MEP's - EBSA Speaks and More Opinions Coming

Well folks, for those of you who know me, you've probably come to understand that I'm a cautious (re: Prudent) person by nature. I'm suspicious of new spins on old concepts and of slick sales pitches which are used to imply one thing, but deliver something less. In that context, I've written, at times sarcastically, about Multiple Employer Plans (MEPs). My underlying message has always been, Proceed with Caution. The idea is that if sounds too good to be true, it usually is and it doesn't hurt to question the idea at its source.

Recently, I personally attended the annual 401(k) Sales Summit put on by the American Society of Pension Profesionals & Actuaries (ASPPA). At the opening of Day 2 of the conference, I attended a session which was a one on one interview of Michael Davis of the Department of Labor by Brian Graff of ASPPA. There were several topics discussed, upcoming fee disclosure rules, the proposed expanded definition of a fiduciary, and yes, MEPs. Mr. Davis, was one of the better DOL speakers I've heard present and I felt he was very clear in that he felt that the current rules governing Qualified Retirement Plans (the ERISA) do not support the concept of an "Open MEP", meaning MEPs for employers that are unrelated and subjected to a collective bargaining agreement. He mentioned this three separate times, so it was very clear. This took place on March 19, 2012.

Interestingly, this news was met with shock/surprise (perhaps anger?) by many of the members of the audience, whom are other pension practitioners like myself. It SHOULDN'T have come to a surprise to anyone as these remarks are consistent with what has been coming out of EBSA for the last year or so, and even again just two weeks prior on March 7, 2012 at Phyllis Borzi's (Assistant Secretary of Labor) testimony to the Special Committee on Aging of the U.S. Senate. Press Release Here --> http://www.dol.gov/ebsa/newsroom/ty030712.html.

In this testimony, Ms. Borzi specifically stated that the idea of "Open MEPs" is not an established concept under ERISA and went on to express concerns about aggressive marketing and promotion of Open MEPs stating that:

1. Adopting Employers are fully releived of fiduciary obligations for administering and monitoring investments and of administrative reporting duties.


2. That by pooling plans together can reduce administrative burdens and costs.

They have stated that two separate Opinions will be forthcoming dealing with the concept of the Open MEP. We are on record (see blog posts from July 2011 and again in August 2011) stating that we believe that any person/entity that may excercise discretion or control over plan assets (whether specifically named in the plan document or not) is a fiduciary as defined under ERISA Section 3(21) and that includes employers who adopt into an MEP. If the rules change, we may also change our opinion. Until then, the message remains, BE CAUTIOUS. Investigate these structures thoroughly including gaining a strong understanding of the relationship between those providing services to the plan (and charging fees) and those in a fiduciary position. We believe that many of the ones we've looked at appear to be in violation of the ERISA Prohibited Transaction rules.

The Value of Working with a Named Fiduciary, A Discretionary Trustee

Two of the major trends within the retirement plan industry are the promotion of fiduciary services and liability immunization for the Plan Sponsor or other fiduciaries. You’ve likely heard us say that ERISA specifically permits the delegation of responsibilities and the allocation of fiduciary duties to third parties. Of course, the natural side effect of this delegation is a reduction in exposure to fiduciary risk. We discussed this very topic in a June 2009 email entitled, “Fiduciary Delegation – Myth or Reality.” (available here)

As the marketplace evolves and new ideas are born, they are molded into various product offerings, and all too often “oversold." A great example of this is the (now old fashioned) fiduciary warranty. We are now seeing these evolutionary processes at work with the advent of ERISA §3(38) Investment Managers as a service built into certain products. When faced with the choice, conventional wisdom suggests that is better to utilize these services in hopes of better plan management and lessened fiduciary risk. The issue we see is that services of this nature are marketed and sold identically as comprehensive shields from liability for the plan sponsor, which they simply are not.

Earlier this week, Forbes.com published an article (available here) featuring a hypothetical deposition between an attorney and a Business Owner/Board of Directors. The article helps illustrate the notion that businesses typically do not consider their retirement plans to be a primary function of their business. As a result, retirement plans are rarely given the requisite attention from business owners/board members needed to fulfill their fiduciary responsibilities. A common assumption is that those under the employ of the owner will operate the plan and maintain responsibility over its compliance. Unfortunately, this can be detrimental to the success of the plan and problematic for plan fiduciaries that are personally liable for the plan’s operation.

We observe that being a fiduciary, and meeting the Prudent Fiduciary Standard of Care, is very complicated, even for those with experience in the field. It would be a monumental undertaking for any business owner or board to develop a technical expertise with qualified plans, which is something they are expected to have simply by choosing to sponsor a plan.

It's not what you make, it's what you keep

Yesterday, Employee Benefit News (EBN) had a very interesting article that discusses savings and spending patterns that occur post-retirement. You can find the article here.

http://ebn.benefitnews.com/news/ebri-health-fidelity-retirement-income-2722370-1.html?CMP=OTC-RSS

The study in the article was conducted by EBRI, the Employee Benefit Research Institute. I found a few takeaways very interesting. Specifically, that retired American households tend to spend approx. 80% of their Pre-retirement income, that there is a curve to spending with the earlier years representing a period of higher spending which reduces as people age and that the two biggest costs post-retirement were on housing and healthcare. Noteworthy, healthcare costs rise from as low as 9% to as high as 18% as the person ages.

What I found interesting as well, were some factors that contributed to these statistics. As an example, a retiree doesn't pay FICA taxes, a retiree doesn't contribute to a 401(k) Plan, a retiree drives less and buys less clothing, frankly because they don't work.

Finally, since health deteriorates as one ages, discretionary spending on entertainment, for example, declines as well.

All of the above confirms what the industry is already working towards which is 'The Number' for each person. We, generally, feel that this number is somewhere around 70% income replacement, adjusted for inflation to be funded by social security, 401(k) savings and outside savings. In general, we advocate retiring later as for each year of work, a person gains one more year of savings and one less year of post-retirement financing and one more year of earnings on what they've already saved.

The bottom line from all of the above is, it isn't how much one earns that is of primary importance, but rather that what one earns needs to be larger than what one spends. This is true during our working years and true post-retirement as well.

Final 408(b)(2) Regulations - Final is Final....about time!

Well, today is the day that the Interim tag was taken off the 408(b)(2) regulations and they have become final. In my first perusal of the rules, the biggest change seems to be the timing. The Interim rule was to be effective April 1, 2012 and that has been pushed back to July 1, 2012. The 404(a)(5) disclosures, i.e. participant fee disclosures, was also tied to this effective date so those are also pushed to July 1, 2012. Everyone gets a little more breathing room.


Other major changes I've observed is the exclusion of certain 403(b) Annuity Contracts and custodial accounts, an expansion of the information required to be disclosed and updates to how disclosure of changes are to be made.


Attached is the actual regulation and the DOL's fact sheet on the guidance.


Full Rule

http://www.ofr.gov/(X(1)S(q03r5lzzov2yvhmrvo4qlk5m))/OFRUpload/OFRData/2012-02262_PI.pdf



DOL Fact Sheet

http://www.dol.gov/ebsa/pdf/fs408b2finalreg.pdf

An Oldie but a Goodie - Criminal Rule, listen up Bank Lenders!

This is an oldie but a goodie. The story goes like this, Plan Sponsor of a 401(k) Plan receives a call from their Bank. Specifically, it is from their lender. The Loan Officer, subtley or maybe not so subtley, tells the client that their credit is at risk if they don't put more assets with the bank. Subsequently, a broker (bank registered rep) is introduced and a few short months later the 401(k) Plan is moved to the bank or a different spin where the credit isn't at risk, instead the client is told that their rate will be reduced in exchange for the plan.

For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/

To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that

Whoever being—
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan

receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.

Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......

Thanks Linked-In and thanks Mr. Toth for the good intelligence.

What!!! For a change, apparently No Delay on Fee Disclosure

In a shocking move by the DOL, they've actually held firm on the Fee Disclosure Deadline!

http://www.benefitspro.com/2012/01/06/dol-says-no-extension-on-fee-disclosure-deadline

This is despite that fact that with approx. 3 months to go they still have not issued the final guidance needed for the variety of different service providers to all comply.

In this author's experience, this is typical. The Fee Disclosure rules, both 408(b)(2) and 404(a)(5) have been around for several years now and it would seem to me that all of the relevant issues have been discussed and vetted ad nauseum, so one would think that final guidance would have been here long before now. But, that is the problem with the regulating bodies. They claim to be sympathetic to industry concerns, but alas not so concerned that they would give industry enough time to implement changes to be in compliance.

Ethically/Morally, we've always been in favor of Fee Disclosure (see former blog posts on the subject) but we remain skeptical that the newly "informed" consumer, i.e. the Plan Sponsor and Participants will either be better off with this new information or outraged by it. Frankly, we believe it very possible that harm will be caused in the form of fewer participants saving money and more plans becoming out of compliance.

In fact, we think it is likely that a whole bunch of Plans that were previously in compliance with ERISA (teh heh....) will now be out of compliance and in many cases be engaging in Prohibited Transactions unknowingly. What remains to be seen is whether or not any of this will actually be enforced. In the meantime, as Samuel Jackson once said in the movie Jurassic Park.... "Hold onto your Butts!"

Discretionary v. Directed Trustees: Fiduciary Focus

In case you haven't seen it, yesterday in Morningstar's Fiduciary Focus column, Here --> http://www.morningstar.com/advisor/t/50458854/discretionary-trustees-vs-directed-trustees.htm, author Scott Simon tackled a topic that we, and our firm, Unified Trust, have been tackling for years. The topic is Discretionary Trustees vs. Directed Trustees. I got rather excited, thinking to myself selfishly that finally, someone else is going to discuss the merits of appointing a discretionary corporate trustee and the advantages of that over the more common, less valueable step-sister, the Directed Corporate Trustee.

Note, that while the article is, in my opinion, well written, factual and fairly thorough, I was disappointed, nonetheless, to read that he was referring to Discretionary Trustees in the broader sense. He makes the valid point that all trustees appointed by the Plan Sponsor are Discretionary Trustees unless specifically appointed as a Directed Trustee. That includes individuals, such as business owners or boards or officers appointed in this role. The only place he even mentions that you can appoint a Discretionary CORPORATE Trustee is as an aside where he states how uncommon this appointment is. He doesn't go into the merits of Prudent Fiduciary Appointment, or even compare contrast the differences between the two types of Corporate Trustees. You can incidentally find that on this blog.

Here -->http://the401kplanblog.blogspot.com/2011/11/practical-differences-of-various.html
and
Here -->http://the401kplanblog.blogspot.com/2011/04/338-im-discretionary-trustee-service.html

Disappointment aside, he does make a few very good points.

1.) All trustees are Discretionary unless specifically identified as Directed in the Plan Document at which point the responsibilities of trustee fall back to the Named Fiduciary, typically the Plan Sponsor. The good example of US Airways and their relationship to Fidelity Trust Company is provided.

2.) Directed Trustees provide a very limited array of services, typically asset custody, following direction and ensuring transaction accuracy. They are a highly limited fiduciary, and most (that I've seen) disavow fiduciary status in the contracts.

3.) No one can ensure blanket relief from fiduciary liability. There are only degrees of limited relief. Unfortunately, he doesn't point out that the highest degree is to prudently appoint a Discretionary Corporate Trustee.

So, long story short (too late, I know), Scott Simon wrote a decent article making the point that the devil is in the details, and that Plan Sponsors should be wary of unscrupulous sales pitches about fiduciary relief.