A few weeks ago, I blogged on the important role that the Securities Compliance Officer may play in 408(b)(2) compliance. I touched on some of the securities rules which apply to retirement plans outside of the executive compensation context. Attached is a more htorough explanation of those rules, which can hopefully be useful as we attempt to wend our way through this changng regualtory landscape.  The article I wrote for the “Practical Compliance and Risk Management for the Securities Industry” March-April issue, is entitled “Securties Rules for Retirement Plans.”

 

 

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.   


 

T his has become my "annual Mother’s Day" posting, which hopefully helps describe the importance of what 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.

  

 

The IRS’s Employer Plans Compliance Unit  is in the process of issuing a 21 question questionnaire, Form 866a, to a sampling of colleges and universities, aimed at  testing  whether or not there is compliance with 403(b)’s "universal eligibility rule."

This inquiry is different than the 401(k) questionnaire that EPCU issued a while back, and is more like the "soft audit" it conducted of K-12 school districts a couple of years ago.  Where the IRS committed that the answers to the questions in the 401(k) questionnaire would not, by themselves, trigger any follow-up enforcement activity, the IRS intends to follow-up with the plan sponsor should the 403(b) questionnaire reveal any problems with either universal eligibility or plan documents. It expects employers to use the EPCRS programs to correct eligibility problems it uncovers.

The "Universal Eligibility" rule is the discrimination test for elective deferrals under 403(b), standing in the stead of ADP testing. It requires that all employees (except for small classes of excludable employees) be given an "effective" opportunity to make elective deferrals into the sponsor’s 403(b) plan, which includes giving employees regular notice of their right to defer.  The most difficult part of this rule is that it is vastly different than the 401(k) eligibility rule, where full time employees can be required to wait a year or two before becoming eligible to defer; where substantial classes of employees can be carved out of participation; and where there is no special requirement to regularly (and currently) advise them as to their right to defer.

This can be a very expensive proposition. EPCRS requires employers who improperly exclude classes of employees to contribute to the plan on behalf of those employees 50% of the average deferral amount that others have made to the plan for all years for which they were improperly excluded, as well as lost earnings on those amounts.

Anyone who has been through the corrections process knows how expensive this can get, as it also includes making a match on those monies where a match was otherwise also made under the plan. Further adding to to the scare on this one is that it is not a new rule that became into play with the 2007 regulations: "Universal Eligibility" has been a requirement for a very long time. It will be interesting to see how the IRS will approach any "long-failing" plans.

The plan document failures, on the other hand, are a recent phenomena-and one in which we will need the EPCRS changes (which are expected to have "non-adopters" corrections) to be published to provide relief under this new "review."

Like the 401(k) questionnaire, the IRS has promised to follow-up on those who fail to answer the questionnaire-as they are now following up on non-responders to the 401(k) questionnaire with formal investigations. 

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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.   


 

 

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

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

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

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

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

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

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

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

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

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

 I have had the pleasure recently of making a presentation to the National Society of Compliance Professionals Midwest Compliance Meeting with Chris Guanciale of PlanMember Services. The NSPC is a nonprofit membership organization dedicated to serving and supporting compliance officials in the securities industry. What we had to say to them was not particularly good news for these overworked professionals. 

There has been a distant relationship in the past between the application of securities law and the application of ERISA. See, for example SEC Release 33-6188 (among other releases) where the SEC describes its essentially "hands off " position with regard to retirement plans.

Over the past few years, with the new found activism of the DOL and the growing impact of retirement plans in the securties market (as of 3rd quarter last year, retirement plans-both ERISA and non-ERISA- had a value equal to about $16 trillion, which was some 88% of the value of publicly traded securities in the Unitied States. Individual account plans like most 401(k) and 403(b) plans, are a "mere" $4 trillion dollars of that total, or some 23% of the value of publicly traded securities), this distance has been "shortening". I have blogged a number of times on this point. 

So now we have the new 408(b)(2) regs, which I often term as potential "business busters" because they speak to the fundamental basis of doing business in this very large retirement plan marketplace: getting paid for the services provided. If you are in this business, compliance with 408(b)(2) is a fundamental issue, because it is a prohibited transaction exemption. Without compliance with 408(b)(2), the business often cannot receive some of their compensation for services related to ERISA retirement plans.

The sorts of things 408(b)(2) covers are at the heart of the Security Compliance Professionals’ practice: disclosure, particularly with regard to fees generated off of investments. It seems that "Compliance" is really the only institutional structure many financial firms have under which they can implement, manage and control their 408(b)(2) practices.  And any new "fiduciary" rules only further complicates this task.

Attached is the outline provided for this presentation. Hopefully, you’ll find it helpful. 

It has been a while since I jumped on the blogging trail, but the question "What comes first, the Written Plan or the Implementation Date?"  seems more and more like…  "the Chicken and the egg." 

Taking this one step at a time, there are a significant number of employer/plan sponsors, administrators and others tackling this question.  I have had a number of conversations with individuals and groups that began pulling together the "Written Plan" for their 403(b) plan(s) and were simply stumped when posed with defining the original start date of the plan.  I have found this question alone can be the primary reason a "written plan" was not finalized for some 403(b) plans.  

Once we get past the "chicken and egg" conversation, the conversation progresses to somewhat of a dart board effect.  Well, a reasonable guess would be to date the plan as of 01-01-2009, but your investments would possibly age prior to that date.  Another reasonable guess is the oldest date on the first investment contract or account holding current assets.  There is a solid argument for this approach, but it can result in a bit of an art, rather than a science. 

Sometimes the right answer is very much tied to your facts and circumstances, within reason.  If you can identify the date of the first contribution or funding to your 403(b) plan, begin there and work forward.  Read on for additional challenges that have surfaced while capturing the "written plan"…

  

Continue Reading First things first… kind of like the chicken and the egg!

When the insurance industry began seriously developing the "living benefits" under annuity products for the retail marketplace a few years back, I dubbed them as "not your grandpa’s annuity." This is because they were attempting to address the concerns that the market had about traditional annuities, which are seen as irrevocable, inaccessible, invisible and inflexible. ( I have blogged on this a few times in the past.  Click on the "401(k) Annuitization" link at the right sidebar to see the posts).

It is encouraging to see the discussion now seriously moving to the provision of these types of products from retirement plans.  

Much of this new discussion is focused only something called "guaranteed minimum withdrawal benefits," or "GMWBs." Under these sorts of arrangements, a systemic monthly withdrawal is made from the participant’s account under the annuity, which will be guaranteed for the participant’s lifetime-even when the account balance runs out.  This is a popular program in the non-plan marketplace, and (at the appropriate price) can be well suited as a distribution option under a 401(k) plan.

GMWBs are not the entire story, however, as there is a whole range of "living benefits" beyond GMWBs which may be appropriate for distribution under a 401(k) plan. This list includes things like:

  • variable annuitization, which provides lifetime income while giving the policyholder some level of equity or "equity-like" participation;
  • guaranteed minimum account value programs (GMAB), which lock in investment gains over a period of time;
  • guaranteed minimum income benefits (GMIB), which insure the purchase of a minimum income stream beginning at a certain time, regardless of underlying equity performance; and
  • a guaranteed lifetime withdrawal benefit (GLWB), which insures the ability to withdrawal benefits at a minimum level for a lifetime.

The legal issues in providing these benefits are all very similar, and are addressed in my newly updated article for BNA Pension & Benefits Daily, "Annuitizing From § 401(a) Defined Contribution Plans: A Technical Overview."  For those with far too much time on their hands, and wanting to read a more extensive discussion on the topic, I am reposting the Tax Management Memorandum on "Income Guarantees in Defined Contribution Plans." 

 

But, first, another note of introduction……

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

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

Drop Sandy a note at sek@rtothlaw.com.

Now, his first blog:

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

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

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

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

 

Continue Reading For Guaranteed Lifetime Income in DC Plans: (ITS) Time Has Come Today

Working through the technical terms of 408(b)(2) is not much different than putting together a picture puzzle. There are a lot of pieces which fit together in some very precise ways. But, in the end, the disclosures which are required are pretty straightforward and-even given the work needed to describe certain ”wrapped” services and estimating their costs- can be made very simply. Keep in mind Asimov’s concept of “Minimum Necessary Change," upon which I blogged a while back.

Long pages of disclosure are not necessary or warranted. 

There are certain keys to making it work, and making the disclosure simple. Keep a few things in mind:

  •  Are you really a “Covered Service Provider” (CSP) that has to make a disclosure (see, for example, my piece on annuity investment accounts)? Remember, a CSP has a direct contract or arrangement with the plan, and that is the party that has to disclose-and only certain service providers are subject to disclosure rules. So, for example, a TPA which doesn’t maintain the financial records (such as where a 401(k) plan is funded with allocated group annuity contracts; or for most 403(b) plans which are funded with individual annuity and custodial contracts);  whose fees are paid directly by the employer or the plan; and for which the TPA doesn’t receive 12b-1 fees, commissions, or other indirect compensation are not CSPs and need not disclose under the new reg.
  • Are you an affiliate or a subcontractor? If so, you don’t need to disclose, but the CSP needs to disclose what they pay you. This generally may include insurance agents who sell annuity contracts to 401(k) or 403(b) plans, and who are likely to be "subcontractors" because of their servicing the contract with things like enrollment services.The caution to those folks: make sure you understand what the actual CSP is saying about you.
  • Make sure you are a “recordkeeper” before you commit to making financial disclosures. Many TPA’s are not 408(b)(2) recordkeepers on much of their business.
  • Keep the disclosures simple, short and sensible. Check existing documents first, as most of the required disclosures may already be in the existing service agreement, policy or other existing agreement.
  • For those who will receive indirect comp from a number of sources, try to standardize what you say about them, and create a short disclosure statement. Only send to those plans which generate that comp.
  •  Over-disclosure is as bad as under-disclosure. Review and edit the description of indirect comp programs that others give you, to make sure it actually applies to you and properly describes your role in it all.
  • Tweak your contract form to accommodate what you say in the disclosure, if necessary. Many existing contracts will not need to be changed to meet the rules.  Even then, however, consider incorporating some helpful changes when renewing the contract.

It does get a bit messier where data on the underlying investment needs to be disclosed, but even this is straightforward and can be simply made from existing data from accessible sources, and can be made in a standardized format.

Follow these guidelines, and you may be surprised with how simple the 408b2 disclosures may really be.

 

 

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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.   


 

 Generally unnoticed in the DOL’s proposed fiduciary reg was the implicit recognition that the commissioned based sales function is important to the operation of the market, and that you can “sell” until the cows come home (a good friend tells me, by the way, that the cows actually do eventually come home),  or until you become a fiduciary.  Anyone familiar with the successful salesperson knows that they are only able to sell once they establish a level of trust with the plan fiduciary, which is why trade organizations are taking the DOL to task on the requirement that the salesperson, in order to be recognized as not being a fiduciary, must then advise the fiduciary (with whom a relationship is being forged) that he or she may have adverse interests to the plan.

However that language is eventually finalized, it raises an important question that hasn’t really been addressed well, being a sort of red-haired stepchild of ERISA: Just what is “sales”and how are commissions treated? Finding your way through it can be trying, as if its a practice in ERISA metaphysics, mysticism and alchemy.

It starts with the basic question of whether or not “sales” is considered a service. It does seems almost metaphysical, and would be amusing if it didn’t have a very real impact.   Commissions from pure sales of an investment product to a plan from a party without an existing relationship to a plan (either on its own or through an affiliate) does not seem to be governed either by 408(b)(2) or by the prohibited transaction rules.  “Sales,” by itself does not seem to be a service covered by 408(b)(2), and the payment of a commission to a someone who is not a party of interest may raise fiduciary concerns if too much is paid, but it is NOT, in itself, a prohibited transaction.  But there are times where sales and the payment of commission may eventually be considered services, where there becomes an ongoing, supportive relationship.

Lets go over some “pure sales” scenarios, with the impact of “sales as service” perhaps being handled in a future blogs:

Continue Reading ERISA Metaphysics, Mysticism and Alchemy: Sales Compensation