The successful chair of a committee serves the committee, the committee does not serve the chair. And so it was with the creation of the just-released "best practices" 403(b) Model Disclosure, which was developed jointly by NEA, ASBO, NTSAA and ASPPA. I was fortunate enough, and honored, to serve as the chair of that group. I have chaired  and served probably more than my fair share of retirement industry related committees over the course of my nearly 30 year career, but this effort was incredibly different: the driving force was not vendor interests, government policy interests, or of those serving our profession. From early on, the focus was instead plan participants,  to get to participants in non-ERISA 403(b) plans (and, in particular, employees of school districts) information that would be useful and inmportant in their purchase of 403(b) retirement products.  Lisa Sotir-Ozkan from NEA Benefits and Melody Douglas from ASBO very much drove the process, and kept us focused on this goal. 

Cloning 408(b)(2) or 404a-5 wasn’t sufficient, nor was relying on those thick prospectuses that accompany variable 403(b) contracts. As valuable as the DOL disclosure schemes are in the employer-sponsored, institutional context, and as important as prospectuses are in protecting investor interests, they the lack simplicity -or obscure in volumes of other data- that which is particulalry important to the individual 403(b) participant. These plan particpants are not fiduciaires, and often do not have anyone to be able to collect and compare data on their behalf. They are sold investment products directly. So it really becomes a very simple issue for that school teacher or adminstrator: how much sales commissions is my investment generating; what services am I getting in return; is there a way for me to compare it all; and how can I reasonably access comparative data on the investemnts themselves?

There is the practical problem: whatever would be recommended also had to be doable by the 403(b) vendor providing the product, so disclosure was based upon information that was already being collected in some way by providers in the ERISA world. The committee also recognized the value of the comparatve format for investments under 404a-5 (and the significant investment being made in those dsclosures),  and took advantage of the benfits of that work by recommending their use here.

The Committee, with skillful drafting support and guidance from ASPPA’s Deb Davis and with Craig Hoffman’s ongoing involvement in our work,   put in serious time over the past 6 mohts to balance the useful with the doable. Along with Lisa and Melody, Aaron Friedman, Carol Gransee, Chris Guanciale,  Scott Betts  and Theresa Ward put together what I consider a pretty good piece of "engineering."  Having known engineers from from my days in Michigan, who have told me that successful engineering is really the art of successful compromise (as, they have said, you cannot have the fastest, strongest AND most fuel efficent vehicle in one; its always a balance between them all), this group can lay claim to a pretty good result.

We all recognize that this first effort was not perfiect, and pratcice will be a good teacher for us as we try to bring a new level of transaprency into play.  There is likely to be changes as we find out what we really did here. But its a pretty good start.

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……

Retirement plan lawyers, both in house and outside counsel, may well want to take note of Bank of New York Mellon’s recently reported troubles related to potentially widespread  and fraudulent use of unfair currency exchange rates in their dealings with unsuspecting state and local pension plans.  If there is a basis for these charges, and f they were as widespread and as sustained as alleged to be, we may have our first prime example of how SOX Section 307 and SEC’s "Part 205" Rules (which implement Section 307) can implicate employee benefit lawyers. This is because it would be hard to believe that there wasn’t a lawyer somewhere in the organization that shouldn’t have been aware of the practice (as these rules apply not only to corporate law staffs, but to lawyers in the business lines as well).

Much of the Sarbanes Oxley Act n 2002 ("SOX") was designed to address many of the corporate abuses arising from the Enron, Tyco and Worldcom fiascoes, and it included enhanced protections for corporate whistleblowers.  Buried within this statute was Section 307, an obscure section which imposed duties upon lawyers who deal with publicly traded companies the duty to "report up" certain corporate malfeasance of which they became aware in their practice.  The challenge with these rules is they seem to clash, in many respects, with the state law rules governing the attorney client privilege. In house counsel have challenging enough circumstances, where their client is the corporation and not the officers who seek their counsel.  This awkward pressure merely increased with the passage of SOX. The stakes became higher, as well: failure to report properly would effectively result in a ban from ever representing a publicly traded client, whether in house or as outside counsel.

I wrote an analysis describing the impact of Part 205 on employee benefit lawyers for ALI-ABA in 2005. In that article, I struggled to describe sensible circumstances where benefit lawyers would be impacted, and where the reporting up obligation would be imposed. This is because the only corporate malfeasance required to be reported under SOX are those which would result in a material impact on the company’s financials, and it seemed at the time that it would be one heckuva stretch to reach the materiality standard in our line of work.

BNYMellon really is an eye opener. For manufacturing companies, there really is rare opportunity for the employee benefit lawyer to trip Part 205 obligations, other than issues related to underfunded pension plans and executive stock programs.  BNYMellon, however, demonstrates that this is a very real possibility for attorneys representing financial service companies which do retirement business. Considering the fact the value of retirement plan holdings are some 85% of the value of publicly traded securities in the U.S., and where many companies’ financial stake in the retirement business continues to grow, it occurs to me that the potential circumstances where SOX may be implicated will only become greater.

Part 205 requires the establishment of written procedures to insure compliance.   Though pure corporate, tax and M&A lawyers have always been well versed in such matters, financial service companies may want to check these procedures to make sure that retirement law staffs (including those in the business lines) are well within the loop.

For those curious on the nuts and bolts of the operations of Part 205 in the employee benefit practice (and there are quite a few), I invite you to read the ALI-ABA paper.

 

 

 

I am, by some serious training and long experience, a corporate lawyer, having been put through the paces by two incredible general counsels: Jack Hunter of Lincoln Financial Group and Scott Campbell of Kellogg Company. Each of these gentleman made quite a study of their attendant Boards and the rules (both formal and informal)  related to their rarefied status. The expectation was that lawyers  dealing with Board matters clearly understood the proper role and culture of "their" Boards.

Every year end I tend to be reminded of this seemingly mundane work (though it is really anything but!) in private practice, as this tends to be the "busy" season when it comes to corporate actions related to plan amendments and other plan activity. Though it may be too late in the year to be useful this year, there are a few thoughts that come to mind which you may hopefully find relevant the next time a plan amendment crosses your desk:

1.  Boards do not manage companies. It is fundamental corporate law that corporate officers run companies, not the Board. Board members have the fiduciary obligation to the shareholders to oversee management; but they do not step into the role of management.  This means that whatever you are looking for the Board to do, it should be generally "big picture,"  such as adopting or terminating the retirement plan. When adopting the plan, try to make sure that a corporate officer has the ability to amend the plan. In larger corporations, this authority will often be subject to certain limits, such as where the benefit is increased.  

2.  Check the minutes.  If you are unsure of who has the authority to amend the plan, check the past Board minutes (if you can find them) to see who has that authority to amend.

3. Rely upon general authority.  If it is not clear who has the authority to amend, you may find guidance in the general authority granted to officers in the bylaws or enabling resolutions as to who may have the authority to amend a plan, absent a specific grant. If you find yourself needing to go in for a Board resolution, take that opportunity to delegate future amendment authority to an officer.

4. Keep details minimal. I recently saw a board resolution that not only adopted a QACA, but also directed the officers to provide required notices. This is patently unacceptable drafting. The officers should be directed, instead,  to take all necessary actions to execute the decision of the board.

5. That fiduciary thing. Make sure that whatever you are asking the Board to do does not constitute a fiduciary action unless you intend it to. One of the worst things you can do to Board members is to inadvertently cause them to have unwanted fiduciary status. Make sure that the authority to act on behalf of the plan is properly delegated to appropriate officers: in the absence of a clear delegation, one would not generally like the DOL or courts to make a de facto finding of inadvertent ERISA fiduciary status of a Bord member.

Related to this are a number of RMD amendments I have been seeing for 403(b) plans, which purport to amend 403(b) plans for the WRERA rule that allowed RMD waivers in 2009.  Some vendors are presenting these amendments to plan sponsors for their signature by year end, as the vendor may have taken it upon itself to generally waive these requirements for those 403(b) customers with individual contracts.

First, it is not clear that such an amendment is needed because, at least for now, you can still incorporate a lot of things by reference-and the inclusion of 401(a)(9) in a 403(b) document should suffice.

Secondly, though, is the bigger problem.  These these carrier provided amendments purport to amend the entire plan. If there are other vendors in the plan  which did NOT offer the RMD waiver, you actually have a plan document problem on your hands if you adopt this broad amendment.

So, be careful; and may your New Year be fruitful, fulfilling and meaningful. 

 

  

Many in the industry saw early on, and tried to address, the terrible disruption caused by the change in 403(b) regulations during the recession. In many circumstances, the transition to the new rules made amounts in many 403(b) contracts unavailable at a time when many teachers and employees of not-for-profit organizations (who were among the hardest hit by the collapse) needed them the most-as loans, hardship distributions, or terminating distributions during times of often grievous financial circumstances.

401(k) plans did not suffer that fate, and I really believe that this recession would have been many times worse had it not been for those defined contribution balances (including 403(b) plans) which acted as a reserve  for those who lost their jobs. I have not yet seen anyone research on those numbers, but the anecdotal evidence appears strong.

Much of the literature being published today talks of how the recession, and the related capital losses within  DC account balances,  speak strongly of the need to preserve that accumulation from future shocks by using those balances to purchase  guaranteed income products. I cannot disagree more strongly.  Many of you know from my writings that I am a strong supporter of guaranteed lifetime income but, I think instead, that the recession demonstrated the huge value of the DC account balance plan: it provided an invaluable cushion to many at a time they needed it most, which would have been otherwise unavailable in a DB type of arrangement. These plans had not  been so widely available during economic shocks in the past.

But there are, and continue to be, huge inequities related to government policies related to the handling of DC plans throughout the recession.

At a time when it was necessary to provide substantial assistance to large financial institutions in many-and now we found out, often hidden-ways (yes, I am a devotee of Gretchen Morgenson and her weekly column in the New York Times), those who were unemployed continued to pay a 10% penalty tax on their defaulted loans and DC distributions which were taken to keep them afloat. The operation of the 10% was, and is, especially cruel, as it is paid regardless of the application of the marginal rate or deductions. So, even if income was so little as to pay little or no tax, the 10% penalty still applied.

The practical effect is that the unemployed were funding, even if in the smallest part, the assistance to large financial orgs which received substantial government support (and, apparently, paid large bonuses from those funds to many of their still employed executives and traders). Regardless of political persuasion, most should have difficulty with this proposition.

Now, as the economy recovers, and hopefully employment returns, many in Congress speak of reducing the amount that can be put into DC plans. Any reduction will have at least two unintended effects which are little mentioned: it will substantially reduce the ability of re-employed participants to rebuild those depleted balance which helped sustain during the recession; and it will seriously impair the ability of all  to build that so-important-cushion for future financially crises.  I would make the case that the smartest thing Congress could do right now is to increase the DC limit, as least for an interim period, to allow balances to be rebuilt.

We do not hear about this much, as it is being suffered by those without a voice: the unemployed and underemployed; those who are being treated so cruelly by the system in which they had, at one time, been invested. But it is all very real, nonetheless.

 

Keeping it simple and sensible is never an easy task. As a matter of fact, it is extremely difficult to do, particularly when dealing with something as complex as 403(b) regulations. This is why the IRS’s recent release of its 8955 FAQ’s is so striking: in merely two FAQs,  IRS and Treasury provided answers that not only make regulatory sense and further tax administration, but did it in a way which makes sense for 403(b) plan sponsors. And it surprisingly well co-ordinates with positions the DOL has taken.

TE/GE has spent considerable effort in 403(b) outreach over the past decade, even in face of much cynicism about the enhanced regulatory approach to these plans-developing an unusual amount of knowledge about the marketplace in the process. It clearly tapped into this expertise in developing the FAQs. They could not have been written without a number of highly knowledgeable regulators and auditors recognizing a challenge, and being committed to coming up with a workable solution. I have not, in the past, been shy at commenting on a number of different unfortunate choices staff has made when writing and implementing the 403(b) regulations. This time, however, staff impressed.

The following are the 403(b) questions from the FAQ. Even the most difficult part of them-the part about contracts which cease payments in 2008-arises from the requirements of the 8955 itself, but the IRS found a way to integrate it well.

Does the Form 8955-SSA filed for 2009 by a 403(b) plan sponsor have to report participants who separated from service prior to 2008 with a deferred vested benefit under the plan?

Generally, no. Form 8955-SSA filed for 2009 generally only has to report participants who separated from service in 2008. Thus, participants with a 403(b) contract or account who separated from service prior to 2008 are not required to be reported on the Form 8955-SSA filed for 2009 (or for any subsequent year).However, a participant should be reported on the Form 8955-SSA filed for 2009 if that participant separated from service in a year before 2008 and began receiving payments under the contract or account, but the payments stopped in 2008 before all of the participant’s benefits were paid. See the Instructions for 2009 Form 8955-SSA. See also Question and Answer 2 for an exception that applies even in the case where payments stopped in 2008. 

 

Does a 403(b) plan sponsor have to report all participants who separated from service after 2007 with a deferred vested benefit under the plan?  

No. A plan sponsor is not required to report a separated participant if the participant’s deferred vested benefits are attributable to an annuity contract or custodial account that is not required to be treated as part of the section 403(b) plan assets for purposes of the reporting requirements of ERISA Title I, as set forth in DOL Field Assistance Bulletin (FAB) 2009-02. 

For this exception  to apply, (1) the contract or account would have to have been issued to a current or former employee before January 1, 2009, (2) the employer would have ceased having any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009, (3) all of the rights and benefits under the contract or account would be legally enforceable against the issuer or custodian by the participant without any involvement by the employer, and (4) the participant would have to be fully vested in the contract or account. For further information, please see DOL FAB 2009-02, www.dol.gov/ebsa.

 

Once again, there are several choices TE/GE could have made when developing its position. It used its knowledge and experience to make some pretty good ones here.

Section 939A of Dodd Frank has a very interesting mandate to federal agencies. It requires federal agencies to review their regulations to determine those which require the use of a credit-agency rating in assessing the credit-worthiness of a security and:

“Each such agency shall modify any such regulations identified by the review conducted under subsection (a) to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate for such regulations.….”

This mandate, to my mind, is justified.   A number of practices of financial service companies (and, apparently, governments) are often geared to obtaining the favor of the (sometimes conflicted) rating agency, sometimes even acting as a substitute for their officers’ better business judgment. There is pressure to defer to the ratings agency’s thoughts about the financial company’s business, even though the agency may well not fully understand the business of the companies they assess. Those rating agencies, and their opinions, are far short of infallible- and may often be seriously flawed.

This plays out in any interesting way in the development of a fiduciary standard for the purchase of lifetime income products for defined contribution plans. In developing any annuity fiduciary regulation, the DOL will likely be unable to reference rating agency standards (even when issuing prohibited transaction exemptions, it noted that it is “cognizant…. of the Congressional intent to reduce reliance on credit ratings and is considering alternative standards for use instead of, or in addition to, existing requirements for credit ratings in granted individual prohibited transaction exemptions").

I had blogged a few months back on the development of such an annuity standard, and had suggested extensive reference to the credit ratings. Thinking it through, however, I now realize I was just using a “lazy man’s” way out to make the standard sound more legitimate.  In reality, actual ratings may or may not be relevant as, somtimes, the higher rating is not necessarily the best for the plan or the participants. A classic circumstance is where the “cost” of getting the higher rating (by means, for example, of establishing higher reserves) on the annuity product results in a higher priced annuity-without necessarily any commensurate, and real, increase in “safety.”

So, let me recast my suggestions for a safe harbor. 

The DOL could require, as part of a safe harbor, that the insurance company which provides the annuity product being purchased by the plan should be prepared to describe to the fiduciary the following, in terms the fiduciary can understand:

-Provide an explanation of any assessment of its financial condition that independent third parties have provided to it, or have been disclosed to a regulatory authority (such as the state insurance department) without reference to any rating which as been assigned to it.

-Describe any material changes in its financial condition in the past five years and describe why. Have those changes affected the interest rate upon which annuity pricing is based? 

-Explain how the state guaranty association rule would apply to the company’s product being sold.

– Describe material outcomes of the most recent state insurance exams.

-Explain the level of reserves, and why they were chosen.

-Describe the risk profile of the investment portfolio that supports the annuity contracts.

In a vacuum, the answers to these questions may mean little to the fiduciary. However, when compared to the answers of a competing insurance company, they could take on a quite a bit of relevance.

The fiduciary would use the answers using these sort of standardized questions (and a few others), focusing on the close details that are indicative of financial strength (or trouble), to arrive at a prudent decision-especially when used to compare the answers of other insurers.  It could possibly have the effect of putting insurance more into the vernacular and make it an extremely useful safe harbor. It could act to help guide fiduciaries through some of the dense and often arcane material that is related to insurance, and to help sort out what is impotent’s to what really is important. 

 

 

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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.   

 

 

 

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