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Robert Toth

Bob Toth has more than 25 years of experience in employee benefits law. His practice focuses on the design, administration and distribution of financial products and services for retirement plans, one which combines elements of ERISA, tax law, insurance law, securities law and investment law for both 401(a) and 403(b) plans. Bob's experience includes implementing 403(b) programs under the new regulations; designing investment products for 401(k) plans; annuitization programs for defined contribution plans; advising on prohibited transactions issues related to retirement plan products and services and their distribution, development of open architecture programs for 403(b) plans; ESOPs and writing and implementing standards for fiduciary and advisory practices. Bob was a partner at Baker and Daniels and spent 17 years in the legal division of Lincoln National Corporation, where he was Associate General Counsel managing the legal affairs of LFG's employer market division. Prior to joining LFG, Bob was a Senior Attorney at Kellogg Company in Battle Creek, Michigan, where he provided in-house counsel for all benefit law issues related to the company. Bob is a Fellow of American College of Employee Benefits Council, and an Adjunct Professor at John Marshall School of Law’s Employee Benefits LLM Program, teaching the 403(b) and 457 plan courses. He graduated from Wayne State University Law School in 1983, and from the University of Michigan in 1978.  Bob is licensed to practice in Indiana and Michigan, and is admitted to the U.S. District Court for the Eastern District of Michigan. His professional associations have included the American Society of Pension Professionals and Actuaries (Member; Board Member of ABC of Northern Indiana; Great Lakes Benefits Conference Executive Committee; Vice Chair, Tax Exempt Plan Committee); EP Program Chair of the IRS Great Lakes TE/GE Council; Co-founder of the Institute for Pension Plan Mgt, Purdue University; Past member of the Advisory Board of the American Benefits Council; Past Chair of the American Council of Life Insurance's Pension Committee; and a member of the American Bar Association. He is licensed to practice in Indiana and Michigan.

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Using an Aggregation Program as a Solution to the Multiple Employer Plan Risk

by Robert Toth
Posted on May 2, 2013

Multiple Employer Plans continue to be an issue for not only PEOs, but for a number of organizations which have successfully used the MEP method in the past to provide “scale” which is otherwise unavailable in the smaller end of the 401(k) marketplace. But for the “bad actors” as in the Hutcheson matter, this scale can effectively provide smaller employers with a high level of fiduciary coverage, well priced investments, a wide variety of non-proprietary investment funds and a greater level of professional service they really could not get elsewhere.

The DOL Advisory Opinion 2012-04 has caused us to take a closer look at how to otherwise achieve this scale. Scale in investments and services, we find, is still possible without using MEP, and in ways which tend to have a lower risk profile for both the MEP sponsor and participating employers.

The attached whitepaper,sponsored by TAG Resources, the applicant for Advisory Opinion 2012-04, "Fixing the MEP: Using an Aggregation Program to Manage the “ASO” Risk in the PEO Multiple Employer Plan” discusses this alternative to a MEP. It does so in the context of addressing the “ASO” problem in a PEO. PEOs, regardless of their position with regard to the application of 2012-04 to their own lines of business, have a problem if they offer their MEPS on an a la carte basis, which is referred to as the ASO ("Administrative Services Only") business.

This paper has application well beyond the ASO issue. It provides some thoughts with regard to the manner in which service providers may be able to effectively provide scale to the smaller case marketplace.

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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.

Tags: Advisory Opinion 2012-04, MEP Aggregation Program, MEPS, Multiple Employer Plans, Retirement Exchange, TAG Aggregation Program

Bringing Some Sanity to Calamity: 403(b)'s New Document Rules

by Robert Toth
Posted on April 5, 2013

A number of years ago, I was in-house ERISA counsel for Kellogg Company (yes, the home of Tony the Tiger). The company’s CEO was in charge of the food manufacturer’s trade group at the time, and he sent me to DC to review and help “fix” the retirement plan for its employees. This was a time prior to even the IRS’s Administrative Policy on Self Correction (“APRSC”-I am showing my age). As I explained to the group’s Executive Committee the issues and the list of horribles which could result, the V.P. for Taxes of Kellogg stopped me in the middle of my presentation and blurted out: “Toth, this s**t’s hard!”

And so it is now, with the new “state of the 403(b) world.” Through fits and starts, and in efforts often delayed, the IRS now has mostly in place a set of comprehensive rules for dealing with 403(b) plans following the unfortunate issuance of the unnecessarily complex regulations in 2007. In reviewing the recently issued package of 403(b) efforts, including the new EPCRS; the ”pre-approved” plan rules under Rev Proc 2013-22; and the new sample plan language, I think back to that vulgar, but accurate, comment made to me many years ago:

This stuff’s hard.

When considering these new plan document rules and the new EPCRS together, there is a massive volume of sometimes difficult detail in the guidance. Much of it is thoughtful, some of it controversial and, I would suggest, some of it innovative. For example, it ventures into the world of effectively requiring pre-approved plans while staying within its regulatory bounds (as we’ll be discussing in future blogs). And for those of us wonks, sadly, it’s all very interesting as well.

The most striking aspect of this effort, however, is what seems to be a newly institutionalized view that 403(b) plans are, in fact, much different than 401(a) plans, and often demands much different treatment. Here is language from the Rev Proc:

“The program described in this revenue procedure is similar in many respects {comment: note NOT the “same”} to the Service’s pre-approved plan program for plans qualified under § 401(a), which is described in Rev. Proc. 2011-49, 2011-44 I.R.B. 608. For example, two categories of pre-approved plans -- prototype plans and volume submitter plans, which are described in section 5 and section 7 of this revenue procedure, respectively -- are available under both programs…..Although the program described in this revenue procedure is similar in many respects to the program described in Rev. Proc. 2011-49, there are differences between the two programs, beyond those that result from the differences in the Code requirements under § 401(a) and § 403(b).”

This is so different from the early days of this regulatory effort, where Reader, Bortz and Architect would all insist that there were few (nor should there be any) fundamental differences between 403(b) and 401(a) plans, a bias that is still reflected in the 2007 regs.

Now, instead, we may be finding ourselves in a much better position of working through the details on how to apply the rules differently (and where) in an environment that is now willing to recognize this reality. Hopefully, we seem to be at the beginnings of the implementation of a regulatory scheme that adequately deals with that 403(b) uniqueness.

This is relatively uncharted territory for all of us. Lou Campagna said it well when he commented on how the DOL also went into unfamiliar grounds with the new 408(b)(2) regs. He noted that sometimes they just aren’t going to get it always right, but the effort is well worth it.

That’s going to be the case here, as it really is breaking into new ground. The IRS now has established a coordinated structure by which we can reasonably attempt to develop compliance. We are not going to like some of the IRS’s choices; and there still is quite a bit of institutional learning about 403(b) plans that still needs to be had. But we now see some sanity in dealing with this calamity. I think we’re going to find, in spite of some of the bumps we all see in this right now, that this was nicely done.

Tags: 403(b), 403(b) EPCRS, 403(b) LRM, Rev Proc 2103-22

The Dueling Fiduciary Shadows of 12b-1 Fees

by Robert Toth
Posted on February 25, 2013

12b-1 fees and other revenue sharing arrangements have really become the guts and glue of the retirement plan business. The marketplace has come to rely upon these critical arrangements to subsidize plan administration, investment advice and a whole range of services enjoyed by plans and participants. The fees are now subject to prior disclosure rules under 408b-2 and (very limited) reporting under schedule C. They have become such a fixture in marketplace that there seems to be a growing sense that these fees belong to the plans whose assets generate them, and that fiduciaries are somehow entitled to them.

Except that this isn't quite so. There is actually another competing set of fiduciary rules which need to be considered when dealing with revenue sharing, and 12b-1 fees in particular.

Remember the true nature of 12b-1 fees: they are paid from mutual funds to distributors under their selling agreements with an investment company to promote the mutual fund. Payments are made from a mutual fund's assets under that fund's 12b-1 program, authorized by the SEC's Rule 12b-1 to the Investment Company Act of 1940, in order to promote that mutual fund and to defray the related distribution costs. It must be approved initially by the investment company's board of directors as a whole, and separately by the investment company's “independent” directors. If the 12b-1 plan is adopted after the sale of fund shares to the general public, it also must be approved initially by a vote of at least a majority of the mutual fund’s voting securities.

The mutual fund's Board members are under the fiduciary obligation to the fund shareholders to make sure that those 12b-1 fees are being used for the benefit of promoting and distributing the fund's shares. I invite you to read the preamble to the 2010 proposed changes to the 12b-1 fees which outlines this obligation in detail. It also contains some great statistics on the use of these fees.

So how is it, then, that a fund's self-serving distribution payment designed solely to promote the best interest of the mutual fund become subject to the ERISA rule that compensation generated by the plan be paid in the interest of the plan?

Its important to parse out just how this works.

Starting with the basics, it is the fund distributor who is contractually entitled to the 12b-1 payment, not the plan, and for very specific distribution purposes. The mutual fund's Board has already had to make a fiduciary determination that the fee is reasonable, in the best interest of the mutual fund shareholders, and that its payment complies with Rule 12b-1.

Separately, the ERISA plan's fiduciary can only permit the purchase a mutual fund which has a 12b-1 program if the amount of the 12b-1 fee is reasonable from the plan's point of view, regardless of whether the mutual fund feels its reasonable. Going into this determination of reasonableness, however, would be things like how the particular 12b-1 charge stacks up against other competing funds that the plan may be able to purchase and whether, or to what extent, the mutual fund's distributor (who really does now control the use of the 12b-1 fee to which it is entitled under its selling agreement with the mutual fund) will be used to offset service or other costs incurred by the plan.

It is so easy to presume that the 12b-1 fees belong to the plan, especially because of their pervasive nature in the marketplace. But don't make this mistake. In the end, a plan's ability to benefit from 12b-1 fees is only a derivative one. A plan has no inherent right to a 12b-1 fee generated by the assets it purchases. The right to those fees belong solely to distributor, one who is paid under a selling agreement for promoting the interests of the mutual fund-not the plan. The plan 's fiduciaries obligation is to make sure that the fee is reasonable, that the total amount a distributor receives off of the plan (including 12b-1 fees) is reasonable and, if the distributor commits to sharing the fee, that the commitment is properly honored.

By the way, It is also important to understand that there can be an element of sales commission built into that fee, payment of which is also acceptable under ERISA as long as certain conditions are met- a point I have noted in the past.

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Tags: 12b-1 fees, 408(b)-2 and 12b-1 fees, 408b2, reasonableness of 12b-1 fees

The "Stable Value" Guaranteed Separate Account; Greetings to the TE/GE Councils Annual Meeting

by Robert Toth
Posted on February 8, 2013

Winter Storm Nemo’s approach to the East Coast this weekend, threatening snows of epic proportions, should come as little surprise to at least one group of employee benefit professionals: the Annual Joint Meeting of the Great Lakes Area TE/GE Council, Gulf Coast Area TE/GE Council, Mid-Atlantic Pension Liaison Group, Northeast Pension Liaison Group, Pacific Coast Area TE/GE Council, which is in Baltimore Thursday and Friday.

3 of the last 4 years, the same has happened. Those who end up staying in the Inner Harbor Hotels tend to be locked up with little to do but wait it out. Those of us, such as Conni and I and other Great Lakes types, who choose the fine accommodations at Fells Point, tend instead to enjoy ourselves through these delays. Unfortunately for us this year, because of the flu, we have been unable to attend the Meeting, and we send our greetings to our many friends there.

Now to the techie stuff:

I know of no common investment used by retirement plans that is less well defined than the term “stable value fund.” Investment companies, insurance companies, financial advisors, and others all seem to define them a bit differently. They can be found in mutual funds, collective trusts and in group annuity contracts. They can also be “synthetic” in nature, with investment managers cobbling together “stable value funds” within a plan consisting of a number of different investment funds otherwise available under the plan.

To my mind, the annuity contract’s guaranteed fund, or fixed account, has always bee the quintessential stable value fund, as it has guaranteed principal and its returns are generally based upon the performance of an insurance company’s general account. The vast majority of assets within an insurer’s general account are those also found within other so-called “stable value funds”-with the difference being that that insurance accounts were actually guaranteed

Advisors never really took well to the guaranteed account as a stable value fund, often because they often had (though with decreasing frequency now) market value adjustments or withdrawal restrictions imposed under certain market conditions. And then there was the matter that the assets in a general account are subject to the general creditors of the insurance company.

This last point becomes important should an insurer become insolvent. Though it doesn’t happen often, and state bankruptcy law and guaranty associations have done a very good job over time in protecting general account products from an insurers insolvency, it creates a terrible marketing problem for insurers: how do you explain this risk in a competitive bidding situation, where a competing type of stable value fund doesn’t bear that risk? The “mere” fact of a guarantee of interest and principal, I guess, doesn’t cut it (does my cynicism show? As you can tell, I am a fan of these products, if well designed).

The solution to this marketing problem? How do you provide the valuable guarantees while avoiding having to explain that embarrassing problem of insolvency risk? Well, lets put guaranteed account investments in an insurance separate account. (An insurance separate account is what you typically see as the “investment funds” in a 401(k) plan which has a group annuity contract. The assets are generally custodied outside of an insurance company’s general account, and under a separately established investment policy). You see, the assets of a separate account are not subject to the claims of an insurer’s creditors under most state laws (with, of course, certain exceptions).

Without going into too much gory detail, this really could be a bit of sleight of hand if designed wrong. There are many separate accounts which really are invested like stable value funds from collective trusts, for example. But if it has guarantees of principal or interest-the “guaranteed separate account”-the risk just moves down a level, and the investor in the guaranteed separate account is still subject to an insurer's insolvency risk. So, instead of the insurer standing up for the value of the guarantees, and how well the insolvency risk is managed and priced into the product, the risk is instead hidden and not discussed.

Well, the National Association of Insurance Commissioners is taking a look at this practice, and coming down strongly on the side of making these types of separate accounts subject to the general creditors of the insurer. I guess this means that now insurers will finally need to actively promote the true value of their guarantees, and market the good nature of the commercial pooling of interests-hmm, then again, maybe not......

For those nerdy enough to want to read it, the proceeding of the NAIC can be found here.

Tags: 401(k) Annuitization, 401(k) guaranteed separate accounts, Fiduciary Issues, group annuity contract, guaranteed separate accounts, naic guaranteed separate accounts

The Continuing Efficacy of Commission Disclosures Under PTE 84-24 After 408(b)(2)

by Robert Toth
Posted on January 24, 2013

Sales compensation on financial products sold to employer plans has always been a critical piece of making the private retirement system work, particularly in the small to mid-size marketplace. As policymakers attempt to adopt different policies to increase the “penetration” of plans in this important segment of the marketplace, no such effort will really be successful unless professionals are paid for the work it takes to get plans to those employers. It is the financial service companies which pay sales commission on their products which really makes these policy initiatives work.

Yet, there seems to have been a certain “ick” factor with the DOL’s approach to sales compensation. This is surely based in part on the sales abuses we have all seen; and the DOL really does see the ugly underbelly of sales on a regular basis. But this still does not diminish the importance of commissions to the successful implementation of retirement policy.

Perhaps it’s this “ick” factor which is leading to the growing ambivalence about the way the DOL approaches sales commissions.

Compensation paid on the sale of a financial product to a retirement plan, whether it be an insurance commission from the deposit to an annuity or from the payment of a 12b-1 fee related to the purchase of a mutual fund, is paid under a contract between the distributor and the financial service company. This compensation is paid in order to promote the company’s best interest, and there is the concept of “active and effective” by which agents and reps are judged. They are paid to promote the company’s interests, not the plan’s.

Under ERISA 406(b)(2), this is the classic adversity of interest. Which is really the reason why prohibited transaction rule 84-24 (originally 77-9) is necessary: it permits a fiduciary to authorize the payment of a commission to an adverse party as long as a few conditions are met.

The regs under 408(b) 2 (the drafting of which I am an unabashed fan), however, never really addresses this sort of inherent conflict. Instead, a strong argument can be made that the reg appears to cast sales commissions as service compensation, and serves to complicate this matter. Consistent with other recent DOL activity, it casts the payment of an asset or deposit based sales commissions as the payment of indirect compensation from the plan. Yet, this compensation is paid under a contract between the sales rep and the financial service company (not the plan and the rep) where the rep is duty bound to protect the interests of the company paying the comp, not in the interests of the plan.

So, though this disclosure may make the comp reasonable comp under 408(b)(2) (that is, if you view sales as a service), it still does not relieve the 406(b)(2) adversity problem. To make any sense of this, it looks like you still need to comply with PTE 84-24 in addition to the 408(b) 2 disclosures.

408(b) 2 did have a clarifying effect, by the way, on PTE 84-24. For years, there had been ongoing discussions on whether or not the recipient of a commission is really the receipt of compensation from the plan, and whether an agent or rep was really party-in-interest to a plan which would be covered by the prohibited transaction rules. By casting commissions as indirect compensation, this question is effectively closed.

I know this discussion sounds a bit tortured, and even a bit non-sensical. But it has real meaning; especially when we are talking about whether, and under what conditions, certain compensation related to a plan is permitted to be paid. I’m afraid that, as we integrate the PT rules into the growing body of fiduciary regulation, we will be stumbling into this sort of things more often.

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Tags: 408b2, 408b2 and 84-24, Complex Prohibited Transactions, PTE 84-24, Prohibited transaction and sales commissions

The "Best Efforts" Standard of the 403(b) EPCRS

by Robert Toth
Posted on January 13, 2013

I think that most practitioners would agree that untimely adopted plan documents continues to be one of the more persistent problem for 403(b) plan sponsors, in large part because it is now a historical problem: plan sponsors which missed the original plan document adoption date of 12/31/2008 have to jump through several hoops for their plan to qualify as a 403(b) plan, even if they have since adopted a plan.

Prior to the new EPCRS, Rev Proc 2013-12, the IRS took several approaches to non-adopters. First, it issued a formal extension until 12/31/2009 in Announcement 2009-03, if certain rules were met. For those plans that failed to meet that deadline, it informally took the position that as long as the 2009-3 rules were met, it would generally grant relief on audit. Finally, in certain circumstances it would recognize what Conni calls the “big paper clip” approach to plan documents, permitting a collection of documents, employee communications and evidence of corporate actions to be cobbled together and recognized as the plan document.

2013-12 institutionalizes part of that approach. For VCP “late adopter” filings, the submission is conditioned upon adoption of a plan document which is intended to comply with 403(b); the plan, in operation, must have acted in accordance with a reasonable interpretation of 403(b) during the period of time for which relief is requested; and, for that period, the plan sponsor must have engaged in a compliance review, under which it used its best efforts to find operational problems and to correct them in accordance with the principles under EPCRS. For Audit CAP, this also appears to be the required correction.

This is a tough requirement, but it reflects the IRS’s intent to compel 403(b) plan sponsors to finally do the hard work necessary to comply with the 2007 regulations. The IRS has been accommodating over the past several years, recognizing the problems and challenges related to the transition to those new regulations (some of which are yet to be resolved). But now, it is taking this opportunity to cause “best efforts” compliance and correction activity for a significant number of plans.

“Best efforts” is really a standard we have rarely, if ever, seen from the IRS in the retirement plan space. It means more than just a “reasonable” effort, or some sort of cursory documentation of some sort of activity. Be prepared to be able to evidence a serious review of the plan’s activities since the effective date of the regulations for that plan.

And remember, this applies to anyone who missed the deadline, even if they have since adopted the plan.

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The world, we are finding, is a very small place. Conni and I are in India, where she is conducting Penserv retirement plan training for certain financial service company IT professionals who are responsible for some pretty impressive software programs which many plan sponsors here in the U.S. use. We have been welcomed graciously, and the staff's passion and interest in the ERISA and Code technical rules are impressive-and so much akin to that we are used to encountering among our colleagues in the States.

Now, if I could only develop a taste for curry....

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Tags: 403(b) Best Efforts, 403(b) EPCRS, 403(b) late adopters, EPCRS

The New 403(b) EPCRS Rules: Its, Um, Complicated.....

by Robert Toth
Posted on January 6, 2013

Be prepared to work hard when you need to take a 403(b) plan through the new EPCRS process under Rev Proc 2013-12-as many of you will need to do soon- especially if you have to use the VCP process, or are defending an audit under CAP. It is going to be complicated. Quite frankly, a separate 403(b) guide to the VCP program will need to be utilized.

This is not necessarily the fault of the drafters of the Rev Proc. They were stuck with a very difficult task: to try to make something which is fundamentally different from a 401(a) plan still fit uniformly into the 401(a) correction scheme. It is clear that a great deal of effort went into this task, but it is still, in many respects, trying to fit round pegs into square holes. To do so requires a number of tortured acts.

This will come out when we actually try to apply the details of the corrections programs in practice. Sometimes it will work and, well, sometimes it is not going to. But in all events, you will need to think it through thoroughly, and outside of the 401(a) box to which one is normally accustomed.

Hopefully, a few tips will be useful to this effort:

Late/non-adopters. The IRS put together a sound program for dealing with “late adopters” and “non-adopters” of 403(b) plan documents. The 2007 regulations imposed a plan document requirement on 403(b) plans, requiring at first that they be adopted by 12/31/2008. The IRS granted an extension until 12/31/2009, as long as certain requirements were met.

Sponsors who adopted a plan document after 12/31/2009 (or failed to meet the requirements for the extension until that date), or who still haven’t gotten around to adopting a document, can now protect themselves from the penalties arising from the lack of a timely plan document adoption through a “late adopter” VCP submission. The IRS sought to encourage these filings by reducing the VCP fee by 50% if the filing is made by 12/31/2013. But it is still a VCP fee, which can be substantial.

The details, however, can make it difficult. The Rev Proc requires a statement that “the plan sponsor has contacted all other entities involved with the plan and has been assured of cooperation to the extent necessary to implement the applicable correction.” This means contacting all of the vendors under the plan, including deselected vendors, to obtain this statement. This, again, raises the ugly issue that the plan sponsor will need to resolve: what contracts are under the plan under Rev Proc 2007-71(assuming it applies to EPCRS, which is not entirely clear), and which are not?

There are a number of technical twists to the VCP filing to deal with 403(b) (such as, for example, dealing with the fact that 403(b) plans do not have the required "Favorable Letter"). The compliance letter which will be issued will recognize the plan as being adopted timely, but will not opine on the qualified status of the plan document. Which leads to the next point:

Plan document failures (other than late adopters). This one is really messy. A plan document failure is one under which a plan term itself, or the lack of a plan term, will cause the plan to fail 403(b) status. In reality, there are precious few terms that need to be in a 403(b) plan document, and of those that need to be in, there is little guidance as to what they should say. The IRS also recognizes that it generally has a problem because of the lack of a 403(b) determination letter program.

To the extent that a plan document error is found on CAP, the plan sponsor will be let off the hook as long as it agrees to adopt correcting amendments in accordance with, within the time permitted, and to the extent required by, the remedial amendment period which will be adopted by the yet to be developed determination letter programs. (I suppose there may be certain, egregious errors which won’t be covered by remedial amendments, but one can only guess).

With regard to VCP, I really have a hard time figuring out the circumstances where good faith terms would ever need to be submitted under VCP as a plan document failure until the 403(b) determination letter programs are developed. This is because those plans can always be corrected under the yet to be developed remedial amendment period. Now this will change over time, of course, to the extent a newly required document term is required by a change in the law, and it is not timely adopted.

Operational errors. The new EPCRS states that the 403(b) corrections will be applied in the same manner as the 401(a) corrections. My first response to this overly broad statement can be best described by the old Trix cereal commercial (“Silly Rabbit…..”). 403(b) plans still are not 401(a) plans, and the corrections-and the ability to correct-are often quite different. So exercise caution when putting the VCP submission together.

Lets use the example of the required minimum distribution. Here’s what EPCRS says: “In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions (with Earnings from the date of the failure to the date of the distribution). The amount required to be distributed for each year in which the initial failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)-5, Q&A-3, reduced by the amount of the total missed minimum distributions for prior years.”

Well, the problems with applying this to the 403(b) minimum distribution are many: because it is an individual, not plan, requirement, the amount of the RMD is based upon all of the 403(b) contracts of the employee with any employer in that participants lifetime; the employee has the right to elect which contract to take the RMD from; and most individual contracts do not permit the employer to force out a distribution from the contract. To do so, by the way, may well violate certain securities laws under certain circumstances. This really means that EPCRS likely cannot be used to correct many 403(b) plans with RMD failures.

So, be careful.

Vendor cooperation statement. Finally, any 403(b) VCP submission requires that above noted statement that “the plan sponsor has contacted all other entities involved with the plan and has been assured of cooperation to the extent necessary to implement the applicable correction.” This means sponsors need to affirmatively contact each vendor, including deselected ones, for VCP to succeed. In addition to the problems in identifying which vendors are part of the plan, vendors themselves may have a problem. They may need to caveat that statement with “to the extent permitted by law.” State insurance law, state contract law, and certain securities laws may otherwise prevent this “cooperation.”

This actually reflects an attitude of certain treasury staff which I find troubling: the belief that vendors have the unilateral right to change their contracts with individuals to give employers certain rights over the individual’s contract. My experience is that state law is still valid. State insurance commissioners, in particular, take a dim view of insurers and employers acting in such a fashion without the policyholder's consent.

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It will take a bit of work to implement this program, and we are likely to find everyone struggling a bit in its implementation. VCP may become unavailable in many instances to the 403(b) plan. Where this happens, I would hope that this would be a factor to be taken into account when determining sanctions for such plans should they become subject to Audit CAP.

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Tags: 403(b), 403(b) EPCRS, 403(b) VCP, 403(b) and Rev Proc 2013-12, Rev. Proc. 2013-12

Re-Thinking Fiduciary Allocations under ERISA Sections 402 and 405: Back to the Future

by Robert Toth
Posted on December 26, 2012

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.

The growing complication of the ERISA regulatory scheme is causing many retirement plan sponsors to seek some measure of relief. As important as the rules are, they are making it a more difficult task to properly maintain what used to be very simple defined contribution plans. Between growing fiduciary obligations, increased disclosure and reporting rules, a growing panoply of different retirement plan products, its not easy to maintain a 401(k) or 403(b) plan anymore.This, in turn, really forms the basis for the popularity of MEPs and PEOs, as a number of service providers seek to fulfill a pressing market demand for a new kind of professional fiduciary which address these employer concerns.

As we deep dive into how the fiduciary rules actually work, I am struck by the manner in which fiduciary allocations were initially structured under ERISA, and how they have evolved since then. Looking closely at the original statutory language, it is clear that plans were established with a single fiduciary, a "trustee," in mind: in the days before daily valuations; mutual fund investment accounts in defined contribution plans; before employee contributions were the predominant feature of these plans; before the differences between 3(16), 3(21) and 3(28) were parsed and analyzed; an employer establishing a profit sharing plan would usually seek to hire a centralized fiduciary to run the plan.

This fiduciary would manage the assets of plan, provide the trust account, custody the assets and often provide all of the recordkeeping and compliance services required by the plan. Often, these were provided by institutions like bank trust departments, where the trust department was clearly the fiduciary for all activities under the plan; or held in annuity contracts, were the insurance company was, likewise, regularly seen as centralizing and controlling plan activities.

The market has moved dramatically over a generation, away from a centralized independent authority which took full responsibility for operating a plan. Lawyers, such as myself, would regularly counsel service provider clients to do anything but accept fiduciary status. That status, we advised, should be left to the employer. Then we proceeded to slice and dice up those services, always making sure that the employer/plan sponsor would bear the brunt of responsibility.

However, it is the centralized, professional fiduciary model (well beyond the professional investment fiduciary) to which employers again are returning, as the sophistication of maintaining the plan is well beyond the ken of the typical employer. Especially since the DOL’s MEP advisory Opinion in 2012-4,where a single plan model was turned down by the DOL, we find ourselves now to turning to ERISA Sections 402 and 405 to explore ways to cost effectively aggregate these centralized services which the market is again demanding. It is back to the future, in many ways.

Most professionals I know pay scant attention to these allocation rules, which dictate how fiduciary allocations are effected. Even more telling are the regulations under these sections, which go into detail of the process related to these allocations. As we re-think fiduciary allocations, this old, dusty portion of the ERISA now becomes critical.

The statutory language is actually quite simple, but it talks of things little discussed. I encourage you to click here to read the rules. It will become a basic part of the repertoire of the type of service provider who is now seeking to provide what used to be the traditional level of fiduciary responsibility.

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A New Years treat, of sort.

I have come up with a couple of interesting historical pieces, which are relevant to what we do today.

First, I went through my Mom's old vinyl records, and discovered an album of John F. Kennedy's old speeches. I was particularly taken by JFK's "New Frontier" speech, a 2 1/2 minute clip from it to which I am linking, below. I invite you to listen to it, and think some about a point I have made from time to time on this blog: what we do with retirement plans makes a difference. This is important public policy which affects large numbers of folks. Though the rules are small, this is big stuff, and stuff which is undergoing dramatic change. The choices related to retirement plans which are soon to be made in tax reform will be setting important policy which will affect our lives for years to come. And, as Kennedy points out, the task is not easy.

Next, I stumbled across in my files a counterpoint, the now infamous "Ownership Society" political memo coming from the Bush White House in 2005. The privatization of social security was seriously promoted in it. Though both pieces (the New Frontier and the ownership memo) speak to personal responsibility, the Ownership Society advocates it in a way which suggests that we are all better off, instead, at going it alone.

Take a look:

White House Ownership Society can be found by clicking here.

An MP3 clip of JFK's New Frontier can be found by clicking here.

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Wishing you all a New Year full of those things which bring you peace. I look forward to seeing and keeping in touch with many of you during the year.

Bob Toth

Tags: ERISA 405, Fiduciary Issues, MEP alternatives, New Frontier, fiduciary aggregation, ownership society

Keeping Your 403(b) Plan In Control

by Robert Toth
Posted on November 25, 2012

I am pleased, again, that Linda has provided us with the following guest post. I am a big fan of her writing style: making things simple is an extraordinarily difficult task, but one that Linda does so well.

In this posting, Linda provides some practical guidance on what to do to prepare for an IRS 403(b) audit-particualrly given that the Service has announced that it will be increasing the number of 403(b) audits this fiscal year.

Bob

Keeping Your 403(b) Plan in Control

by Linda Segal Blinn, J.D.*

Vice President, Technical Services, ING U.S. Retirement

If you have seen the November 14th edition of the IRS’ Employee Plans News (click to link to the newsletter), you already know that “internal controls” is the latest catchphrase. And, as the IRS ramps up its audit activity with 403(b) plans, chances are that more IRS auditors will be asking 403(b) sponsors about internal controls for their plans.

So, what are some of the internal controls the IRS might have in mind?

• Human Resources procedures:

• Certainly, having your 403(b) “written plan” in place is important, but that may only be the first step. An IRS auditor also may request the most recent version of your employee handbook to compare against the terms of your 403(b) plan. Take the time now – before an IRS audit – to resolve discrepancies between the plan document and the employee handbook. Keep in mind that the 403(b) plan should reflect both your operating procedures and the IRS rules.

• Be prepared to provide samples of the annual “universal availability” notice sent each year, plus documentation of the distribution list of eligible employees, regardless of whether they were currently participating in the 403(b) plan.

• Payroll procedures: Establish payroll procedures to monitor employee deferrals against the annual IRS deferral limit. If employees are making catch-up contributions, maintain catch-up calculation worksheets to assess whether those catch-ups conform to the IRS-permitted limits.

• Procedures to coordinate with your service providers:

• Confirm that employees’ contributions are transferred to the authorized investment providers in accordance with the timeframes permitted under the IRS regulations. Amounts are only considered to be under the plan when received by the investment –provides. If the plan uses a common remitter service, determine how quickly the remitter sends contributions to its investment providers.

• Demonstrate that your investment providers are sharing information with you (or your TPA, if you have delegated this function) to confirm that the participant is eligible for the disbursement before processing a participant’s request for a loan, hardship, or distribution due to severance of employment. Be prepared to show your internal procedures and information sharing agreements with the plan’s investment providers.

Anticipating the lines of inquiry in advance of an IRS audit is the best preparation you can take. Make your own list of internal controls and check it twice to determine if you are able to produce documentation for each of the above internal controls. Any disconnects between the plan document and your internal procedures could highlight either document or operational defects to an IRS auditor. Even if your 403(b) plan is not under examination, this serves as a good reminder to review your plan so that you can identify and fix any outstanding issues in the event of a potential audit in the future. The IRS has indicated that a 403(b) plan with the proper internal controls will be perceived as having greater credibility for operating in an IRS-compliant environment.

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Linda Segal Blinn, J.D.*, is vice president of Technical Services for ING U.S. Retirement. In this capacity, Blinn supervises the provision of legislative, regulatory, and compliance information to assist employers in operating their retirement plans. A contributing author to several publications, Blinn also speaks frequently at industry associations meetings on retirement plan issues facing K-12 schools, higher educational institutions, and non-profit entities. Contact Linda at (860) 580-1643 or LindaSegal.Blinn@us.ing.com

This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.

* Linda is not a practicing attorney.

Tags: 403(b), Blinn, IRSAudit

Keeping 12b-1 Basics in View When Reviewing Plan Revenue Sharing

by Robert Toth
Posted on October 30, 2012

Revenue sharing related to retirement plan investments plays a central role in the financing of plan administrative services and sales compensation in the retirement industry. The bulk of this revenue sharing arises from mutual fund payments of 12b-1 fees and other service fees (such as sub-transfer agent fees) either paid directly by the mutual fund company to the plan and its service providers, or indirectly through vehicles like separate accounts in group annuity contracts.

All sorts of revenue sharing issues arise well beyond the disclosure of these arrangements which has been required by the new 408(b)(2) regulations. For example, one of the focuses of the ASPPA annual conference being held here in DC in the middle of hurricane Sandy is related to ERISA accounts and forfeitures, much of which arise because of these 12b-1 based revenue sharing programs; and revenue sharing continues to garner the attention of the DOL through its investigative activities.

I have noticed a curious perception with regard to all of this activity related to 12b-1 arrangements, which gives me some pause. There seems to be a growing sense of entitlement, that somehow plans are entitled to revenue sharing, that there is some sort of innate (and perhaps legal) right plans have to the 12b-1 and service fee payments generated under these programs. It seems that a plan's "right" to revenue sharing is too often where the conversations begin, and even seems to be creeping into some of the DOL’s own approach to it.

I think it may be helpful to keep in mind the source and purposes of mutual fund 12b-1 and service fee programs, as it will help keep a healthy perspective when winding one’s way through these revenue sharing issues.

12b-1 is actually Rule 12b-1 to the Investment Company act of 1940, which establishes the manner in which the Board of a mutual fund company can establish and administer marketing programs which support the sales of mutual funds. The language of 12b-1 is telling. The rule applies:

“if it (the investment company) engages directly or indirectly in financing any activity which is primarily intended to result in the sale of shares issued by such company, including, but not necessarily limited to, advertising, compensation of underwriters, dealers, and sales personnel, the printing and mailing of prospectuses to other than current shareholders, and the printing and mailing of sales literature.”

Note the absence of any language related to paying retirement plans for administrative services. Indeed, mutual fund companies have often taken the position that these 12b-1 fees can only be paid to broker dealers for their marketing activities, and often have issues with their shareholders (such as retirement plans) actually receiving these funds. This fear arises in part from the “discrimination” issues that ’40 Act companies face: mutual fund companies are prohibited from discriminating between its shareholders. They really cannot pay 12b-1 fees to some shareholders (plans) and not to others (individual shareholders).

The industry has devised all manner of machinations to address the problems raised by the actual structure of 12b-1 fees as marketing fees, and to address the discrimination issue. But they are, after all, machinations: 12b-1 fees are, in reality, fees paid to promote the marketing of mutual fund shares. How this then somehow worked to eventually serve as the basis of a crucial part of retirement industry is quite a story.

The basic notion remains, and is helpful to keep in mind when analyzing revenue sharing. 12b-1 fees are marketing fees payable to distributors and marketers of mutual fund shares. It is these marketers and distributors to whom revenue sharing rights arise; any plan rights to such payments are only derivative. These are not funds to which mutual fund shareholders (like 401(k) plans) are entitled. No plan has the right to demand the payment of these fees and, in actuality, their eventual payment to plans requires implementing some very interesting fictions.

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