Friday, 21 July 2017
Consider a typical retirement plan sponsored by a private employer. The employer is a fiduciary to the plan along with employees who individually serve as trustees or members of the plan’s investment or retirement committee.
The employer may (should!) have concerns about the liability associated with its fiduciary status. Let’s say you are the person asked by the employer to look into this matter.
There are a number of steps you might take to protect plan fiduciaries from liability. One thing you might consider is engaging an investment advisor to act as a co-fiduciary along with the in-house staff responsible for the plan. But let’s say you take another step and engage an “investment manager” to take on “all” responsibility for plan investments. In this case, the hired investment manager actually makes all decisions about plan investment and, as a “discretionary” advisor, only notifies the employer afterwards as to specific investment transactions.
At this point, in-house fiduciaries are exempt from liability for the specific investment decisions made by the investment manager. But are the in-house fiduciaries completely off the hook?
A recent federal district court decision, Perez v. WPN Corp, et al., elaborates on what in-house fiduciaries are required to do in exactly this situation. The court holds that the plan fiduciaries who appoint the investment manager are still responsible for “monitoring” the investment manager’s performance. This duty includes adopting routine monitoring procedures, following those procedures, reviewing the results of the monitoring procedures and, most important, taking any action required to correct any performance deficiencies of the investment manager. So, whether you pick an investment advisor to act as a co-fiduciary or an investment manager to make all the decisions on plan investments, in-house fiduciaries still need to review the conduct of these professionals and take action when necessary.
- There’s no risk-free way to put your retirement plan on autopilot. Having quality service providers is a good idea but they cannot relieve you, your company or your other in-house fiduciaries from all responsibility for investment and administrative decisions.
- Some financial advisory firms charge extra to act as “investment managers.” You may find that the “extra protection” afforded by this arrangement is not really worth the additional expense.
- Consider other alternatives to mitigate fiduciary liability. This may include steps like adopting a suitable investment policy statement or obtaining fiduciary insurance. Other possibilities are outlined in “Your Fiduciary Duty – And What to Do About It” that can be viewed here.
Thursday, 18 May 2017
You’re a successful business owner and you’d like to plan ahead. Professionals are urging you to prepare a “succession plan” – but you look at it as a retirement plan. Getting out of the daily grind might be nice, but giving up your life’s work and your legacy business? Maybe not so nice. No matter how they sugar coat it, “succession planning” looks like you’re calling it quits.
Whether they call it a succession plan, an exit plan or a retirement plan, it usually amounts to a transaction where you cash in your chips and your legacy business goes away. And, as soon as you sign that transaction document, you may no longer have any input in the conduct of your own business.
Is there another way? Can you cash your chips, continue your legacy business and still have a hands-on role? Can you have your cake and eat it too? The answer for you very well may be “yes!”
An employee stock ownership plan (“ESOP”) may allow you to sell your business to your employees in a non-adversarial, tax-advantaged transaction and continue to manage operations by electing directors of your choosing. You can participate in the business as much or as little as you would like. Want to taper off over the next ten years or so? No problem!
In this way, ESOPs can treat the two major non-financial issues facing business owners “in transition”: the end of the business involvement of a lifetime, and the likely loss of the legacy business itself.
The Takeaway: If a business transition is in your future, make sure an ESOP purchase is on your short list.
Monday, 03 April 2017
If your organization sponsors a 401(k) or other retirement plan, you or someone in your organization is a fiduciary to that plan. You may have hired a service provider to administer the plan (a third party administrator, or “TPA”), but the buck stops with your organization. This is because the fine print in your TPA’s service agreement says the official “Plan Administrator” is the employer, not the TPA. This means the employer has the ultimate responsibility for the plan’s ERISA compliance.
On the investment side, the plan’s trustee or investment committee will be a responsible plan fiduciary. The investment fiduciary must act with the care, skill, prudence and diligence of a prudent person “familiar with such matters.”
This is a prudent expert standard. So ask yourself, do the people making investment decisions for your plan have a financial or investment background? If not, you need to consider engaging a professional investment advisor to assist with investment decisions.
What does all this mean to you?
Plan fiduciaries do not have to make perfect decisions but they do need to exercise diligence in their deliberation on both administrative and investment matters. It is always advisable to document fiduciary deliberations as the best defense to a claim of fiduciary misconduct. Remember, good intentions never justify fiduciary misconduct including any inattention to fiduciary duties. As one federal judge put it: “A pure heart and an empty head are not an acceptable substitute for proper analysis.”
There are other steps that plan sponsors take to help their plan fiduciaries:
- Hire an investment advisor, adopt an investment policy statement – and follow it!
- Meet with your investment advisor at least annually to review plan investments – and document these discussions.
- Perform self-help compliance checkups for your plans using IRS and Department of Labor websites.
- Consider fiduciary insurance (that’s not the plan’s ERISA fidelity bond).
- Get professional help when you need it, and consider using independent legal counsel to assure the confidentiality of sensitive plan-related information.
The Takeaway: Take another look at the bullet points immediately above. Is there any good reason not to follow each of those protective steps?
Friday, 03 March 2017
Many 401(k) plan sponsors have wisely selected investment professionals to assist in selecting the plan’s investment menu, typically a listing of various mutual funds. Other plan sponsors may allocate this duty to company officers and other key employees. In either case, the resident plan fiduciaries (the company officers and key employees who act on behalf of the sponsor as plan administrator or trustee) have a legal duty to “select and monitor” plan investments and, in the case of sponsors who have hired investment professionals – to monitor not only investment performance but also the performance of the investment professionals.
So, how do you “select and monitor?”
There’s only one hard and fast rule: Document what your investment-related decisions are and how you made them. But here are some guidelines on how to proceed:
- Investigate available investment providers. This may include banks, insurance companies, stockbrokers and mutual fund companies and their broad array of investment options. Then solicit specific information on several investment programs. This could be done in a standard format such as a request for proposal (RFP).
- Analyze costs and investment characteristics of available investments and select the investment menu that offers diversified investment options at competitive prices. Remember, your plan is not “free” if your participants pay administrative costs through reduced returns on their plan investments. So, get a handle on this kind of indirect compensation (“revenue sharing”) and make sure you take it into account.
- The general requirement is endorsed by the Supreme Court in the Tibble opinion as a “separate” duty of a trustee to “monitor trust investments and remove imprudent ones.” You should review investment results on a periodic basis with a view towards replacing laggards in your plan’s investment array.
- Compare investment results with criteria set out in your plan’s investment policy statement, or IPS (yes, having an IPS is a good idea). Also, document your decision-making process to prove that in-house plan fiduciaries have performed this duty.
The Takeaway: Process, process, process! Just going through the procedure suggested above – and providing documentary proof – could satisfy an IRS or Department of Labor inquiry even if your plan has mediocre investment results.
Friday, 03 February 2017
The Affordable Care Act (ACA) has tied the hands of employers who would like to reimburse employees for the cost of their individual health insurance coverage. Under the ACA, tax-free reimbursement of employee health insurance costs was not permitted through a health reimbursement arrangement (HRA) unless it was “integrated” with an employer-provided group health plan. Stand-alone HRAs were prohibited even for small employers that were not subject to the ACA mandate to offer group health coverage.
However, in the waning days of the Obama administration, the President signed the 21st Century Cures Act which allows “small employers” to adopt Qualified Small Employer HRAs (QSEHRAs) to reimburse covered employees for their own health insurance premiums as well as other qualified medical expenses.
Small employer means an employer that does not employ at least 50 full-time plus “full-time equivalent” employees. In other words, employers that are not required to offer ACA coverage to their employees. Full-time employees for this purpose are those working 30 or more hours per week. If a small employer does maintain a group health plan, it cannot provide QSEHRA reimbursement benefits.
QSEHRA benefits must be offered to all eligible employees. Some employees can be excluded (those under age 25, those who have been employed fewer than 90 days, part-time and seasonal employees). Annual reimbursement benefits are limited to $4,950.00 (individual) and $10,000.00 (family) with a proration of these limits for partial plan years. No employee contributions are permitted. Also, employees must personally maintain ACA minimum essential coverage to avoid taxable income on reimbursement benefits. There are additional employee notice and tax reporting requirements.
The Takeaways: For small employers with employees covered by individual ACA policies, a QSEHRA can provide tax advantaged benefits at whatever benefit level the employer selects up to the permitted maximum. Qualifying employers with a young work force may find this benefit particularly attractive as it is young workers who are paying significantly increased premiums for individual ACA coverage.
For shareholders of S corporations, their QSEHRA eligibility needs to be reviewed because of existing limits under the Internal Revenue Code on those who may have “other coverage” available through a spouse or otherwise. S corporation shareholders need to consult a tax professional if they intend to participate in their corporation’s QSEHRA. Additional guidance from the IRS on QSEHRA’s is expected, and such guidance could affect the current understanding of QSEHRA requirements.
Monday, 02 January 2017
Entrepreneurs who work hard and build a business over decades realize that, at some point, they need to think about slowing down and stepping back. Frequently, planning and specific decisions about transition are put off. Entrepreneurs worry about two things that can make delay an attractive option. Number one is a concern about their standard of living if they sell their business. Number two is facing the prospect of disposing of the entrepreneur’s legacy business that may represent a lifetime of work and achievement.
Both of these concerns are very real. First, after payment of transaction costs and taxes, the possible investment of the net proceeds of the sale of the business very well may result in a reduced cash flow to the entrepreneur and family. And, unless there’s a family member who is capable – and interested – in taking over the business, the entrepreneur justifiably feels that the legacy business may have to be surrendered. Both of these factors make it hard to let go - or even to think about letting go.
Here’s something for the reluctant entrepreneur to consider: there is a way to defer or even avoid taxes on the sale of your business, to undertake a transaction without the aggravation and delay of dealing with pesky buyers, to sell your business in installments or a lump sum - and still not give up control!
These results can be attained if the business is sold to its current employees through an employee stock ownership plan, or ESOP.
Maybe the entrepreneur you know would be more willing to plan for a business transition if he or she were aware of these ESOP possibilities.
The Takeaway: ESOPs can be more than just retirement plans and for many entrepreneurs, they offer the best succession solution.