Half A Chance...

I’ve never played the lottery. But there are days…

I tell myself it’s because I know how remote the odds are, that the rules are too complicated, that they “feed” on the aspirations of people who should be spending their money on “better” things – and even that I don’t have enough “lucky” numbers to bet on consistently. But those are rationalizations.

The simple fact, despite the screaming billboards and nightly news reminders about the size of the latest “mega” jackpot, is that I simply find it inconvenient. Oh, it’s not like I never frequent the convenience stores or even grocery checkouts that these days beg for the cash/credit card that hasn’t yet been put away. I’ve never really regretted walking away from those “temptations.” And yet…    

As an industry, we spend a lot of time focused on a wide variety of considerations that impact the likelihood of having a financially satisfying retirement. But what about those who don’t have access to a retirement plan?

Now, even thoughtful industry insiders have been known to push back on the notion that people don’t have access to a retirement plan. And, in fact, you don’t have to be an industry insider (though it helps) to know that anyone who doesn’t have access to a retirement plan at work can stroll down to your local bank or financial services outlet and open an IRA – heck, these days you can just boot up your computer and do that online. And yet people don’t. This isn’t really a surprise – but even among modest income workers ($30,000-$50,000/year), we’ve seen that workers are 12 times more likely to save via a workplace retirement plan than to open that individual IRA.

Last week, we unveiled a state-by-state analysis that highlighted the coverage gap – that more than 5 million employers in the United States still don’t offer a workplace retirement savings benefit, a generation after the 401(k) plan design was first introduced. And what that means is that more than 28 million full-time workers don’t have an opportunity to save for retirement in a 401(k) – and that doesn’t include more than 23 million part-time workers who don’t have that opportunity.

That is, of course, the coverage “gap” that the so-called state-run automatic IRA programs are designed to close. And, though it’s still relatively early in that particular vein, they do seem to be having a positive effect. In Oregon (whose OregonSaves program has just commemorated its second anniversary), they’re reporting more than 6,856 employers now participating – who ostensibly didn’t offer a plan before – with some 95,704 employees – who, ostensibly, weren’t saving for retirement previously. And if the opt-out rate is high (approximately 30%) compared with the 7-9% rates typical of automatic enrollment plans administered in the private sector, well it not only lacks the support of an employer match (not to mention the support of workplace education or an advisor), but it also has a (still) relatively high 5% default contribution rate, though recent surveys suggest that the default rate standard is rising in 401(k)s.

There are, of course, issues with the emergence of multiple, and potentially contradictory, state-run versions – particularly for employers who draw workers from multiple states. But in just this last year, the program has begun offering traditional IRAs and has been opened to the self-employed, gig economy workers and cannabis businesses. The program is now more than halfway through its statewide rollout, which will be completed by mid-2020, with more new “features and improvements” in the works. Similar programs in Illinois and California are underway, or nearly so – and Rep. Richie Neal (D-MA), Chairman of the House Ways & Means Committee, has previously proposed a federal version. 

Much of the coverage gap can be laid at the door of smaller employers, which arguably have a different focus on such matters than larger organizations. And, sure enough, a 2013 analysis by the nonpartisan Employee Benefit Research Institute (EBRI) found that when you adjust for access to a plan – the percentage participating divided by the percentage working for employers that sponsor a plan – you find that participation rates between larger employers and smaller ones largely disappear. For example, while data indicates that just 16.9% of those full-time, full-year employees who work at smaller employers participate in a plan – that turns out to be about 86% of the 19.5% of workers in that category whose employer sponsors a plan. And that is nearly identical to the participation rate of private-sector employers with 1,000 or more employees.

A few years back I remember hearing a lottery motto, “Gotta be in it to win it.” That’s a motto that those worried about retirement finances should always take to heart.

But if they’re going to have (more than) half a chance, there’s something to be said for improving the odds – by having a chance to “play.”

- Nevin E. Adams, JD

How Much (Should) a New Committee Member Know?

A recent federal court decision should remind us all of the importance of plan committee education.

The case involved a suit by participants in the SunTrust 401(k) plan (see Is Fiduciary Responsibility Retroactive?) that challenged the initial selection of, and subsequent acquiescence with, an ostensibly imprudent plan investment menu. The court’s decision focused on one aspect of the case: the liability of “new” plan committee members for actions that predated their involvement on the committee, but continued after their involvement. The court, in a decision that will likely be viewed favorably by new committee members, excluded them from liability for committee moves that predated their participation, at least to the extent they lack “actual knowledge” of imprudence.

Along the way to that determination, Judge Orinda D. Evans of the U.S. District Court for the Northern District of Georgia incorporated the testimony of those new committee members as to the training/information they received as they joined. While it may reflect their recollection more than the reality, they convey[1] a very strong sense of being handed reading materials, and left to their own devices to fill in the blanks.

The deposition questions were doubtless focused on the particular aspect of fund selection, and perhaps dealt with nothing beyond that. Indeed, several of the committee members did recount both an exposure to the plan document itself and some awareness of the importance of their role as a plan fiduciary.

As a baseline, I have long maintained that every plan committee member needs to know that:

You are an ERISA fiduciary.

Even if you consider yourself to be a small and relatively silent member of the committee, you direct and influence retirement plan money, and fiduciary status is based on one’s responsibilities with the plan, not a title. Simply stated, if you (or the committee you are part of) 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.

You are responsible for the actions of other plan fiduciaries.

All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.

As an ERISA fiduciary, your liability is personal.

If they didn’t hear this message out the outset, the onset of litigation surely brought this reality home to the committee members. A committee member may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Now, you can obtain insurance to protect against that personal liability – but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

The plan’s investment policy matters.

Note that I didn’t say the plan’s investment policy statement. The law (ERISA) doesn’t require that you have a written investment policy statement, but that same law does expect that the plan’s investments will be monitored as though one was in writing. Indeed, the vast majority of plans do have a written IPS – more than 90%, according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.

More than that, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

And a suggestion for you: have a formal “on-boarding” process for plan committee members.

Every plan, and every plan committee is unique. But the responsibility, and the prudent expert standard to which those responsibilities must be held applies uniformly – and it has been called “the highest known to the law.” In forming and conducting the committee it’s imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.

One recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explains that the committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”

The plan provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”

Arguably the personal interests of the new plan committee members in the SunTrust case were, at least at this stage, “well-served” by their lack of education (more specifically, the lack of “actual knowledge”) regarding the background of the decisions made prior to their appointment. However, this is only one set of issues, and they may yet be held to account for their subsequent affirmation (be it active or passive) in the continuance of those decisions.

And that’s when ignorance of your duties as a plan fiduciary can be really expensive.

- Nevin E. Adams, JD
 
Footnote

1. Defendant Jerome Lienhard stated in his deposition that he received binders describing the funds in the Plan “presumably” containing documents describing fiduciary standards, that he spoke with Defendants Donna Lange and Ken Houghton about being a Benefits Plan Committee member and, upon becoming a member of the Benefits Plan Committee in August of 2006, familiarized himself with the Plan document. However, he did not recall taking action to determine whether previous breaches of fiduciary responsibility had been committed.

Defendant Christopher Shults said that he received training regarding the funds in the Plan when he became a Benefits Plan Committee member, and that he was “directed… to meet with an investment consultant representative "to become more educated about the investment decisions made by the Benefits Plan Committee.” However, he did not "remember any of the details of specificity around what we discussed" and he did not recall discussing previous investment decisions by the Benefits Plan Committee with the representative. Nor did he recall learning about selection decisions made by the Benefits Plan Committee prior to his becoming a member.

Defendant Mimi Breeden remembered that she “would have talked to subject matter experts and [her] staff and others to come up to speed on what the committee’s work was” and “what key priorities were,” that she “probably” had knowledge of the history of the Plan before 1997 but could not recall it or any information about the 1996 selection of Affiliated Funds, and that she could not recall whether she ever knew about the initial selection of Plan funds in 1996.

Defendant Mary Steele was sure she had read the Plan document at some point while a member of the Benefits Plan Committee and that Defendant Donna Lange briefed her regarding her fiduciary responsibilities as a Benefits Plan Committee member and “the most important things that [she] need[ed] to know about the committee,” and that while she did not remember how the SunTrust proprietary funds first came to be offered in the Plan, but that the 1996 change in the Plan from common trust funds to mutual funds “sound[ed] familiar.”

Defendant Thomas Kuntz did not recall whether he received any training regarding his duties as a Benefits Plan Committee member or whether he reviewed prior meeting minutes, though he recalled that the Benefits Plan Committee, “[a] s a matter of course,” “reviewed all the funds in the plan ... for appropriateness.” In a disposition he explained that he believed the proprietary funds in the Plan were appropriately included because “[t]hey looked to be reasonable choices based on assessments that [he] might have had at the time,” though he did not recall what those assessments were.

Defendant Donna Lange said that she was not aware of the process used in initially selecting the Affiliated Funds in 1996, just that “the approved funds were in place when [she] arrived.” As for that 1996 fund selection, Lange went on to say that she did not "recall studying this other than being aware “this is the plan, this is what we started with.” She did state, however, that she knew the Plan was only using proprietary funds when she arrived.

Defendant Aleem Gillani stated in his deposition that he does not recall ever being briefed or “brought up to speed” on the Benefits Plan Committee's decisions prior to becoming a member, and that he had no knowledge of them when appointed to the Benefits Plan Committee.

Finally, Defendant William H. Rogers, Jr. stated in his deposition that he has no knowledge of the initial Affiliated Funds selection in 1996, 1999, and 2001.

A Giant Leap for Mankind…

While I am sure there was a period in my youth when I wanted to be a fireman, a cowboy, or maybe even a professional athlete, my earliest memories are of wanting to be an astronaut.

Never mind that my odds of becoming a professional athlete were, even then, considerably better than those of joining the nation’s elite group of astronauts. It was evident even to me early on that I lacked the athletic acumen for a career in sports – but it took years for me to appreciate what would have been required for me to satisfy NASA’s requirements (and be able to rationalize that the “real” reason was that I was too tall).

It was a magical time for our nation’s space program. There was a plan, three separate programs (Mercury, Gemini and Apollo) to help us get there, and a vision – as President John F. Kennedy said in May 1961 – of “achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth.” There was also a sense of national urgency (the so-called “Space Race” with the Soviets, which was a lot less scary than the arms race), and, while throughout its life the program was remarkably bereft of injury, the tragedy of the February 1967 fire on Apollo 1 that took the lives of Gus Grissom, Ed White and Roger Chaffee reminded us of the stakes involved.

And then, after years of watching Americans enter space, circle the planet, exit their craft while circling the planet (at unimaginable speeds), and then leave Earth’s orbit to touch the lunar sky, I can still remember the grainy black-and-white images of Neil Armstrong’s “one small step for man” flickering across the screen of my family’s small black-and-white television (replete with its aluminum foil-festooned rabbit ears) on that Sunday evening in 1969. An experience that was, in some form or fashion, replicated around the world that special July evening 50 years ago in a rare planetary unanimity of experience as we got that report of a successful landing at “Tranquility Base.”

Of course, it wasn’t all about developing “Tang,” magical space walks, and those incredible images of our astronauts bounding across the lunar landscape. It was about knowing where we wanted to be; putting together a detailed, comprehensive plan to get there; having any number of contingencies and backups “just in case”; the tenacity, dedication, and intellect to work around the inevitable problems that arise that you didn’t anticipate with those contingency plans (just watch Apollo 13); and – perhaps the most critical element in the successful completion of any project – a deadline.

It doesn’t take much imagination to draw a correlation between the planning for a landing on the moon and a successful arrival in retirement (OK, so maybe it takes a little imagination). It requires a notion of what constitutes a successful arrival, an idea of the steps that will be required to get there, the tenacity and ingenuity to deal with the inevitable bumps along the way – and the specificity of a date certain to give some structure to those plans.

Students of history know that one of the contingency plans for the Apollo 11 mission was a presidential statement if those astronauts had crashed (they got pretty low on fuel before landing), or if they hadn’t been able to return to Earth (some engineer actually forgot to put a handle on the outside of the lunar module door – and if they hadn’t noticed that and left the door open while they were on the surface, they might not have been able to get back inside the LEM). Fortunately, those contingencies are now simply interesting historical anecdotes. Still, it’s worth recalling that the ultimate mission was not only to get men to  the moon, but to return them safely home.

As we ponder the accomplishments and planning that helped our nation put men on the moon, it’s worth remembering that our “mission” is not only to get tomorrow’s retirees safely to retirement, to take those “small steps” along the way – but ultimately to position them and their finances to carry them safely through  retirement… to their “tranquility base.”

- Nevin E. Adams, JD

The Biggest Retirement Assumption

There have been many different solutions put forth over the years to remedy the nation’s retirement ills, but regardless of your perception of the coming crisis (including those who believe such notions are overblown), there is a constant in every estimation of our retirement future.[1]

Yes, I’m talking about Social Security. Indeed, we rely on the inevitability of those benefits with a certainty generally accorded only to death and taxes (both of which play a significant role in Social Security eligibility and claiming, as it turns out).

And yet, for all its centrality in planning, Social Security faces its own funding crisis, or is projected to, according to the trustees of the program, in a report formally titled, “The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. ” That the program will run short of funds is no secret, with the only variable being at what exact point in the future will benefits have to be reduced (it changes modestly from year to year, depending on a couple of variables).

Not only is the funding crisis well-known, the aforementioned trustees’ report acknowledges, and routinely outlines a “broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall,” along with cost estimates.

Years back, when the future crisis was no less real, but somewhat less large, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of “fixing” Social Security. Greenspan, who had led a commission in the early 1980s charged with solving was then a more immediate crisis of the program (believe it or not), outlined the two core elements of any serious attempt to resolve the funding shortfall:

• increasing funding (generally either by raising the withholding rates or the compensation level to which they are applied, or both); and
• reducing benefits (by raising the claiming age) or what’s euphemistically referred to as “means testing,” which effectively reduces the benefits to higher income recipients. 

So, the answer to the problem is, as the actuaries remind us, “just math,” and we needn’t choose one solution or the other; rather, some combination – as it was in 1983 – is the approach that seems the most likely outcome.

Except, of course, the answer isn’t “just” math, it’s money. And fixing it – while not hard to figure out – will cost money that those who would make that call would “rather” spend on other things. It’s also fraught – as it was in the 1980s – with political hot buttons. Social Security has long been considered a “third rail” of American politics, and politicians have been burned for merely suggesting the need for change, much less putting forth specific proposals.

That said, if there’s any aspect of this that is as widely known as the fact that there is a looming financial shortfall, it’s that the longer we put off taking steps to do so, the more difficult – the more expensive – it will be.

Yes, Social Security is most certainly the biggest retirement assumption – by individuals, retirement planners, and legislators alike. Today as we stand at the brink of the biggest retirement reform legislation in a decade – as we consider a growing number of state retirement savings mandates, and contemplate a federal expansion – we also know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system – they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated.

It’s time, in short, for an adult conversation about – and some adult action – to make sure that that most fundamental of retirement planning assumptions remains something we can count on.

- Nevin E. Adams, JD
 
Footnote
1. A notable exception is the Employee Benefit Research Institute's Jack VanDerhei, who routinely includes an assessment of the impact of the projected reductions in Social Security benefits if the current funding status remains unchanged. In a March 2019 Issue Brief, he notes that "when pro rata reductions to Social Security retirement benefits are assumed to begin in 2034, the aggregate retirement deficit increases by 6 percent to $4.06 trillion."

5 Fiduciary Fundamentals: A Founding Fathers Perspective

This week we’ll commemorate Independence Day – but with all of freedom’s lessons, there are certain things that plan committees (still) have in common with the Second Continental Congress.

Certainly anyone who has ever found their grand idea shackled to the deliberations of a committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we commemorate this week.

Consider these similarities:

Committee members should understand their obligations – and the risks.

Those that gathered in Philadelphia that summer of 1776 came from all walks of life, but it seems fair to say that most had something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would (eventually) accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants.

It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Moreover, fiduciaries have potential liability for the actions of their co-fiduciaries. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.

Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

Money can be a sticking point.

Before it declared independence, the Second Continental Congress created the Continental Army, named a Commander-in-Chief (George Washington), and authorized the first printing of American money ($1 million in bills of credit). Indeed in the months (and years) that followed, the costs of (and means of funding) that army would be a constant source of contention between the Congress and the leaders of the Continental Army, even after the fighting on the battlefields was over.

The costs of running a retirement plan are varied, and these days many are borne – directly or indirectly – by the plan and participants themselves. But if the American Revolution was fought over “taxation without representation,” ERISA charges plan fiduciaries with an unequivocal obligation to ensure that every action taken, every service or service provider enlisted, be done for the exclusive benefit of retirement plan participants and their beneficiaries.

It’s not all about money, of course. But – as the Labor Department has noted, and as the plaintiffs’ bar clearly knows – fees and expenses paid by the plan can have an impact on retirement savings and security. Plan fiduciaries should be no less attentive.

It can be hard to break with the status quo.

By the time the Second Continental Congress convened, the “shot heard round the world” at Lexington and Concord was more than a year old, but many of the representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and put George Washington at its helm. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to take on what was then the world’s most accomplished military force.

As human beings we are largely predisposed to leaving things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, in the absence of a compelling reason for change, inclined instead to rationalize staying put.

As a consequence, you often see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and an overall inertia when it comes to adopting potentially disruptive plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries can’t defer that responsibility to others (see 5 Things Your Plan Committee Members Need to Know). Rather, their decisions are bound by an obligation that those decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world since is unquestioned, and perhaps unprecedented. Putting that declaration – and the sentiments behind it – in writing gave it a force and influence far beyond its original purpose.

As for plan fiduciaries, there is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process – but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members – both past and future – with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were.

They also can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted – properly documented, of course.

Big change takes time – and effort.

Congress may have declared independence that July, but the reality took considerably more time and effort. Though before the year was out, Washington’s troops would cross the Delaware under unimaginable conditions and win a stirring victory at Trenton, on their way to a series of impressive, but largely unappreciated victories against the British army in New Jersey – but less than a year later Washington’s troops would winter at Valley Forge.

Independence may have been declared in 1776, but it was not won until the victory in Yorktown, Virginia in 1781, and not official for two years more.

We do, of course, have much to be thankful for this Independence Day; for those who had the courage to stand up for the principles and ideals on which this nation was founded, for those who were willing then to take up arms to defend those principles and ideals against overwhelming odds, and those who continue to do so to this day.

Plan fiduciaries who are doing their duty and fulfilling their obligations aren’t exactly putting their lives on the line - but in their own special way(s), they’re working to help assure American worker retirement freedoms – their financial independence – every day.

- Nevin E. Adams, JD

'Special' Treatment

Our industry has long disparaged the apparent “overindulgence”¹ of participants in the stock of their employer as a retirement investment. However, for plan fiduciaries – and those who advise them – there may be a more pressing concern.

Anyone who has been paying attention to 401(k) plan litigation these past several years knows that a common trigger – perhaps the most common trigger – for litigation is the presence of company stock in the plan; more specifically, the presence of company stock that has sharply declined in value. In fact, these days no sooner does some big earnings surprise or unanticipated business calamity make the headlines than the plaintiffs’ bar is out “trolling” for potential clients. And let’s face it, a 401(k) plan is a class action litigant’s dream – potentially thousands of similarly situated and comparably injured plaintiffs in one place (so to speak).  

But if the instances of litigation have been numerous, the odds of success – for plaintiffs – have been anything but.

Prudent ‘Presumptions’

For a long while, these claims failed to clear a “presumption of prudence.” Now, one needn’t scour ERISA’s text to discern the boundaries of this legal construct; indeed, that would be a futile effort. Rather, it is a concept gleaned by the courts (and subsequently enshrined in legal precedent) from their understanding of the black letter of the law. It is a concept that found its footing in a 1995 case called Moench v. Robertson. Now, in that case, as in many of the new generation of “stock drop” cases (drawing their name from the fact that the action arises after the value of the stock drops), a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer’s financial condition “deteriorated.” In the aftermath of the Moench ruling, nearly every court district court that considered the issue of prudence of employer stock holding had rejected plaintiff claims based on this so-called “presumption of prudence.”

That was the “law of the land” in such matters until 2014 when the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs outlined a new standard – a “more harm than good” standard that emerged with Fifth Third Bancorp v. Dudenhoeffer. The notion here was that a plan fiduciary might be excused from taking action with regard to company stock in the retirement plan – such as removing it as an option, or forcing a liquidation of those investments – if doing so would do “more harm than good.”

More Harm?

“Inspired” by this new standard, many of the so-called “stock drop” suits which hadn’t passed muster under the “presumption of prudence” threshold refiled. But ironically, those too had generally come up short of the new standard – though they did at least routinely get past the summary judgment stage. Which, of course, meant more time and expense for the fiduciary defendants – but no recovery for the plaintiffs (or the plaintiffs’ attorneys, who generally work on a contingent fee basis in these class actions).

At least that was the case until a recent district court decision (Jander v. Ret. Plans Comm. of IBM) was overturned by the U.S. Court of Appeals for the Second Circuit, which concluded that, in fact, the plaintiffs plausibly alleged facts showing that a prudent ERISA fiduciary “could not have concluded” that a corrective disclosure of an allegedly overvalued IBM business would have done “more harm than good to the fund.”

In fact, the plaintiff in that case – recently accepted by the Supreme Court – argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen, nothing that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”

What’s Next?

And yet, that same Second Circuit Court of Appeals whose decision teed up the issue that the nation’s highest court will now consider – within a week of that decision – found that a similar case lacked the “special circumstances” necessary to overcome the more harm than good bar.

As for what lies ahead, the forthcoming review by the U.S. Supreme Court could bring a new, more relaxed pleading standard to the fore. Or it might establish a “new” standard that doesn’t do anything more to improve plaintiffs’ prospects than the “more harm than good” did beyond the “presumption of prudence.”

In any event, plan fiduciaries who still maintain company stock as plan investment option (and according to the Plan Sponsor Council of America’s 61^st Annual Survey of Profit Sharing and 401(k) Plans, 12% of plans allow company stock as an investment option for both participant and company contributions, and 4% restrict it to company contributions only) might well want to spare themselves the cost and aggravation of litigation that seems inevitable when (if?) the value of that stock holding goes down.

In this day and age, a plan fiduciary unable to see the potential for employer-security-related litigation is perhaps unworthy of the role, and a dual-role plan/corporate fiduciary unable to appreciate the potential for a conflicted duty vis-à-vis his or her fiduciary responsibility to the retirement plan is surely living in a state of active denial.

Because while “special” circumstances may seem to warrant such consideration, ultimately, perhaps inevitably, the end result seems to eventually be putting not only prospective plaintiffs, but the plan fiduciaries, between a rock and a hard place.

 

- Nevin E. Adams, JD

 

1. Participants given an option to invest in company stock have long invested what professionals would deem an inappropriately large percentage of their portfolio there ( Vanguard’s How America Saves 2019 report notes that 4% of participants with the option to invest in company stock have more than 20% of their balance so invested) – arguably the least diversified investment option on the menu, and one that is inextricably tied to the success of their employer’s business (meaning that when the business slips, so might the prospects of their continued employment). On the other hand, an investment in their employer is seen by many as a mark of confidence and loyalty – and, for many, it’s doubtless the investment on that menu that they best understand. 

(Not) Standing Still

A recent headline screamed that 401(k) savings rates have “stagnated” – but that’s missing the point. Several of them, actually.

“Stagnated” in this case apparently means that the average savings rate in 2018 — both employee and employer contributions — was 10.6%, roughly the same as the 10.4% rate reported in the survey in 2004. The point seems to be that, despite roughly a decade of automatic enrollment and other plan design enhancements, Americans aren’t saving any more.

That’s a perfectly obvious point to draw from those two datapoints – in this case from the recent 2019 How America Saves report from Vanguard which, while it only covers plans recordkept by Vanguard, the experience of 1,900 plans and 5 million participants in the survey always provides some interesting insights.

First a couple of basics; what do you suppose the odds are that we have the same plans (and participants) in the 2004 and 2019 surveys? Exactly. So, while it may not be apples to oranges, it’s clearly not pure apples to apples, either. The Vanguard authors themselves at one point acknowledge that there has been an impact to the report averages due to bringing on new plans with lower account balances. Secondly – and I’ve written about this previously – averages are mathematically simple, but can gloss over individual details.

There is, however, much more going on behind the scenes than the average conveys[i]. The reality is that automatic enrollment, while it boosts participation, actually – initially – depresses average savings rates. Why? Because while it generally lifts the participation rate from 70% or so to 90% or so, at the same time it “creates” a whole new group of people saving at a default rate (typically 3%)[ii], whereas those who signed up voluntarily save at rates more than double that. Consequently, you might well expect that a decade of automatic enrollment plan designs might have done good things for participation, they might well have depressed savings rates – and yet, they haven’t.

Some of that can be attributed to improvements in those automatic designs; in 2018, echoing results from the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans, slightly more than half of plans chose a default rate of 4% or higher, whereas in 2008 only about a quarter (27%) of plans did. The report also notes that in 2018 23% of plans chose a default rate of 6% or more – more than double the percentage that did so in 2009. And while it has long been the “norm” to apply automatic enrollment provisions to new hires only, the newest Vanguard report finds that it has now been applied to all non-participants in half the plans.

Better still, two-thirds of the plans with automatic enrollment have now implemented automatic annual deferral rate increases, and as of 2018 that has served to narrow the spread between deferral rates for participants in voluntary enrollment plans and those with automatic enrollment to just 0.4 percentage points!

Not that there isn’t room for “improvement”; just one-in-five had a deferral rate of 10% or higher in 2018, and – to the point above, 3 in 10 had a deferral rate of less than 4%. Moreover, only 13% of participants capped out at the 402(g) limit ($18,500), and in plans that allow catch-up contributions for those aged 50 and more, only 15% took advantage of that opportunity in 2018. And – even among the highest paid workers, 6% of those eligible aren’t (yet) taking advantage of that opportunity.

The dictionary defines “stagnant” as “showing no activity; dull and sluggish.” Well, while one number may make it seem that retirement savings has been standing still, the reality is quite different – and not at all "stagnant". 

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[i] To their credit, the Vanguard report authors take pains in the space of the 112-page report to not only provide median, as well as average figures, but to break data down by tenure, salary, and in some cases, age, as well as for participants who have been consistently in their database over a period of time.

• [ii] The Vanguard report notes that even among individuals earning less than $30,000 in plans with automatic enrollment have a participation rate more than double that of those in plans with voluntary enrollment.

A Not-So-SECURE ‘Act’?

The headline in a recent New York Times piece cautions that “Confusing Options May Be Coming to Your 401(k). It Could Cost You.” 

Those “confusing options”? Retirement income. And, ironically, they might undermine support for the most significant piece of pro-retirement legislation in a decade.

In fairness, the article begins by acknowledging to its readers that there might soon be some “welcome changes to the rules governing their retirement savings plans,” but quickly moves on to take to task the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which not only brings with it those welcome changes, but a key element that has some consumer advocates all atwitter (literally) – a fiduciary safe harbor for the selection of a lifetime income provider.

For years the retirement industry has bemoaned the lack of a lifetime income option in defined contribution plans. Indeed, for all the vaunted talk of the so-called “DB-ification” of DC plans, the latter has largely steered clear of embracing what is arguably one of the most compelling elements of DB plan design (aside from the completely employer-funded and managed aspects) – providing a pension, a stream of lifetime income.

Of course, in a DB plan, the cost and risk is on the employer, not only for the funding, but also for the provision of that pension benefit. DC plans have a very different dynamic, and DC plan sponsors have – largely – seen little upside in signing on for a decision that they see as carrying with it a liability that extends well beyond the employment relationship. Indeed, there have been any number of real and perceived reasons to avoid doing so (see 5 Reasons Why More Plans Don’t Offer Retirement Income Options).

The SECURE Act attempts to resolve some of that resistance – creating a legislative “safe harbor” in place of the one articulated by the Labor Department in 2008 and expanded upon in a 2015 Field Assistance Bulletin. Arguably, a legislative safe harbor is “safer” than one staked out by regulators, but plan fiduciaries hoping to find a fiduciary “free pass” won’t find one here, despite the concerns expressed in the Times.

‘Financially Capable’

The legislation states that a fiduciary is expected to engage “in an objective, thorough, and analytical search,” and that they must consider the financial capability of the insurer to satisfy its obligations, consider the cost (including fees and commissions) of the guaranteed income contract “in relation to the benefits and product features of the contract and administrative services to be provided under such contract,” and determine “at the time of the selection, the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract…”.

Now, unlike the regulatory safe harbor, the SECURE Act outlines some pretty specific criteria as to what would satisfy the financial capability tests, specifically that the fiduciary gets written confirmation from the insurer that they:

• are licensed to offer such products; 
• have operated under a certificate of authority from their state insurance commission at the time of selection, and for the immediately preceding seven years; 
• have filed audited financial statements in accordance with the laws of that state; 
• maintain reserves that satisfies those state requirements;
• have undergone, at least every five years, a financial examination (in accordance with those state requirements); and
• that they will “notify the fiduciary of any change in circumstances occurring after the provision of the representations” detailed above that “would preclude the insurer from making such representations at the time of issuance” of the contract. 

The SECURE Act goes on to clarify that while fees are a consideration, there is no requirement to select the lowest cost, and that the fiduciary may consider the value of the contract, including features and benefits and attributes of the insurer. It also states that the fiduciary will be deemed to have conducted the required “periodic” review if they receive the written representations from the insurer on an annual basis, unless they receive a contrary notice, or are aware of “facts that would cause the fiduciary to question such representations.”

Limit ‘Ed’

If all of those conditions are met, the SECURE Act goes on to limit the liability of the fiduciary for any losses “that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.”

While the fiduciary obligations to review and evaluate the insurer resonate with ERISA’s fiduciary admonitions, the concerns raised in the Times article seem to be twofold: that the mere existence of this new safe harbor will be touted as the free pass it most surely isn’t – and that the relative specificity of the conditions deemed to satisfy the financial capability test will result in a mere checkbox review – and that the checkbox – basically doing business in a state (and let’s remember that various states have varying requirements) while avoiding running afoul of those same state regulators – will serve as a back door for the annuity pitching “foxes” to enter the 401(k) “hen house” and those participant accounts to which they have long effectively been denied access.

Now, if in fact those results do flow from the SECURE Act’s implementation (and its integration with the Senate’s Retirement Enhancement and Savings Act (RESA)), there would be cause for concern. Certainly SECURE’s lifetime income provider fiduciary safe harbor is a more secure mooring for plan fiduciaries than the current landscape, if only because it provides some structure for the assessment of the financial capability of the product provider. That said, you could hardly be faulted, however it’s ultimately pitched, for not seeing a ton of daylight between that new safe harbor and the current fiduciary landscape. And the legislation, to my eyes, anyway, minces no words in reminding plan fiduciaries of the existing obligations under ERISA to assess, monitor, and review the conditions underlying the suitability of the lifetime income option as a prudent plan investment.  

Unless, of course, you’re reading the Times (instead of the actual legislation) – and you are concerned enough at the potential abuse that you’d consider withholding your support for the legislation, legislation it’s worth remembering passed the House by the kind of margin generally reserved for the naming of post offices.

Now, what the Times article gives voice to is a seed of distrust – viewing the safe harbor language not as a relatively modest means to encourage consideration of an option that experts have long said was needed, for which participants routinely express interest (in surveys, if not actual take-up rates), but that plan fiduciaries have nonetheless been reluctant to embrace.  

When all is said and done, this safe harbor may not be “enough” – but it is a step, and fear-mongering notwithstanding – it is arguably a step along a path to a retirement that is, indeed, more secure.

- Nevin E. Adams, JD
 
See also: Retirement Plans and Retirement Income: It’s Complicated.

'Lesson' Plans

Life has many lessons to teach us, some more painful than others – and some we’d just as soon be spared. But as graduates everywhere look ahead to the next chapter in their lives, it seems a good time to reflect on some lessons learned along the way.

It’s handy to know at least a little about sports and the weather.

Paying the minimum due on your credit cards is dumb.

Be willing to take all the blame – and to share the credit.

Know that there actually are stupid questions. Try not to be the one asking them.

Shun those who are cruel to others – and don’t laugh at their “jokes” – sooner or later, you’ll be a target.

Never say you’ll never.

“Bad” people eventually get what’s coming to them, though you may not be around to see it.

Always sleep on big decisions.

When it seems too good to be true, it’s generally not good nor true. 

Never let your schooling stand in the way of your education.

Sometimes the grass on the other side looks greener because of the amount of fertilizer applied.

Never email in anger – or frustration. And be extra careful when using the “Reply All” button.

If your current boss doesn’t want to hear the truth, it may be time to look for a new one.

Never miss a chance to say “thank you.”

Hug your parents – often.

If you wouldn’t want your mother to learn about it, don’t do it.

Bad news generally doesn’t age well.

There can be a “bad” time even for good ideas.

Your work attitude often affects your career altitude.

Comments that begin “with all due respect” generally aren’t.

Sometimes the questions are complicated, but the answer isn’t.

Remember as well that that 401(k) match isn’t really “free” money – but it won’t cost you a thing.

And don’t forget that you’ll want to plan for your future now – because retirement, like graduation, seems a long way off – until it isn’t.

Congratulations to all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD
Got some to add? Feel free to comment below....

5 Things Your Retirement Can (Still) Learn From Game of Thrones

Whether you are a Game of Thrones aficionado – or haven’t watched a single episode – there are lessons to be learned nonetheless.

Last week I recounted some fiduciary admonitions from the HBO series. Turns out there are words of wisdom for individual retirement savers as well. Check these out.

“When you play the game of thrones, you win or you die. There is no middle ground.”

All the way back in Season 1, Cersei Lannister explained what has certainly been a theme for the series as a whole. That said, retirement isn’t a game of thrones, nor is it precisely a “win or die” scenario. We all die, eventually of course (no “wights” here), but there are those who “win,” at least if you consider those who have sufficient resources to fund retirement as “winning.”

The non-partisan Employee Benefit Research Institute (EBRI) has previously found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers – between 83% and 86% of them, in fact – with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold – and that’s making no assumptions about the positive impact of plan design features like automatic enrollment and annual contribution acceleration.

When EBRI recently looked at an individual basis, the average Retirement Savings Shortfall for those ages 60–64 ranges from $12,640 per individual for widowers to $24,905 for single males and $62,127 for single females. Those looking for a big boost in the odds of success could find it in eligibility for a defined contribution plan. Consider that the average retirement deficit for individuals ages 35-39 with no future years of eligibility in a defined contribution plan is $78,046 per individual – more than five times the average retirement deficit for those fortunate enough to have at least 20 years of future eligibility in a defined contribution plan (where the average retirement deficit is $14,638).

Not that there isn’t plenty to worry about: reports of individuals who claim to have no money set aside for financial emergencies; the sheer number of workers entering their career saddled with huge amounts of college debt – and the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work… and those important years of eligibility.

“A Lannister always pays his debts.”

While the official motto of the Lannister house is “Hear me roar!”, at several points throughout the series, the Lannisters are able to trade on their reputation for, by hook or by crook, fulfilling their debt obligations (though note, such “debts” are not always monetary in nature).  

Debt of any kind – and these days student debt seems to loom largest – certainly weighs on thinking, if not saving, for retirement. While younger workers’ balance sheets are clearly hurt by student debt, researchers have noted preliminary results that indicate that they do not substantially reduce retirement saving to compensate. Good news for their long-term prospects, anyway.

However, note that nearly two in three workers (63%) say debt is a problem for them, and the Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey has consistently found a relationship between debt levels and retirement confidence. In 2018, just 2% of workers with a major debt problem say they are very confident about having enough money to live comfortably in retirement, compared with a third (32%) of workers who indicate debt is not a problem – while 37% of workers with a major debt problem are not at all confident about having enough money for a financially secure retirement, compared with 6% of workers without a debt problem.

Now, confidence is one thing; reality is another. Paying off debt – or avoiding racking up serious amounts of it in the first place – is the wisest course when it comes to retirement preparations. But, as Tyrion Lannister observed in Season 3, “I’m quite good at spending money, but a lifetime of outrageous wealth hasn’t taught me much about managing it.”

”If you think this has a happy ending, you haven't been paying attention.” 

Ramsay Bolton’s Season 3 admonition to Theon Greyjoy (soon to be Reek, several seasons ahead of his eventual redemption) predicated what was surely one of the more uncomfortable sequences (certainly for Theon) – and proved to be prescient for viewers as well.

It is an observation that many retirement industry professionals would surely direct at the individuals that any number of consumer surveys suggest have set aside little or worse – nothing – not only for retirement, but for the relatively commonplace financial emergencies that seem to be part and parcel of life. Granted, some doubtless are living “paycheck to paycheck” not by choice, but necessity.

And yet, there’s plenty of evidence to suggest that these behaviors aren’t always constrained by economic reality, but by a very human inclination to sacrifice the long-term view for the exigency of today’s pleasure(s), if not an unhealthy confidence that the future will bring opportunities to remediate today’s decisions.

“The Lannisters send their regards.”

Game of Thrones may not have invented the notion of surprisingly (if not randomly) killing off key characters, but the series has arguably taken it to a whole new level. For my money, even in a series well-known for its plot twists, unanticipated shifts of loyalty and sheer mayhem, there’s nothing quite like the episode titled “The Rains of Castamere,” but more commonly known to fans as the “Red Wedding.”

We’ve all been to at least one wedding where the underlying tensions between families threatened to undermine the happiness generally associated with such proceedings, but I think it’s fair to say that the wedding of Edmure Tully and Roslin Frey had a conclusion far more dramatic than its participants (or viewers) anticipated (unless, of course, you read the book). That said, it’s not as though the Starks didn’t have a premonition about the trouble that would ultimately befall them. It’s just that, ultimately, they relied upon a certain amount of social decorum to prevail. Suffice it to say that the “decorum” that accompanied Roose Bolton’s infamous quote above wasn’t what the Starks had in mind.

The lesson for retirement savings is, of course, that it’s always prudent to be prepared in case planned events take an unexpected turn. That could come in many forms: an unexpectedly early retirement, a sudden illness or disability, a need to provide parental support, or even a sharp, sustained downturn in the markets.  

It might be a good time to check out “6 Things that Can Wreck a Retirement."

“Winter is coming.” 

This is perhaps the most iconic phrase from GoT, and while those who live in climates where the arrival of winter can mean significant change – snarled commutes, cancelled flights, or perhaps trips to the ski slopes – in the Game of Thrones it’s unequivocally a bad thing, though – as in making retirement preparations – there are some who think that arrival is further off than it actually turns out to be.

Retirement – or perhaps more precisely, the end of a full-time working career – though it’s often depicted with scenes of warmth and beaches – is “winter” of a sort, or might be if adequate preparations aren’t made. While there are varying degrees of concern about that impact, and the timing of that impact, it seems fair to note that Americans know that retirement, like winter in GoT, is coming.

Those who haven’t are well advised to bear in mind Tyrion Lannister’s caution, “The day will come when you think you are safe and happy, and your joy will turn to ashes in your mouth.”

Better counsel comes from Petyr Baelish, who in Season 6 noted, “The past is gone for good. You can sit here mourning its departure, or prepare for the future.” Because, as that same Petyr Baelish explains in Season 4, “a lot can happen between now and never.”

And here’s hoping it does – because it certainly can.

- Nevin E. Adams, JD

4 Fiduciary Lessons from the Game of Thrones

I was late to the Game of Thrones – and though its final season seems a bit “rushed” – there has been plenty to not only watch, but mull over in its eight-season run. And yet, as the series wound to a close on Sunday night, I kept thinking there were some lessons for retirement amidst the mayhem.

‘A man’s gotta have a code.’

Sandor Clegane (a.k.a., the Hound) had some of the best quotes during the series run (though most of them are not “printable” here). This is one for the ages, and while he drew this particular line in a conversation with Arya Stark about his choice between being a thief (not OK) and a murderer of young boys (OK?), for Sandor, he did at least have a personal, if not, “professional,” boundary which governed his actions.

Of course, plan fiduciaries have not one, but two to keep in mind: ERISA – and the Internal Revenue Code.

‘No one can survive in this world without help. No one.’ 

Jorah Mormont’s words of wisdom to his “Khaleesi” (Daenerys Targaryen) are broadly applicable, of course, and in the retirement context both to individual retirement savers seeking help, as well as the employer/plan sponsors looking to provide plan designs that are prudent and effective in helping them do so.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law – and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic, “first, do no harm” stance are afforded no such discretion under ERISA’s strictures.

It’s one thing to find yourself in a job for which you are not immediately trained, or perhaps even qualified, but there’s no beginner track for ERISA fiduciaries. You’re not only directed to act for the exclusive purpose of providing benefits, but to do so at the level of an expert. The DOL has said that “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert."

The simple matter is, as an ERISA fiduciary, you’re expected to conduct yourself as an expert – or to hire help that is.

‘Sometimes nothing is the hardest thing to do.’

While that can certainly be true in times of volatile markets, most participants – certainly those who have the benefit of automatic enrollment, contribution acceleration and qualified default investment alternatives – have, despite Tyrion Lannister’s Season 7 counsel to Daenerys Targaryen – long found that “nothing” is actually not only easy, but in many, and perhaps most, cases a better result than they might have managed on their own.

That said, “nothing” has been the bane of any number of plan fiduciaries on matters ranging from conducting regular provider evaluations, prudent examinations of plan investment options, removal of imprudent options, and documentation of their deliberations.

In those situations, “nothing” was likely not the hardest thing to do – though it certainly had its hazards. This might be a good time to revisit “6 Dangerous Fiduciary Assumptions.”

(In the bear-in-mind department, Daenerys Targaryen later pushed back on Tyrion’s counsel by declaring “You told me to do nothing before and I listened to you. I’m not doing nothing again.”)

‘No matter who you are, no matter how strong you are, sooner or later, you’ll face circumstances beyond your control.’ 

While she never really carried on as though she thought this applied to her, none other than Cersei Lannister offered these words of wisdom to her (really nasty) son Tommen Baratheon in Season 5 (ironically, before she found out for herself the awful truth of those words).

Whether the source is the markets, regulations, legislation, litigation, workforce dynamics in general, or all/some of the above, plan fiduciaries have to know that circumstances may well drive them out of their comfort zone, regardless of how carefully or thoughtfully they have tried to prepare for that eventuality.

The good news is, ERISA requires prudence, not perfection.

- Nevin E. Adams, JD

A Good Example

Mothers give us a lot, not the least of which is life itself. But as I was reading through all the accolades on social media over the weekend, I couldn’t help but be reminded of all my mother gave me.

As is the case in many families, “Mom” was our family’s CFO. See, like many in his generation, my dad wanted to hold the checkbook, but it was Mom who always made sure that there was money in the account. She’s the one who started setting aside money from her paycheck in her 403(b) plan at work – and continued to do so, even when my father was convinced they couldn’t afford it – and made no secret of that opinion. Or did until he got a glimpse of the statement that showed Mom’s retirement account growth – and then, inspired by that example – he began setting money aside for retirement as well.

Not surprisingly, Mom was the one who encouraged me to start saving in my workplace retirement plan as soon as I was eligible – and while I wasn’t always smart enough to take Mom’s advice in every situation, I’m happy to say that on this one I did.

Now nearly 89, Mom’s still independent, vibrant, and financially self-sufficient – and that’s no accident. A school teacher, she took a fairly significant (and unpaid) “sabbatical” so that she could stay at home with her four kids until the youngest was ready to head off to school. When she returned to work she was covered by a state pension plan, and one that required from her paycheck a much more significant contribution than most choose to defer into their 401(k) today. She even saved diligently to buy back the service credits she had forgone during the years she worked in our home without a paycheck, in addition to her 403(b) contributions (and for all the nonsense that gets the headlines about advisors in the K-12 space, the one Mom worked with for years did just fine by her).

Indeed, generally speaking, women face many more challenges regarding retirement preparation than men. They live longer (and thus are likely to have longer retirements to fund), tend to have less saved for retirement (a result of lower incomes, as well as more workforce interruptions, both when children are young, and as their parents age), and in addition to longer retirements, those longer lives mean that they are also more likely to have to fund what can be the catastrophic financial burden of long-term care expenses. Among the unexpected expenses in retirement – as parents all know, are those related to your kids – because, even after they leave home and have kids (and expenses) of their own – they’re still your kids.

Sadly, because we know how much difference it can make in retirement savings, women are less likely to work for an employer that offers a retirement plan at work – and to be part-time workers, and thus less likely to be eligible to participate in those plans even when they do have access. Oh, and like my mother, they tend to outlive their spouses – often by far more than the variance in average life expectancy tables suggest.

Yes, nearly a quarter century in, Mom’s sacrifices over the years (and they continue to this day) have allowed her to have a retirement that is, while certainly not luxurious, comfortable. Oh, like many in her generation, she’s worried about being a “burden” to her family, though – because of her preparations, there’s not much chance of that.

What she is – certainly to this grateful offspring – is a (very) good example.

- Nevin E. Adams, JD

Author’s Note: My mom’s example isn’t the only inspiration to be found around us. The upcoming Women in Retirement Conference will feature, among other things, an exciting panel comprised of the leadership of the American Retirement Association, and its member associations – all women! It’s going to be an incredible event, with lots of inspiration – and examples! 
Find out more at https://womeninretirement.org/.

Business As Unusual: Fiduciary Do’s and Don’ts

Plan sponsors often gloss over the reality that they are ERISA fiduciaries – or think that if they have hired an advisor, they’ve basically hired a stand-in for that responsibility. But there’s another mistake that even the most well-intentioned make – with remarkable frequency, based on what I hear from advisors.

In the marketplace, it’s normal – even expected – that firms extend more favorable terms and/or discounts to those who do business with them across various offerings. But those “normal” practices can cause you trouble when it comes to doing business with ERISA-governed plans. Here’s how:  

If you make decisions regarding the plan or plan assets, you’re an ERISA fiduciary.

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. Ditto if you are able to hire individuals that control or direct the investment of those assets.

Plan decisions you make as an ERISA fiduciary – including hiring those who provide plan services – must meet certain criteria.

With regard to what a fiduciary must do, the Employee Retirement Income Security Act, or ERISA, sets out a number of requirements for plan fiduciaries in what are generally referred to as the “prudent man” rule, the duty of loyalty and the “exclusive benefit” rule.

Taken in their entirety, this means that plan fiduciaries must carry out their duties as would “a prudent man engaged in a like capacity and familiar with such matters,” to act “solely in the interest” of plan participants and to act for the exclusive purpose of providing retirement benefits to participants. Those duties include the selection and monitoring of providers – and those must be done for the exclusive benefit of participants and beneficiaries. Failing to do so constitutes a breach of your fiduciary duty – and this has been the underlying allegation in just about all of the recent litigation regarding ERISA plans.

There are also certain things you can’t do as an ERISA fiduciary.

Fiduciaries may believe that, in order for a conflict of interest to exist, the fiduciary must somehow act in a manner that is bad for the plan, but ERISA outlines a number of actions that fiduciaries may not take, generally referred to as “prohibited transactions.”
The transactions that constitute an unlawful exchange between a plan and a party in interest, or prohibited transaction, involve the sale, exchange or lease of property; lending of money or other extension of credit; furnishing of goods, services or facilities; or a transfer or use of plan assets. A disqualified person who takes part in a prohibited transaction must correct the transaction and must pay an excise tax based on the amount involved in the transaction.

Note that if a conflict of interest is precluded under ERISA's prohibited transaction rules, the fiduciaries cannot, as a matter of law, allow the plan to become a party to the transaction – even if the action were otherwise reasonable or profitable to the plan. There are exemptions to some of these prohibited transactions, but without that, fiduciaries are absolutely prohibited from entering into a contemplated transaction – even if doing so could otherwise be considered “prudent.”

Businesses make “relationship” deals all the time – ERISA-governed plans can’t.

Remember that as an ERISA fiduciary you have a legal obligation to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. 

So, let’s say the local financial institution, currently bidding on the opportunity to manage your plan’s assets, wants to acknowledge the “value of the expanded relationship” by extending a more favorable interest rate, or to expand the firm’s existing line of credit were they to be awarded the plan business.

From a customary “doing business” standpoint, this probably wouldn’t raise any red flags – but then, ERISA isn’t “customary” – and from that standpoint, there are red flags aplenty.

The clear intent of the offer is to reward the decision to award the plan business to the financial institution, or at least to acknowledge that the financial institution is willing to view its business holistically. That said, when it comes to dealing with an ERISA plan, fiduciaries must make those decisions in isolation – solely is the operative word here – and a decision to transfer plan assets in exchange for better banking terms for the company fails that test.

Specifically, it violates 406(b)(1) and (3) because the responsible fiduciary has dealt with the assets of the plan for the benefit of an entity other than the plan participants and beneficiaries. Nor does it matter that as employees of the firm there might be some incidental benefit from the enhanced LOC. Why? Because the decision wasn’t made for the exclusive purpose of providing benefits, nor was it solely in the interest(s) of plan participants and beneficiaries.

What could be worse?

Worse – imagine a situation where the fees or services offered to the plan by the financial institution aren’t the top choice of the plan fiduciaries/committee. Again, in a “customary” business transaction, it’s not unusual to consider the entire relationship, to weigh the breadth of services and costs in totality.

But ERISA isn’t customary – and if better options were readily available, and there is no specific plan benefit justifying the transfer, the plan fiduciaries have run afoul of the duty not only to act prudently, but to do so for the “exclusive purpose” of providing the retirement benefits to plan participants and beneficiaries. And, depending on the nature of the transaction, they may well have run afoul of ERISA’s prohibited transaction restrictions.

Remember that your liability as an ERISA fiduciary is personal.

There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that ERISA fiduciaries – and your decision as a committee member means that you’re one - can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

The bottom line: When it comes to dealing with ERISA plans, plan fiduciaries are well-advised to consider if anyone other than the participants benefits as a result of the selection of a service provider or an investment decision. And if so, to tread carefully – very carefully.

- Nevin E. Adams, JD
 
Note: For a more extensive analysis on the subject, I am indebted to the work of Fred Reish who has on this topic, as on many others over the years, provided excellent insights, including this one.

5 Things Your Plan Committee Members Need to Know

Over the past decade and change, there have been a number of high-profile excessive fee suits brought against retirement plan fiduciaries, notably the plan committees that oversee these programs. Here’s what your plan committee members should know.

1. Why they are a member of the committee.

Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary.

There is, or should be, a legitimate, articulatable reason why each and every member of your plan/investment committee was selected. They, and every other member of the committee, should know that reason. If you can’t articulate that reason (or can’t with a straight face), they shouldn’t be on the committee – for their own sake, and the sake of every other committee member.

Note also that, over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making. So, it’s worth revisiting that articulatable reason – and making sure it’s still valid – on at least an annual basis.

2. That, as a member of the plan committee, each of them is probably a fiduciary. 

Committee members often do their work in relative anonymity – or did before the recent spate of ERISA litigation. That said, in a recent excessive fee case (Sacerdote v. N.Y. Univ.), the court – while delivering a verdict for the plan fiduciaries – nonetheless called out several committee members who “…displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary” – including, in one case, a member who “…did not consider herself a fiduciary (but rather believed the Committee was the fiduciary).”

In that case, a federal judge also stated that “the hiring or appointment of a co-fiduciary does not relieve the original fiduciary of its independent duties,” that “no fiduciary may passively rely on information provided by a co-fiduciary,” and that a “fiduciary who delegates fiduciary responsibilities nonetheless retains a duty to exercise prudence” – a process that she likened to a “good old-fashioned ‘kicking the tires’ of the appointed fiduciary’s work…”.

Their role on the committee may be bounded in by the focus of that group – a focus on the investment and investment menu, for example. That said, if they’re on a plan committee, and they are influencing plan assets, they’re a fiduciary, and they should not only know that, but know what that means.

Of course, fiduciary status is based on one’s responsibilities with the plan, not a title. Simply stated, those who 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), are fiduciaries to the extent of that discretion or control – and that certainly includes committees that either make decisions regarding the hiring or firing of plan fiduciaries, or those that make decisions regarding the plan’s assets.

3. What being a plan fiduciary means.

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. More precisely with the skill and aptitude of a person expert in such matters.

Even when the plan hires a professional investment advisor to help them – something that ERISA demands of plan fiduciaries when they lack the skill and knowledge of a prudent expert – in the NYU case above, the same judge pointed out that even then the committee could not “unthinkingly defer” to that advisor’s expertise. Rather, she said, in order to fulfill their duties, “…the Committee members must meaningfully probe” the advisor’s recommendations “and make informed but independent decisions.”

ERISA fiduciaries are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. What does that liability mean? 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.

And since fiduciaries have potential liability for the actions of their co-fiduciaries, it’s also a good idea to… know who their co-fiduciaries are.

4. What’s in the plan’s Investment Policy Statement.

First, let’s acknowledge that the law doesn’t require that you have a written investment policy statement. Of course, if the law does not specifically require a written investment policy statement (IPS) – think of it as investment guidelines for the plan – ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And indeed, the vast majority of plans do have a written IPS – more than 90%, according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.

More than that, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

5. What you’ll do to support them in this important duty.

Every plan, and every plan committee is unique. But the responsibility, and the prudent expert standard to which those responsibilities must be held has been called “the highest known to the law.” In forming and conducting the committee its imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.

One recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explains that the committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”

The plan provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”

And if your committee does that – well, then you’ll have the makings of a great plan committee.

- Nevin E. Adams, JD