By Carol Buckmann
By Carol Buckmann
Carol's latest "Ask the Lawyer" column for 401ktv provides some guidance.
Here is the link: https://401ktv.com/outside-counsel-call-ask-lawyer/https://401ktv.com/outside-counsel-call-ask-lawyer/
By Carol Buckmann email@example.com
Many of us were breathing a sigh of relief that the House tax bill did not cut back on pre-tax 401k contributions as had been threatened. We soon learned that the threat to retirement savings hadn’t ended, it was just coming from a new front. The Senate is now considering cutting back on contributions under 401k, 403b and 457 plans, which remains bad retirement policy for many reasons, but mostly because we know that Americans are not saving enough for retirement as it is. (See my recent blog for Penchecks- http://www.penchecks.com/wrong-policy-wrong-time-save-401k-contribution/- for some sobering information about the retirement savings gap.) If these provisions make it into a final bill, we don’t know where the conferees will come out on this.
Here’s what is now under consideration:
· The maximum catchup contribution would be increased to $9000, but catchup contributions would have to be made on a ROTH basis. This would apply to all plans with age 50 catchup contributions, not just to 401ks.
· No catchup contributions would be permitted for employees earning more than $500,000.
· Catchup contributions for pre-retirees and long service employees under 403b and 457 plans would be eliminated.
· Special post-termination employer contributions for 403b plan participants would be eliminated.
· The rules permitting contributions to a 457(b) plan in addition to maximum 401k and 403b contributions would be eliminated.
The whole point of catchup contributions is to allow participants approaching retirement to make up for any deficit in their retirement savings by making bigger contributions in their pre-retirement years. We all know that this deficit exists. Statistics also show that participants don’t make much use of ROTH contributions when they are available. These changes, if enacted, would take retirement policy in the wrong direction. Tax policy should encourage retirement savings, not make it more difficult to fund a secure retirement.
Carol's latest blog for Penchecks discusses why cutting back pre-tax 401k contributions is bad retirement policy. Now the Senate is targeting 403b plans, and reform is a moving target. We are not out of the woods yet.
401ktv has published Carol's article with an action plan for fiduciaries. Ignore this problem at your peril! Here is the link: https://401ktv.com/audit-time-know-participants-ask-lawyer/
By Carol Buckmann
This is the time of year when our plan sponsors with extended 5500 filing deadlines have me on speed dial. It is always surprising to me how many vendors send out draft 5500’s with wrong answers, and how adversarial the relationship between some sponsors and the accountants doing their annual plan audits can get. Here are some tips from years of experience with October 5500 madness.
Always Start to Fill Out Your Questionnaires Early.
Maybe it’s too late for that for 2016 Forms, but it’s the best advice I can give for next year. If you don’t fill these out correctly, the Form 5500 will be incorrect, and some of the questions aren’t easy or intuitive. For example, if you have a 401k plan, the answer to the question how many participants are in the plan requires you to include those eligible but not contributing. Do you have a fidelity bond? That’s another question that confuses plan sponsors. It’s not the same as fiduciary liability insurance and if you don’t have one, you are in violation of Title 1 of ERISA. You won’t want to answer “no” to that one; just get the bond. And you may have terms in the questionnaire such as “highly compensated employee” or ”key employee” that you need to consult an adviser to understand.
Check Every Line of Your Vendor’s Draft.
Do the answers make sense? Read the instructions (available on line) and make sure the plan feature codes are correct. Does the plan have a committee as named fiduciary for administration? Vendor employees seem oblivious to this issue and mechanically fill in the Company’s name as plan administrator every time. Has your plan been involved in a merger or spinoff during the year? Is the contribution information correct? If you don’t understand an answer on the draft, ask the vendor and get items corrected if necessary.
Cooperate with Your Auditor to Get the Audit Finished on Time.
The more you understand about what the auditor has to do, the better prepared you will be to facilitate the audit by getting the auditor the needed information. Any issues identified by the auditor as problematic or possible government audit problems-such as late contributions, failure to make required minimum distributions or loans in default- can be fixed going forward; it is better if they are caught now. Be available to answer questions about qualification issues or bring in your attorney to answer the auditor’s questions. Every year I get questions whether the 5500 should be filed without the audit report or held until it is finished, but this shouldn’t be an issue. If the audit is a team effort, it can be completed on time.
Still Having Problems? Consider a New Auditor.
Auditors who specialize in employee benefit plan audits do a much better job and are not hard to find.
Carol's article on this valuable compliance tool was featured in the 401ktv newsletter. Too few plans have them. https://401ktv.com/internal-controls-policy/
In her latest blog post for PenChecks, Carol weighs in on the impact of further delaying the Fiduciary Rule and the negative effects of the continuing uncertainty. Here is the link:
Carol's latest Ask the Lawyer column identifies some common gaps and discusses how to fix them.
Carol's most recent "Ask the Lawyer" column for 401ktv discusses why target date fund rfps make sense and contains a list of some suggested questions for the rfp request. Here is the link: https://401ktv.com/rfp-target-date-funds/
By Carol Buckmann
We are stuck at 43%. A 2017 defined contribution plan survey by J.P. Morgan indicates that there has been no improvement in this percentage of corporate plan decision-makers who don’t understand that they are fiduciaries. 17% even thought that they could pass on all of their fiduciary responsibilities to third parties such as their provider, recordkeeper or investment adviser. Not surprisingly, the survey also indicated that those who were aware of their fiduciary status were more confident in their processes, more aware of fiduciary protections and more likely to follow best practices.
What are we to make of this? It appears that all of the recent publicity about the Fiduciary Rule and the role of advisers hasn’t made any impression on this group. Nor have the statements in the service contracts they sign which either acknowledge that the provider is not a fiduciary or provide that the adviser will be a “co-fiduciary” for investments. What do they think the “co” means? While it may be that some of these clueless fiduciaries won’t get the message until they are audited or sued, this survey provides a compelling reason to expand fiduciary education efforts.
Overcoming Resistance. The first reaction of busy executives to the suggestion that they need fiduciary education is usually “I have to run my business. I don’t have the time.” This is a good opportunity to explain the concept of personal liability for fiduciary breaches, which usually gets their attention. It is also a good time to explain how good processes and procedures, as well as delegation to other professional fiduciaries, can limit their liability exposure. Decision-makers who don’t know they are fiduciaries probably also don’t have fiduciary insurance covering their plan activities, and understanding available protections can also be a selling point for fiduciary education. Finally, while fiduciary education isn’t legally required by any specific rule, Department of Labor auditors do look to see if there has been fiduciary education as part of their audits. This makes sense, as it is unlikely that company insiders are effectively fulfilling their fiduciary responsibilities if they don’t know what they are.
Topics to Include. Start with bonding. Even today, I find plan fiduciaries who don’t understand that they need to be bonded for losses caused by fraud or dishonesty. If they haven’t complied, they can be required to personally make up losses that should have been covered. In addition, good education should include discussion of the following:
· Safe harbors, including ERISA 404 (c) and qualified default investment alternatives
· Outsourcing to fiduciary investment managers and professional plan administrators
· Sharing responsibilities with co-fiduciaries
· The importance of written policies and procedures
· Monitoring plan providers
· What auditors look for
The bottom line is that corporate decision-makers need to be made to understand that “the buck stops here.”
Carol's post was published by 401ktv. The answer may surprise you.
Carol's blog post-Say it Loud and Clear-has just been published by PenChecks. Here is the link.
By Carol Buckmann
No fiduciary wants a prolonged legal battle. Sometimes, though, fighting rather than settling 401k (or 403b) litigation can result in complete or partial vindication for beleaguered plan fiduciaries. My last post discussed victories for fiduciaries in cases involving the Chevron and Wells Fargo plans. While it is still true that the majority of these cases get settled at a price, and that some fiduciaries still don’t take their responsibility to pick and monitor investments seriously enough, responsible fiduciaries get caught in the net of class action litigation as well. At least a few other courts are carefully examining the conclusory allegations in these complaints and finding them wanting. It is too early to tell whether this is will be a trend in fee litigation, but responsible fiduciaries should be heartened by these victories.
Is It Really That Simple? One of the misconceptions about ERISA that we see in fee litigation complaints is that always choosing the cheapest option is a legal requirement or, put differently, that it is imprudent not to select the least expensive investments or service provider. In fact, ERISA has always required fiduciaries to consider performance as well as fees, and the test is that fees must be reasonable in relation to the services provided. This makes sense if you think about it-should fiduciaries pick a poorly performing fund with low fees over a fund with stellar performance but slightly higher fees? If they have a complex plan, should they hire a recordkeeper that can’t deal with the complexity simply because the recordkeeper charges less? Complaints also posit that there is only one responsible way to invest, even though investment specialists have many different views on that issue. One of the trendy current claims is that it is always a fiduciary breach to have a money market fund as the cash equivalent investment rather than a stable value fund, though stable value funds can have transfer and withdrawal restrictions. And some of the basics of litigation-such as standing and causation-have also been found to be missing in these suits. The complaints put forth an oversimplified view of the law, and some judges have seen through it.
Here are some of the other victories----
In June, Putnam Investments defeated a claim that putting its own funds in its 401k plan was imprudent. The court said that the employee-plaintiffs hadn’t demonstrated how Putnam’s actions caused them losses.
In the past few days, a decision involving Voya was released dismissing claims based on its stable value fund. The plaintiff in that case questioned Voya’s ability to profit by setting the minimum guarantee rate in funds which were not even available under her 403b plan. The court appropriately found that she had no standing to pursue the claims or to be a class representative. Other claims regarding stable value funds were previously rejected in a case involving CVS. Plaintiffs claimed that the funds, which are cash equivalent investments which compete with money market funds, were too heavily weighted towards ultra-short term investments. The court concluded that whether the fund was a prudent investment could not be determined in hindsight, and found the actual investments to be consistent with the fund’s objectives.
403b plans became litigation targets last year, and we have now had a decision involving Emory University dismissing plaintiffs’ claims that having too many funds in the menu could be a fiduciary breach. Similar claims were not dismissed, however, in a case involving Duke University. The court hearing the Duke University case dismissed claims based on failure to monitor investments because plaintiffs had not specified how the monitoring process was deficient. Duke and Emory won only partial victories, as several other claims were cleared for trial.
If Fiduciaries Choose to Fight--These cases are still a small percentage of those being litigated but they should provide some comfort to fiduciaries who fear being liable no matter what they do or how careful they are in selecting investments. Fiduciaries who choose to fight these suits are still well advised to follow good procedures, hire professional co-fiduciary advisers and document the reasons for their decisions. Having experienced ERISA lawyers on board can also make a big difference.
By Carol Buckmann
Can plan fiduciaries ever win a fee lawsuit? Most suits survive the early challenges and go on to be settled or, in a few cases, on to trial and appeal. But once in a while, cases get dismissed in the early stages.
This is encouraging because while there are still many fiduciaries out there who should be paying more attention to their fiduciary responsibilities, plan fiduciaries also sometimes rightly complain that if they become a target of a 401k class action, whatever they have chosen to do will be challenged without any real evidence that they acted improperly. The complaints contain conclusory statements such as “investments were made in X fund, while Y fund in the same class had lower fees.” Last year, a court in the Chevron litigation determined that mere conclusions in a complaint weren’t enough and dismissed a suit against Chevron. We have now had a second case in Minnesota in which a judge looked under the hood and found no substance there. The Minnesota judge dismissed the case with prejudice (meaning plaintiffs won’t have a second bite at the apple.) Is this the beginning of a trend? We can only hope so.
This case involved a challenge to Wells Fargo's putting its own target date funds in its 401k plan. The complaint alleged that Vanguard’s and Fidelity’s target date funds had lower fees. The court correctly ruled that ERISA does not require fiduciaries to scour the market to find the cheapest investments, and that factors other than fees can be relevant to an investment decision. The decision also questioned the comparison between the funds, given that the cited target date funds were designed for different purposes and choose their investments differently. The court found that plaintiffs had not introduced evidence of an appropriate benchmark to which the Wells Fargo funds could be compared.
It is important to note that the decision does not vindicate Wells Fargo’s selection of its own funds. As I noted in a prior post, fiduciaries need to carefully consider their selection of target date funds and we don’t know from this decision whether or not Wells Fargo did that. Other lawsuits involving the use of proprietary funds are proceeding to trial (or settlement).
While these two judges may be swimming against the tide, the point they make is a valid one. No fiduciary should be subjected to a trial without a showing that there is some real basis for the allegations of fiduciary breach. These suits should not be fishing expeditions. Judges should look under the hood, and if there is nothing of substance there, determine that this vehicle can’t move forward.
By Carol Buckmann
The Department of Labor has confirmed that the initial June 9 compliance date for the Fiduciary Rule will not be postponed, as opponents of the Rule had hoped. In fact, the Department has just issued FAQs that clear up some of the confusion about what those affected will and won’t need to do. Secretary Acosta reportedly shares the Trump administration’s position regarding the Rule, so it would be wrong to read this as anything other than a short-term victory for the Rule’s supporters.
Secretary Acosta recognizes- as the Trump Executive Order that initiated further review of the Rule does not-the constraints placed by the Administrative Procedure Act. The Department won’t act highhandedly, but will continue its review of the Rule despite the multiple court decisions upholding it. In fact, Acosta’s statements parrot arguments that have been made repeatedly by the Rule’s opponents and rejected in the past. Odds are that wholesale changes will be made to the Rule in the future, which its supporters will undoubtedly fight.
What Happens on June 9? A new group of people who give advice to plans and IRAs, including many brokers, will be subject to a fiduciary standard requiring them to give advice that is in their client’s best interest. If they receive compensation that varies depending on what they recommend, they will have to follow a watered-down version of the Best Interest Contract Exemption (“BICE”). They won’t have to give any warranties or special disclosures, but they will also need to determine that their compensation is reasonable and avoid making materially misleading statements. This standard has been incorporated in some revised prohibited transaction exemptions that will also become effective, but those receiving variable compensation and using BICE, the principal transactions exemption or PTE 84-24 need only comply with the 3-part best interest standard. The Department of Labor has separately stated that it will not pursue claims or enforce taxes against those acting in good faith during the transition period before January 1, 2018. This weakens the Rule and may stymie lawsuits before January 1, 2018.
What Can We Expect on January 1, 2018? There is plenty of time to give the notice required and to hold hearings on wholesale changes to the Rule, so I wouldn’t place any bets on the other parts of the Rule coming in as scheduled. Acosta has suggested that the SEC, which was consulted by the Department when the Rule was developed, needs to be consulted again. The SEC was directed under the Dodd-Frank Act to consider whether a fiduciary standard should apply to all advisers, but nobody expects any action on this in a Trump Administration that is committed to scaling back Dodd-Frank. Acosta also suggested that the development of “clean shares” in mutual funds-that is, shares whose price does not include built-in commissions or 12b-1 or other fees-may obviate some of the conflicts the Rule is designed to control. An additional exemption for clean shares could make sense.
Today you are a fiduciary, tomorrow you are not? It is hard to imagine a scenario in which the Department would backtrack completely and restore the old 1975 regulation or establish new rules under which most brokers will not be fiduciaries. How would this work after they had been operating under the new Rule since June 9? Some became fiduciaries in anticipation of the Rule, and all would find that stating that they would no longer be fiduciaries would not sit well with their clients. A substantial watering-down of the protections in the Rule is more likely. There is bound to be a court challenge if this happens, and Congress might still act, so the ultimate status of the Rule is still in question.
Carol's recent blog for PenChecks-the third installment of a series on participant education and retirement readiness- has received a lot of attention. Here is the link: http://www.penchecks.com/the-supported-participant-how-401k-plan-design-can-increase-retirement-savings/
It seems as if every day we read about a new lawsuit filed against ERISA plan fiduciaries. Fiduciaries can't insulate themselves from being sued, but they can minimize their risk and be in a good position to defend a lawsuit if they follow good fiduciary practices. Carol has been blogging and speaking about these topics for some time, via her "Intelligent Fiduciary" series and "Intelligent Fiduciary" programs for Worldwide Employee Benefits Network and Westlaw. We have complied some of her more popular posts in a booklet that is now available without charge.
By Carol Buckmann firstname.lastname@example.org
June 9 is now the magic date when, unless the Department of Labor or Congress acts quickly, parts of the Fiduciary Rule will come into effect. June 8 is the last day of the 60 day extension granted in response to President Trump’s executive order directing the Department of Labor to reexamine the Fiduciary Rule, and after that brokers and others who give investment advice to plans will be subject to fiduciary responsibilities and a best interest standard (though not to many requirements of the Best Interest Contract Exemption). We are all advising about what people will need to do by June 9. Being prepared is important, but I am still not sure that anything will really happen then, as numerous actions are being taken by opponents of the Rule to further extend the June 9 effective date or to repeal the Rule.
How Much Time is Needed? Some may question why any review of a rule that was more carefully studied than any in recent memory, has been upheld by every court that has looked at it, and was supported by an overwhelming majority of those who filed comments on the proposed delay is necessary, but President Trump’s executive order directs that a review be made and it hasn’t been completed yet. Opponents of the Rule continue to lobby against it, though their efforts to stay the court decisions pending the Department of Labor’s review were unsuccessful. They argue that the Department of Labor’s action making parts of the Rule effective on June 9 (which surprised many practitioners) is not consistent with the directive in the executive order to fully review the Rule. In fact, though, the prior analysis was so thorough that limited additional time should be needed for review.
What Is Happening Now? New Labor Secretary Acosta, who has expressed reservations about the Rule, had not been confirmed when the delay was finalized, and various interested groups, including supporters such as AARP, have requested meetings with him to discuss the Rule. Last week, 100 Republican lawmakers wrote a letter to Secretary Acosta urging further delay, and the Dodd-Frank overhaul bill, called the CHOICE Act, was approved by the House Financial Services Committee with an added provision repealing the Rule. The repeal provision also prohibits the Department of Labor from enacting another rule until the SEC has taken action on broker responsibilities, which no one expects to happen while the Republicans are in charge. Virtually anything can happen now.
· The Department of Labor could further extend the effective dates while it continues to examine the Rule, and then decide that it either does or does not need to be changed. It may or may not, on its own, decide to defer to SEC rulemaking.
· Congress could still overturn the Rule legislatively, though the full House and the Senate would need to approve the repeal provision. (Due to the date it was adopted, the Fiduciary Rule was not eligible to be removed under the Congressional Review Act.)
· The Department of Labor could eliminate the most controversial parts of the Rule, such as extending fiduciary protections to IRA holders and the special protections in the Best Interest Contract Exemption and let a watered down fiduciary standard come into effect.
· The Department of Labor could withdraw the Rule and propose a completely different version, such as one that relies solely on disclosure, though this seems a long shot, given its initial position not to further delay parts of the Rule.
· Lawsuits may be brought by proponents of the Rule to challenge administrative actions that further delay or change it, seeking to enforce the original provisions as upheld by several courts. Standing will be an issue.
Where Does This Leave Us? While I don’t pretend to have a crystal ball, my prediction is that some parts of the Fiduciary Rule will survive, but the watered down version will be less effective in reining in conflicted advice. However, the playing field has already changed; more and more providers will voluntarily adhere to a fiduciary standard. Retirement plan investors and sponsors will still be responsible for providing their own protections by hiring those who adhere to fiduciary standards and seeking contractual protections.