Perspectives March 26, 2008

Perspective: Emerging Challenges for Plan Management

There’s a growing recognition that retirement plan managers are under the gun because of new legislation as well as increases in employee mobility and auto-enrollment.
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But over the past year, another negative force has begun, albeit insidiously, to impact the industry.
The fallout from the sub-prime mortgage crisis is taking its toll on retirement plans. Results of the 2007 survey[1] indicates that workers are more concerned about falling home prices, rising debt, and keeping up with monthly expenses than with saving for retirement. As fewer employees participate (or start saving at a lower rate), average plan balances drop, and servicing costs increase.
The survey also reveals that these employees rely more on their plan sponsors and administrators for information and decision-making help than on any other source. That makes a thorough understanding of the fiduciary risks involved, particularly as they relate to former employees, all the more important.
In addition, when terminated employees leave money in a qualified retirement plan, they retain the same legal rights as active participants. That’s not necessarily a big issue when the number of ex-employees is small. But those inactive accounts often become a substantial portion of a plan’s participant base.
The documents inactive participants are entitled to include Summary Plan Descriptions (SPD), material modifications to the SPD, the Summary Annual Report, notice of all IRS filings, participant statements, and if requested, the Plan document and the entire Form 5500. Of course, every investment and provider change, including fund replacements, additions, or deletions, must also be communicated.

Successfully managing liability exposure during a provider change is especially important. Complete communication regarding such changes, including the black-out notices that are distributed to active employees, is essential. In recognition of the problem, the Department of Labor sponsors a national campaign to educate employers and service providers about fiduciary responsibilities. The latest initiative in the series, “Getting It Right – Know Your Fiduciary Responsibilities,” available as a Webcast (PPA Update Webcast), deals with some of the common problems found by the Employee Benefit Security Administration (EBSA).

In addition to the communication challenges posed by ex-employees, there is a real financial downside when the ratio of former to current employees increases. Those costs associated with servicing inactive accounts add up. When they are properly addressed, through roll-outs and rollovers, they can quickly turn into substantial savings in plan administration costs.

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One final word of warning – while difficulties in locating ex-employees mean extra work and additional costs, a complete inability to find those workers can lead to potential legal issues. Terminated workers with a grudge against former employers have been known to base law suits on the non-receipt of plan information.

Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Spencerjoined RolloverSystems in 2007. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual from 1997 to 2007, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.
© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be construed with investment advice.

[1]Fifth-annual Mercer Workplace SurveyTM
Compliance March 26, 2008

Fiduciaries May Have Disclosure Mandate Not Specified in Law

Federal regulators have contended that fiduciaries may still be legally required to disclose plan fees such as revenue sharing even if such a mandate is not explicit in federal benefits law.
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That contention was contained in arguments presented to a federal appellate court by the U.S. Department of Labor (DoL) as part of an ongoing participant battle over revenue sharing fee disclosures. DoL lawyers filed a friend of the court legal brief with the 7th U.S. Circuit Court of Appeals asking the court to throw out a June 2007 ruling by U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin dismissing a participant excessive fee suit against Deere & Co., Fidelity Management Trust Company, and Fidelity Management and Research Company.

Shabaz asserted the defendants had followed current laws and regulations regarding retirement plan fee disclosures. Fidelity is trustee and recordkeeper for the farm equipment maker’s 401(k) plans (See Deere and Fidelity Fee Lawsuit Thrown Out http://www.planadviser.com/compliance/article.php/857).

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Among other issues, the DoL lawyers argued in their appellate brief, Shabaz had disregarded DoL regulations about the applicability of the Employee Retirement Income Security Act (ERISA)’s 404(c) safe harbor provision.

“In the Secretary’s view, the fiduciary duties of prudence and loyalty can encompass a duty to disclose information…,” the DoL brief contended. “Nothing in the text of (ERISA) or the regulations governing annual reports (Forms 5500) and summary plan descriptions indicates that those requirements were intended to be the exclusive disclosure obligations under ERISA, or purport to qualify in any way the general fiduciary obligations of prudence and loyalty….Thus, where the Act and regulations promulgated by the department do not expressly address whether a particular type of disclosure is required or what form a disclosure should take, the general fiduciary duty of prudence and loyalty applies and may, depending on the facts and circumstances of the case, require that a disclosure be made.”

The plaintiffs suit charged that Deere did not understand the fees being charged on its investment options, failed to implement any process for ensuring the reasonableness of the plans’ fees and expenses or to negotiate over the fees, and paid considerably more than was necessary given the size of the plan and the availability of investment alternatives.

The DoL document pointed out that a number of federal appellate courts have previously ruled that in certain circumstances, a fiduciary has an obligation to accurately convey material information to beneficiaries, including material information that the beneficiary did not specifically request. This obligation is contained in the common law of trusts, the government lawyers said.

A DoL Clarification

Despite their extensive arguments in favor of an appellate court reversal of the lower court decision, the DoL lawyers clarified that they were not necessarily pushing for a victory for the Deere plaintiffs on the merits of their suit.

“This is not to say, however, that the Secretary agrees with plaintiffs’ more sweeping suggestions that the fiduciaries of participant-directed plans must always, or even usually, disclose revenue sharing arrangements as a matter of general fiduciary principles,” the DoL brief asserted. “Indeed, we are skeptical that, absent any misrepresentations, ERISA’s duties of prudence and loyalty would have required disclosure to plan participants of revenue sharing among Fidelity affiliates.”

The friend of the court brief was filed in an effort to foreclose the appellate court’s sanctioning of what the DoL said was an overbroad rejection of “any possible fiduciary duty to disclose.”

The case is Hecker v. Deere & Co., 7th Cir., No. 07-3605. The DoL brief can be found here. The Shabaz ruling is available here.

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