A Red Flag for a ‘Red Flag’ Report

  Did you hear the one about how nearly all U.S. retirement plans have “at least one regulatory or fiduciary ‘red flag’ violation”?

Well, here’s hoping you haven’t. Because this so-called “analysis” of Form 5500 filings claims to have discovered that 84% of all (that’s right ALL) retirement plans in the United States have “at least one likely Employee Retirement Income Security Act (ERISA) red flag from a regulatory and/or fiduciary violation.”

Now, having grabbed your attention, you probably won’t be surprised to find in the fine print of the press release an opportunity to “schedule a cost-free benchmarking audit.” But before you do so, you might want to take a look at the criteria this firm designates as a “red flag.”

From their press release, “Abernathy-Daley defines red flag violations as either ‘infractions, fineable offenses, fiduciary failure, or plan malpractice’ and are separated into two main categories: Regulatory Infraction Red Flags (RIRF) and Egregious Plan Mismanagement Red Flags (EPMRF).” 

As if the industry needed any more acronyms — much less made-up ones. 

With regard to the former, the press release identifies the following “selected RIRF infraction categories”: 1) loss from fraud or dishonesty; 2) not offering qualified default investment alternatives (QDIA); 3) an insufficient fidelity bond; and 4) not 404(c) compliant. With a straight face the firm claims that at least 328,833 retirement plans had at least one of these RIRFs, representing approximately 43% of the total plans. 

We’ve got no numerical breakdown by category, but someone should notify these folks that there’s no legal requirement that a plan be 404(c) compliant nor that they offer a QDIA.  These are safe harbor options available to any plan that desires them and that is willing to take on the conditions that accompany them — but it’s hardly a violation of any kind not to.

As for losses from fraud or dishonesty — well, to the extent such things are actually discoverable on the 5500, it’s likely the plan already knows the issue (and has already resolved the matter). Ditto the allegedly insufficient fidelity bond — and well, considering the categories compiled here, it would be useful to know what they deemed “insufficient.”

And then there’s the “Egregious Plan Mismanagement Red Flags” (EPMRFs). Hope you’re sitting down. Those are defined as “red flags that may not necessarily result in a fine, but represent failure of: The plan administrator in their fiduciary duty to the plan sponsors, and The plan sponsors in their fiduciary duty to their employees.”

More to the point, these “infractions” (their word choice, not mine) were detailed as “1) Not including automatic enrollment; 2) No corrective distribution of excessive contributions; 3) No 404(c) with participant-directed accounts; and 4) Failure to transmit payments on time.” Once again, we don’t have a breakdown of how many in which category, but they claim that at least 584,113 retirement plans had at least one EPMRF, representing approximately 76% of the total plans.

Once again, though — neither automatic enrollment nor 404(c) compliance is legally required (unless it’s a plan adopted after Dec. 29, 2022, and those won’t yet have shown up in the Form 5500 data). And again, if you’re able to find evidence of corrective distributions and/or failure to transmit payments on time on the Form 5500 — well, that’s only because the issue has been found, acknowledged, and likely corrected.

Look, an advisory firm can set out whatever standards it deems appropriate, affix clever (if arguably misleading) names (and acronyms) to practices that fall short of those individual standards, and even issue a press release proclaiming that it has found the vast majority of plans in existence are found “wanting” based on those standards — doubtless in hopes that it will be picked up and shared uncritically by the media (and read by potential clients).

That said, the deliberate choice to position practices that are clearly neither required nor necessary as some kind of “regulatory and/or fiduciary violation” — strikes me as a “red flag” violation of another kind.

• Nevin E. Adams, JD

5 Things Plan Sponsors Should Know

Whether or not you’re in the habit of making New Year’s resolutions, this is a time of year when reassessments seem appropriate, and perhaps in no area as much as that of retirement plan administration. Many find themselves in the role of plan sponsor (or plan committee) with no background, limited training, and far more responsibility than they may appreciate at the outset.

For those of you who find yourself starting the year with new plan sponsor clients, or new members of the plan committee, or perhaps even incumbents who could benefit from some New Year’s resolutions, here’s five things every plan sponsor should know:

How much your 401(k) plan costs.

Okay, fees are just one of several factors plan sponsors need to consider, but when the fees for services are paid out of plan assets, there is an obligation to understand the fees and expenses charged. This is important because you are expected to ensure that the fees paid and services rendered to the plan are reasonable. It’s hard to know if the fees paid are reasonable if you don’t know what they are. Oh, and even if the plan fees were determined to be reasonable in the past, they need to be monitored. Things change over time, after all.

Need some help? Check out this information from the Employee Benefits Security Administration. 

The services that you receive for those 401(k) fees.

As noted above, determining reasonability of fees and services means not only understanding the fees paid, but also the services provided for those fees. Larger fees may, of course, be reasonable for more expansive or comprehensive services. But also note that paying big fees for unnecessary services could be considered unreasonable.

See also “Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan.”

How much of your 401(k) plan fees/costs go to whom.

Arguably, knowing how much who is being paid for what is required to assess reasonableness. But the Department of Labor now requires that “covered service providers” (CSP) furnish in writing “the services to be provided and all direct and indirect compensation to be received by a CSP, its affiliates, or subcontractors. You can find out more about these requirements here.

Who the plan fiduciaries are.

Odds are, if you as a plan sponsor are reading this, you are one. But don’t take my word for it. Check out “Meeting Your Fiduciary Responsibilities.”

The responsibilities — and obligations — of plan sponsors.

Since you (probably) are one, you should make sure you know what your responsibilities are, the extent of your personal liability, and what kind of insurance is maintained by your employer to address that exposure.

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently.

That brings up a sixth item for our plan sponsor list: If a plan fiduciary lacks the expertise to fulfill those duties, they should, of course, consider hiring a professional to help them.

- Nevin E. Adams, JD

Take It or Leave It?

While each situation is different, in my experience leaving a job brings with it nearly as much paperwork as joining a new employer. Granted, you’re not asked to wade through a kit of enrollment materials, and the number of options are generally fewer, but you do have to make certain benefits-related decisions, including the determination of what to do with your retirement plan distribution(s).

Unfortunately, even in the most amicable of partings, workers have traditionally lacked the particulars to facilitate a rollover to either an individual retirement account (IRA) or a subsequent employer’s retirement plan—and thus, the easiest thing to do was simply to request that distribution be paid to him or her in cash.

Over the years, a number of changes have been made to discourage the “leakage” of retirement savings at job change: Legal thresholds for mandatory distributions have been set; a requirement established that distributions between $1,000 and $5,000 on which instructions are not received either be rolled over into an IRA or left in the plan; and even the requirement that a 20 percent tax withholding would be applied to an eligible rollover distribution—unless the recipient elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. All these have doubtless served to at least give pause to that individual distribution “calculus” at job change.

Indeed, a recent EBRI analysis¹ indicates that workers now taking a retirement plan distribution are doing a better job at holding on to those retirement savings than had those in the past. Among those who reported in 2012 ever having received a distribution, 48.1 percent reported rolling over at least some of their most recent distribution into another tax-qualified savings vehicle, and among those who received their most recent distribution through 2012, the percentage who used any portion of it for consumption was also lower, at 15.7 percent (compared with 25.2 percent of those whose most recent distribution was received through 2003, and 38.3 percent through 1993).

As you might expect with the struggling economy, there was an uptick in the percentage of recipients through 2012 who used their lump sum for debts, business, and home expenses, and a decrease in the percentage saving in nontax-qualified vehicles relative to distributions through 2006. However, the EBRI analysis found that the percentage of lump-sum recipients who used the entire amount of their most recent distribution for tax-qualified savings has increased sharply since 1993: Well over 4 in 10 (45.2 percent) of those who received their most recent distribution through 2012 did so, compared with 19.3 percent of those who received their most recent distribution through 1993.

The EBRI report also notes that an important factor in the change in the relative percentages between the 1993 and 2012 data is the percentage of lump sums that were used for a single purpose. Consider that among those who received their most recent distribution through 2012, nearly all (94.0 percent) of those who rolled over at least some² of their most recent distribution did so for the entire amount.

There is both encouraging and disappointing news in the EBRI report findings: The data show that improvement has been made in the percentage of employment-based retirement plan participants rolling over all of their LSDs on job change, along with less frequent pure-consumption use of any of the distributions. However, the data also show that approximately 55 percent of those who took a lump-sum payment did not roll all of it into tax-qualified savings.

In common parlance, “Take it or leave it” is an ultimatum—an “either/or” proposition that frequently comes at the end, not the beginning, of a decision process. However, as the EBRI analysis indicates, for retirement plan participants it is a decision that can (certainly for younger workers, or those with significant balances) have a dramatic impact on their financial futures.

Nevin E. Adams, JD

 

¹ The November 2013 EBRI Notes article, “Lump-Sum Distributions at Job Change, Distributions Through 2012,” is online here. 

 

² Two important factors in whether a lump-sum distribution is used exclusively for tax-qualified savings appear to be the age of the recipient and the size of the distribution. The likelihood of the distribution being rolled over entirely to tax-qualified savings increased with the age of the recipient at the time of receipt until age 64. Similarly, the larger the distribution, the more likely it was kept entirely in tax-qualified savings.

Thanks, Giving

After a dozen years here at PLANSPONSOR, effective November 1, I have joined the Employee Benefit Research Institute (EBRI) in Washington, D.C., as Director, Education and External Relations, and Co-Director of the EBRI Center for Research on Retirement Income.

I have long had a strong personal and professional admiration for the work that EBRI does in helping provide our industry with valuable and objective information and am thrilled to be able to be part of those efforts at this critical juncture.

It has been my great privilege over this past decade and change to share with you some of my thoughts and observations in this space. You have been generous both with your comments and commentary on those musings, as well as our publications overall.

While it’s not quite Thanksgiving, I thought I would dedicate this final “IMHO” to sharing some of the things for which I’m thankful:

I’m thankful that the vast majority of plan sponsors continued to support their workplace retirement programs with the same match and options as they had in previous years—and that so many of those who had to cut back in prior years still seem committed to restoring those original levels.

I’m thankful that participants, by and large, hung in there with their commitment to retirement savings, despite the lingering economic uncertainty. I’m especially thankful that many who saw their balances reduced by market volatility and, in some cases, a reduction in their employer match were willing and able to fill those gaps, in most cases by increasing their personal deferrals.

I’m thankful that most workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms in place to help them save and invest better than they might otherwise.

I’m thankful for the time, cost, and effort employers expend each year on health-care coverage for their workforce—and continue to do so, despite the uncertainties still attendant with health-care legislation.


I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that that input continues to be shared broadly in open forums. I’m thankful that so many in our industry take the time to provide that input.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different from when most initially decided to offer these programs.

I’m thankful that plan sponsors will soon have better access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as some fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants and are now trying to figure out how to do it.

I’m thankful that the “plot” to kill the 401(k)…hasn’t…yet.

I’m thankful that we might—finally—be ready to have a national, adult conversation about retirement income and entitlement programs.

I’m thankful to have been given an opportunity to be part of something great here at PLANSPONSOR; to have seen a little internal e-mail publication called “NewsDash” come to reach—and touch—the lives of nearly 70,000 readers worldwide. I’m thankful to have been able, in some small way, to make a difference—and to have before me a marvelous opportunity to continue to do so.

I'm thankful for the warmth with which readers, both old and new, have embraced me and the work we do here. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the years. I’m thankful for the constant—and enthusiastic—support of our advertisers throughout good times—and not-so-good times.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts over the years—and for the ongoing support and appreciation of readers like you.

Thank you!

Nevin E. Adams, JD

My new email is nadams@ebri.org.

Court Costs

Last week brought to light an aspect of 401(k) litigation that doesn’t generally get a lot of coverage—and the participant-plaintiff was presented with a $50,000 bill.

Now, at some level, this case was “just” another stock drop suit where some kinds of accounting issues contributed to a sudden (and ostensibly unexpected) drop in the price of company shares, including those held in the company’s 401(k) plan.1 These types of cases have cropped up one after another in the wake of the market downturn, and while the fact patterns behind the drop in share price vary slightly, the suits themselves allege pretty much the same thing: The plan fiduciaries kept the stock as a plan investment after it was no longer prudent to do so; to wit—after it suffered a precipitous drop in value.

Most of these cases don’t seem to get very far, the courts either deferring to a “presumption of prudence” (see “IMHO: Prudent Mien?” or, as in this case, finding that ERISA 404(c)’s safe harbor provided shelter (see”Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


What’s interesting to me about this case isn’t that it is a stock drop suit, not that the judge found 404(c) applicability as a shield (honestly, I’m not “getting it” in this case), and certainly not that the employer prevailed (that seems a pretty common result in stock drop cases). No, what I found interesting—and what one would hope that plaintiffs who get lured to these actions in the future might want to keep in mind—is that they might lose more than just their day in court.

Not that it was an all-out victory for the defendants. Sure, they’ll get $50,000 from the participant-plaintiff, but they had asked for roughly $500,000—and that didn’t include attorney fees! But in this case, after spending some time discussing whether such awards could be made and on what grounds, Judge Gottschall decided that such fee awards were allowed—and then proceeded to pick apart the itemized requests for reimbursements with the fine-tooth comb of someone auditing a business expense reimbursement request (disallowing most for either a lack of specificity or an inability to document the origins of the expense).

Regardless, I found the list of expenses to be eye-opening2, and while the defendants may well have had other resources to tap to cover them, it was a stark reminder of just how expensive litigation can be, how much court costs, even when you win.

But maybe there’d be less of that if those who set such things in motion had to spend some of THEIR money when they’re wrong.

—Nevin E. Adams, JD

1 Specifically, U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois granted the assessment of some $50,000 in costs associated with the litigation against David E. Rogers, who filed the suit against Baxter International in 2004. The suit, rejected by this same judge in 2010, alleged that Baxter continued offering company stock in its 401(k) plan after it was no longer prudent to do so (specifically, after its stock twice took tumbles after the reporting of disappointing earnings results, one involving fraud at a Brazilian subsidiary). Judge Gottschall ultimately dismissed the suit because she found that the employer qualified for protection under ERISA 404(c)’s safe harbor (see “Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


2 From Baxter and former Baxter CEO Harry Kraemer:

(1) $23,163.44 for transcripts and video recordings of court hearings and depositions,
(2) $6,956.60 for photocopying court documents and preparation materials for depositions,
(3) $112,648.13 for exemplification and copying costs incurred in connection with responding to discovery requests (including nearly $78,500 in fees paid to an “e-discovery vendor” to process data into a readable format that could be reviewed and produced to plaintiff, as well as $15,000 spent digitalizing documents that existed in hardcopy format—at a rate the court said was about twice as expensive as simply copying them),
(4) $163,474.09 for the cost of computerized legal research.

From former Baxter CFO Brian Anderson:

(1) $4,070.95 for transcripts,
(2) $10,673.10 for photocopying,
(3) $2,687.04 for exemplification of trial exhibits,
(4) $173,150.00 for expert-witness expenses (apparently without providing any supporting documentation, so it was rejected).

"Status" Quo?

Last week, during our PLANADVISER National Conference, I asked a panel of four plan sponsors if their current adviser was a fiduciary—and if that status mattered to them.

It’s not the first time I’ve asked that question; in fact, I have asked it of these plan sponsor panels at each of our four such conferences to date (although the plan sponsors were, of course, different). I ask it for one simple reason: While I sense a certain unanimity of opinion on the matter in retirement plan adviser circles, plan sponsors frequently have a more nuanced view.

Sure enough, this year a plan sponsor panelist not only said that his adviser wasn’t a fiduciary, but that he wasn’t at all sure why that mattered. In fact, he wondered aloud why an adviser would want to go to jail with him if something went awry.

Now, you could tell that many of the advisers in the room were surprised, perhaps stunned, by that statement. And yet, IMHO, that plan sponsor demonstrated what I felt was a pretty insightful appreciation for the litigation shield—or lack thereof—afforded him in hiring a fiduciary. For my money, far too many plan sponsors think that when they hire a plan adviser who is a fiduciary (or a provider who touts itself as a “co-fiduciary”), they have, in fact, supplanted their own fiduciary obligations to the program. But here was a plan sponsor who understood that if something “went wrong,” even if his adviser were a fiduciary, he was still on the hook.

That said, this plan sponsor’s answer was the kind of response that should surely give pause to an industry that spends so much time and energy “angsting” over the fiduciary issue.

The truth is, hiring a fiduciary is no magic talisman against litigation for the plan sponsor—and those who think (or who are mislead into thinking) so are ill-advised, to put it kindly. So why should fiduciary status matter?

Consider for a minute, when you bought your last car, who was that salesman looking out for—even as he ostensibly went to lobby his manager on your behalf? What about that clerk that was so helpful as you considered that PC or big-screen TV purchase? How about that commission-based realtor? Did they really have your best interests in mind?

Advisers that have adopted fiduciary status routinely talk about how their fee-for-service approach insulates them from bias in making fund recommendations; note that it allows them to bring THEIR very best judgment to the fore. What is, however, IMHO, too often glossed over is that it’s not just their best judgment, even an unbiased judgment, that is the essential benefit to hiring an ERISA fiduciary. Rather, it’s that judgment applied, and applied solely, in the best interests of the plan and its participants.

And that matters most—or, IMHO, should matter most—to those who are themselves charged with making decisions that adhere to those standards

—Nevin E. Adams, JD

QDIA Essentials

PLANSPONSOR’s National Conference last week featured a series of panels titled “Five Things You Need to Know About…” focused on a series of topics.

One of those was qualified default investment arrangements (1), or QDIAs—and while the “five things” that follow are somewhat different from the list presented by that panel, what follows was certainly inspired by the discussion.

Here’s my list:


(1) You don’t need to have a QDIA to get 404(c) protection.

IMHO, one of the most marvellous things about the Pension Protection Act’s defined contribution provisions was that they weren’t imposed on plan sponsors. They provided clarity, structure, guidance, and, yes, protection on things like automatic enrollment, contribution acceleration, and default fund choices—but didn’t require that you embrace these concepts, unless, of course, you hoped to benefit from the protections associated with adhering to those structures. Sure, IMHO, it’s a lot easier to obtain 404(c) protection under the umbrella of the PPA’s qualified default investment alternative (QDIA) provisions—but plan sponsors who had those protections in place before the PPA can still have them by still continuing to doing the things required to retain them today.

(2) You need to pay attention to participant notices.

Among all the fuss over what a QDIA is, and the applicable structures for automatically enrolling participants in those options, it has been easy to gloss over the requirement to notify those defaulting workers that they are being defaulted, and that they have a right to opt out—both upon enrollment and annually thereafter. Failure to provide the proper notices at the proper times has long been an impediment to fulfilling 404(c)’s conditions—and, if you’re not careful, perhaps enough to thwart QDIA’s shield as well.

(3) A QDIA doesn’t have to be a target-date fund.

Admittedly, target-date funds are the low-hanging fruit of QDIA options. While balanced funds, managed accounts, or even target-risk funds are explicitly acknowledged in the regulations, it is also clear that in order to be “qualified,” the QDIA must be structured in such a way as to take into account the age of the participant and/or the workforce (see “IMHO: It’s About Time” at http://www.plansponsor.com/IMHO___It’s_About_Time.aspx). New adoptions seem to be embracing the target-date approach, but, at least anecdotally, it seems that plan sponsors who previously had a balanced-fund default are finding ways to make it work.

(4) The fiduciary requirements to prudently monitor and select a QDIA are no less than for any other plan investment option—and they are fiduciary requirements.

Plan fiduciaries can reap significant benefits from the adoption of a QDIA, and participants even more so—if the option is prudently selected and monitored. Now, personally, I think you could make a case that the selection of an investment fund in lieu of any participant direction whatsoever (much less one that studies consistently indicate will likely never be reallocated) should, if anything, be held to a higher standard than that imposed on the “regular” investment options on the retirement plan menu.

But, at a minimum, in the QDIA regulations, the Labor Department made it abundantly clear that “selection of a particular qualified default investment alternative… is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.”

Moreover, that, “[a]s with other investment alternatives made available under the plan, fiduciaries must carefully consider investment fees and expenses when choosing a qualified default investment alternative.”

(5) Just because a default fund isn’t a QDIA doesn’t mean it isn’t a prudent default choice.

While target-date vehicles are certainly convenient for plan sponsors and well-received by participants—and explicitly acknowledged as QDIA-eligible—they aren’t the exclusive prudent choice for a default option. Of course, choosing something else—a target-risk fund with no age orientation, a balanced offering, or even a stable value fund—won’t afford you the same protections that a QDIA will. On the other hand, a well-chosen, thoughtfully monitored investment default might not require them.

—Nevin E. Adams, JD

(1) Default investments are investment options chosen by plan fiduciaries in situations where participants fail to provide investment instructions, either through some kind of administrative oversight, or in cases such as automatic enrollment. The Pension Protection Act of 2006 (PPA) provided certain specific conditions under which plan fiduciaries would be afforded special protections when certain specific qualified default investment alternatives were provided for that purpose.

A SunAmerica Opinion

I am admittedly something of a pension (and regulatory) geek, but when the SunAmerica Opinion was published (December 2001), it was clear that something big had just happened.

Not only did the Labor Department sanction an arrangement that, for the first time, allowed an investment management firm to offer advice on its own funds and be paid for that advice—even if that advice impacted the compensation received—it made the effort to make that decision public; IMHO, signaling to the industry that the model sanctioned in the Advisory Opinion ) could serve as a blueprint for other investment firms (and advisers) to follow in those footsteps. Indeed, it was issued not as a prohibited transaction exemption in a specific situation (though that was what had been requested), but as an advisory opinion on the program’s structure.

Sure enough, in the months that followed, it seemed as though just about every large DC provider put together some kind of program that, like the SunAmerica model, applied some kind of independent asset-allocation computer modeling to their DC platform investment offerings. In no time at all, millions of participants1 who had been looking for a bit of substantive guidance on how to invest their 401(k) balances had an answer—and, it should be noted, generally at a price that they found attractive (it was often included at no additional cost). In fact, after the SunAmerica opinion took hold, it always seemed to me that the urgency around finding a way to provide “advice” to participants was greatly diminished.

That wasn’t the end of the issue, of course—even when then-Assistant Secretary of Labor Ann Combs published the SunAmerica opinion for the world to see, she noted the Labor Department’s continued support for advice legislation long-championed by Congressman John Boehner (R-Ohio), legislation that, in large part, found its way into the (still) controversial fiduciary adviser provisions of the Pension Protection Act (PPA) (see “DoL Lowers Another Advice Barrier”).

Still, I was surprised when Assistant Secretary of Labor Phyllis Borzi invoked the name of the SunAmerica Opinion at a recent conference; particularly when she said she had heard reports that firms had been inappropriately taking advantage of its provisions (see “EBSA Sets Out Carrot, Stick Agenda”). Now, Secretary Borzi didn’t elaborate on any specific firms, but considering that the original opinion contained a number of specific conditions, it is entirely possible that, eight years later, one or more firms have managed to “gloss over” some key elements either in designing or in explaining their program(s). It is even possible, of course, that some have flagrantly disregarded those provisions. Those situations should be dealt with promptly and, IMHO, visibly.

I was also struck by the repeated invocation of the SunAmerica opinion last week in a hearing by the House Ways and Means Committee (see “House Lawmakers Hear DB Funding, Advice Bill Pleas”). Most of the witnesses expressed concerns that legislation recently proposed—the 401(k) Fair Disclosure and Pension Security Act of 2009 (HR 2989)—would, in its attempt to eliminate the fiduciary adviser provisions of the Pension Protection Act (PPA), also, at least effectively, and perhaps unintentionally, lead to the elimination of many advice programs in place prior to the PPA’s passage, including those predicated on the SunAmerica structure. I say “effectively” because the proposed law would basically impose the stricter PPA computer model auditing requirements on any computer-modeled advice—and the concern is that the cost and complexity of doing so will lead firms to disband those programs and/or employers to cease offering them.

It is not clear to me at this point that that was the intent of the proposed legislation, though it may well be the result. No one is in favor of conflicted advice (though we may disagree on what falls within that definition)—but, however complicated we may try to make it, most participants (and plan sponsors) don’t care whether you call it “advice” or “education.”

They just want some help.

—Nevin E. Adams, JD

(1) The Profit Sharing/401(k) Council of America reports that 20 million participants are offered advice through Sun America arrangements.

You can check out the full testimony from the House Ways and Means hearing HERE

“To Do” List—Part 2

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. In my experience, most who find themselves in that role (see “IMHO: Duty Call”) do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job. In this week’s column, we’ll touch on the rest of my “10 things you’re probably doing wrong” list:


6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.

Any number of studies suggest that many, perhaps most, plan sponsors think their plan meets the standards of ERISA 404(c ), a provision that ostensibly shields them from being sued for participant investment decisions, so long as certain conditions are met.

On the other hand, industry experts are nearly uniform in their assessment that very few, perhaps no, plans meet those standards (though the courts have been somewhat more liberal in their application). So, even if you think your plan does comply—check. And even if your plan does comply, understand that, while 404(c)’s shield may offer some protection against an individual participant suit, it offers no insulation against a participant suit predicated on an inappropriate investment option. Remember, too, that the DoL thinks you’re responsible for every participant investment decision except those behind 404(c)’s “shield.”

7. Depositing contributions on a timely basis.

The legal requirement for when contributions must be deposited to the plan is perhaps one of most widely misunderstood elements of plan administration. Unfortunately, a delay in contribution deposits is also one of the most common flags that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst case situation (the 15th business day of the month following) to be the legal requirement. It is not.

8. (Not) monitoring providers on a regular basis.

In some sense, we all “monitor” the performance of plan providers all the time. Is the Web site available when people try to access it? Do checks and statements arrive on time? Are the balances displayed accurate? The reality is that, for most of us, no news is seen as “good” news. After all, if the answer to any of those questions was “no,” we’d not only know about it, we’d be complaining about it (after fending off our own set of complaining phone calls). Odds are that you have a very full-time job dealing with the things that are “broken”—why go looking for trouble?

However, relationships with providers are like any other relationship—we all slip into “ruts” of complacency—and the best way to keep that new customer “honeymoon” feeling alive is to do something as simple as ask your current provider for a regular service review. At least once a year—no matter how well things are going—you should determine if your plan has access to the new services that have come online since you converted; that you are getting the advantages of the most current thinking about costs and fees; and how your plan’s participation, deferral, and asset diversification stack up. And every three to five years (sooner if there are problems, of course), you should go through a formal request for information (RFI) or request for proposal (RFP) process—on your own, or with the help of an adviser (who doubtless has more experience with such things).

Remember also that the DoL says that, “Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.”

9. Not following the terms of the plan document.

Plan documents are, after all, legal documents and can skirt the fringes of readability. Retirement plans develop certain patterns or routines—the way things are handled—that may not, over time, remain consistent with the terms of the plan. Particularly if you are using a plan document prepared by a provider (or, worse, an ex-provider) that may well accommodate that provider’s approach, but may not match (or may not have kept up with) how you actually administer the plan. It is a good idea to do a document/process “audit” every couple of years; don’t assume that “the way we’ve always done things” is supported by the legal document governing your plan.

10. Not realizing who is a fiduciary—and what that means.

The first thing to understand is who a plan fiduciary is, and to understand that the “test” isn’t what you call yourself (or, in some cases, what you avoid calling yourself), but your ability to control and influence plan assets. A fiduciary is any person or entity named in the plan document (e.g., the plan sponsor and trustee); any person or entity that has discretionary authority over the management of a retirement plan or its assets (all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee—if it has such a committee—and those who select committee officials); and any person or entity that offers investment advice with respect to plan assets, for a fee.

Remember too, that the authority to appoint a fiduciary makes you a fiduciary—and that hiring a “co-fiduciary” does not make you an “ex” fiduciary.

If you are a fiduciary, and you feel that you lack the expertise to make those decisions, you will of course want—and, in fact, are expected—to hire someone with that professional knowledge to carry out the investment and other functions.

Finally, remember that, IMHO, you’re more likely to get sued for not doing something you should be doing than for doing something you shouldn’t be doing.


—Nevin E. Adams, JD

You can find more information on fulfilling your fiduciary responsibilities at the Employee Benefits Security Administration’s (EBSA) Web site HERE

Duty 'Calls'

When it comes to qualified retirement plans, there are three kinds of people: people who are fiduciaries and know it, people who aren’t fiduciaries and know it, and people who are fiduciaries and don’t know it.

Now, for the most part, those in the first category are in pretty good shape. Oh, there are a plethora of ways in which a fiduciary can fail to uphold his or her responsibilities under the Employee Retirement Income Security Act (ERISA)—but, in my experience, if you’re at least trying to do the right thing(s), and taking the time to document that effort, you’re in good shape. Still, even those who are trying to do the right things—and who embrace that role—don’t always fully appreciate the implications.

The second category mostly tends to include those folks or firms that provide services to the retirement plan fiduciaries. Most enjoy that status because they don’t technically have any authority to do anything on their own; they just help those who do know what to do. Of course, there are some who think they are in the second category—who are actually in the third category.

As for that third category—well, if your plan sponsor clients are there, IMHO, it means you aren’t doing your job as a plan adviser. Here are seven things that every plan sponsor should know about being a fiduciary:

If you’re a plan sponsor, you’re a fiduciary.

Fiduciary status is based on your responsibilities with the plan, not your title. If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. If you’re not sure—and are worried that you aren’t sure—there’s a good chance you are.

Note that every plan must have at least one fiduciary (either a person or an entity) specifically named in the written plan document, a “named fiduciary” that is either identified by office or by name.

Of course, if there is a title less well-understood than “fiduciary,” it may well be “plan sponsor.”

For the very most part, you can’t offload or outsource your fiduciary responsibility.

ERISA has a couple of very specific exceptions; more precisely, ways in which you can limit—but not eliminate—your fiduciary obligations. One exception has to do with the specific decisions made by a qualified investment manager—and, regardless, you remain responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan. The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA’s 404(c). Here also, even if your plan meets the 404(c) criteria (and it is by no means certain it will)—you remain responsible for the prudent selection and monitoring of the options on the investment menu from which they are selecting (1).

Outside of these two exceptions, you’re essentially responsible for the quality of the investments of the plan—including those that participants make.

If you’re responsible for selecting those who are on the committee(s) that administer the plan, you’re a fiduciary. If you are able to hire a fiduciary, you’re (probably) a fiduciary.

The power to put others in a position of power regarding plan assets is as critical as the ability to make decisions regarding those investments directly.

Hiring a co-fiduciary doesn’t keep you from being a fiduciary.

Moreover, all fiduciaries have potential liability for the actions of their co-fiduciaries. If a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals that breach, or does not take steps to correct it, both are liable.

You have personal liability as an ERISA fiduciary.

That’s right, the legal liability is personal (you can, however, buy insurance to protect against that personal liability—but that’s not the fiduciary liability insurance you may already have in place).

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.

Once you’re a fiduciary, you can’t just quit and walk away.

The Department of Labor cautions that “fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan.”

You’re expected to be an expert—or to hire help that is.

ERISA’s Prudent Man rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. None other than the Department of Labor itself notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

As a plan fiduciary, it’s never too late to start doing the right things the right way. But doing the right things means understanding what is expected of you—and appreciating the implications.

—Nevin E. Adams, JD

For more information, see Fiduciary Fundamentals

http://www.dol.gov/elaws/ERISAFiduciary.htm

(1) With the enactment of the Pension Protection Act of 2006 (PPA), fiduciaries who automatically enroll participants in accordance with the provisions of the automatic enrollment safe harbor into a qualified default investment alternative (QDIA) get the protections of 404(c ) for those balances. However, the plan fiduciary remains responsible for the prudent selection and monitoring of the QDIA itself.

'Second' Opinions

ERISA’s 404(c) has long been held out by some as something of a magic talisman: Comply with its strictures, they claim, and you have an iron-clad defense against participant lawsuits —and, IMHO, the implication is a defense against ALL participant lawsuits. Of course, any number of ERISA experts will tell you that it is nearly impossible to satisfy those strictures, certainly not for every transaction (and mind you, 404(c) is transactional protection)—not that that seems to dissuade plan fiduciaries from trying, nor plan advisers from purporting to help them achieve that end. Nor are plan fiduciaries, or the participants and beneficiaries they support, ill-served by those efforts.

That said, I have long been surprised at how broadly the judiciary has been willing to extend those protections. Good news if you’re the plan sponsor getting sued, of course—but not-so-good if you’re a plan fiduciary looking for some consistency in the law.

The most recent example was Hecker v. Deere (see “Appellate Court Backs Deere Case Dismissal”), one of the litany of revenue-sharing lawsuits that have been brought (see “IMHO: Fighting Words”). This particular case has drawn the attention of the Department of Labor (DoL), and not for the first time. In fact, it was almost exactly a year ago that the DoL tried to help the appellate court do a better job applying the law than the District Court had (see “IMHO: The Letter of the Law”).

This time, the DoL said in a friend of the court filing that a “[p]anel rehearing is warranted to correct the panel’s mistakes of law and fact in misconstruing section 404(c ) of ERISA and declining to defer to the Secretary’s reasonable interpretation of her 404(c ) regulation.”

Besides the issue of deference to the Secretary of Labor, at issue in the DoL’s filing: “whether participants and beneficiaries exercise independent control,” but more specifically, did that exercise happen “in the manner described in the regulation,” because only then would the plan fiduciaries not be liable for any loss “that is the direct and necessary result” of that exercise of control.

The DoL cites language in 404(c)’s preamble that clearly puts the act of designating investment alternatives as well as the ongoing determination that those choices are “suitable and prudent” outside the shield of 404(c), and goes on to note footnote language that, IMHO, confirms the obvious—that the choice of those fund menu options is a task “over which the fiduciary, and not the participant has control”—and thus, even if the plan qualified as a 404( c) plan, those protections would not apply. Moreover, and at issue in the Deere case, the DoL notes, “[I]f on the other hand, the fiduciary maintains imprudent investment choices—such as investments with imprudently high fees (emphasis added)—then under the Secretary’s regulation, any resulting loss is not a ‘direct and necessary consequence of the participant’s exercise of control,’ and the fiduciary is not exempt from liability for that loss.”

The DoL notes that the court’s decision “appears to rest in large part on a mistaken impression that plaintiffs’ claims hinge on the fiduciaries’ failure to ‘scour the market to find and offer the cheapest possible fund,’ as well as the conclusion that the fees were necessarily prudent because the Plan’s array of investment funds were offered ‘to the general public’ at the same expense ratios that the Plans paid.” To the DoL’s point, it’s one thing to say that there is no obligation to find/obtain the cheapest fee, another altogether, IMHO, to claim that a multi-billion-dollar 401(k) plan has no fiduciary obligation to negotiate a better deal on behalf of its participants than they could do on their own account in a retail environment. To fail to do so is not necessarily a fiduciary transgression—but, IMHO, it surely is worth a proper hearing.

To its credit, the DoL didn’t just take issue with the fact that the court basically ignored its earlier counsel, nor did it focus strictly on its belief that the court just plain got it wrong, though it did say that “[t]he court also may not have fully understood the potentially far-reaching ramifications of its decision, which permits fiduciaries to evade accountability for the imprudent selection and maintenance of funds in defined contribution plans.”

The DoL also looked out to the future to see where a judicial misapplication of the law might take us and, I’m pleased to say, they cited this column (1). “These implications have not gone unnoticed,” the DoL said. “For instance, a commentator in PLANSPONSOR notes that if he were advising an employer with a 401(k) plan based on this decision he would ‘advocate giving participants LOTS of fund choices—via a brokerage window if possible,’ and would advise the employer that it ‘won’t have to worry about being prudent in the selection of the fund options for the plan because, according to [this Court’s] ruling, that [404(c)] safe harbor applies to that decision.’” The DoL then notes that “[e]ven if this Court meant to limit its holding to plans that offer a brokerage window of the type offered by the Deere plans…it is not hard to imagine that plan designers will advocate including this feature for all plans in order to immunize fiduciaries from any liability with respect to the selection of the plan’s option.”

Of course, the “counsel” I offered in that column was somewhat tongue in cheek. To me, it’s evident on the face of the matter that that would be an inappropriate result—and yet, as the DoL acknowledged by including the comment, you don’t need to reach very far from the court’s articulated rationale to arrive at that result.

In fact, the DoL has, consistently to my ears, and across administrations, said that, in the absence of 404(c)’s protection, plan fiduciaries are responsible for all plan investment decisions, even those made by well-informed, active, and engaged participants, even if that is further than many plan sponsors are willing to acknowledge.

That makes those protections all the more precious—and, with all due respect to the judges who consider these situations, all the more important that they get it right.

—Nevin E. Adams, JD


(1) IMHO: “Winning” Ways?

See also: IMHO: Letter of the Law