newsletter can be accessed (with a free subscription) at http://www.dcpinstitute.com.

As I review advisors’ websites and advisory agreements, I sometimes see “plan design consulting” as a service offered to retirement plan clients. While there is nothing inherently wrong with assisting clients with the design of their plans, I would caution that the DOL has long viewed such services as being materially different from other non-fiduciary activities. 

Specifically, in a publication entitled “Guidance on Settlor v. Plan Expenses,” the DOL noted:

The department has taken the position that there is a class of activities which relates to the formation, rather than the management, of plans. These activities, generally referred to as settlor functions, include decisions relating to the formation, design and termination of plans and, except in the context of multi-employer plans, generally are not activities subject to Title I of ERISA. Expenses incurred in connection with settlor functions would not be reasonable expenses of a plan.

While the same publication claims that, “Plan design expenses clearly constitute settlor expenses and, therefore, are not payable by the plan,”[1] the basis for the DOL’s position is less than clear.  In fact, the term “plan design” is never used in ERISA. Neither is “settlor expenses.” Instead, the DOL appears to draw support for its position from the law’s emanations and penumbras. 

For example, in Advisory Opinion 97-03A, the DOL indicated its position was required, in part, by the following language in §403(c)(i):

(T)he assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan. 

In order to tie its position to this statute, the DOL must necessarily conclude employers do not form retirement plans “for the exclusive purpose of providing benefits to participants in the plan” but, instead, primarily to further their own interests. To be fair, our Supreme Court has opined that employers derive some incidental benefits by forming a retirement plan (e.g., in the recruitment and retention of employees).[2] Surprisingly, though, the DOL brushed aside any reliance on this argument, arguing that such incidental benefits are not sufficient to convert an activity into a “settlor expense.”[3]

As a result, advisors should be forgiven for not having a good understanding of when their advice becomes a “plan design expense” that cannot be paid from plan assets. The best guidance the DOL has offered in that regard is that, “Typically, plan design expenses are incurred in advance of the adoption of the plan or a plan amendment.”[4] 
 

• Comments
• Trackbacks
• Print This
• Email This

I drafted the following article for the DCPI Weekly Exchange as the first of an ongoing series of comments on fiduciary issues.  DCPI's newsletter can be accessed (with a free subscription) at http://www.dcpinstitute.com.

Okay, I will admit it.  I have not spent my entire legal career focused upon ERISA.  In fact, before joining National Retirement Partners as in-house counsel to its broker-dealer and registered investment advisory firm, I served as counsel to an insurance company and, yes, as a plaintiff's attorney. 

However, having such varied experience can sometimes provide a more nuanced perspective.  Take, for example, the ongoing debate regarding the benefits and drawbacks of serving as an investment advisor to ERISA-qualified plans under section 3(21)(a)(ii) or as an investment manager under section 3(38). 

If you were to merely read ERISA, you would likely conclude there are significant differences in the potential liability being assumed under each role.  After all, an investment advisor, by definition, merely provides advice to the ultimate decision-maker.  By contrast, an investment manager manages the fund's assets on a discretionary basis.  In fact, section 405(d)(1) of ERISA specifically provides immunity to plan trustees for the acts or omissions of an appointed investment manager. 

Unfortunately, some commentators have attempted to use these statutory differences to assert that investment advisors have no legal liability because they are providing nondiscretionary advice, while investment managers completely shield plan sponsors from legal liability by acting with discretion.  Upon closer inspection, however, these theoretical distinctions quickly break down. 

• Comments
• Trackbacks
• Print This
• Email This

But, first, another note of introduction......

It is with great pleasure to announce that my friend and fellow pink-shirted compatriot (many of our industry colleagues may fondly remember THAT story!) Sandy Koeppel has decided to join us as Of Counsel, and to have some fun following his illustrious career at Prudential.  Together with myself, Phil Troyer and Conni Toth, we intend to continue to contribute helping make the U.S. retirement system - which we are all so passionate about - work better. Sandy brings a tremendous wealth of experience in guaranteed lifetime income from employer plans to the marketplace (I invite you to read his bio), and intends to continue to carry this torch. Between us all, we offer substantial knowledge of the design, marketing and distribution of these products.

Sandy, as he mentions below, has also formed Plan Income Consulting & Evaluation Services, LLC (PLICES), a consulting firm which has affiliated with this firm and which provides advisors, vendors and employers consulting services related to guaranteed income products.  

Drop Sandy a note at sek@rtothlaw.com.

Now, his first blog:

The shift from Defined Benefit to Defined Contribution plans as the primary workplace retirement vehicle has eroded the confidence and jeopardized the retirement security of a vast number of American workers and their families. The recently published EBRI 2011 Retirement Confidence Survey finds that confidence among workers in their ability to have a comfortable retirement has dropped to an all-time low. According to the EBRI survey,

"the percentage of workers not at all confident about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent, the highest level measured in the 21 years of the RCS. At the same time, the percentage very confident shrank to the low of 13 percent." The RCS further states that "56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 37 percent report that they and/or their spouse currently have such a benefit with a current or previous employer. Therefore, up to 19 percent of workers may be expecting to receive the benefit from a future employer—a scenario that is becoming increasingly unlikely, since private-sector employers, in particular, have been cutting back on their defined benefit offerings."

These findings along with other results of this survey are disturbing and demonstrate that American workers not only are uninformed but feel challenged, concerned, and threatened about potential declines in their future lifestyle in retirement.

 With the passage of the Pension Protection Act, Congress recognized the need to instill defined benefit-like outcomes into the defined contribution plan universe. The PPA enables plan sponsors to include in their DC plans features such as automatic enrollment, automatic contribution escalation and gain fiduciary protection by offering qualified default investment alternatives deploying professional money management. These important first steps do much to replicate for workers the defined benefit plan experience in the asset accumulation stage. However, up to now, most DC plans do not offer the critical and essential missing piece to assure retirement security: guaranteed lifetime income. There are many reasons for this failure. Chief among them include: legal uncertainty about the rules and standards that apply to the choice of providers; unsettled tax issues (e.g. applicability of qualified joint and survivor annuity rules) associated with new and innovative forms of guaranteed lifetime income; cost and administrative burdens; lack of demand among participants; lack of guidance from the Department of Labor delineating between advice and education for distribution planning and the availability of out-of-plan (retail) vs in-plan (institutional) guaranteed lifetime income solutions if it is desired.    

• Comments
• Trackbacks
• Print This
• Email This

But first, an introduction.... 

Today, we are pleased to introduce the writings of Phil Troyer, who has just joined our firm.  Phil brings a fascinating and badly needed skill set to the retirement plan world: a deep knowledge of the broker-dealer and retirement plan advisor marketplace; practical experience on how ERISA, and its fiduciary rules, actually work (and don't work) in that part of the market;  and, rare for our world, being deeply grounded in how insurance liability coverage actually works for fiduciaries and plans.  Check out his bio n the "About" section of this website, and feel free to contact him at pjt@rtothlaw.com.

Phil's blog piece on being a naked fiduciary:

Are You a Naked Fiduciary?

Much has been written about the Department of Labor’s proposal to broaden the definition of “investment advice” to bring more service providers under the fiduciary standard of care. However, lost in the plethora of articles summarizing its potential effects is a question that should be foremost on the mind of every registered representative who provides services to qualified plans; namely, will I be left without insurance coverage (i.e. “naked”) if I am deemed to be a fiduciary as a result of providing investment advice to my plan clients? 

The answer - which may come as a shock to many representatives - is that it depends. Specifically, it depends upon the specific language used in their professional liability policy to exclude coverage for claims arising from the insured’s status as a fiduciary of an ERISA-qualified plan. 

The basis for the ERISA-fiduciary exclusion contained in most E&O policies is understandable because serving as an officer or administrator of a retirement plan is not generally considered to be a service broker-dealers offer to their clients.[1] Furthermore, separate “ERISA Fiduciary Liability” policies are available for individuals who serve as named fiduciaries of a qualified plan. As a result, insurance carriers have a justifiable reason for ensuring their professional liability policies are not used to bootstrap coverage when a registered representative happens to serve as an officer or administrator of a qualified plan.  Unfortunately, though, these exclusions are not always drafted with sufficient care.

For example, a policy that excludes coverage for “any services performed by any Insured acting as a fiduciary under ERISA,” creates a significant landmine for registered representatives with retirement plan clients because - even under the current definition of “investment advice” - they could be deemed to have acted in a fiduciary capacity by providing investment recommendations to the plan on a regular basis. Obviously, this risk will increase dramatically if the DOL’s expanded definition is enacted to remove the requirement that the recommendations be provided on a regular basis.

Conversely, exclusions based upon the insured’s status as a “named fiduciary, as defined by ERISA” miss the point that the law allows a plan’s named fiduciaries to “designate persons other than named fiduciaries to carry out fiduciary responsibilities.”[2] As a result, the exclusion may not be sufficient to prohibit coverage for a registered representative who was not specifically designated as a fiduciary by the plan but is later deemed to be acting as one as a result of providing management or administrative services to it on a contractual basis.

If insurance companies intend to exclude coverage for services not typically performed by registered representatives (i.e., managing or administering a qualified plan) while preserving coverage for services which are (i.e., providing recommendations regarding investments), then the carriers should be careful to base their exclusionary language on the activity being performed as opposed to the insured’s status as a fiduciary under ERISA. 

At the same time, registered representatives would be well served to dust off their E&O policies to determine whether they will currently have coverage if they are deemed to be a fiduciary under ERISA – especially before a new definition of “investment advice” makes it more likely to occur. Otherwise, they could find they were walking around naked at the time they most needed coverage.

• Comments
• Trackbacks
• Print This
• Email This