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Reading Between the (DOL's) Lines

9/24/2014

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I'm back from the Plan Adviser National Conference (see the Plan Adviser site at http://www.planadviser.com for details), where I was on the Washington D.C. Update panel.  The discussion was about as interesting as two lawyers talking about the goings on at the DOL, IRS and SEC, not to mention our coverage of the "progress" in the Congress, could be.  (Seriously, we were able to hold onto the crowd in the big "general session" room and I heard from a lot of people who were there that they thought the discussion was valuable.)  I hope that they paid attention in particular to one part of the talk and wanted to pass along the topic and analysis to those of you who weren't there.

My focus in this post is on two fairly recent releases from the Feds, one of which came from the GAO and the other of which came from the DOL.  Here's a summary of what came out and the parts of the releases that I think are important.

  • The DOL release probably is on your radar.  It is a Request for Information, in which the DOL is asking for input on potential regulations governing brokerage windows.  This is the first step in the process of proposing regulations.  While the Release is styled as a fact-finding exercise, everyone expects guidance from the DOL in this area, as the DOL has already expressed its positions on fiduciaries' responsibilities related to brokerage windows (in Field Assistance Bulletin 2012-02 and 2012-02R, where the "R" stands for "revised," which is what the DOL had to do in response to the firestorm of negative opinion that it triggered by suggesting that fiduciaries have a duty with respect to brokerage windows).  The Request for Information contains 39 separate requests related mostly to what constitutes a brokerage window, who uses them, how they are selected and monitored by fiduciaries, what they cost and how relevant information about them is communicated to participants.
  • The GAO release may not be on your radar.  In June, it released a report to the Committee on Education and the Workforce, House of Representatives, entitled 401(k) Plans -- Improvements Can Be Made to Better Protect Participants in Managed Accounts.  The report looks at the major providers of such accounts in 401(k) Plans and proposes a variety of regulatory approaches that could help participants.


The link between these two releases may not be apparent, except that the GAO specifically linked them, in its report, because managed accounts are often available through brokerage windows.  And, the report contains the DOL's written response to the GAO's call for regulations, including in connection with the brokerage window project.  The most significant GAO points in this regard are its requests for guidance to plan sponsors related to selecting and overseeing managed account providers and its request for a requirement that plan sponsors have to provide for more than one choice of managed account provider.


I am "reading between the lines" in the area of overlap between the DOL and GAO releases.  They're both focusing on how fiduciaries pick and monitor providers in these areas.  I understand the logic--we've always understood that there is a requirement to act prudently when selecting a plan investment vehicle or a vendor responsible for administration.  What concerns me is that, in many situations, the questions "who should provide the brokerage window?" or "who is providing non-default managed accounts?" isn't asked very clearly because the answer is "our third party administrator is in that business and they included it in their proposal."


The activity in D.C. that's discussed here should lead fiduciaries to show that they considered the alternatives and specifically selected the TPA for these additional roles.  Actual Regulations may be a long way off, but the direction is clear, and plaintiffs' lawyers can read between the lines just as well as we can.  Fiduciaries who anticipate where they could be criticized (in a lawsuit or by the DOL) can act in ways that make that criticism less likely.  And, following this advice wouldn't add significantly to the work the fiduciaries are doing anyway, if they are selecting and monitoring providers properly.
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Missing Participants and Terminating DC Plans

8/19/2014

 
Continuing to catch up on developments that occurred while I was traveling.  This is from last week.

A lot of us have been paying attention to long-lost participant claims.  Spurred by Social Security Administration notices of possible private retirement benefits (look here: http://www.dol.gov/ebsa/SSAPotentialPrivateRetirement/SSAPotentialPrivateRetirement.html for the DOL's explanation), claimants have been investigating whether they have benefits that haven't been paid and plans are dealing with trying to determine whether benefits are payable (and prove that they have been, even when records of payment have been lost or destroyed, as reported here:  http://www.plansponsor.com/Tips_for_Fielding_Lost_Participant_Claims.aspx).

While the considerations are more flexible for an ongoing plan (as reflected by the ERISA Advisory Council's call for more specific guidance in the area, reported here:   http://www.dol.gov/ebsa/publications/2013ACreport3.html), there has been specific guidance for terminated plans, which have a more immediate need to find the participants or come up with an alternative, so that they can complete the termination and liquidation of the plan.

Field Assistance Bulletin 2014-01 reflects an updating of the prior guidance.  The updating was necessary to reflect that the prior guidance (FAB 2004-02) pointed plan fiduciaries to the IRS and SSA mail-forwarding services (which have been discontinued) and because the growth in the internet since 2004 has resulted in several low-cost methods for locating missing individuals.  The new guidance also reflects recommendations made by the ERISA Advisory Council, although it does not follow the Council's call to cover non-terminating plans.

The guidance covers two topics--(1) how does a fiduciary discharge its duty to find a lost participant and (2) what can a fiduciary do with the account of a person who cannot be located:

  • The fiduciary must act consistent with the duties of prudence and loyalty and "make reasonable efforts to locate missing participants."  The "reasonable" standard will require that low or no-cost methods with a high likelihood of success MUST be undertaken.  The guidance specifically says that all of the following should be tried--certified mail, checking other plan and employer records, attempting to reach persons named as beneficiaries and using free electronic search tools.  More expensive approaches may be necessary where the account balances are large.  (As with other fiduciary decisions, a record of the process used to make this decision should be made and the specific decision(s) should be reflected in it.)  Note that the guidance permits a fiduciary to charge a participant's account for reasonable expenses incurred to locate the participant.  Of course, the plan document must permit expenses to be charged to the plan, if they are being charged.

  • Where the above steps do not result in the locating of the participant, the preferred method of distribution is a rollover to an individual retirement account or individual retirement annuity.  If that's not available to the fiduciary, it can open a federally-insured interest-bearing bank account for the funds, or transfer them to a state unclaimed property account (both of which are taxable, which is why "in most cases, a fiduciary would violate ERISA['s] obligations of prudence and loyalty" by using one of the alternatives if a tax-free rollover were available).  As with all things of a fiduciary nature, the fiduciary should consider the features of these two alternatives before selecting one over the other.  The guidance also mentions one unacceptable option--100% income tax withholding (i.e., turning the money over to the IRS).


The new Field Assistance Bulletin will be helpful because it reflects current thinking in the area.  Although it contains a few simple rules (always use certain search techniques, always use tax-free rollovers and never use 100% withholding), the bulk of the guidance hits the common themes--conduct fiduciary activities with prudence and loyalty, show how you did it and make a record of what you ultimately decided.

 
 

The Cost of Not Practicing "Procedural Prudence" Goes Up

8/18/2014

 
I have just returned from some time on the road and will be catching up on developments from the first half of August.

The most important one is a case that has been looking at what to do about fiduciaries who don't do the required "procedural" job of investigating alternatives and making a reasoned decision, but who may have gotten the answer correct anyway.  The decision just issued was from the appellate court, in the Fourth Circuit.  The decision is very adverse to fiduciaries who aren't observing the required procedural obligations.

In Tatum v. RJR, the trial court had concluded that, because a fiduciary who had undertaken the necessary amount of procedural prudence "could have" reached the same conclusion that the RJR fiduciaries reached, there was no liability for the lack of prudence.  The Fourth Circuit, in a decision issued August 4th, disagreed.  In the court's view, the fiduciary escapes liability only if a fiduciary who engaged in procedural prudence "would have" reached the same conclusion.

The case involved the elimination of RJR and Nabisco stock funds from the RJR plan.  The fiduciaries decided to sell off the stock after both funds lost significant value, at least in part due to adverse decisions in tobacco-related litigation.  Their decision followed a very brief discussion of the point and the courts had no problem concluding that the process employed by the fiduciaries was a breach of fiduciary duty.  The courts have been wrestling with the question "if the fiduciaries did it the wrong way but came up with the right answer anyway, are they liable?"

This is a very interesting question and, as usual, I'll skip the competing analyses of the majority and dissenting opinions.  I'd rather focus on whether the decision and the debate teach us anything that we can use when administering our plans.

There is a simple lesson--get the process right--and a greater reason to do that--the possibility that a court will follow the "would have" approach.  The court recognized that, if a fiduciary complies with the procedural prudence obligation, it won't be liable even if the decision that it makes works out badly.  In the court's view, there is no breach of fiduciary duty in that case, as ERISA requires only that the fiduciary develop the necessary basis for a decision, including alternatives, and then makes the decision in the sole interests of participants and beneficiaries.  But, if procedural prudence is not used, then the fiduciary has to show that a prudent fiduciary would have made the same decision.  This shifts the burden in a way that will make it extremely difficult for a noncomplying fiduciary to win a lawsuit.

For me, the lesson is "approach the decision correctly and you won't face liability; approach it incorrectly and the burden can shift in a way that makes it extremely difficult to win."  In other words, "do it the right way when you control the situation and you won't lose control later."  Seems like an easy and valuable lesson to me.
 

Quarterly Report

8/11/2014

 
Every quarter, I prepare a recap of developments in the benefits and compensation areas for Institutional Investment Consulting.  Although many of the items have been reported in previous blog entries, I do a deeper dive for the IIC report.  Below is a copy of the most recent report, covering April through June. 
 

Coming Soon

7/14/2014

 
The week before The 4th was the Supreme Court's last week and I posted several times about the big decisions issued as the Court ended its session.  Then, radio silence.

A lot of what has happened in the interim didn't seem to have enough "wow" to follow the most recent entries.  While Fidelity settled fiduciary litigation against it for $12 million, the immediate impact would appear to be important only for plan sponsors that include proprietary funds in their plans--which doesn't cover many companies.  And, the Senate's imminent launch of a bill that would overturn Hobby Lobby is newsworthy, but it doesn't seem very likely that the House and Senate will agree on very much about ACA (particularly as the House prepares to sue President Obama for extending the ACA deadlines), so I wouldn't expect anything to get through Congress [updated July 17--the proposal didn't even get through the Senate].

But, there are a few items that are important enough to be covered in detail:

  • The IRS finalized the Qualified Longevity Annuity Contract Rules, which will permit very extended annuity payment terms in defined contribution plans.
  • A Sixth Circuit decision against Anheuser-Busch can be read as applying more of a de novo standard of review than we'd otherwise expect to a matter of plan construction.
  • Another court ruling has come down in one of the "church plan" cases, signaling that a large number of those plans could lead to unexpected liability, despite the IRS's consistently ruling that they were church plans (and, therefore, not subject to ERISA rules that, apparently, did apply).
I'll post three separate articles on these developments in the next couple of days.

 

Supreme Court Ends Term With Two Benefits Decisions

6/26/2014

 
We have been expecting the U.S. Supreme Court to finish the Term with two important decisions affecting benefit plans.

Yesterday, the Court ruled in Fifth Third Bancorp v. Dudenhoeffer that there is no presumption of prudence for fiduciaries in an ESOP.  The question affects directly how courts decide motions to dismiss and summary judgment motions when a plan is challenged for continuing to offer a company stock fund to participants when company stock is losing value.  While that may seem like a technical legal problem, it's a very practical problem because (1) stocks go up and down in value and there a lot of ERISA cases filed when prices go down, even when a company isn't failing and (2) as I've said many times, the risk for fiduciaries isn't that they'll lose a trial, it's that they won't be able to get out of a case on a motion to dismiss or for summary judgment and will settle (for seven or eight figures) to avoid the expense and uncertainty of trial EVEN THOUGH THEY HAVEN'T DONE ANYTHING WRONG.  (Sorry for the all-caps; it's a touchy issue for me, as I've worked with companies that have paid significant amounts when they really didn't do anything wrong.)

The other decision is coming Monday.  Then, the Supreme Court will decide Hobby Lobby, which addresses whether the Affordable Care Act's contraceptive mandate can violate a secular company's religious rights.  This is also a technical legal issue that has important practical implications, because it will either strengthen or weaken the overall ACA structure.

Fifth Third Bancorp is worth further comment, and I'll post something more on it soon.  Hobby Lobby  will be decided early Monday and I'll get something up on it Monday.

 

Mass Mutual a "Functional Fiduciary"; In-House Fiduciaries Need to Consider Their Responsibilities

5/22/2014

 
The courts have not been uniform on the subject of whether a 401(k) administrator can attain fiduciary status through its authority or activities.  A Federal Court in Massachusetts joined the courts concluding that an administrator is a fiduciary in a decision this week affecting Mass Mutual.  While the court concluded that fiduciary status did not follow from Mass Mutual's ability to change investment options (because it hadn't exercised that authority), the court concluded that Mass Mutual's ability to increase its separate investment account management fees DID make it a fiduciary.

The decision occurred in connection with a motion to dismiss (which, for these reasons, was denied).  Despite the preliminary nature of the decision, in-house fiduciaries need to evaluate whether terms in their contracts with administrators can lead to fiduciary status.  If they do, the in-house fiduciaries may need to heighten their level of oversight of the administrators to ensure that the fiduciary breaches of the administrators do not lead to co-fiduciary liability for the in-house fiduciaries.

On a practical note, the risk just mentioned can be handled by adding a section to the fiduciary compliance checklist that all in-house fiduciaries should consider having.  A checklist provides a roadmap for fiduciary compliance and a record that the fiduciaries are being prudent in their activities.

 

401(k) Plans Paying for Disability Insurance

5/20/2014

 
Some regs came out last week that will let a plan pay for disability insurance that will make contributions to a 401(k) plan for a participant who becomes disabled.  (The direction of the regs is that premiums can come out of the plan tax free and the disability benefits will also be tax free because they are being contributed to the plan.)

I originally thought "interesting but complicated, so who would want to do that?"  However, I'm seeing some retirement plan thought leaders saying "this is big."  While they're not articulating all of the policy considerations, one of the primary ones is that, for companies with DB plans, there is disability protection in the retirement arrangement; with most companies using DC plans exclusively, there needs to be something that accomplishes the same thing.


I'm still getting stuck on the "complicated" point, but will be discussing this with clients and watching to see how it's embraced in the marketplace.

 

First Quarter Update

5/6/2014

 
Each calendar quarter, I prepare a discussion the most important employee benefits and executive compensation developments (it comes out about a month after the quarter ends) for Institutional Investment Consulting, an excellent and highly regarded consulting firm in the qualified and nonqualified retirement plan space.  You can get their info at www.iic-usa.com.  Here is the full QI 2014 Report.
 

    What You'll Find in this Blog

    Every day, I come in contact with several developments in compensation and benefits.  When I see something that is important in its own right, or that could affect decisions you make in your job, I'll post it here.  I'm not trying to give you every detail--there are other sources you can get that from, if you need it--I just want to make sure that you are aware of what's happening and what I think the implications of the development could be.

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dweiner@davidweinerlegal.com

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