Compliance August 12, 2014

Court Says RBC Executive Compensation Plan Is ERISA Plan

A federal court has found a wealth accumulation plan (WAP) offered to executives of RBC Capital Markets Corporation is a “pension plan” under the Employee Retirement Income Security Act (ERISA).
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The 5th U.S. Circuit Court of Appeals noted that a “pension plan” as defined by ERISA is “any plan, fund, or program . . . maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan…” The appellate court disagreed with RBC’s argument that the two conditions must be taken together and said they are two separate conditions for determining whether a plan is a “pension plan” under ERISA.

The court agreed that the express purpose of the plan was not to provide retirement income, but found in the beginning of the WAP document, the statement of purpose refers to the WAP as a “deferred compensation plan” and explains that, by design, employees have the option “to defer receipt of a portion of their compensation to be earned with respect to the upcoming Plan Year.” In addition, later sections of the WAP contain provisions for both Voluntary Deferred Compensation and Mandatory Deferred Compensation. “A deferral of income therefore ‘ensues from’ (or, ‘arises as an effect of’) the express terms of the WAP,” the court concluded in its opinion.

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The court also found the express terms of the WAP contemplate employees deferring income “to the termination of covered employment or beyond.” The vesting sections explain that, upon separation, unvested amounts vest immediately. Also, the distribution sections mention available forms of distributions if a distribution is made due to separation.

For these reasons, the court determined the plan fell into the second condition for a plan to be a “pension plan” under ERISA. The court refused to consider RBC’s citing of a previous court case that applied a conditional clause found in another section of ERISA about pay being systematically deferred, noting that the plan in that case was a bonus plan and the WAP was clearly not a bonus plan.

The case was brought by former plan participants who had portions of their WAP accounts forfeited when they left their jobs at RBC. The plaintiffs alleged the forfeitures were violations of ERISA. But, a federal district court ruled that the plan was not an ERISA plan because its purpose was not to provide retirement income.

RBC had argued that, regardless of whether the WAP is a “pension plan” under ERISA, it is a “top hat” plan—a plan that is (1) unfunded and (2) maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees”—thereby making it exempt from the fiduciary duties imposed by ERISA. The district court did not address this argument.

However, the 5th Circuit found the resolution of the dispute over the “top hat” exemption—now that it determined the plan is a “pension plan” under ERISA—may require factual determinations regarding, for example, selectivity and high compensation. The appellate court remanded the case back to the district court to decide this issue.

The 5th Circuit’s opinion in Tolbert v. RBC Capital Markets Corporation is here.

Data & Research August 12, 2014

Contribution Rate Inertia Poses Major Problems

Thirty-six percent of Americans currently contributing to an employer-sponsored retirement plan have never increased the percentage of salary they defer into retirement accounts.
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This is according to a recent survey from TIAA-CREF conducted among a national sample of U.S. retirement plan participants. The survey results show an additional 26% of current plan participants have not increased their defined contribution retirement account deferral in at least a year. Even employees who received a raise showed reluctance to increase salary deferrals—with 57% of workers saying they did not increase their plan contribution after their last raise.

Considering that 44% of American employees save 10% or less of their annual income each year, these findings indicate that many employees have the opportunity to improve their retirement readiness by increasing their plan contributions regularly, TIAA-CREF says.

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Further exacerbating the deferral problem, TIAA-CREF says, is the fact that relatively few plans have adopted automatic enrollment. A full 53% of employees with access to workplace retirement plans say they were not automatically enrolled, according to the survey. As TIAA-CREF explains, those not automatically enrolled lost precious time saving for retirement, with 37% of respondents noting they waited six months or longer to enroll on their own, and 24% of employees waited a year or more (see “Auto-Enrollment Can Help Solve Balance Disparity”).

A commonly cited reason for not increasing contributions after a raise is the need to pay for short-term living expenses. A more encouraging sign is that 25% of respondents say they did not increase their contributions after their last raise because they were already contributing to their plan at or near the legal limit. TIAA-CREF says men (33%) were nearly twice as likely as women (17%) to be contributing the maximum amount allowed.

Another issue is that participants are not taking the steps necessary to make sure they have the right investments at each stage of their lives. Twenty-five percent of workers have never made changes to how their money is invested, and an additional 28% have not made changes to how their retirement savings are invested in more than one year.

Thirty-four percent of people age 55 or older say they have never made a change to the way their money is invested, meaning they are less likely to have taken the steps necessary to transition from saving for retirement to creating income for a lifetime. Changing markets also necessitates consistent asset rebalancing to ensure portfolios are maintaining appropriate equity and fixed-income exposures (see “Equity Overweighting Likely As 401(k)s See Record Balances”).  

“Plan sponsors should be proactively looking for opportunities to engage directly with employees about their retirement savings, especially during pivotal times such as benefits enrollment season and after an employee receives a raise,” explains Teresa Hassara, executive vice president of TIAA-CREF’s institutional business. “Reaching employees at the right time with the right messaging can have a profound effect on retirement readiness.”

An executive summary of the research, which highlights other important statistics around auto-enrollment and auto-escalation, is available here. TIAA-CREF worked with an independent research firm, KRC Research, on the poll of 1,000 adults nationwide.

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