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

We have posted a number of blogs and otherwise written over the past year discussing the growing role of the SEC in the retirement plan market. See, especially, the article on the SEC' sand DOL's "Cross Agency Waltz." The ERISA sessions at the National Society of Compliance Professionals, at which I spoke, were particularly well attended.

The fact that the DOL and the SEC held their first ever joint hearings in June, reviewing target date funds, is further evidence of the SEC's continued interest in a field which has been traditionally dominated by the Treasury and Department of Labor.

The SEC's rules have always had particular applicability to the 403(b) marketplace. But the SEC also has leverage into the 401(k) market, a market which often pays scant attention to the agency. in addition to the SEC's  authority to regulate registered investment products,  a participant's interest in a 401(k) plan is still, legally, a "security" under its jurisdiction. 401(k) plan interests  may be exempted from the registration and filing requirements of the '33 and '34 Acts, but they ARE NOT exempted from those laws' anti-fraud provisions. So, the agency has every right to investigate fraudulent activities related to the provision of 401(k) plans to plan participants. This is particularly why last year's  Memorandum of Understanding between the SEC and the DOL-promising cooperation at the investigation and enforcement level- becomes so critically important to retirement plan consultants and practitioners. It will be interesting to see what level of SEC/DOL cooperation we see coming out of the DOL's Consultant and Adviser Program, which is investigating abusive practices of pension advisers.

This is all reinforced by an October 22, 2009 speech to the AARP by Mary Schapiro (Chair of the SEC), reported in BNA Pension and Benefits Daily. Here is an excerpt from that speech which really puts the retirement plan community on notice:

"In my view, financial service firms should engage in responsible product development in the retirement market. Barraging investors with retirement products that feature the latest financial gimmick or marketable fad will not ultimately serve investors’ interests.

America’s future retirees deserve products that they can understand and evaluate. This means that complex fee arrangements or product descriptions should be discarded in favor of simple, clear disclosure.

Our future retirees should have access to products that will help them meet their retirement goals without imposing inappropriate risks. Products offering enhanced leverage and avant-garde investment techniques may be appealing to those investors that want to speculate. But they are not the type of investment products that belong in the retirement portfolio of the average American seeking to provide for security in retirement.

In addition, extolling the eye-popping results of the short-term performance of certain investment products, without focusing on the long-term implications or risks, can result in disappointed investors and potentially angry plaintiffs — not to mention an SEC prepared to be aggressive in enforcing the investor protection rules.

These types of disclosure, product development and marketing issues surrounding retirement products will be areas of focus in the coming year for those of us at the SEC. The burden imposed on those investing for retirement is significant, especially after the market events of last year and we must be committed to assisting those investing for retirement."

 If you didn't believe it before, you probably really need to take notice now. The SEC is very interested in your world.

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, nor to create an attorney client relationship with any party.  

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ERISA really did create some fundamental changes that has broad personal affect. This reposting of a blog I wrote last year provides a good Mother's Day reminder of the importance of the work we do:

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 sometimes helpful to step back and see the personal impact of the things we do.

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 Ford's 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, by the way, is still alive and doing well.

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The mantra of Congress, investment advisors and the DOL over the past decade has been consistent: retirement plan assets must be invested in such a way to provide American workers with sufficient assets upon which to actually retire comfortably. This is as basic as apple pie, and a concept with which one can hardly disagree. It has even been the driving force behind regulatory efforts like the QDIA regs, where stable value or insurance investment options were openly scorned as appropriate default investment options.

As laudable as these efforts have been in the past, and as sound as they still may be, encouraging investment gain for the purpose of providing adequate retirement gain is NOT and has NEVER been the standard by which fiduciaries are judged.

ERISA Section 404(a)(1)(b) is written pretty clearly:

...a fiduciary shall discharge his duties.... by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly imprudent to do so."

There is no talk of maximizing gain. There is no language about providing any particular level of income. There is nothing about testing to see what level of return is needed to maintain a lifestyle. There is no discussion of age based target funds. It is truly based upon the concept of preserving the assets of the trust. 

It is important to re-find this lost concept, particularly as fiduciaries review their investment policies to test whether they are adequate under the current market conditions. This is not an argument against the use of equities, merely that the manner in which one fulfills the duty to minimize large loss necessarily includes investments designed to preserve capital.

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In our anger at AIG, Bank of America, Merrill Lynch and the other holding companies which have sorely abused the public and marketplace trust, we need to recognize  the many good men and women in those organizations who will and do put their shoulders to the wheel without demanding ransom; those who believe in their organizations, the work they do and in their fellow employees who are struggling to make their companies work.   It is sad that they will now take the heat for their abusive leaders. It is often their pay which was first cut, their budgets and staffs first reduced, their jobs first eliminated, even while their executives paid each other far too well.

I sorely hope that the compensation consultants who have had their way in the design of outrageous executive compensation programs do not hold sway in their arguments that exorbitant pay is necessary to attract and maintain a high level of executive talent. Many of us who have counseled the financial services industry over the years do hold many executives in the highest regard, and remain confident in their leadership and heart. They are also disgusted by what they see is happening.  But  we have also seen far too many of them who have gained a position of high authority (and with the concurrent ability to amass great wealth) by their political adroitness rather than business insight; and have seen those who have arrived at positions of inflated pay not by possession of any unusual skill or knowledge, but merely by serendipity and the abuse of the customer's trust.

Let us be careful in our anger, though. Let us make sure that those who work in those companies, the bulk of them, those who do the hard work of designing and operating fine retirement programs, do not become the inadvertent targets of our rage. They have suffered their fools for far too many years, and they know it. It would be unfair now to heap any further insult on them which would only add to the indignities they themselves have suffered over the years from such corrupt leadership.

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