Compliance May 15, 2014

Defendants in One Church Plan Case Get a Victory

The defendants in one of the church plan court cases have had their status confirmed by a federal court.
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U.S. District Judge Avern Cohn of the U.S. District Court for the Eastern District of Michigan found the retirement plans of Ascension Health Alliance entities qualify for “church plan” status under the Employee Retirement Income Security Act (ERISA). In contrast to two other rulings handed down so far among six cases (see “Sixth Church Plan Challenge Added to List”), Cohn held a plan need not be established by a church in order to qualify as a church plan.

Cohn also held that the plans, as a consequence of the management structure of Ascension Health Alliance, are church plans because Ascension Health Alliance is controlled by and associated with the Roman Catholic Church. He dismissed lead plaintiff Marilyn Overall’s ERISA claims. “This conclusion is consistent with ERISA’s statutory language, legislative history and relevant agency interpretations. Because they are church plans and exempt from ERISA, plaintiff’s ERISA claims fail to state a viable claim for relief,” Cohn wrote in his opinion.

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Cohn addressed recent court rulings contrary to his. In Rollins v. Dignity Health, the district court concluded that only a church can establish a “church plan” under ERISA Section 3(33), 29 U.S.C. Section 1002(33). That court determined that the Internal Revenue Service (IRS) and prior cases erred in reading that text of the statute. Similarly, in Kaplan v. Saint Peter’s Healthcare, the district court held that only a church may establish a church plan (see “Another Court Rejects Pension’s ‘Church Plan’ Status”).

Cohn said those courts wrongly interpreted the interplay of the subsections of ERISA Section 3(33). Sub section (A) says, “The term ‘church plan’ means a plan established and maintained . . . for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of title 26.” Cohn noted that this section clearly provides that a plan established and maintained by a church is a church plan.

Subsection (C) says church plan "includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church . . . if such organization is controlled by or associated with a church . . .."

“In Dignity Health and Saint Peters, the district courts interpreted section (A) as a gatekeeper of section (C),” Cohn explained. “That is, these courts concluded that section (A) sets the standard—only a church can establish a church plan—and section (C) only describes how a plan under section (A) can be maintained. The problem with this interpretation is that section (C) uses the word ‘includes’ not ‘subject to.’ Section (C) says that ‘A plan established and maintained . . . by a church includes a plan [meeting the requirements of section (C)(I)]. As Ascension puts it ‘under the rules of grammar and logic, A is not a ‘gatekeeper’ to C; rather if A is exempt and A includes C, then C is also exempt.’”

Cohn continued: “This is how the Court interprets section (C). In other words, a church plan may include a plan that meets the requirements of section (C). Section (C) requires that the plan maintained by an organization that is either (1) controlled by or (2) associated with a church or convention of churches. To find otherwise would render section (C) meaningless.”

He also noted the phrase “associated with a church or convention or association of churches” means an organization that “shares common religious bonds and convictions with that church or convention or association of churches,” and Section D of the statute provides the church an opportunity to cure any failure to meet that requirement.

In his opinion, Cohn gave deference to Congressional notes from before the amended definition of church plan was codified in ERISA Section 3(33), including a citation from “Senator Talmadge” noting organizations that care for the sick and needy or provide instruction can be essential to a church's mission and should fall under the exemption, and a citation from “Senator Javits” noting exemption is being expanded to schools and other church-related institutions.

Also important, according to Cohn, is that the "church plan" exemption is codified in parallel form in the Internal Revenue Code (IRC) at Section 414(e). He cited an IRS General Counsel Memo in which the agency recognized that its "worshipful activity" requirement had been legislatively overruled and that the "church plan" exemption now includes plans sponsored by nonprofit organizations that are "controlled by or associated with a church," which the IRS memorandum applied to include hospitals operated by Roman Catholic religious orders. “The IRS has followed this rule for more than 30 years,” Cohn wrote (see “Church Plan Lawsuits Could Reverse 30 Years of Precedent”).

As evidence that Ascension was controlled or associated with a church, Cohn noted first that Ascension Health Ministries is an organization within the Roman Catholic Church, created by the Roman Catholic Church's canon law as a "Public Juridic Person"—an organization afforded the right to own and operate real and personal property under the auspices of the Church. In addition, currently five Catholic religious orders are the "Participating Entities" that appoint the members of Ascension Health Ministries. These members have religious obligations imposed by the canonical statutes to maintain the Roman Catholic Church's control over Ascension and its system entities, so that Ascension and the system entities may remain a healing ministry carrying out the apostolic works of the Roman Catholic Church. Finally, the articles of incorporation and bylaws of each entity affirm its obligation to act in conformity with the teachings of the Roman Catholic Church, including the Ethical and Religious Directives for Catholic Health Care Services.

In the lawsuit, Overall submits claims for equitable relief under ERISA Section 502(a)(3) against Ascension, and all of its retirement plans, for failure to provide notice of reduction in benefit accruals under ERISA Section 204(h), for violation of reporting and disclosure provisions under ERISA, for failure to provide minimum funding under ERISA, for failure to establish the plans pursuant to a written instrument meeting the requirements of ERISA Section 402, and for failure to establish a trust meeting the requirements of ERISA Section 403. She also submits a claim for a civil money penalty under ERISA Section 502(a)(1)(A) against Ascension Health for breach of fiduciary duty against all defendants.

The IRS issued a private letter ruling granting Ascension church plan status in July 1993.

Contingent on the court finding Ascension did qualify for church-plan status—which it did—Overall also filed a claim for declaratory relief that the church plan exemption violates the Establishment Clause of the First Amendment of the Constitution. But, Cohn found no evidence to suggest Overall would have a better funded pension if the court were to strike down the church plan exemption provisions of ERISA, or the exemption as applied to Ascension, so Overall failed to show she has suffered a concrete harm, or that the relief she seeks would redress an alleged injury. He dismissed the claim for lack of standing.

The court’s opinion in Overall v. Ascension is here.

Products May 15, 2014

Invesco Slices Stable Value for Easy Comparison

The SVAnalyzer was created to evaluate 10 critical factors that can make it difficult to compare one stable value investment with another.
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Stable value investments have a few characteristics in common, and quite a few that vary, depending on the provider and the underlying investments, says Jeff Hemker, national sales director of retirement for Invesco.

“Stable value really is the man behind the curtain,” Hemker tells PLANADVISER. The investment gives you a book rate of return, a stable rate of return, but it’s not at all that simple behind the scenes. It can be difficult to compare one stable value investment with another, according to Hemker, because they are all structured differently. Variables include the number of providers, duration and credit quality of underlying instruments, and risk-adjusted performance, among others.

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The truth is that stable value investments are relatively complex vehicles, Hemker says, and when plan sponsors look for information, the requests for proposal (RFP) on stable value investments are very detailed and very in-depth—a process that plan sponsors in the large-plan market can conduct without too much difficulty.

But small and midsize plans are not always able to turn to a consultant to conduct an RFP, and it is this market that Invesco had in mind as the user of the SVAnalyzer, a tool that simplifies the comparison process across a range of characteristics. 

Plan sponsors may have needs that differ. Invesco came up with 10 areas around stable value funds that are very important for plan sponsors and plan advisers to understand, Hemker explains.

The adviser or plan sponsor obtains the most recent quarter-end SVAnalyzer tool and in-depth request for information (RFI), which is then submitted to stable value managers for completion.

The RFI is a shorter version of the RFP, Hemker explains, with fewer questions and less information. It is not a formal proposal, but is used to answer some questions. “It’s more of a data-gathering than an in-depth process,” he says.

The RFI responses are easy to upload into the platform, which generates a side-by-side comparison of stable value managers and products, ranking capabilities across 10 categories. Each characteristic can be weighted according to the user’s own ranking, given its importance. 

Customized Rankings

The default weights each category at 10%, but something that is more important to the plan sponsor could be weighted at 30% or 40%, Hemker explains. “What we look at is the needs of the fiduciary or plan sponsor. Plans may have different needs.”

Credit quality, duration and expense are factors that plans might rank very differently in importance. Invesco’s tool creates a report that is very specific to the needs of the plan sponsor and plan participants, Hemker says.

Experience and expertise of the manager and team can be critical. When selecting a stable value investment, important considerations are tenure, scale and reputation as a stable value provider, not to mention the firm’s commitment to their stable value line of business. Invesco suggests plan sponsors ask if the manager and team have the expertise in stable value investments and risk management, operations and servicing.

Questions to ask when evaluating the stable value pooled fund expertise include:

  • Does the manager avoid investor concentration of large plans?
  • Does the manager demonstrate a willingness to close a fund if needed to avoid dilution?
  • Does the manager prohibit the use of pooled funds as a liquidity buffer for separate account clients?

Consider the nature of the investment portfolio’s composition, duration and credit quality of underlying investments, Invesco advises. If the investment concentration, duration and credit quality parameters have changed notably over time, find out why.

Consider whether the strategy involves external managers. If so, determine which managers are used and how they are selected and monitored. Consider the criteria used to select wrap providers, as well as the funds’ parameters for wrap providers. Other questions include:

  • What are the current allocations to each wrap provider and the provider credit ratings?
  • Is the wrap provider mix optimized in the best interest of investors?
  • Does provider use global wrap contracts or individual wrap contracts for specific pools of assets?
  • Has the manager experienced any difficulties accessing wrap capacity in the past five years? If so, how has the situation been addressed?

Other manager characteristics that can be evaluated are credit rating competitiveness and consistency; strength and consistency of market-to-book value ratio; reasonableness and transparency of underlying fees; plan sponsor/participant access to product information; and portability and product termination provisions.

No RFP Needed

The analyzer allows an adviser or plan sponsor to avoid what Hemker describes as the “whole massive RFP thing. This is something I can take to virtually any size plan, do an analysis of their stable value option, and I can do it annually,” he says. The tool is free for users, part of Invesco’s value-first proposition in providing tools, education and support for defined contribution investment only (DCIO) clients, Hemker says.

From a fiduciary standpoint, a plan adviser needs to make sure what’s going on. Investments get quarterly updates, Hemker points out, to see if anything has changed. “Stable value investments are not checked as often, but a lot of things go on behind the scenes,” he says, “and as we saw in 2008 and 2009, they weren’t all happy things.”

The tool gives a plan adviser another way to show value and demonstrate that they do ongoing due diligence from a fiduciary standpoint. “Not on a cursory basis,” Hemker emphasizes, “but with a process and a procedure and documentation. Those are the three things every fiduciary should be saying all day long.”

For the plan sponsor, the educational value is significant, Hemker says. “Plan sponsors don’t always truly understand stable value. The tool has glossary terms that explain why these things are important to understand,” he explains.

Any jumbo plan does similar comparisons and analysis of stable value investments, most likely using a consultant, according to Hemker. The Invesco tool may not be as in-depth, he says, but in the small and midsize market, stable value investments are less customized. It provides an efficient way for an adviser to help clients maintain fiduciary responsibility in choosing plan investment options, and the report can be customized with the adviser’s company name and logo.

 “What goes on behind the curtain is the question,” Hemker says. Credit quality, duration and expense are factors that plans might rank very differently in importance to different plan sponsors. Invesco’s tool creates a report that is very flexible and specific to the needs of the plan sponsor and plan participants, Hemker says. “That’s what we wanted to build in the flexibility. How it’s used and presented is the key thing. I don’t know what is important for you or your participants.”

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