The Green Book, published May 11 by the Treasury Department, contains further details on Obama’s workplace pensions first described in his budget proposals (on which we blogged  in March). See pages 7-9 of the Treasury report for details.

It really does create a new scheme of individual pensions, much akin to the 403(b) arrangements of the past. I strongly suspect that there will be many similarities to the manner in which private industry approaches these to the way industry had approached "non-ERISA" 403(b)s.

It will cover employers who had been in business for  two or more years and who have 10 or more employees. Eligibility will be a lot like the "universal eligibility" rules under 403(b), in that those employees who are eligible (or who are excluded under a statutory exclusion) under a plan of the employer (even if not participating) can be excluded from this automatic program. If an employer excludes a class of employees for reasons other than the statutory exclusions, they must be covered by the IRA program.

The default rate of deferral is proposed to be 3%, which the employee could lower or raise (but who cannot "opt out"). 

It would be by payroll deduction, mostly with direct deposit to the IRA. There would be default IRA investments set by statute, for employers who did not wish to be involved in vendor selection. Employers would have the option of designating a private sector custodian, or permit employees to choose their private vendor.

Like the 403(b) plans of old, employers would have no responsibility for compliance with "qualified plan-like" requirements, nor have any responsibility for monitoring IRA eligibility or contribution limitations. The individuals, not the employers, would bear ultimate responsibility for compliance. A national website would be maintained with information and investment educational material.

Like 403(b) plans of old, the variable investments among these products these will be registered  which need to be sold by registered reps. They will be individual arrangements, typically with higher costs and fees, and in different asset classes than employer products. Inevitably, group arrangements will be offered by vendors to attempt to garner more assets from larger employers or groups of employers in order to offer more competitively priced products. Eventually, there will be RFPs and competition at the employer level for access to payroll slots. This all can create some ERISA tensions.

This proposal really means something for 403(b)plans down the road. But even now, given the Administration’s position that it is OK to rely upon participant representations under circumstances such as these, perhaps the IRS should take a closer look at allowing such representations under its current 403(b) regulatory attempts as a way in which to resolve many of the tough transition rules which we are now facing.

 

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

 

ERISA wonks such as ourselves tend to get lost in the press of details which seem to flow non-stop from our regulators and legislators in D.C.  It is sometimes helpful to step back and see the personal impact of the things we do.

A few years back, a good friend of mine who ran the retirement plan operations of a large insurance company asked me to speak about ERISA to a meeting of his administrative processing staff. At the time, they were still struggling with some of the more difficult administrative processes related to the QJSA and QPSA rules. Here’s what I told them:

My father died at Ford’s Rouge Plant in 1970, after 20 years with the company. Back then, the normal form of benefit under a defined benefit plan was a single life annuity, covering the life of only the employee.  There was no such thing yet as a qualified joint and survivor annuity or a qualified pre-retirement survivor’s annuity.  This meant that my father’s pension died with him. My mother was the typical stay-at-home mother of the period who was depending on that pension benefit for the future, but was left with nothing. With my father’s wages topping at $13,000 annually and five kids at home, there was also little chance to accumulate savings.

The Retirement Equity Act of 1984 (a copy of which I still keep in my office) was designed to change all of that. By implementing the requirement of a spousal survivor annuity, a whole class of non-working spouses received protection which was desperately needed.  So in that speech to my friend’s administrative staff, I asked them to take a broader view-if just for a moment- of the important task they were being asked to implement. It was valuable social policy with real, human effect which they were responsible for pulling off, and they should take a measure of pride in the work they were doing.

Things have evolved much over the years, and some of those same rules which provided such valuable protection have become the matter of great policy discussions centering on whether they are appropriately designed, and whether they can be modified in a way to accommodate new benefits like guaranteed lifetime income from defined contribution plans. But the point is that Congress sometimes gets it right, and there is very valuable social benefit often hidden in the day to day  "grunge" of administering what often seems to be silly rules.

Mom, by the way, is still alive and doing well.

  

 

 Mark Iwry, one of the principals of of the Retirement Security Project, has been appointed as  Senior Advisor to Treasury Secretary Geithner and Deputy Assistant Secretary for Retirement and Health Policy.

First and foremost, our heartfelt congratulations to Mark. This is a post well suited to him, and an appointment which will serve the nation’s retirement needs well.

Mark’s policy pedigree will be known to many readers of this blog: he was one of the early advocates behind the Automatic Enrollment rules under the PPA; he was instrumental (with David John) in the development of the Administration’s retirement policy of mandatory employer based IRAs; and has done much work with the RSP (through writings and many presentations) on the value of annuities and lifetime guarantees in defined contribution plans.  We have mentioned his work a few times in our blog.

We have no crystal ball or any inside information, but the presence of a senior administration official who passionately believes in protecting workers’ retirement income, and who sees annuities as one of the critical tools in that effort, is likely to manifest itself in the policies developed by this administration.

This appointment clearly gives a boost to an imorrtant financial tool. The challenge is for vendors  to develop a series of appropiate products and policymakers appropriate rules that address the concerns that advisors continue to raise, most particularly the transparency of an annuity’s financials and addressing the fear of insurance company meltdowns.

 

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

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

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

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

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

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

Just when I thought I was going to get a chance to talk a bit about annuities again, the IRS drops a bomb: it has proposed the design of its long awaited 403(b) prototype program and List of Required Modifications.  Announcement 2009-34 is the description of the prototype program; and the LRMs can be linked here. 

Combined, it is 92 pages of pretty serious reading. Pay close attention to the detail as you read it, as some very small statements seem to reflect some pretty large decisions.

There is a lot in that announcement and the LRM, and you’ll find us blogging on a number of issues we have already noticed. First, however, let’s tip our hats to the IRS. The documents are clearly written and well considered. There a number of things to take issue with, but this is  a vast improvement over the ambiguities introduced by the difficult language under Rev. Proc 2007-71. I have read a large number of documents in the past year, and this is really among the best written I have seen. The Announcement itself also shows that the IRS has been listening to (though not necessarily agreeing with) the comments of the 403(b) community.  Angelique Carrington and James Flannery should be complimented on their efforts, as well as the drafters of the LRMs.

So, now that I’m done gushing about the IRS staff, lets take a quick look at a few key points about the structure:

  • Comments are due by June 1. The IRS also wants to hear from potential volume submitters and prototype sponsors. They want to know who will be sponsoring these plans, and how many plans do they intend to sponsor.
  • There will be a Standardized and Non-Standardized program, both based upon using a basic document.
  • There will be an individual determination letter program, but it is still in the making.
  • In a thoughtful move, there will be the ability to retroactively correct defects in currently drafted plans, by a date to be determined-but it will be no earlier than March 15, 2010.
  • There is not yet any auto-enrollment language, that is still being written.
  • No changes will be required for any school district which has adopted the sample language in Rev. Proc. 2007-71. There will still be reliance to the extent the 2007-71 language is used, but sponsors will not have the benefits of a prototype program.  
  • It limits Notice 2007-3 to 2009 only; that Notice will not be extended.

Some initial thoughts on a few substantive points:

  • The IRS wants to cover what they consider to be "most eligible employers," a decision which seems to have driven most of their substantive choices. Several of its choices, however, severely limit the use of the prototype:
    • Users of the prototype can only have one beneficiary per contract. Virtually all annuity contracts support multiple beneficiaries.
    • The prototype MUST have language under which the specific plan language will override any inconsistent provision in any annuity contract or custodial account. This will force employers to take a serious look at each of their contracts (assuming they can figure out which contracts are part of the plan) before they can adopt a prototype. On the positive side, does this imply that a Plan Administrator for an individually designed plan has the authority to determine if the contract language or the plan language applies?
    • The prototype language requires that the participant can change investments at will. This is a particular problem for a lot of annuity contracts, many of which have transfer restrictions on their "guaranteed" funds. 
    • All employer contributions must be fully vested-even under the Non-Standardized contracts. This means that most plans with employer contributions will not qualify for the prototype program.
  • The IRS recognizes that many plans will not be able to be covered by the prototype program. I suspect there will be a lot more not eligible than they think.
  • The administrative duties language in the LRM is smartly written: it obligates the sponsor to monitor and make sure things are being done, instead of commanding them to do specific acts for which they may not have the authority. Well done. 
  • The LRM and the proposed Rev. Proc. have taken a huge step in identifying the 415 limit as an Employer based limit, not an individual limit. IRS staff in the past had suggested publicly that the 415 limit was to be applied against all 403(b) contributions from unrelated employers.

There is much more to come.

 

It has been a couple of weeks since we’ve last posted a blog, and with good reason. Between Evan, Monica and I, this two month span has us doing some 15 presentations and articles, whie keeping up with clients (and a couple of us squeezing in some overdue vacation time!).  Monica is speaking this week at the Plan Sponsor 403(b) Summit in Orlando; Evan will be speaking this week at a TIAA Client Forum in DC and at the CUPA Eastern Regional Conference in two weeks; and I am speaking at the IRS/ASPPA Great Lakes benefits Conference in Chicago next week and the NIPA Annual Conference in Las Vegas the week after. Come up and say hi if you see us! 

DC annuitization seems to be picking up a head of steam recently, with attention being paid to guaranteed income streams because of the effects of the recession on 401(k) and 403(b) accounts. As our good friend and fellow blogger Jerry Kalish has posted, the train is pulling out of the station. The Retirement Security Project has been espousing this for a few years; many of the major insurance have developed products specifically for this market; and even mutual fund companies are working with insurers to develop solutions. We have also blogged and published on this issue a few times.

Now Phyllis Borzi, the President’s nominee for Ass’t Secretary of Labor for the EBSA, is reported to hold the same conviction as well.

So, the real question is now what? Most consultants, TPAs and lawyers have only a passing familiarity with annuities, particularly the new breed of annuities which offer innovative guarantees. How does one go about deciding which annuity is right, whether the fees are appropriate, and whether the insurance company is solvent enough?  How do you explain their features to plan participants, and what part does it play in an employer’s benefit program? What do you need to know about state guarantee associations, and what about rating agencies and the problems they now seem to be having?

In short, the things a plan has to look at to buy these financial guarantees creates quite a "fog" for an industry unaccustomed to them. The products are not difficult to understand, but their features, documentation and issues are much different than the typical plan investment we have been dealing with over the past few decades.

The DOL has made a first stab at things,  publishing an annuity safe harbor  designed to assist fiduciaries in their choice of annuity policies as a distribution option under their individual account plans. The insurance industry is not enamored by the safe harbor, as it seems to set some pretty high standards for fiduciary review, one which competing long term investments don’t seem to have to suffer.

Imperfect as they may be, take a look at the DOL regulation. It does provide a chance to help begin to understand these products so that fiduciaries may become more comfortable with them.  We’ll be addressing a number of those issues raised in the reg in the next few blogs.

 

Evan and I spoke at the ALI-ABA’s Advance Law of Pensions this past week in San Francisco, probably the leading seminar for experienced employee benefit lawyers in the country. Our topic was "Getting Over The Hump," a 403(b) guide for the non-403(b) practitioner. We’re checking with ALI-ABA for permission to publish our paper and PowerPoint here.

One of the most difficult questions we received from the audience had to do with the counting of former employees for purposes of the 2009 Form 5500 (those "Lost Souls of 403(b)"), which 403(b) plans will need to file in toto for the first time. Follow this link to the DOL’s 2009 Form 5500 regs.

The question went something like this (with editorial license taken): a private tax-exempt employer has maintained a 403(b) plan for 25 years, under which 75 employees are currently eligible to participate (remember, here, the universal eligibility rules will really goose this number).  The employer also has had, over its 25 years of maintaining the plan, 100 former employees who had left its employ owning individual 403(b) contracts (either custodial accounts or annuity contracts). The employer has never tracked these contracts, and now needs to know whether or not to include these former employees in their counts for the Form 5500.

This is a huge question, because the answer will determine whether or not an expensive audit will be needed for the plan year: if contracts for those "lost souls" need to be included, the participant count will cross the audit threshold of (generally) 100 participants; if the plan doesn’t need to count them, the audit will not need to be done. Its an important issue even for those for whom the threshold will not be crossed, as the totals will still be needed for inclusion in the shortened Form 5500 schedules, and the Form itself.

Regrettably, there are a whole host of other Title 1 questions which are also implicated.

One would hope that we could look to the IRS’s Rev. Proc. 2007-71 for guidance, to glean some sort of sensible ERISA answer which would be consistent with the Code: perhaps if you don’t need to track the participant’s contract or account for tax compliance purposes, you wouldn’t need to include it in plan counts for ERISA purposes.  This, though, has its odd results: the inactive contracts issued prior to 2005 would all be excluded, and inclusion of those in the 2005-2009 "transition" period would depend upon whether they were for active or former employees and whether a good faith effort has failed. Given the difficulties and ambiguities surrounding the implementation of 2007-71, this Rev. Proc. will not provide a testable, objective standard which would pass an auditor’s scrutiny.

A clearer answer is likely to be found in using the DOL’s traditional analysis of what constitutes a "plan asset" for its regulatory purposes. The DOL has consistently ruled in the past that "in situations outside of the scope of the plan assets-investments regulation, the assets of a plan are to be identified on the basis of ordinary notions of property rights," Advisory opinion 92-22A. See also 2005-08A, and 2003-05A.

So, it would seem that you would need to look to the terms of the annuity contracts and custodial accounts of these former employees and make a determination if the particular contract fell within the "ordinary notions" concept. To me, this is particularly attractive because it uses an existing "structure" to address the tough issues for employers like the one in my example, who may have no idea if any particular contract even exists any more. It also may provide a method by which to sanely determine whether an individual annuity contract, a certificate under a group annuity contract, an individual custodial contract or an interest in a group custodial arrangement should be covered: that is, look at their terms and the legal rights they convey, not merely at the "type" of arrangement it is.

There is no doubt a bit of tweaking will need to be done to make this work in the 403(b) context-including developing protections to avoid excluding active contracts, and how to deal with plan terminations. But the DOL has addressed odd issues before, noting in footnote 2 to Advisory Opinion 94-31A that they can be informed by their ability to further develop the "common law" of ERISA when dealing with the definition of "plan assets."

Important participant rights can be protected in the same manner as under terminal funding annuities or under plan distributed annuities (about which we have blogged). It would be also helpful if whatever the DOL comes up with was recognized by the IRS as representing the same "pool of lost souls" against which the tax compliance rules would apply. 

 

 

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

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

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

 

 

One of the most unfortunate and unintended consequences of the new 403(b) regulations is the freezing of hardship distributions and loans from contracts of "deselected" vendors, at a time when these funds are needed the most.

What at first seemed like an almost esoteric, academic discussion of what to do with contracts which were issued prior to 1/1/09 and to which all contributions ceased as of that date has now become one which is fraught with human tragedy. Participants in in 403(b) plans (and, it seems, mostly in non-ERISA plans like school districts) are now caught in a terrible cat-fight between employers and vendors which has resulted in employees not having access to those 403(b) funds to help them through this economic mess in which we find ourselves.

What is happening is all centered on the most fundamental change that the regs have introduced: the banning of the ability of a vendor or an employer to rely on a participant’s representation when taking a loan or hardship from their 403b contract. The old rule which permitted such reliance made much sense, particularly for employers where 403(b) plans were adopted and administered as the individual pensions they were intended to be.  The wholesale "dumping" of that rule has now befuddled the marketplace, as vendors and employers try to sort out who has the responsibility for doing what employees used to be able to do.

The typical scenario goes something like this: An employer, in response to the new regs, has sorted through their plan and has limited the number of vendors available. The "deselected" vendors are not named in the plan document, and are not treated by the employer as part of the plan. Deselected vendors, by the same token, do not wish to be part of the plan and want no obligation for compliance from those old contracts. The employer has engaged in the "good faith" efforts under Rev. Proc. 2007-71, and has notified the deselected vendor of the contact information necessary to get compliance data.

A participant approaches a deselected vendor for a hardship distribution to prevent the foreclosure of their primary residence, and fills out the appropriate vendor form. The vendor, instead of being able to rely upon the employee’s representation as to the existence of a hardship, is now seeking assurances from the plan that: (1) that the plan allows for hardships, and that the safe harbor will be followed which suspends elective deferrals for 6 months; (2) that the employer make a determination of hardship; and (3) that the employer approve the distribution.

The employer is now in a quandary.  They have excluded that old contract from their plan.  They fear approving the hardship brings the vendor’s contract into the plan. It will cause them to try to enter into a servicing agreement with the deselected vendor to get the compliance the employer needs.  Inclusion in the plan without referencing it in the plan document and without coordinating the terms of the contract with the terms of the plan can disqualify the plan. If it is a non-ERISA private employer, that sort of decision will trigger ERISA Title 1 obligations. So the employer tells the vendor to go away, and that its up to the vendor to make that determination.

The vendor, unwillingly to become the party responsible for complying with the new 403b regs, denies the hardship.  The policyholder is left holding the bag.

What is happening on the loan side is also causing hardship. Deselected vendor loans are very difficult to get.  Even with "selected" vendors, it is now very time consuming in the "multivendor" 403(b) environment to get a loan. It now typically takes a great deal of time to collect data from all the vendors in order to get loan approval, forcing incredible delays into the system that 401(k) plan participants do not suffer. Implementation of the SPARK standards, intended to help alleviate this, is spotty at best, and appears  to be successfully implemented only in a small number of very large vendors.

It is within the IRS’s authority to partially address the most egregious of these problems: at least for deselected contracts issued prior to 1/1/09, and to which no contributions have been made after that date, allow vendors and employers to rely upon employee representations and the single vendor’s own records. Could there be some abuse? Absolutely. But will it help bring relief in a crisis where there is terrible human tragedy? Without a doubt.

 

 

 

We recently blogged on the similarities between the Automatic Workplace Pension being proposed in President Obama’s budget proposal and the original concept of the retirement programs under IRC section 403(b). We noted that while 403(b) programs were initially set up as individual pension plans, it has been the policy of the IRS for over 15 years to treat 403(b) programs as employer plans. The IRS’ approach to 403(b) plans, most recently manifested in the new regulations under 403(b), is particularly problematic for the continued viability of the so-called non-ERISA 403(b) arrangements. These are 403(b) programs that are intended to fit under a safe harbor from ERISA coverage ( DOL regulations §2510-3.2) that exempts a 403(b) program from Title I of ERISA if the employer is minimally involved in its administration and does not exercise any discretionary authority over the program. The increased compliance responsibility imposed by the new IRS regulations can easily cause an employer to run afoul of the DOL rules, and have caused practitioners to question the continued viability of non-ERISA 403(b) arrangements.

Despite some helpful efforts by the DOL to provide guidance (e.g., Field Assistance Bulletin 2007-02), there are still significant obstacles for the employer that wants to maintain a non-ERISA 403(b) arrangement. Under the 403(b) regulations, the employer is responsible to make certain that the program remains in compliance with the tax rules, but its efforts to meet this responsibility can then cause it to fall out of the DOL safe harbor.   For example, a program that allows loans or hardship withdrawals will fail to meet the IRS’ rules unless someone, other that the employee, determines that a request for a loan or hardship withdrawal complies with the applicable tax rules. If the employer makes that determination, it has gone beyond what is permitted under the DOL rules. While the determination can be made by the investment provider, many are unwilling to take on that responsibility. And the employer apparently cannot simply hire a TPA to fulfill this function; the decisions of the TPA will be attributed to the employer. This problem is exacerbated when the plan is funded by multiple investment providers and the records of each provider need to be coordinated to ensure compliance with the tax rules.   As the DOL has said that in order to fall within the safe harbor a 403(b) plan must (at least in most cases) have more than one investment provider, most non-ERISA 403(b) arrangements will need to coordinate between providers.

The similarities of the Automatic Workplace Pension proposal to 403(b) plans and its apparent (early) support from both sides of the political spectrum demonstrate that there is still a continuing need for the non-ERISA 403(b). This is a simple and relatively inexpensive retirement savings arrangement that works much like the new proposal: the employer’s major responsibility is to send salary reduction contributions to investment providers. It avoids some of the costly obligations that apply to ERISA covered plans, such as the need to have an independent audit if the plan has over 100 employees.   Moreover, the non-discrimination rules that apply to the salary reduction provisions of 403(b) plans – universal availability – are easy to apply and consistent with the policy goals of encouraging widespread participation. Arrangements under section 403(b) have a long and successful track record of promoting retirement savings among employees in the tax-exempt community, and should continue to be encouraged.