Month: April 2004

From Bloomberg.com, “Is Your Retirement Plan Gouging You on Fees?”

If lawmakers and the U.S. Securities and Exchange Commission want to know how mutual fund costs are hurting future retirees, they should talk to Adrian Nenu. . . Nenu wanted to be informed on his retirement options, so he started calculating what various plan choices were costing him. . . “I felt a sense of outrage when I found out how much I was being charged, especially when the total fees charged by the four vendors were nearly identical and there was no low-fee vendor to escape to,” Nenu said.

From Reuters via Forbes.com, “US Senate’s Frist wants pension bill this week“:

The majority leader of the U.S. Senate wants to pass pension legislation this week that would save U.S. companies more than $80 billion over two years and has already cleared the House of Representatives. “I want to act on the pension bill this week,” Sen. Bill Frist, a Tennessee Republican, told the Senate on Monday. . . Republicans think Kennedy would have trouble rallying the votes he needs to defeat the measure. Many senators of both parties have companies in their states who want the billions of dollars of aid in the bill.

Kerry Kerstetter at the TaxGuru.net has been faithfully bringing us some wonderful tax humor to lighten the load during tax season. Another great comic here.

At the ALI-ABA Annual Spring Employee Benefits Law and Practice Update held last week, Louis Campagna, Jr., Chief of the Division of Interpretations, from EBSA, discussed the recent mutual fund investigations and reiterated what has already been set forth in the DOL’s statement issued in February, 2004. Mr. Campagna stated that after the mutual fund scandals broke, the DOL was flooded with questions from plan fiduciaries wanting guidance regarding their duties under ERISA with respect to the investigations. Mr. Campagna discussed how statements made by the DOL in speeches (here and here) and in the statement issued in February are designed to reinforce that fiduciaries should not panic, but can take applicable steps to fulfill their duties under ERISA as follows:

(1) First and foremost is the requirement that plan fiduciaries be informed. He stated that prudence requires that, if fiduciaries are not informed, they are not exercising prudence as required under ERISA. If plans are invested in funds with providers under investigation, fiduciaries have a duty to contact the fund directly in an effort to obtain specific information about the nature of any alleged abuses. If the funds have been involved in market timing or late trading, fiduciaries have a duty to investigate the possible economic impact of the abuses on plan investments and perform an evaluation regarding such impact, as well as evaluate the steps being taken by the funds to limit the potential for such abuses in the future.

(2) Fiduciaries should take appropriate action where necessary. The guiding principle for fiduciaries, as stated in their guidance, is to to ensure that appropriate efforts are being made to act reasonably, prudently and solely in the interests of participants and beneficiaries, and that actions taken are fully documented.

(3) Plan fiduciaries should consider any steps available to make the plan participants whole, such as participating in lawsuits. However, fiduciaries should weigh the costs to the plan against the potential for recovery in such lawsuits before participating.

(4) Plan fiduciaries should consider other plan assets, not just mutual fund investments, which could also involve similar abuses and take additional action with respect to such investments, such as pooled separate accounts and collective trusts. Mr. Campagna mentioned that the DOL is currently investigating these type of investments for possible abuses.

(Comment: Please note that in remarks of Assistant Secretary Ann L. Combs To the Washington Forum of the U.S. Institute on March 8, 2004, Ms. Combs mentioned this investigation by the DOL and stated as follows:

EBSA is currently conducting its own review of practices by mutual funds and other pooled investment vehicles, such as bank collective trusts, as well as service providers and so-called “intermediaries” to such funds, to determine whether there have been any violations of ERISA. We are examining a sample of mutual fund and other financial service providers to see whether activities such as market timing or illegal late trading may have harmed retirement plan beneficiaries. Under ERISA, a mutual fund affiliate or other retirement plan fiduciary that engages in or facilitates market timing or late trading, causing losses to an ERISA covered plan, is liable to restore losses to the plan.

We are focusing on investment companies and banks that offer 401(k) services to plans more than employers who run their own retirement plans. We are looking for improper payments for directed investments, and whether retirement accounts have been used to facilitate market timing or late trading for clients.

I should note that this review is exploratory and not the result of specific evidence that investment professionals serving as fiduciaries have engaged in improper or illegal activity. We don’t know yet if there are any real problems here but we have an obligation to look.)

(5) Mr. Campagna discussed how plan fiduciaries have been very concerned about whether they can take any steps to address market-timing by plan participants. Fiduciaries have been particularly concerned with the impact these restrictions on market-timing might have on ERISA section 404(c) safe harbor protection. In an effort to address these concerns, the DOL stated in its guidance that imposing reasonable redemption fees on sales of mutual fund shares and/or placing restrictions on the number of times a participant can move in and out of a particular investment within a particular period would not affect the safe harbor protection of section 404(c). Mr. Campagna also emphasized that any such restrictions must be clearly disclosed to the plan’s participants and beneficiaries.

Pam Perdue, attorney with Summers, Compton, Wells & Hamburg and a panelist, emphasized the importance of disclosure. If the plan fiduciaries receive a statement from the provider regarding alleged abuses, her position is that the plan fiduciaries should make this information available to participants and beneficiaries. She also noted that courts have upheld the validity of market-timing restrictions on plan investments where there was adequate and prior disclosure of such restrictions to plan participants.

Panelists noted that fiduciaries should beware of targeting certain plan participants with market-timing restrictions since this could run afoul of the 3-day advance notice requirements for blackout periods under Sarbanes-Oxley.

(What is being referred to here are the requirements that apply to so-called “black-out periods” in participant-directed retirement plans under Sarbanes-Oxley. Black-out periods occur when the ability of plan participants (or of a plan participant) to take certain actions is temporarily suspended. Under Sarbanes-Oxley, participants must receive advance written notice of certain black-out periods, and corporate insiders are restricted in trading in employer securities during such black-out periods. The DOL and the SEC have issued final rules implementing the new requirements. Substantial penalties may be imposed for non-compliance with the black-out notice requirement or the insider trading prohibition under Sarbanes-Oxley.)

The DOL also emphasized this point in its guidance, stating that “[t]he imposition of trading restrictions that are not contemplated under the terms of the plan raises issues concerning the application of section 404(c), as well as issues as to whether such restrictions constitute the imposition of a “blackout period” requiring advance notice to affected participants and beneficiaries.”

(6) In the Q & A portion of the seminar, a question was asked as to whether or not the mutual fund guidance issued by the DOL applies to self-directed brokerage accounts. Mr. Campagna remarked that under SEC rules, the plan is the customer which buys the mutual fund product. Therefore, if information regarding funds targeted in an investigation is in the possession of the fiduciary, the plan fiduciaries would likely have fiduciary responsibility regarding the investment, and therefore the guidance would be applicable.

From the Insurance Journal, “Allstate Agents Pin Hopes on ERISA Charges Following Dismissal of Age Discrimination Complaint“:

Despite a federal judge throwing out their high-profile class action age discrimination claim against Allstate Insurance Co., lawyers for the 6,400 agents say they are happy with the decision overall because it permits their ERISA (Employee Retirement Income Security Act) claims for breach of contract and breach of fiduciary duty to go forward. In Philadelphia, U.S. District Judge John P. Fullam rejected the group’s age discrimination case against the insurer, deciding it was invalid “for the simple reason that employees of all ages were treated alike”. . . “Overall, we are pleased with Judge Fullam’s decision yesterday,” [Michael Lieder of the Sprenger & Lang law firm] told Insurance Journal. “He ruled on numerous issues. . . He declared voidable the release that the agents were virtually forced to sign, removing Allstate’s primary defense to their claims. While we regret that Judge Fullam dismissed one of the claims, for age discrimination, he allowed the agents to proceed with their claims under ERISA and for breach of contract and breach of fiduciary duty.”

(More on the Allstate case: From Forbes.com, an article here and one from the New York Times here. Access the actual ruling by U.S. District Judge John P. Fullam here at this website.)

From Accounting Web.com, “FASB Issues Proposed Stock Option Rule“:

As expected, the Financial Accounting Standards Board moved yesterday to require employee stock option pay be shown as an expense on company financial statements, beginning next year . . . Despite several bills pending on the issue in Congress, none is likely to derail the FASB’s proposal since it would fall to the Senate Banking Committee to act on the matter. Its chairman, Sen. Richard Shelby (R-AL), has said he would stop any attempt to override FASB’s proposed rule, his spokesman told the Journal.

(You can access the FASB News Release here and the Exposure Draft here.)

An example of how one plan sponsor’s fiduciaries handled the mutual fund investigations–“Hanford turning to Vanguard for 401(k)“:

The committee handling the retirement funds decided not to immediately cut its ties with Putnam Investments when fraud allegations from securities regulators surfaced in November. The committee instead stuck with a process begun in the summer — before mutual fund scandals at Putnam and other fund companies began to make headlines. In July the committee had started to analyze proposals to handle record keeping and fund management services that the mutual fund company Putnam now provides to make sure it was offering employees a competitive investment package. The committee considered value, investment performance and service. But Putnam’s troubles also weighed into the decision, and the committee decided to replace Putnam with the Vanguard Group. . .

From Reuters via MSN Money.com, “Treasury Sec. Urges Care in Fund Reform“:

U.S. Treasury Secretary John Snow on Friday said the Bush administration supports overhaul of the troubled mutual fund industry but also pledged to work with it on possible reforms. “The Administration supports the (Securities and Exchange Commission) taking strong action when harm is done to investors, but believes that care must be taken to preserve the valuable benefits and flexibility that mutual funds provide,” Snow said in prepared remarks to the Financial Services Roundtable, an influential lobby group.

From Morningstar.com, “Sens. Grassley, Baucus Urge SEC To Rethink Late-Trade Rule“:

Two top Senate Finance Committee members urged the Securities and Exchange Commission to back off a proposed rule that would bar mutual-fund trades after 4 p.m. . . Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee said in a letter sent to SEC Chairman William Donaldson Monday that the impact of the rule would disadvantage retirement plan participants. “Under the proposed hard 4 p.m. deadline rule, investors who trade directly with mutual funds or the funds’ primary transfer agents will have a distinct advantage over retirement plan participants, whose trades are typically processed by plan administrators or other third-party intermediaries,” the letter said.

(Regarding mutual fund reform, access the Senators’ letter referred to above here. House members also wrote a similar letter which you can access here. Access testimony last week at a hearing entitled “Review of Current Investigations and Regulatory Actions Regarding the Mutual Fund Industry: Fund Costs and Distribution Practices” before the US Senate Committee on Banking, Housing, and Urban Affairs here.)

A few of the highlights from the ALI-ABA Annual Spring Employee Benefits Law and Practice Update (via Satellite) are as follows:

(1) Bill Sweetnam, Benefits Tax Counsel, for the Treasury Department, commented briefly on the recent guidance issued regarding Health Savings Accounts (“HSAs”) and remarked that “additional guidance is coming.” For instance, in the works are plans for:

• A model plan document for use by HSA custodians/trustees;
• Guidance pertaining to the interaction between flexible spending accounts, health reimbursement accounts, and health savings accounts.
• Guidance pertaining to employer contributions to HSAs, as well as other guidance addressing issues pertaining to employer-run HSAs.

He also mentioned the following additional benefits issues targeted for guidance: 403(b) annuities–updating of the regulations is planned; phased retirement issues; 401(a)(9) guidance–more work on the regulations is planned; finalization of regulations regarding deemed IRAs with particular attention given to the issue of when disqualification of the deemed IRA might disqualify the entire tax-qualified plan and how state and local governments can utilize the feature; incentive stock options; 280G golden parachute provisions; and withholding guidance regarding nonqualified stock options.

(2) Roger Siske, attorney with Sonnenschein Nath & Rosenthal LLP, and Jim Holland, Employee Plans Group Manager, discussed minimum funding waiver issues and Rev. Proc. 2004-15 which was issued in February of this year. According to Jim Holland, the number of minimum funding waiver requests has increased, due to the economy, market conditions and interest rates being low. The real issue in the IRS’s view, in deciding whether or not to grant a funding waiver, is whether the granting of the waiver will help the plan sponsor’s temporary cash flow problems so that the plan sponsor can, at some point in the future, begin funding the plan again. In other words, the IRS is not interested in granting a funding waiver to a company that will not recover sufficiently to make up the waived contributions. Therefore, the IRS must be convinced that the business hardship is temporary.

The Revenue Procedure contains a new requirement for obtaining a funding waiver, i.e. that is the plan sponsor must provide a detailed statement of all amounts that have been paid or will be paid to officers and directors during the plan year for which the request is being made and the immediately preceding 24 month period as well. (Post-US Airways fallout.) This can be a significant and time-consuming requirement for the applicant.

Also, the IRS has not historically been willing to grant more than one minimum funding waiver a year. Jim Holland mentioned that the number of multiple year requests is up, with some requests for waivers for the years 2003 and 2004, and with some requests going beyond those years. Mr. Holland said the IRS has not decided whether or not it will grant the multiple year funding waiver requests and expressed concern that when requests are made for years beyond 2004, this appears rather speculative. He mentioned that the IRS does understand that many of these troubled companies are receiving pressure from lenders wanting to know about the status of the company’s pension obligations in the future.

(3) Sherwin Simmons, attorney with Steel Hector & Davis LLP, who has a written a very good article on same-gender marriage issues affecting the benefits arena (here at the PSCA website, free registration required) gave a good overview of the issues for the audience, and reiterated that for federal purposes, marriage is still defined under the Defense of Marriage Act (passed in 1996). The Defense of Marriage Act defines “marriage” as a legal union between a man and a woman and “spouse” as a person of the opposite gender who is a husband or wife. Thus, he noted that, at least until further developments, the terms “marriage” and “spouse” will not include same-gender relationships for ERISA and Internal Revenue Code purposes. Therefore, spousal rights, spousal consents, joint returns, innocent spousal benefits, surviving spousal benefits and the like will continue only to refer to an individual who is married to a person of the opposite gender. He did point out that there is a movement presently underway to legally challenge the constitutionality of the Defense of Marriage Act. (Read about the movement here.)

The panelists made the following observations:

• Many private employers are going ahead and providing benefits for domestic partnerships.
• If an employer does decide to provide for domestic partnership benefits, make sure that Summary Plan Descriptions are written in such a way that it is clear that, for federal law COBRA purposes, the domestic partner would not have any COBRA rights, even though the plan may be providing quasi-COBRA benefits for the domestic partner.
• One of the panelists mentioned that in a recent IRS submission of a qualified plan, the plan document attempted to define marriage according to state law. However, the IRS agent reviewing the submission required that the plan define marriage in accordance with the Defense of Marriage Act.
• Jim Holland mentioned that, if an employer wishes to provide a joint and survivor annuity through the plan to a domestic partner, there could be 415 issues and a plan could be disqualified if the plan exceeds those limitations.
• Also, Marjorie Hoffman, Senior Technician Reviewer for the Internal Revenue Service, remarked that problems could occur under the minimum distribution requirements for same-gender marriages.

(Stay tuned for Part II of From My Notes, featuring Louis Campagna’s comments regarding recent DOL guidance pertaining to ERISA fiduciary issues involving mutual funds under investigation.)

J. Bryan Tuk, an attorney practicing in labor and employment law and commercial litigation, has started a new blawg entitled “Employee Relations Law & News.” (It is great to be able to add another blawg to the small number of HR-related blawg listings over in the right-hand column.) Say hey to Bryan!

This just in from Forbes.com–“US House oks billions in pension aid for companies.” The article reports that “the outlook is shaky for the measure in the Senate.”

Also, from the Associated Press via SFGate.com–“Pension bill faces House vote, Senate uncertainties“:

While everyone didn’t get everything they wanted in this bill, I can assure you we’ll all be back again a year from now when we are discussing long-term proposals to reform and strengthen the defined benefit system,” said Rep. John Boehner, R-Ohio.

A press release from the Committee on Education and the Workforce is here.

You can access the text of the Conference Agreement, an outline of the Conference Agreement, and the statement made by the managers, all at the American Benefits Council website here.

(See how Pennsylvania representatives voted for the measure here.)

Reuters has this report–“House-Senate Panel OKs Pension Relief“:

U.S. House and Senate negotiators agreed on a massive pension relief bill for U.S. companies on Thursday, but a lack of Democratic support made final passage uncertain. The lawmakers, reconciling rival House and Senate bills, agreed to provide about $80 billion in relief for U.S. companies struggling to fund traditional pensions and added $1.6 billion in extra aid for pension plans of major airlines and steel companies.

ERIC issued this statement in response–“ERIC Warns Government Over Roadblocks on Pension Rate Relief Crippling Pension System“:

Conferees meeting today on H.R.3108 accepted a final position that divided conferees along party lines, indicating that it will be very difficult to pass the agreement and forward it to the President.

You can access the Outline of the H.R. 3108 Conference Report here via the American Benefits Council website.

Finally, the Committee on Education and the Workforce has issued this press release–“Short-Term Pension Bill Approved by Conferees; Proposal Ready for House Floor Action“–stating as follows:

House and Senate conferees today adopted a responsible, stopgap pension proposal that employers and workers say Congress desperately needs to pass and send to President Bush before the end of the week. The vote came at the final meeting of a House-Senate conference, chaired by U.S. Rep. John Boehner (R-OH), which has been racing the clock to send a bill to the President before a crucial deadline for employers and employees is reached later this month. Employers must make their quarterly contributions by April 15th. The House is scheduled to adjourn at the end of this week, meaning action on the pension relief bill must be completed this week. “This urgently needed pension relief legislation is now on its way to the House and Senate floor, and that’s encouraging news for American workers,” Boehner said. “The proposal adopted by conferees today is a fair and responsible proposal that meets the goal that conferees agreed upon, which was to target multiemployer relief only to those plans most in need. Most importantly, I believe this compromise is a proposal the President will sign.”

Thanks to RIA for a pointer to this case–Donahue’s Accounting and Tax Service, S.C. v. Ryno, Donahue’s Accounting and Tax Service, S.C. v. Ryno, 674 NW2d 681 (Wisc. App., 2003). Without going into all of the facts of the case, suffice it to say that the court had some humorous remarks to make about the Internal Revenue Code as follows:

Whether or not Donahue breached a duty to Ryno to file a claim for “Innocent Spouse” status prior to filing her 1999 tax returns requires reading, comprehending and applying the Internal Revenue Code (IRC). It is obvious to this court that the IRC is incomprehensible without the assistance of a qualified expert in tax law.

This conclusion is best supported by a short and snappy comment from Justice Jackson, once Chief Counsel for the IRS, in a dissenting opinion in Arrowsmith v. Commissioner of Internal Revenue, 344 U.S. 6, 12 (1952), where he referred to federal taxation as “a field beset with invisible boomerangs.“

One of America’s most respected jurists, Judge Learned Hand, offers a more thoughtful observation on the law of taxation:

In my own case the words of such an act as the Income Tax … merely dance before my eyes in a meaningless procession; cross-reference to cross-reference, exception upon exception-couched in abstract terms that offer no handle to seize hold of-leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegal: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.

Ruth Realty Co. v. Horn, 353 P.2d 524, 526 n.2 (Or. 1960) (citing 57 Yale L.J. 167, 169 (1947)), overruled on other grounds by Parr v. DOR, 553 P.2d 1051 (Or. 1976).