Wednesday, July 2, 2014
The term “fiduciary” is certainly one of the lightning-rods of these times in our industry. In a period of intense scrutiny of the management and operation of retirement plans, and the arrangements between plans and those who provide services to them, to be a fiduciary is to be under a regulatory and legal microscope. One need look no further than the dockets of our district and appeals courts, or the news releases published by the Department of Labor (DOL), to conclude that a great deal of time and energy go into policing retirement plans. Unfortunately, even the most honest and well-intentioned plan administrators and service providers can be exposed to lawsuits or regulatory sanctions for outcomes seen as or alleged to be damaging the interests of benefit plan participants. And, when the layers of the legal or regulatory onion are peeled away, “fiduciary” is as often as not at the core.The most high-profile regulatory event of these times is the effort by the DOL’s Employee Benefits Security Administration (EBSA) to issue regulations defining who should be considered a fiduciary with respect to retirement plans, and the standards to which they will be held. These regulations have several times been delayed, and it is unclear when, or if, they will ultimately be issued. But, with or without such regulations, the mandates of the Internal Revenue Code and ERISA, and the eagerness with which lawsuits alleging fiduciary breaches are filed, already are enough to make potential plan fiduciaries uneasy.
Given the demonstrated responsibility and related risk in being a fiduciary to a retirement plan, it’s not too surprising that some enterprising individuals and companies are offering themselves as solutions to this risk. And, also not surprising, some employers, fearful of the risks accompanying fiduciary status, are listening. They recognize that they don’t necessarily understand their obligations and responsibilities and the prospect of insulating themselves from risks involved in administering a retirement plan is appealing. And in many cases, a course of action that results in the plan fiduciary hiring an expert is in the best interest of both the fiduciary and plan. This said caution and understanding on the part of the plan fiduciary is still needed.The most aggressive of these fiduciary service marketers propose to transfer all employer fiduciary risk to themselves by the delegation of certain functions that may include plan administration, investment management or a combination thereof. With all fiduciary obligation for those functions lifted from the employer’s shoulders, they claim, the employer can focus on making their enterprise successful, rather than on the sometimes-indecipherable details of employee benefit administration.
The marketing pitch is likely to contain official-sounding references to one of several classes of fiduciary, and tout the level of protection – even immunity – that the fiduciary service provider can give the employer. But, whether the marketer presents itself as a 3(16) fiduciary, a 3(21) fiduciary, a 3(38) fiduciary, or what-have-you, there is one inescapable fact that often times you will not see prominently advertised. While a service provider can take on fiduciary liability by the tasks it performs, the employer is always ultimately responsible for fiduciary decisions. That’s because it is under the employer’s ultimate fiduciary authority that entities such as investment managers, third-party administrators, or those who only perform ministerial functions, and all who serve the plan, are chosen. The employer is ultimately responsible for the providers they appoint to fulfill these roles and has an ongoing obligation to monitor the actions of each provider. While use of experts to fulfill these roles is often a prudent course of action for the plan fiduciary, they must always remember that their fiduciary obligation doesn’t end with this appointment.When you dig deeper into the fine print of some of these fiduciary promotions you will typically find disclaimers. These disclaimers, when interpreted with only a modicum of legal expertise, make it all too clear where the buck stops. It stops with the employer. It is imperative that an employer understand exactly what is being provided and any limitations when choosing to use these types of fiduciary services. All else being equal, an employer will be in better hands working with an administrator or service provider that acknowledges an employer’s fiduciary risk – and will help limit it through good services and administration and in some cases may even assume some of that risk – rather than someone who proposes to eliminate it all and doesn’t provide the entire fiduciary story.
Monday, June 23, 2014
A recent article appearing in the retirement industry press made a bold, but not necessarily accurate, statement about the consolidation of qualified plan recordkeepers and the services they provide. First, the assertion that “rising technology costs, lower fees and increased intellectual capital needed to remain competitive” will lead to consolidation, and will reduce the total number of retirement plan recordkeeping service providers. That much may very well prove to be true. The bold statement came next, claiming that this consolidation “will result in higher fees and worse service.”Beyond the obvious question of how the competitive need for lower fees and increased services will eventually result in higher fees for less services – those two contrary claims were made in consecutive sentences – there are other reasons to question the article’s pessimistic prediction. Technology, and the costs associated with it, have certainly come to recordkeeping. Investing retirement plan assets has become extremely sophisticated in a mostly daily-valuation environment, and the overall volume of transactions and plan-to-participant interactions has grown exponentially. The idea that these things can be done efficiently and cost-effectively by manual means, or with simplistic technologies, is no more valid than believing that the evening news should be shot on film, rather than digitally. Better technology has its price.
But in many, many cases where advancing technology has been applied, we can point to greater capability and lower prices, not less service and greater expense. Smart phones, computers, robotic manufacturing, even the early assembly line process dating back to the time of Henry Ford, are examples of the quality and cost benefits of applying new technologies to a product or service.Another implication of the article is that the only way providing recordkeeping services can be profitable is if the provider has another product to sell, such as – for example – proprietary investments. Believe it or not, there are recordkeepers in the marketplace who run profitable businesses without cross-selling anything, just as there are fee-for-service investment advisors who make a living without being compensated in other ways. Neither model is wrong. But I believe it’s inaccurate to state or imply that only by selling another product or service can recordkeepers serve the industry well, or remain in business.
From my observations, consolidation within the recordkeeping industry should not be seen as a sky-is-falling development. Conscientious recordkeepers will continue their commitment to offering the best product they can, at a price that generates a reasonable profit, but is also fair to plans and their participants. If they do less, someone will see the obvious opportunity and take their business. This dynamic will continue to govern the recordkeeping industry, as it has, whether the quality recordkeeper has many industry peers, or few.
Monday, June 9, 2014
Many seasoned industry professionals will remember an iconic TV commercial of some three decades ago, produced for the E.F. Hutton brokerage firm. In this ad, when the broker shared his insights, the world around him came to a frozen-in-time standstill, in order to hear what he had to say. The theme was: “When E.F. Hutton talks, people listen!”I don’t want to suggest that when representatives of the Department of Labor speak, the world comes to a complete halt and gives them undivided attention. But when the subject is one which is as controversial as proposed regulations on a definition of “fiduciary” for retirement arrangements, the effect is similar. Assistant Secretary of Labor Phyllis Borzi, of DOL’s Employee Benefits Security Administration (EBSA), had a captive audience when she spoke on this subject at the International Foundation of Employee Benefit Plans’ Washington Legislative Update in early May.
In her comments, Ms. Borzi seemed to show a mixture of accommodation with a hint of impatience. She acknowledged that her agency has slowed the pace of completing new proposed regulations to define “who” and “under what circumstances” an advisor or investment representative should be considered a fiduciary with respect to retirement assets. Promised August issuance of these proposed regulations appears now to have been reset, in order to – we are told – obtain more input from the industry and interested parties. In fact subsequent to this May presentation, the agency’s updated Semiannual Agenda of Regulations now lists a target date of January 1, 2015. At the same time, however, Ms. Borzi was quoted as saying that “We’re not going to wait forever.” It is apparent this is a high priority for Ms. Borzi and one she intends to see come to pass as quickly as possible.It is not entirely clear whose hand is actually on the throttle with respect to these new regulations. Ms. Borzi has been EBSA’s “point man,” champion, and spokesperson for them since an earlier version was released in 2010, then withdrawn in 2011. Yet she indicated in her recent comments that new DOL Secretary Thomas Perez would give the order on when to issue the new proposed regulations. Adding more uncertainty is the fact that this is a mid-term election year, when control of the Senate and House of Representatives – really the national balance of political power – is up for grabs. In a foretaste of the political season to come, already we see legislation being introduced in Congress that appears to be primarily intended to expose the opposing party to negative publicity, and provide campaign advertising fodder in the fall campaigns. If the party now in the White House comes to view the proposed fiduciary definition regulations as a potential political liability, we can be almost certain that they will languish until after the November elections. The release of the regulatory agenda seems to indicate that is exactly what has happened.
Many in the industry fear that if EBSA overreaches in its new proposed regulations, advisors who are concerned about a level of responsibility out of proportion to their roles – and potential litigation – will be unwilling to advise and consult. It is feared that if this happens, retirement savers – particularly IRA savers – may find themselves underserved or abandoned when it comes to badly needed investment guidance. We do not doubt Ms. Borzi’s sincerity or good intentions. Many simply disagree on the point where agency oversight and regulatory action and investor hand-holding could tip the balance from helpful to harmful, and leave retirement savers the losers in the bargain. Taking the time to balance all the facts and to get this right seems to be the prudent course of action.
Friday, May 23, 2014
Given the pace at which we live our life these days, it’s pretty easy to let the distinctions between the different holidays become blurred. We often find ourselves seeing holidays as just a break from time in the office, an extra-long weekend to spend on our favorite pastimes, an opportunity to focus on things other than work, or – less exciting, perhaps – to make progress on projects.If there is one holiday that we should not let that happen to, it is Memorial Day. It’s a day to remember the sacrifices that others have made for us. Ultimate sacrifices, to put a finer point on it. As is often said of those who have served, “all gave some, some gave all”. In honor of those who have paid that price, this blog will depart from its normal retirement plan focus and look at what this holiday means.
There are probably few who are younger than the baby boom generation that will recognize the term “decoration day,” and even those of this generation that do recognize it, likely does so only because their parents or grandparents may have called it by that now-archaic name. Memorial Day was, in fact, first known as Decoration Day when it was recognized as a national holiday following the American Civil War. It was a day, traditionally the last Monday in May, when family members and others put flowers on the graves of soldiers, both Union and Confederate, who died in what many consider the event that most defined us as a people and a nation. In other words, they "decorated" the graves in memory and recognition. Since those early days the title changed and Memorial Day has officially become a day to honor and remember all who have made that ultimate sacrifice while in military service.Many Americans have no idea or have forgotten how close our country came to being two countries, rather than one, a century and a half ago. There is no way to properly envision or comprehend what two divided Americas might not have accomplished in shaping the world as it now exists. In particular, helping as we did to save our world from dark forces that rejected individual freedoms and sought political and military domination. We are by no means a perfect nation. We have made our mistakes and have our flaws. But in our balance of imperfection and good intentions, our commitment to self-determination and individual liberties stands out and we can be proud of most of what we have come to stand for to the rest of the world.
The sacrifices a century and a half ago that affirmed us as a united people have been demonstrated more than once, in world wars and in other conflicts, but also in peaceful things, made possible by the common purpose that was a byproduct of our unity. Creating an international forum in which nations can attempt to resolve their differences, striving and working for equal opportunity and personal dignity for our citizens, exploring the universe beyond the confines of our own sphere, and many other accomplishments, are a legacy of sacrifices both before and since the first Decoration Day.As a nation and a people we are not inclined to dwell on gloom and loss, the emotions that must have accompanied the first Decoration Day. We’re inclined to look toward the future through the lenses of optimism and confidence. Maybe that is why Memorial Day as we celebrate it in our era is a time for smiles and laughter, appreciating our families and friends, as well as for remembering the sacrifice and loss of those who have served and insured our freedom.
And after this welcome holiday is over, a time to get back to working toward a worthy and secure retirement for us all.
Tuesday, May 20, 2014
One of the truisms of our industry, as it is a truism of life, is that “nothing is as constant as change.” That certainly applies to the IRA rollover limitation issue, which reared its head in the Bobrow v. Commissioner U.S. Tax Court case, and completely upended thirty-plus years of IRS interpretation on IRA rollovers. As most will remember, the Court disallowed a taxpayer’s IRA rollover on the grounds that he was limited to one rollover distribution per taxpayer per 12-month period, not one rollover per IRA per 12-month period. Proposed regulations dating back to 1981, and IRS publications, had formerly granted the more liberal option.That’s water under the bridge, because the IRS has fallen into marching step with the new drummer – the U.S. Tax Court. The IRS revealed in Announcement 2014-15 that, going forward, the rule will be one IRA distribution per taxpayer, not per IRA, that will be eligible for an indirect 60-day rollover in any 12 month period. Released in March, Ann. 2014-15 stated that the IRS would not enforce this new interpretation before January 1, 2015. Ascensus has since learned from a reliable IRS contact that the “no sooner than” timing for enforcement of this new interpretation will, in fact, be January 1, 2015. The IRS representative stated that the nine month enforcement reprieve – from March to next January – was granted in response to industry requests for a grace period to allow IRA custodians, trustees and issuers to adjust their procedures.
Some over-eager service providers did not wait until the IRS released Ann. 2014-15, but responded to the January Tax Court decision and immediately informed clients and prospects that they should amend their IRA documents, advising that they do this at the first opportunity. They also indicated that the new interpretation had to be followed and adhered to immediately. This was suggested not only before the IRS responded to the Tax Court ruling by issuing Ann. 2014-15, but before it was even known whether the Bobrow case would be appealed, and whether its ruling might be upheld, or reversed.The point here is that it is usually best in such situations to let the dust settle, to not over-react, or – as some might do – take an opportunistic tack and recommend actions prematurely. Yes, IRA documents will certainly have to be revised for new accounts, and it is advisable that existing IRAs be updated to align with the new interpretation that will govern future rollovers. But, as revealed in Ann. 2014-15, we are still nearly seven months away from the earliest enforcement date for the new rule, and no date has been even hinted at for updating existing IRAs. For the remainder of 2014, the enforcement of the rule will remain as it has been, one rollover per IRA.
A little reflection on the new rollover interpretation might also be in order here, given the level of uproar and resistance seen within the industry. Many were predictably upset that the Tax Court ruled as it did, reversing a long-held tradition and contradicting an oft-stated and oft-published IRS position. Perhaps more upsetting was the fact the IRS brought this case in the first place and didn't give credence to their own published guidance. Regardless of this, the statutory reference to rollovers in the Internal Revenue Code has not changed since 1978, and a plain-language reading of it – while somewhat ambiguous – can in all honesty be read as the Tax Court did, limiting rollovers to one per-taxpayer per year.The Tax Court took the position that our lawmakers intended to make access to IRA funds possible, but not so easy as to encourage abuses. “Leakage,” or frittering away retirement assets, has long been a concern of Congress. Also, there are clear prohibited transaction rules that discourage an IRA owner from dealing “…with the income or assets of a plan in his own interest or for his own account.” IRA assets are to be preserved for retirement as much as possible. Some might say that the strategy – permissible under the existing rules – of setting up multiple IRAs and thereby receiving multiple rollable distributions within the same 12-month period, was tantamount to enabling the taking of multiple 60-day “loans” from one’s IRAs. Put another way, that person could, in some peoples minds, be accused of using IRA assets “in his own interest.”
As much as we like flexibility and freedom when it comes to our own property, we can’t ignore the desirability of accumulating sufficient assets to experience a reasonably comfortable, independent retirement. We also can’t ignore the fact that we typically receive a tax break as an encouragement for us to save. Sometimes we rely on our own discipline to resist temptation and make the right choices, and sometimes the Tax Code does it on our behalf. If it serves the ultimate end of helping us accumulate assets for a secure retirement, maybe the change in the rollover limitation won’t be such a bad thing after all.
Friday, May 2, 2014
Retirement plan rollovers are a high priority for the IRS these days. That is not a criticism, because the portability of retirement savings is essential to workers if they are to have the maximum opportunity to retain IRA and employer plan assets for a financially secure retirement.Perhaps the rollover issue getting the most attention has been the IRS’s declaration in Announcement 2014-15 that it will change its stance and limit taxpayers to one IRA rollover per 12 months, regardless of how many IRAs an individual has. Some have suggested that the agency itself “rolled over” by abandoning a position it held for over 40 years, which had allowed one rollover per IRA per 12 months. But it is pretty hard for the IRS to ignore a U.S. Tax Court decision (Bobrow v. Commissioner), which prompted the reversal.
More recently, the IRS issued guidance intended to give employers some comfort and certainty when their plans accept employee rollovers from IRAs or other retirement plans. This guidance, Revenue Ruling 2014-9, provides several practices which, if followed, may serve as evidence that the administrator of the recipient retirement plan took the necessary steps to determine whether assets being received into the plan were eligible for rollover.Under Treasury Regulations, a plan administrator will jeopardize the qualified status of a plan with respect to a rollover unless two conditions are met. The administrator must “reasonably conclude that the rollover contribution is valid,” and if it later proves otherwise, “distribute the ineligible rollover contribution, with earnings, within a reasonable time of discovering the error.”
In the past, some plan administrators felt it necessary to go to such lengths as requiring an employee to produce a determination letter from the prior retirement plan where the pending rollover originated. In those days, prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), only assets that originated in another qualified retirement plan could be rolled over to a new one. What’s more, when distributed from such prior plan and not immediately rolled over to a new plan, the assets had to reside for the interim period in what was then known as a “conduit IRA.” It was a lock-box, or quarantine, you might say. Commingling such assets with other IRA or employer plan assets disqualified them for rollover to another employer plan.Motivated by concern over workers dissipating their retirement assets prematurely, Congress, through EGTRRA, liberalized the rollover rules to enhance plan-to-plan portability and hopefully limit such “leakage.” Thereafter, general portability between plan types, and even rollovers to employer plans of IRA-originating assets, was possible.
The expectations of employers changed, too. It may be over-simplifying, but instead of absolute certainty that assets received in a rollover had come from a compliant qualified plan or IRA, employers were required to take steps to be “reasonably certain” that a rollover was valid. Under this standard, employers have had a certain amount of flexibility in making such determinations.The IRS has now, in endeavoring to add clarity for employers, provided a list of actions an employer can, or should, take in determining whether a rollover is valid. Steps described in IRS Revenue Ruling 2014-9 include visiting the Department of Labor’s web site and reviewing a prior employer plan’s Form 5500 filing, to see whether it was “intended to be a qualified plan,” in the IRS’s words. “Certification” of rollover validity is to be obtained from the employee requesting the rollover, whether it’s from another employer plan, or from an IRA. Reliance on documentation from a custodian or trustee holding the funds prior to rollover is suggested, with check or wire transfer payment source details given as an example.
Industry reaction has been mixed. On the one hand there is appreciation; there is value in details versus generalities. On the other hand there is some concern and uncertainty over the application of the IRS’s suggested due diligence steps. In the IRS’s own words the agency states that “These procedures are generally sufficient.” Are they not always sufficient? Are they a new minimum standard? How much latitude and judgment do plan administrators now have in determining rollover eligibility? The unintended consequence may be more uncertainty, rather than less.In the eyes of many, there has not been a significant problem in judging the eligibility of rollovers to employer plans. What has really been lacking is more aggressive participant education efforts to reinforce the importance of retaining assets for retirement, and the options for doing so. That, many believe, is where the problems really lie.
Wednesday, April 30, 2014
In March of this year the 8th U.S. Circuit Court of Appeals in St. Louis handed down rulings in the case known as Tussey vs. ABB. It was a case closely watched not just for its fiduciary implications for plan sponsors, but also for plan service providers. In this case the service provider happened to be Fidelity Investments, which served as the investment provider and recordkeeper to the ABB plan.
ABB, Ltd., is a supplier of transmission and distribution equipment for the power industry. This case centered on 401(k) plan fiduciary responsibility, alleged to have been abused by ABB and Fidelity Investments. Specific allegations included ABB’s supposed failing to properly monitor recordkeeping fees, and selecting unnecessarily costly share class investments. Recordkeeper Fidelity was alleged to have improperly retained float income associated with the funds used to purchase securities shares as plan investments. The law firm representing the plaintiffs, Schlichter, Bogard & Denton, has been at the forefront of litigation against plan sponsors for alleged fiduciary failures.In the boxing world this one might be called a split decision. The appeals court upheld a lower court decision that ABB, Ltd., was guilty of “failing to control recordkeeping costs,” and the court affirmed a $13.4 million award to plan participants. ABB was judged to have failed in the area of due diligence, specifically by not “comparison shopping” or benchmarking the fees it paid Fidelity for recordkeeping.
The appeals court vacated, or set aside, the lower court’s judgment against ABB for its mapping of an investment option between fund families, and subsequent losses to participants who held that mapped investment. This one will go back to the lower court for further litigation.One element of the appeals court’s ruling is of particular interest to many retirement plan service providers. That was its overturning the district court’s finding that Fidelity had improperly used plan assets by not allocating “float” income among the plan’s participants. “Float” can be described as a sum used to purchase investment shares, held temporarily – for logistical reasons – until it can be paid to the chosen investment funds to purchase the shares requested. This timeframe is commonly next-day.
In a strategy that many would call prudent, Fidelity invested this float in secure investment vehicles that could earn interest during the very brief overnight float period. Earnings, or “float interest,” was distributed broadly among all shareholders of the selected mutual funds, whether these shareholders were plan participants or simply private investors. Fidelity did not retain the float interest for itself.The plaintiff’s attorney claimed that this float interest belonged to the plan, not broadly to all investors in these mutual funds. The float interest was, plaintiff’s counsel claimed, a plan asset that Fidelity improperly distributed to investors other than plan participants. Fidelity countered that the participants had been immediately credited with the shares they directed to be purchased, and were entitled to – and paid – any dividends or other gains associated with the shares purchased for them. The “cash” used to purchase the shares, however, was no longer the property of the plan once the share purchase transaction was executed, Fidelity asserted. The appeals court found that the plaintiffs were unsuccessful in rebutting Fidelity’s position on entitlement to float interest, and reversed the district court’s $1.7 million judgment against the firm.
There may be multiple morals to this story, for plan sponsors, administrators and service providers alike. Especially worth emphasizing is the importance of transparency and due diligence. Knowing what is being paid for and what is being received, and knowing that amounts paid are “in the ballpark,” is crucial. We get a sense from this and similar ERISA litigation that “reasonable” is a relatively flexible term in the eyes of the courts, as long as the terms of service and compensation are disclosed.