Andrew S. Williams
Department of Labor proposed regulations would allow certain employers (including employer groups or associations) and business owners with no employees to share a single 401(k) plan. This arrangement would transfer administrative and compliance responsibility to the sponsor of the retirement plan under a multiple employer plan, or “MEP.”
Under the proposed regulations, the MEP sponsor would be responsible for ERISA reporting and disclosure requirements for all of the participating employers. So, there would only be one ERISA bond and one annual report no matter how many employers participate in the MEP plan. MEP sponsors would also be responsible for general fiduciary duties although each participating employer would continue to be responsible for choosing the MEP plan, reviewing its performance, and arranging for employer and employee contributions to the plan.
MEPs can also be offered through qualifying professional employer organizations (“PEOs”), which are businesses that perform certain employment-related functions for its employer clients, such as hiring, payroll, employee benefits and HR functions.
So, the proposed regulations are intended to expand availability of 401(k)-type plans to smaller employers with the prospect of making such plans available at a lower cost. But bear in mind that the availability of MEP retirement plans is subject to a number of requirements, principally:
MEP sponsors must have a business purpose other than just providing retirement plan benefits to its member employers.
MEP members must have a “commonality of interests” such as (1) being in the same trade, business or profession, or (2) having a principal place of business in the same state or city as the other MEP members.
So, MEPs might work to expand the availability of 401(k)-type plans at a cheaper price for smaller employers. They could also protect member employers from responsibility for much of the plan’s administrative compliance. But bear in mind that the above is just a brief summary of the requirements for MEP members and MEP sponsors. Any specific MEP arrangement should be carefully reviewed before entering into a MEP participation agreement.
Smaller employers who find that candidates in a competitive labor market need to have 401(k) benefits may find a MEP plan to be a simpler, cheaper alternative to adopting their own plan. Also, employers with 25 or more Illinois employees who do not currently have a retirement plan will be required to adopt an Illinois “Secure Choice” plan by no later than November 1 of this year (click here for details on the Secure Choice program). Adopting an available MEP plan might prove to be an attractive alternative.
Andrew S. Williams
We have an award winner for 2018: Florida eye doctor Samuel Poppell.
In McLain v. Poppell, it was alleged that Dr. Poppell, owner of the Emerald Coast Eye Clinic and trustee of its 401(k) plan with total investment discretion, invested plan assets primarily in VirnetX, a publicly traded company whose principal business was acting as a “patent troll” (a company that acquires patents and uses them primarily to sue other businesses for alleged patent infringement).
Dr. Poppell’s investment decisions were based on his personal review of internet message boards. His investment acumen resulted in a loss of more than one-half of the plan’s asset value in a single year as the VirnetX stock cratered.
In response to participant complaints about these investment losses, Dr. Poppell allegedly threatened to terminate the plan as its VirnetX investment continued to lose money. Dr. Poppell’s next response, as participants continued to complain, was to terminate their employment!
Dr. Poppell was able to settle the suit filed by participants against him for about 25 percent of the plan’s total investment losses. However, the Department of Labor subsequently intervened and required Dr. Poppell to compensate participants for the balance of their aggregate losses.
So, for his complete disregard for his fiduciary duties to his employees and his related retaliation against participants who had the temerity to complain, Dr. Poppell is our 2018 ERISA Hall of Shame “honoree.”
Fiduciaries of 401(k) plans need to engage and rely on their professional advisors – you can’t just wing it when it comes to plan investment decisions.
Andrew S. Williams
We’ve all read about the lawsuits questioning an employer’s 401(k) investment fund selections and related claims of excessive fund costs. And typically a plan’s professional investment advisor (yes – you should have one unless you have an investment professional on staff) meets with company representatives periodically to discuss a detailed report on fund investment performance and any recommended changes in the plan’s investment fund selections. So, your 401(k) plan files bulge with investment-related materials (and they should!). But what about the rest of an employer’s 401(k) responsibilities?
As posed by the moderator of the 401(k) panel at the Illinois CPA Society’s recent annual Summit that I had the pleasure of appearing on, what should plan sponsors be paying attention to in addition to monitoring plan investment results?
Good question – so what can you do to get a leg up on the rest of the 401(k) universe?
Consider online IRS compliance guides like “A Plan Sponsor’s Responsibilities”. This material covers plan documentation, monitoring plan service providers, internal controls, law changes, payroll data you need to share with plan providers, hardship distributions, participant loans, ERISA fiduciary bonds, as well as eligibility, vesting and benefit payment matters. It also provides links to other IRS compliance resources and is a good starting point to find more detailed information on specific plan administrative requirements such as government filings, participant notices and fiduciary requirements. Also consider articles such as “Your Fiduciary Duty – And What to Do About It”.
There’s more to an employer’s 401(k) responsibilities than selecting and reviewing plan investment funds. Remember, as the “Plan Administrator,” the buck stops with the employer when it comes to all compliance matters. So, consider IRS guidance as a starting point, but do not hesitate to address any resulting concerns with your plan’s investment advisor, third party administrator, accountant or ERISA lawyer.
Andrew S. Williams
There are judicial decisions holding that a business owner can be personally responsible when the owner has control over company finances and exercises such authority by paying company creditors instead of making required payments to a welfare benefit plan. But a recent decision of the U.S. Court of Appeals for the Ninth Circuit holds that an employer does not become an ERISA fiduciary merely because it breaks its contractual obligations to make welfare plan contributions (see Glazing Health & Welfare Fund v. Lamek).
In the Lamek decision, the Court considered whether or not unpaid contributions could be considered “plan assets” so that parties in control of those assets would be deemed fiduciaries to the plan. The Court found that:
…even an ERISA plan that treats unpaid contributions as plan assets does not make an employer a fiduciary with respect to those owed funds.
This is good news to plan sponsors, especially those who contribute to union sponsored health and welfare funds. Under Lamek, parties to an ERISA plan cannot by contract designate unpaid contributions as “plan assets” in order to make employers plan fiduciaries. However, not all circuit courts agree with the Ninth Circuit and employers in the Second Circuit (New York, Connecticut and Vermont) and the Eleventh Circuit (Alabama, Georgia and Florida) should be wary of collective bargaining agreements that define unpaid employer contributions as plan assets. Other circuit courts such as the Court of Appeals for the Seventh Circuit in Chicago have not yet ruled on this issue. It may eventually take a Supreme Court decision to resolve the conflict among the circuit courts. Until then, there will be no nationwide judicial resolution of this matter.
The Ninth Circuit decision is a favorable development for employers in California and the other West Coast states included in the Ninth Circuit. For the rest of the country, it’s wait-and-see what happens in the circuit courts – or the U.S. Supreme Court.
Andrew S. Williams
Your retirement plan may have an outside third party administrator (TPA) to assist with plan administration. However, a TPA typically is not a fiduciary to the plan and does not act as “plan administrator” (that’s usually the employer itself as provided in a typical TPA services agreement). This leaves the employer ultimately responsible for the plan’s compliance with all applicable legal requirements. So, even if your TPA makes a mistake, the employer is likely on the hook for any resulting liability because the TPA’s services agreement usually imposes damage limits and employer indemnities that protect the TPA.
An independent service provider (maybe your current TPA) can be engaged to act as the “plan administrator” pursuant to Section 3(16) of ERISA. As a 3(16) fiduciary, the service provider assumes fiduciary responsibilities in administering the plan. The 3(16) fiduciary is responsible for all compliance activities, including the following:
- Determining employee eligibility
- Retaining plan service providers
- Preparing and filing annual reports
- Maintaining fidelity bond coverage for employees who handle plan assets
- Interpreting and applying plan provisions
- Distributing summary plan descriptions and supplements on a timely basis
- Preparing an investment policy statement
- Administration of participant loans, hardship withdrawals, as well as benefit computations and distributions
- Distributing participant notes such as summary annual reports and, as applicable, annual qualified default investment alternative (QDIA) notices, safe harbor notices and investment fee disclosures
- Reviewing and acting on reports of plan investment advisors and any private auditor
- Reviewing and implementing qualified domestic relations orders (QDROs)
Are your bases covered on all of the above? If your TPA is not involved in these compliance functions, are they adequately performed by your own employees? If not, your plan may need help from an outside service provider or even a 3(16) fiduciary.
Engaging a competent 3(16) fiduciary should provide any retirement plan the maximum compliance protection available. Just bear in mind that the employer still retains a legal obligation to prudently select the 3(16) fiduciary and to monitor the fiduciary’s ongoing performance of its duties.
Andrew S. Williams
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.
Andrew S. Williams
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?