Complex Prohibited Transactions

We spend a lot of our time focusing on ERISA’s “Prohibited Transaction” rules, which extensively cover the manner in which compensation is paid under retirement plans, and how it is disclosed. Lurking darkly in the background behind all of our  discussions of fee disclosure and how the prohibited transaction rules apply under 408(b)(2), however, is something most of us in the benefits world typically pay little attention to: the U.S. Criminal Code and 18 USC 1954.
Continue Reading Remember, Some Sorts of Compensation Is Flat Out Illegal, Not Just “Prohibited”

A common misunderstanding between 408(b)(2) and 404(a)(5) is the nature of the requirements: 408(b)(2) requires the service provider’s contract with the plan’s fiduciary contain certain, specific terms. It does NOT require that those fees be disclosed to participants, nor does it require annual disclosure. It is simply a business matter between the fiduciary and the service provider. The only time a follow-up “disclosure” is ever required is if there is a material change in the contract’s terms (including the service fee), and then that disclosure is only required to be made to the plan fiduciary.
Continue Reading The Use, and Impact, of 408(b)(2) and 404(a)-5 Are Often Confused

The new PEP rules do not add any new services to the marketplace. Rather, PEPs merely reorganize existing services to be provided in a different format, with the one exception is that it now permits unrelated employers to be able to file a consolidated Form 5500. The Department’s issuance of guidance as to the allocation of these different authorities (consistent with in ERISA Section 3(44)(C) which requires the Department to ‘‘(i) to identify the administrative duties and other actions required to be performed by a pooled plan provider…”) is a required condition precedent to the determination of whether any prohibited transaction exemptive relief is necessary in the operation of a PEP.
Continue Reading PEP Comment to DOL Outlines the Structure of PEPs

The ERISA marketplace is complex, with a plethora of different sorts of arrangements which will be affected in a variety of different ways by the new Fiduciary Prohibited Transaction Exemption. In general, however, I would be little surprised if it ending up being that not many parties will have the need to take advantage of this new exemption.
Continue Reading The DOL’s Fiduciary Rule Prohibited Transaction Exemption May Only Be Needed In Limited Plan Circumstances

One of the continuing confusions in how 401(a) rules apply to 403(b) plan  involves the reporting rules related to the correction and reporting on the 5500 of one of the most common errors in any elective deferral plan: the late deposit of those deferrals into the plan.  Neither non-ERISA or ERISA 403(b) will ever file a Form 5330. Ever. Even when the VFCP program is being used to correct the late deposit.

Adding to the confusion is that the Form 5500 instructions do not differentiate between 403(b) plans and 401(a) plans. It simply states that  all “defined contribution” plans need to file the Form 5330 for late deposits, and pay the penalty tax.
Continue Reading Ignore Those Form 5500 Instructions: 403(b) Plans DO NOT Use Form 5330 For Late Deposits

State based auto-IRA programs continue to pick up steam, and may soon become prominent features of the retirement security landscape. Granted, there are a number of legal and logistical issues which need to be resolved before they can be fully implemented, but things are moving quickly.
So it is timely to discuss participant protections under these programs. A successful program must necessarily incorporate ways to protect employee deposits. The holding of employee deposits are not much of a concern, as employee deposits will be held in IRAs protected by highly regulated, commercial custody companies-as in any IRA program. The real challenge will be the protection of employees’ payroll based deposits in getting to the IRA.
Continue Reading Employee Asset Protection and State Auto-IRA Programs

Though disclosure may make the sales comp reasonable under 408(b)(2) (that is, if you view sales as a service), it still does 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.
Continue Reading The Continuing Efficacy of Commission Disclosures Under PTE 84-24 After 408(b)(2)

In short, a retirement plan product is really a package of financial and administrative services. This knowledge is especially important when one is tasked with understanding the reasonableness of fees related to retirement products and services. Purchasing investments through a defined contribution plan is so different than an individual making purchases for their own personal account, and it is horribly misleading to suggest otherwise.
Continue Reading The Reasonableness of Fees in Retirement Products

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.

Annuity contracts purchased by 401(k) plans, and other retirement plans, often offer the ability for the plan or the participant to invest in these insurer’s “general accounts” as an investment fund. They are now often marketed as “stable value funds” which, in return for time, provide guarantees of principal, some measure of guaranteed returns, and enhanced crediting rates. Though they are called "stable value funds," they are really nothing like the stable value mutual funds. They are backed (in part) by real "things" like investments in bridges, roads, equipment, factories, apartments and shopping malls.
Many of these general account investments offered under annuity contracts, however, have the hated “contingent deferred sales charges” (otherwise known as surrender charges), or “market value adjustments (MVA) ” to the stable fund investments, should these contracts be terminated or substantial amounts withdrawn before a stated time. Surrender charges are generally related to sales costs, but the MVA, as unpopular as they may be, are often necessary because of the long term capital investments backing the guarantees which may be provided. Many products today, by the way, are offered without surrender charges or MVAs, but also generally offer reduced crediting rates in return.

Which really brings us to an obscure problem the DOL has struggled with in the past under ERISA’s plan asset rules (in attempting to define a “transition guaranteed benefit policy”), and now is an issue which may well come to the forefront because of the termination rules under Reg. 1.408b-2(c)(3). 1.408b-2(c)(3)  states that a contract will not be considered reasonable if it does not permit termination “on reasonably short notice under the circumstances“ of the contract by the plan without penalty to the plan. Fortunately, the DOL noted that this should not be read to prevent long term contracts, nor contracts which “reasonably compensates the service provider” for their loss upon early termination of the contract. This exception will not apply if that recoupment is “in excess of actual loss or if it fails to require mitigation of damages.”

So the question becomes what does “without penalty” mean, under 408b-2, when you are terminating an annuity contract.  As noted, the DOL had addressed this issue in the past in an odd, and very specialized, regulation under ERISA 401(c)(1) – which may now have renewed meaning under 408b-2. Under 2550.401c–1, the DOL outlined what it meant to terminate an annuity contract "without penalty" for purposes of that reg.  It established a standard to be applied to both the surrender charge and the MVA:   ”the term penalty does not include a market value adjustment (as defined in paragraph (h)(7) of this section) or the recovery of costs actually incurred which would have been recovered by the insurer but for the termination or discontinuance of the policy, including any unliquidated acquisition expenses, to the extent not previously recovered by the insurer."
This seems consistent with the language used in 408b-2.
The challenge for regulators, insurers and the responsible plan fiduciary will be figuring out when annuity contract termination charges cross this line.  Though annuities designed for the retirement market typically are designed to meet these rules, there may be some questions related to retail annuities placed into plans.



Continue Reading Annuity Termination Charges under 408b-2: What is “Without Penalty?”

The disclosures related to 408()(2) are really just a precursor to the next step: the imposition of the prohibited transaction taxes and penalties related to compensation which fails to meet those standards.  It looks like the regs have the effect of shifting the application of the rules related to the "amount involved" in the transaction