Compliance September 12, 2011

Law Firm Did Not Violate ERISA Anti-Cutback Rule

Paying a lump-sum distribution from a cash balance plan that was half of what a participant would have received if the plan had not been terminated was not a violation of the Employee Retirement Income Security Act’s (ERISA) anti-cutback rule, a court has ruled. 
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The U.S. District Court for the District of Columba ruled concluded the law firm Feder Semo & Bard P.C. did not violate the anti-cutback rule when it terminated its cash balance plan and paid former law partner Denise M. Clark a lump-sum distribution that was approximately half of the present value of her straight life annuity. The court said Clark’s claim did not involve the type of benefit reduction the anti-cutback rule protects.

In her statement detailing her claim, Clark contended that Feder Semo improperly grouped her for purposes of her account credit, thereby understating her retirement benefits by 41%. She also claimed that Feder Semo violated ERISA’s anti-cutback rule, 29 U.S.C. § 1054(g), when it proportionately reduced the aggregate amount distributed to plan participants to match the plan’s assets.

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Additionally, she contended that defendants violated ERISA’s disclosure requirements by failing to disclose the consequences of a plan termination and the plan’s lack of insurance. She also argued that the retirement plan’s fiduciaries failed to use a reasonable actuarial assumption for interest that caused the plan to be underfunded. And, she contends that the retirement plan’s fiduciaries failed to comply with the distribution restrictions in Treas. Reg. 1.401(a)(4)-5 with the effect of reducing the benefits received by most plan participants.

While the court ruled against Clark on her anti-cutback claim, it said she could continue with her claim alleging she was improperly grouped with a class of employees that received smaller percentage credits from the plan. However, the court said Clark had to decide whether to pursue this claim under ERISA Section 502(a)(1)(B) or Section 502(a)(3).

The court rejected Feder Semo's argument that Clark could not pursue this claim under Section 502(a)(3) because she was seeking monetary relief for a fiduciary breach, not “appropriate equitable relief.”

Clark was an attorney at Feder Semo for approximately 10 years. While working for the firm, she participated in the firm's cash balance plan, which was terminated in 2005.

Clark was given the option of receiving her benefits in the form of a straight life annuity commencing at her normal retirement date, or as a lump-sum distribution. Feder Semo determined although the lump-sum actuarial equivalent of Clark's straight life annuity would be $312,381, she would be paid only $166,542 because the plan did not have enough assets to cover lump-sum distribution requests. Clark elected to receive her benefits as a lump sum, but reserved the right to pursue any difference between the distribution and the full value of her accrued benefit.

In 2007, Clark sued the firm. Among other things, Clark argued she was improperly classified in “Group C” rather than “Group B,” which resulted in the receipt of smaller percentage credits from the plan. Clark further alleged that Feder Semo violated the anti-cutback rule by paying only 53% of the lump-sum actuarial equivalent of her straight life annuity.

Clark also contended Feder Semo violated ERISA's disclosure requirements by failing to disclose in the SPD the consequences of a plan termination, among other things.

In addition, Clark claimed Feder Semo breached its ERISA fiduciary duties by using actuarial assumptions that overlooked the fact that most plan participants opted to receive their benefits in lump-sum payouts rather than as straight life annuities.

In a previous decision, the court ruled for the firm on the anti-cutback claim. The court, however, revived the anti-cutback claim in September 2010.

Once again ruling for Feder Semo on Clark's anti-cutback claim, the court said it was persuaded by the firm's argument that Clark received less than the full amount of her accrued benefit because of the plan's underfunding and the plan's termination provision, which permitted the pro rata distribution of available benefits. The court said Clark could not point to any plan terms that were changed as a result of the plan termination.

Moreover, Clark did not cite any cases in which the termination of an underfunded plan triggers the anti-cutback rule, the court added.

The court also ruled Clark could continue with her “improper grouping” claim. While Clark brought this claim under ERISA Section 502(a)(1)(B) against the plan and under ERISA Section 502(a)(3) against the plan's fiduciaries for breach of fiduciary duty, the court said Clark could not move forward under both sections.

The court disagreed with Clark that she should be able to pursue her claim under both sections because, due to the lack of plan assets, she would be left without an adequate remedy under Section 502(a)(1)(B).
 

However, the court also was not swayed by Feder Semo's argument that Clark could not proceed under Section 502(a)(3) because she was seeking to impose liability for money damages. The court said that under Amara, certain forms of monetary relief, such as “surcharge,” may qualify as traditional equitable relief.

Turning to Clark's claim of a deficient SPD, the court said Clark could proceed against the firm on her own behalf under Section 502(a)(3), but she could not proceed against the plan under Section 502(a)(1)(B), based on Amara's finding that an SPD is not part of a plan. Clark also could not proceed with this claim on behalf of the plan under Section 502(a)(2), as the causal link between the alleged breach and the loss to the plan was “too attenuated,” the court added.

In addition, the court said Clark could pursue her claim that Feder Semo breached its fiduciary duties by using improper actuarial and interest rate assumptions to fund the plan, as genuine disputed issues of fact remained.

Finally, the court ruled for Feder Semo on Clark's claim that the fiduciaries impermissibly permitted distributions to the firm's founder and his wife.

The case is Clark v. Feder Semo Bard P.C., D.D.C., No.: 107-cv-00470-JDB. 
 

In Practice September 12, 2011

PANC 2011: The Commoditization of the Retirement Plan Adviser

With fee disclosure rules leading many to predict fee compression for advisers, how can you justify charging more than the average? What does it take to become “the premium retirement plan adviser”?
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On day one of the PLANADVISER National Conference (PANC) in Orlando, three panelists discussed how retirement plan advisers can continue to be profitable even as fee compression becomes more and more of a reality.   

Asked whether a focus on retirement plans can be a competitive advantage anymore, Bill Chetney, Executive Vice President, LPL Retirement Partners, acknowledged that there are many advisers touching retirement plans; about half of all advisers at LPL have a retirement plan on the books. However, he also said that less than 5% have five retirement plans as clients and less than 2% have ten plans. So, he said, it is still a very specialized field and the speciailzation is valuable to plan sponsor clients.

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Joseph Lee, Head of Defined Contribution Advisor-sold Distribution at BlackRock, echoed this sentiment: “We’re the experts. It used to be okay to be ‘proficient’ in defined contribution, but that’s no longer the case.  The trend towards specialization is going to continue; that’s why it’s not a commodity.”

And J. Fielding Miller, Chief Executive Office at CAPTRUST Financial Advisors, said this is “as good of a bull market as you can have in terms of being a retirement adviser.” Miller said it’s a huge advantage to be specialized in this field, especially in the mid-sized market where more plan sponsors are going through a formal RFP process than ever before. This is creating a huge demand for specialists, he said, and non-specialists can’t fake it anymore.

None of the advisers in attendance at PANC would argue that the need for retirement specialists exists– the question then becomes how can advisers position themselves to prove their value proposition is worth more than the “lowball” pricing?

Lee pointed out that a lot of it is perception. “[Plan sponsors] think it’s been free. Once they become aware that there is a price [for retirement plan administration and services], they’ll look more closely at what services are being given to them. They’ll be able to compare services. And you can offer measurable statistics, success rates, and results.”

The battle for advisers in pricing is in the pitch, said Miller. If people are lowballing the fee, “you don’t want to get knocked out before you get to the finals,” he said, adding that you have to get the value on the table early.

And it’s more than just investment due diligence, Chetney added.  That used to be the sole topic of conversation, but a better approach would be to present yourself as the intermediary between the plan and all the providers–ERISA counsel, investment managers, etc.–“be the interface to create efficiencies; offer yourself as a comprehensive solution,” he said.

In other words, it’s not about selling a product, but solving a problem. Miller said advisers should shift the focal point of the conversation with plan sponsors away from quarterly performance reports and more to plan outcomes. The investment component will still be at the center, but it will get more sophisticated as topics such as retirement income and target-date funds become more mainstream; investment due diligence will require a lot more work, which is more likely to lead to "profitability compression" rather than fee compression. 

Miller also pointed out one possible pitfall; “If you’re doing your job really well and things are running really smoothly, you’ll have to remind the client that it didn’t happen by luck. You might want to go in there and re-sell yourself and re-show the value, in case someone comes in there with a lowball rate.” An adviser has to find the “happy medium” between staying on the sponsor’s radar and not being a nuisance.   

However, Chetney said existing plans don’t pose as much of a problem as getting new clients can be. Existing clients tend to know what value an adviser is adding, whereas a prospective client has no idea.

Using commodities, not being one  

Miller said there is always a level of commoditization in every industry. “When a tool is developed–that has now become a commodity. You can’t blow past that. So you need to make it more anecdotal. Proactively going out, doing real research, and not just relying on the commodity as a tool.  Our best advisers get their stories out,” he said.

And what if your margins aren’t high enough?  Fees are too low and costs are too high? What should be done then?

Fielding had a one-word answer for this: grow. “Grab market share. If you’re thinking about specialization, this is the time to do it. That’s an easy answer, but every time you bring a new account in, the suns starts shining, the birds are singing–it just gets better.”

Lee said it’s important to analyze how much time you spend servicing existing plans and going after new ones.  “If you have a lot of plans, you have some pricing power. Look at your model – how you service and how you chase; find the things that are driving revenue and get as many assets under management as you can.”

As for closing advice for adviser conference attendees; what’s the next big selling point for retirement plan advisers?

Chetney believes it’s delivering better education and offering more conversations with employees. “Talk to people about their future–the lowballers are not willing to do that– and you are, so you can charge for that.”

Miller said his selling point is his talent.  “We invest our money in people. Sixty-five percent of our revenue goes to compensation and benefits. We have a 20% profit margin, 15% for overhead. Investing in people, that’s our differentiator.”

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