IMHO December 13, 2010

IMHO: The Measure of the Plan

Not so long ago, plan sponsors gauged the success of their defined contribution offerings by a single metric: participation rate.   
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It’s not that they didn’t pay attention to other criteria, but participation rate is objective, easy to calculate, and, certainly for a voluntary savings program, it’s not an inappropriate gauge of the program’s perceived value. 

Over the past couple of years, a growing number of plan providers have brought to market a new set of plan diagnostic measures, measures that not only show individual and plan balances, but also project those balances out to an estimate of what those balances will provide in retirement income, or presented as a measure of retirement readiness—compared with an established level of income replacement. 

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It’s not a new idea, of course.  Heck, there has even been legislation introduced to place—on participant statements—a projection as to what the participant’s monthly retirement income would be.  Meanwhile, despite long-standing fears that participants, confronted with the stark realities of their savings situation, would abandon the cause, the realities seem to be quite different.  One might well expect the providers touting such wares to extol the virtues of the approach (and they do), but I have yet to meet a plan sponsor who had adopted these enhanced gauges of retirement readiness who said it had had a negative impact. 

That said, there are still many plan sponsors that have not yet taken that step.  At the PLANSPONSOR National Conference this past June, I asked the audience of some 200-plus plan sponsors if they had established any kind of target replacement ratio as part of their program design.  While the survey sampling was admittedly unscientific (though I would suspect skewered toward more-active, involved, engaged plan sponsors) a whopping 78% said “no.”  Just one in 10 said yes, while the remaining 12% responded “not explicitly, but it’s in the back of our minds.” (1)

Based on that result, I wasn’t too surprised that just 28% said their participants will be able to retire comfortably, while 43% said “maybe” (the polling was anonymous). (2)

Now, most of us have a hard enough time answering that comfortable retirement question for our individual situation, much less an entire employee populationbut I was struck by how many of those in that particular attendance didn’t even seem to have a rough notion in the back of their mind.  As I explored that poll result with the audience, a couple of themes emerged: First, plan sponsors only know so much about an individual participant’s lifestyle, sources of income, and/or plans for retirement, and generally don’t have the time or inclination to know any of that, anyway.  Second, these are voluntary programs, and while plan sponsors take seriously their responsibility to see that they are well, reasonably, and efficiently run, most don’t see it as their responsibility to make sure that participants are doing what they need to do (in fairness, most plan sponsors have their hands full just trying to make sure that THEY are doing what they need to do).

In casual conversations with plan sponsors about these types of programs and their reluctance to embrace them, it isn’t the cost or complexity that holds them back, nor is it concern about the response of newly enlightened participant-savers.  Rather, it’s an underlying concern that, once those retirement replacement goals have been established at a plan committee level, and once those readiness results are presented in black and white (or multi-color) to plan fiduciaries, they could be held accountable for the results and/or shortfalls.  Ignorance, to some it seems, is not only bliss, it’s a litigation shield.

Personally, I think plan sponsors already carry burdens and responsibilities beyond what many, perhaps most, are compensated for (and some beyond what they are aware).  That said, it seems to me that presenting plan participants with specific information about their retirement savings situation, coupled with the kinds of diagnostic tools that accompany most of these offerings (not to mention the counsel of a trusted adviser) not only serves to help them make better decisions sooner, it effectively undermines their ability to later turn on the plan fiduciaries and try to hold them accountable for the participant’s results.

Now, some might argue that sponsoring these programs with no specific goal in mind is not much better than participants who save with no goal or focus to those efforts.  Others would go so far as to suggest that failing to administer these programs with those kinds of specific goals in mind runs afoul of ERISA’s fiduciary charge. 

For me, it’s not about measuring your program—it’s about seeing how your program measures up.

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(1) While I don’t have a correlation between the responses and the program designs represented, it seems fair to say that many were in the DC-only camp.

(2) As for the rest of the responses, 16% said “no,” 10% were “not sure,” and 3% said “I’ve no idea.”

 

Compliance December 10, 2010

DoL: Bankruptcy-Appointed Trustee Can Bring ERISA Action

In his second attempt to bring suit against a custodian used by a rogue plan administrator, bankruptcy-appointed trustee John C. McLemore is again getting support from the U.S. Department of Labor.
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Addressing Regions Bank’s attempt to curtail McLemore’s Employee Retirement Income Security Act standing (ERISA) based on a prior court decision that a trustee seeking to exercise powers and fulfill obligations exclusively under the Bankruptcy Code may take action only for the benefit of the bankruptcy estate rather than for the debtor’s former clients, the DoL said in an Amicus Brief. The prior court case did not involve a trustee exercising standing and authority under another federal statute such as ERISA.  

“The clear and unambiguous language of section 502(a) of ERISA, 29 U.S.C. § 1132(a), the provision which grants standing to an ERISA fiduciary to commence an action, contains no such limitation,” the brief says. “Congress has chosen to broadly define who may be a fiduciary in order to maximize the protections afforded under ERISA. Thus, to exclude certain ERISA fiduciaries from their duties, based solely upon their status as bankruptcy trustees, would contravene the plain meaning of the statute and defeat the intent of Congress to protect the interests of participants in employee benefit plans.”  

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In addition, the DoL said Regions attempt to bar the suit by McLemore by use of the in pari delicto defense – an unclean hands doctrine that, where applicable, bars wrongdoers from obtaining recoveries in actions for wrongs for which they have been the perpetrators – is equally unavailing. According to the agency’s Brief, its application in this type of case would be contrary to ERISA, which generally requires fiduciaries to act with complete loyalty and prudence towards plan participants, unqualifiedly confers standing on them to bring suits for fiduciary breach, and specifically directs successor fiduciaries to seek to remedy a prior or co-fiduciary’s breach of fiduciary duty.   

The DoL noted that in its previous decision, the district court concluded that it particularly makes no sense to impose an in pari delicto bar on McLemore as he has committed no wrong, but is seeking to correct a wrong. Moreover, he is suing Regions not on behalf of the debtors or the debtors’ estates, but in a representative capacity as a fiduciary of the ERISA plans, to recover losses to those plans for the benefit of plan participants who were the victims of the debtors’ wrongdoings.   

In its first decision, the district court dismissed multiple ERISA claims for relief brought by McLemore against Regions and Mid-Atlantic Capital Corp, a registered broker-dealer used by 1Point Solutions, on the grounds that neither of the defendants was an ERISA fiduciary. McLemore is appealing that decision.  

1Point Solutions, a Nashville-area benefits management firm faced multiple client lawsuits alleging the loss of funds in employee benefit programs the firm was running. Former 1Point CEO Barry Stokes pled guilty to 29 counts of embezzlement of retirement funds, in addition to several counts of wire fraud, mail fraud, money laundering, and criminal contempt (see Rogue Plan Administrator to Get 14 Years Under Plea Deal).  

The Amicus Brief is here.

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