In Practice January 2, 2015

Nondiscrimination Testing: Good Value Add?

The complexity of testing a plan can be one way to justify higher fees, says an ERISA plan administration business development specialist.
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The subject of fees continues to generate a lot of attention, according to Michael Adamson, an Employee Retirement Income Security Act (ERISA) plan administration business development specialist, consultant and principal at Evergreen Benefit Services LLC.

However, Adamson points out, a greater level of service provided can be a way to illustrate the reasonableness of higher fees. Although some members of the industry may equate reasonable fees with minimal service in order to lower what they charge to plan providers and sponsors, this is wrongheaded, Adamson feels. “Participants need services,” he says, “and the providers—recordkeepers, advisers, third-party administrators [TPAs]—need to charge a certain fee for the services they provide.”

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As long as an adviser charges fees that are commensurate with the level of service, the fees are compliant. “You have to take it on a case-by-case basis,” Adamson says. “Every company is different. Some companies like quarterly service visits to talk about the plan, advice for participants and other services.” Others take a limited approach to providing a retirement plan, so a key part of the fee question will be assessing the service level.

One task Evergreen Benefit Services performs for retirement plans is nondiscrimination testing according to the 410(b) rules of the Internal Revenue Service (IRS). 

Performing nondiscrimination testing on a plan is a complex process, Adamson says. “It’s very involved, with schedules on the Form 5500, and can be straightforward or complicated, depending on the type of plan.” Adamson says his firm tests plan data and gives the plan sponsor a precise description of the tests they performed on the plan in order to be able to draft the report that goes to the Department of Labor (DOL).  

A great deal of detail goes into this task, he says, and it varies depending on the type of compensation and contributions that go into a plan. Profit-sharing in a plan will mean a large amount of mathematical testing, Adamson says, from the sources of money, the amount of salary deferrals, the company match and profit-sharing. “It can get extraordinarily complex,” he say. “How much can you give to various individuals without discriminating against non-highly compensated employees?”

Testing the Data

Among the most complex of plan tests is the average benefits test. Adamson says the data must pass certain tests, and the plan sponsor may have to make adjustments to the contributions in the plan. “So you test data using all the allowable methods permitted by the IRS,” he says, “and that’s when you get into a lot of mathematical calculations. You are comparing the amount of contributions you’re contributing to non-highly compensated versus the highly compensated employees. It’s volumes of mathematical information.” 

Even safe harbor 401(k) plans that are not subject to nondiscrimination tests must still be tested for 410(b) coverage, Adamson says, and can require lengthy and time-consuming testing.

The work of nondiscrimination testing can be set forth on the invoice so plan sponsors understand what goes into it. The task will require different fees depending on the type of plan, Adamson says, whether safe harbor or profit-sharing. Each plan will need a different number of hours, but the data used in testing has to come from the plan sponsor, which potentially can generate more fees. “When we place a request for the data, if we don’t get a timely response or we receive incomplete information, then we have to go back to the plan sponsor and re-request it, which takes up more time,” he says.

Adamson uses billable hours to set fees, with a best-guess estimate for certain services that details the amount of service rendered. “When the invoice comes out, the client has a full understanding of how much service is given,” he explains. The prearranged fee comes with the understanding that if additional services are rendered, there will be additional fees. “It is similar to working with a  CPA or an attorney,” he says. “If they incur additional billable hours, we let them know there will be additional fees.”

Compliance January 2, 2015

Supreme Court Sets Date for Tibble Arguments

The United States Supreme Court will hear arguments in the closely watched 401(k) fee litigation case Tibble v. Edison near the end of February.
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An updated docket sheet on the U.S. Supreme Court website shows Tibble v. Edison will be argued on February 25, 2015.

The case is considered by industry observers to be the first “excessive fee” litigation to reach the country’s top court. In a 2014 interview with PLANADVISER, the plaintiffs’ attorney in the case said Tibble v. Edison is tremendously important for the future of the retirement planning industry.

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“The question before the Supreme Court is whether plan sponsors can get permanent immunity on an imprudent investment decision, for all time, based on the limitations period [in ERISA],” says Jerry Schlichter, of the law firm Schlichter Bogard and Denton, who will argue for plaintiffs in the class action. “The lower courts have decided that, even if a plan has been shown to include a fund that is known to be imprudent, as is the case here, it can be protected from liability by the ERISA six-year limitations period. That’s the question the court has to decide whether to overturn—whether it’s appropriate to give sponsors permanent immunity from liability once the investment that is being challenged has been on the plan menu for six years.”

According to the Supreme Court’s website, justices will limit their review of Tibble to the following question: “Whether a claim that ERISA [Employee Retirement Income Security Act] plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”

As part of that question, the Supreme Court must also decide if the so-called “Firestone deference” (as established in the high court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch) applies to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants.

During a recent conference call, one ERISA specialist said the real issue at hand in Tibble v. Edison has less to do with the strength or weakness of the ERISA limitations period than many in industry and media have suggested. As Fred Reish, an attorney with Drink Biddle & Reath and leader of the firm’s ERISA practice, explains, “the true issue before the Supreme Court is whether there is a discreet and ongoing duty to monitor investments that is distinct from the initial duty to select.” 

“The trial court and the 9th Circuit, consistent with other appeals courts, ruled that once the six-year window has gone by from when an investment was selected, there is no continuing duty to monitor,” Reish explains. “As the decision stands, the duty to monitor doesn’t start that limitation period again each year, it doesn’t keep rolling that way. So once six years go by from the initial fund selection, the fiduciaries are safe from plaintiffs seeking damages.

“If this goes if favor of the defendants it will eliminate or substantially reduce the ongoing duty to monitor,” Reish notes. “In this sense, again, the question before the Supreme Court is not really a statute of limitations question, as some have interpreted. The real question is whether there is an independent duty to monitor that has its own six-year statute of limitations, such that every year the failure to monitor starts a new limitation period, and the sponsor can then be sued on at any point in the next six years once a failure to monitor has occurred.”

Reish urges both the plan sponsor and adviser communities to “watch this very carefully, because it could diminish the perceived value of advisers if the Supreme Court says there is no legal separation between the ‘ongoing duty to monitor’ and the original decision to select.”

Additional coverage of Tibble v. Edison, including more background and interpretation from industry experts, is here.

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