Month: December 2003

Gardner, Carton & Douglas has a very helpful article analyzing “What the New Medicare Law Means for Employers.” Quote of Note: “Though there is no regulatory guidance on this point yet, employer-established or funded HSA arrangements would generally seem to be ERISA plans, and thus subject to the fiduciary, disclosure and other rules of ERISA, to the continuation requirements of COBRA, and the privacy and portability requirements of HIPAA.”

Our Daily Local News featured Benefitsblog yesterday in this article: “Attorney’s Blog Gets Recognition.” Just working my way up to the Wall Street Journal🙂 Correction, though, on statistics cited: Benefitsblog receives over 20,000 “visits” a month and over 60,000 “hits” a month.

Plan Sponsor has an interesting article: “Businessman Threatens To Pull K Plan From ING Due to Outsourcing.” The article reports that Fred Tedesco, president and co-owner of Pa-Ted Spring Co. Inc., sent a letter to ING Group threatening to take his company’s 70-person 401(k) plan business elsewhere if the company outsourced any more computer jobs.” Quote of Note:

Even though Tedesco said he realizes that losing his firm’s small 401(k), with several million dollars of assets, would mean little to ING, which has administered the plan for a year. . .”the whole point is to set the stage for other people to look at” the issue. . . The move by Tedesco may be the initial ripples of an oncoming small business tsunami. Several pro-American business groups are expected to start urging small businesses to take similar stands against insurers and financial services firms. Leading the charge is MADe in USA, a coalition of employees and owners of small and medium manufacturers that Tedesco helped create more than a year ago.

While I applaud Mr. Tadesco’s efforts (anyone who is a regular reader at Benefitsblog knows my great concerns about this whole outsourcing movement), this is another area where ERISA plan fiduciaries need to tread carefully. Generally, plan fiduciaries may not make investment decisions based on social, moral and other noneconomic criteria (referred to as “social investing”) unless the policy also satisfies ERISA’s fiduciary requirements of loyalty to plan participants, prudence, and diversification. The DOL has addressed these concerns in DOL IB 94-1 (1994), also known as DOL Reg. section 2509.94-1. See also, Advisory Opinion 98-04A in which the DOL stated:

The Department has expressed the view that the fiduciary standards of sections 403 and 404 do not preclude consideration of collateral benefits, such as those offered by a “socially- responsible” fund, in a fiduciary’s evaluation of a particular investment opportunity. However, the existence of such collateral benefits may be decisive only if the fiduciary determines that the investment offering the collateral benefits is expected to provide an investment return commensurate to alternative investments having similar risks. In this regard, the Department has construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to participants and beneficiaries, as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives. In other words, in deciding whether and to what extent to invest in a particular investment, or to make a particular fund available as a designated investment alternative, a fiduciary must ordinarily consider only factors relating to the interests of plan participants and beneficiaries in their retirement income. A decision to make an investment, or to designate an investment alternative, may not be influenced by non-economic factors unless the investment ultimately chosen for the plan, when judged solely on the basis of its economic value, would be equal to or superior to alternative available investments.2

In discharging investment duties, it is the view of the Department that fiduciaries must, among other things, consider the role the particular investment or investment course of action in the plan’s investment portfolio, taking into account such factors as diversification, liquidity, and risk/return characteristics. Because every investment necessarily causes a plan to forgo other investment opportunities, fiduciaries also must consider expected return on alternative investments with similar risks available to the plan.

(It may very well be that the plan fiduciaries of the 401(k) plan mentioned in the Plan Sponsor article have dealt with these fiduciary concerns, but the article does not mention it.)

Regarding outsourcing in general, the New York Times reported last week: “Who Wins and Who Loses as Jobs Move Overseas?” In answer to the question “How big an issue is job migration?” an economist states:

Offshore outsourcing is a huge deal. We do not have a data series called jobs lost to offshore outsourcing, but 23 months into the recovery, private sector jobs are running nearly seven million workers below the norm of the typical hiring cycle. Something new is going on. America is short of jobs as never before, and the major candidates for our offshore outsourcing are ramping up employment as never before. So yes, I think two and two is four.

Also, Business Week Online had this: “The Rise Of India: Growth is only just starting, but the country’s brainpower is already reshaping Corporate America.”

Also, this from Philip Greenspun’s Weblog: “Outsourcing to India in Business Week and at MIT” (which by the way, inspired 86 comments with respect to one post.)

UPDATE: David Giacalone has a great post on developments in legal services outsourcing: “Corporate Outsourcing May Bring Trickle-Down Competition and Options in Legal Services.” You can access a brief post here at Benefitsblog on outsourcing of legal services to India.

How about this? (Brief Disclaimer: No financial incentives here at all. No guarantees about this product or the company selling this product.)

“Lawyers Are Warned on Mutual Fund Roles“: the New York Times is reporting. According to the article, the SEC is saying that regulators may soon open a new front in their investigation of possible wrongdoing at mutual funds, focusing on the role of lawyers who represent them. This focus on lawyers was revealed in a speech by SEC Commissioner Harvey J. Goldschmid, entitled “Mutual Fund Regulation: A Time for Healing and Reform,” before the ICI 2003 Securities Law Developments Conference on December 4, 2003. Here are some of his remarks:

Fund lawyers, under SEC rules that became effective August 5, 2003, have a similar “reporting up” duty. The SEC’s attorney conduct rules apply to any attorney employed by an investment manager who prepares, or assists in preparing, materials for a fund that the attorney has reason to believe will be submitted to or filed with the Commission by or on behalf of a fund.

Under these rules, an attorney who is aware of credible evidence of a material violation of the securities laws, or a material breach of fiduciary duty, must report this evidence up the chain-of-command or ladder to the fund’s chief legal officer, and ultimately, to the independent members of the mutual fund board.

This “reporting up” requirement should significantly enhance the flow of key legal information (involving “reasonably likely” material violations) to independent members of the fund board. “Reporting up” also empowers lawyers. The requirement will allow dispassionate, independent fund directors ? not conflicted fund investment managers ? to resolve key securities law and conflict-of-interest issues. Everyone should understand that the SEC’s rules are now a matter of substantive federal law. As of August 5, available for violations are the Commission’s traditional broad spectrum of remedies, penalties, and other sanctions.

Mike O’Sullivan at Corp Law Blog weighs in on this development here as well as Professor Bainbridge here.

Regarding the mutual fund scandals in general, the December 15th issue of Business Week has an article entitled “Breach of Trust.” The article makes the interesting point that “changes in retirement plans–particularly innovations in 401(k) plans”–provided fuel for the mutual fund scandals. The article states that just a decade ago, “participants had few funds to choose from and were limited to one trade each quarter.” The article goes on to say that with plans offering so many choices and participants being able to trade daily, it is these innovations which “paved the way for abuses, such as market timing by 401(k) participants.”

The Wall Street Journal today has this article discussing how employers and fund companies “are cracking down on workers who make frequent in-and-out trades in their 401(k) plans”: “The Crackdown on Funds Hits Your 401(k).” Here are what some of the companies are doing to curb market-timing, according to the article:

• Imposing one-day timeouts between trades to make it more difficult for market timers to engage in market-timing.
• Imposing a 15, 30, or even 90-day holding period for certain international funds.
• Imposing redemption fees designed to take some of the profit out of market timing. Fees range from a 1% to 1.5% fee on redemptions of investments in certain international funds, if employees hold the funds for less than 30 days. The move is designed to help compensate participants in the fund for the transaction costs generated by the frequent trading.
• Barring employees from investing in a fund if they engage in market timing.
• Temporarily barring employees from telephone and online exchanges if they make too many trades.

Finally, CBS Market Watch reports: “It’s the expenses, stupid: Illegal timing and trading are distractions.” The article describes how mutual funds are skimming off your money in what is called the “fund industry casino.”

From the New York Times: “Memo Shows MFS Funds Let Favored Clients Trade When Others Couldn’t.”

And would you believe the “Fed Cracks Down on Trading in Its Own Employee Fund.” (From Yahoo! News.com)

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