Who do you trust: the institution or the individual?

Trust Filter








My social media role model, Kevin O’Keefe, blogged an interesting question yesterday, Individual lawyer or law firm blog, which is trusted more? Kevin is President and Founder of LexBlog, the pioneer in law firms and lawyers with blog (and non-lawyers such as yours truly).

Understandably Kevin puts the trust issue – and it is indeed an issue today – in the context of the legal profession. But I’m a business owner in the retirement plan business that sees trust with a different perspective: trust between retirement plan sponsors and employees and their service providers.

Trust in institutions is a big issue worldwide. For the past 15 years, the Edelman Annual TrustBarometer, has tracked trust in business, media, government, and non-government organizations. The 2015 edition tells a sad story.  There has been a global decline in trust over the last year, and the number of countries with trusted institutions has fallen to an all-time low among the informed public.

Bottom line (pun intended) from my vantage point is that people do not trust business. It’s never been more difficult and complex in recent years to build and maintain credibility. But the 2015 data shows that now more than ever, a company’s employees are one of the most trusted sources of information. Edelman calls it “tapping the internal trust surplus”.

So Kevin, based on the Edelman data and my own experience, I vote for the Individual Lawyer.

Image courtesy of Flickr by Mark Smiciklas.   

Employee financial stress and how employers can help


The whimsical picture shown above belies the serious matter of many American workers suffering from financial problems. They are living paycheck-to-paycheck with budgets stretched thin affecting employees at all pay levels.

Dr. E. Thomas Garman, Professor Emeritus of West Virginia University, became concerned as far back as 2006 about workers struggling with their finances when his research showed that approximately 50% of American employees are facing financial diffculty and are trying to reduce their debt of which 25% struggle with serious financial stress.

That year Dr. Garman, Aimee Prawitz, Judith Cohart, and others established the Personal Financial Employee Education Foundation (PFEEF) of which I am now President. PFEEF is a 501(c)(3) organization whose mission is to promote and facilitate financial education in the workplace.

Employee financial stress spills over into the workplace negatively effecting direct employee costs of absenteeism, administration, lost productivity, and turnover. An employee’s low engagement or absenteeism can also have a negative impact on coworkers’ attitudes.

Today, more so that in 2006, employers recognize that workplace wellness programs should not only include health matters, but employee financial education. The market place now offers a wide array of resources and tools such as in-person counseling, on-line course, and our own Personal Finance Well-Being Scale™, a survey used to benchmark the financial health of employees and let the employees track their progress.

Now as to which delivery method is best? That’s a topic I’ll discuss in a future blog post.

About the Author

Adam Turville is President of the Personal Financial Employee Education Foundation (PFEEF), a 501(c)(3) organization whose mission is to promote and facilitate financial education in the workplace.

Image courtesy of Flickr by topgold.

Legal Advice on Your 401(k) Plan – Is It Confidential?

ConfidentialLet’s say you have a concern about how your 401(k) plan is operating.  Maybe participant loans aren’t getting repaid or a service provider has neglected to allocate forfeitures on an annual bases.  So you consult a lawyer.  The lawyer writes a memo outlining the situation and advising on corrective steps.  You drop the memo in your 401(k) file.

Then the Department of Labor (“DOL”) comes calling and asks to look at your plan administrative documents.  You would like to withhold the lawyer’s memo as confidential “attorney–client” communications.  Can you do that? Or do you have to produce the memo – and give the DOL a roadmap on how to assert a claim against the Plan Administrator or other in-house fiduciaries?

The answer is that memo ­­­­actually has to be produced because legal advice about plan administration is likely to be subject to the “fiduciary exception” to the protection normally afforded by the attorney–client privilege.

The rationale is that the fiduciary seeking legal advice is doing so in a representative capacity on behalf of all plan participants.  As such, the fiduciary cannot conceal material information about fiduciary communications from participants and others acting on their behalf – like the DOL.  As summarized by one court:

[As] applied in the ERISA context, the fiduciary exception provides that an employer acting in the capacity of ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration.

Exceptions may apply in the case of legal advice to an employer concerning plan design issues and other “settlor” functions.  Also, legal advice to a plan fiduciary with respect to a pending benefit dispute with a plan participant may still be confidential on the basis of the attorney –client or work-product privilege.  But employers, most of whom act as both the plan sponsor (a non-fiduciary role) and plan administrator (a fiduciary role), need to proceed with care in seeking advice on plan-related matters.


If you have a problem and require outside advice, by all means get the help you need.  But consider how you want to proceed with legal advice.  Use of independent ERISA legal counsel may help sustain the attorney-client privilege.  Also bear in mind that by having your plan service providers (third party administrator or “bundled” provider) communicate through ERISA counsel, the attorney-client privilege can be extended to them and keep their work-product confidential from both aggrieved participants and government regulators.

About the Author

Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law.He maintains a website, Benefits Law Group of Chicago with additional updates, commentary and analysis on benefits and employment topics.

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.


IRS Makes Permanent Relief Program for Delinquent Form 5500-EZ


The sound you may have heard recently was the sigh of relief when the IRS announced Revenue Procedure 2015-32.

The Rev. Proc. made permanent a pilot program that ended Tuesday, June 2 that provided administrative relief for delinquent Form 5500-EZ for owner-only plans with over $250,000 in plan assets.

Business owners will be able to avoid substantial penalties for late 5500-EZ filings by following the program and paying $500 for each delinquent return for each plan, up to a maximum of $1,500 per plan.

It was a long time in the making. Here’s the back story.

Since 2002, business owners and their spouses could set up their own 401(k) plans in which they were the only participants to take advantage of increased deduction limits. No matter if the entity in which they were receiving otherwise taxable income was a Sole Proprietorship, Partnership, C-Corporation, S-Corporation, or LLC, the tax benefit were the same as plans in which common law employees participated.

It didn’t take long for practically every major financial service company, e.g., insurance companies, brokerage firms, and mutual funds, to offer a low 401(k) plan that came to be known as Solo-K Plans. It also didn’t take long for many owners to accumulate more than $250,000 in their plans, and that’s the point at which many owners had compliance problems.

Once that $250,000 threshold was passed, owners now had the obligation to file Form 5500-EZ each year. For those of us who work with business owners, we were never surprised that some new clients had never filed Form 5500-EZs – ever!

Until recently delinquent Form 5500-EZs were not eligible for the Department of Labor’s Delinquent Filer Voluntary Compliance (DFVC) program which caps penalties at $750 for one delinquent Form 5500 and $1,500 for more than one year, however many years are involved. The penalty for non-compliance could be large which plans with at least one non-owner can avoid.

How large?

  • IRS penalties: $25 per day up to a maximum of $15,000.
  • DOL penalties: Up to $1,100 per day (no maximum). For willful violations, individuals face up to a $100,000 fine and/or imprisonment up to 10 years.

So there was huge sigh of relief from those of us in the retirement business on May 9, 2014 when the IRS published Revenue Procedure 2014-32. The Rev. Proc. established a temporary one-year Pilot Program providing administrative relief from the imposition of penalties for failure to timely file Form 5500-EZ and similar filers. The termination date of which was June 2, 2015.

Our collective anxiety about “would they or won’t they” make the program permanent was eliminated when the IRS announced Revenue Procedure 2015-32. The new Rev Proc makes the pilot program permanent.  You can get all the details here.

How the re-proposed Fiduciary Rule came to be

evolution slide6-01-1

As everyone in the ERISA world knows,  the Department of Labor (DOL) on April 20, 2015 published a proposed regulation in the Federal Register relating to the definition of fiduciary within the meaning of ERISA section 3(21)(A)(ii). ERISA section 3(21)(A)(ii) is that part of the definition of fiduciary that addresses investment advice for a fee or other compensation.

If you’re not part of our ERISA world, my guess is that you would have probably heard about it or read about in terms other than the above-referenced legal title. Most likely, you’ve probably heard it called the “Fiduciary Rule”, the “Fiduciary Standard”, “Conflict of Interest Rule”, or some other name depending on one’s point of view or financial interest.It’s become the most controversial ERISA regulation in recent memory.

But I’m not here to express a point of view – political, economic, or otherwise. Rather, this article is my attempt to put it all into context by providing a timeline of how it got to where it is today. Context, after all, can help planning.

The Common Law of Trusts: The Beginning

ERISA, or course, codified a fiduciary relationship with respect to employee benefit plans that provide retirement income or welfare benefits. The core principles of which are derived from the common law of trusts, the law of trusts that developed over time from the ruling of judges rather than by statutes enacted by legislatures.

Much of the common law of trusts originated in England, but an 1830 case decided by the Supreme Court of Massachusetts, Harvard College v. Amory, was an important decision relating to the meaning of prudence. It’s believed that this case was the first time the “Prudent Man Rule” was articulated.

Prohibited Transaction Exemption (PTE) 75-1

ERISA and the Internal Revenue Code (the “Code”) didn’t incorporate all of the core principles of the common law of trusts and added two key components.

First, the ERISA prudence standard is a prudent expert standard. (Memo to plan sponsors who want to  self-manage plan assets, but do not have in-house expertise).

Second, Congress recognized that modifications had to be made because of the unique nature of employee benefit plans. One of those modifications was to prohibit a broad group of activities and transactions between an employee benefit plan and a “party in interest “under ERISA and a “disqualified person” under the Code. The violation of which could result in an excise tax.

Because of the broad scope of prohibited transactions, investment providers would effectively be unable to perform their duties unless there were statutory and Department of Labor exemptions. The DOL did exactly that in PTE 75-1 which provided an exemption to employee benefit plans and broker-dealers and banks from certain of the prohibited transactions of ERISA and excise taxes.

December, 2006 Government Accounting Office Fee Report

But PTE 75-1 was, of course, before Congress added Section 401(k) to the law as part of the Revenue Act of 1978 followed by IRS regulations in 1981. By the end of 2005, the Investment Company Institute reported that 401(k) plans had more active participants and about as many assets as all other private pension plans combined. The numbers were significant:

  • 47 million people participating
  • in 417,000 plans
  • with approximately $2.5 trillion in assets.

No surprise then that fees, disclosures and conflict of interest became part of the public consciousness. In December, 2006, Government Accounting Office (GAO) issued its report, Changes Needed To Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees.

The GAO Report was commissioned by Rep. George Miller, D-Cal. The Congressman announced that the House Education and the Workforce Committee that he was in line to chair under the new Democratic-controlled Congress should hold hearings in 2007 to examine the “fee issue”. I described it back then as a shot fired across the 401(k) industry bow.

Indeed, in March 2007, 401(k) fees officially became part of the political debate Congressman Miller held hearings with comments falling across party lines. The Democrats using verbiage such as “hidden fees erode retirement savings”, and the Republicans saying more information is confusing.

Proposed Amendment of PTE 75-1 in 2010

Then three years later, the DOL proposed a change to the definition of fiduciary that would have expanded the scope of those who become fiduciaries. Significant objections were voiced by numerous industry groups and by Members of Congress from both parties. The DOL withdrew its initial proposal and stated it would conduct further economic analysis.

In February 2015, President Obama announced that the DOL should move forward with its proposed rule making. But before we fast forward those five years, two events in 2013 put 401(k) plans right back into the public consciousness.

2013: The Year of the Headline

The first event was the PBS Frontline documentary, The Retirement Gamble, aired on April 25, 2013 by investigative reporter, Martin Smith. The documentary created a firestorm of comment on the state of retirement and was highly critical of the financial services industry.

Later that year in November 2013, Forbes added a seasonal touch in an article saying

PBS ran it again in late October–just in time for Halloween. It revealed a scary picture on the state of retirement and all its shortfalls including the big costs that come with a 401(k). It’s hard to watch this program without a sense of horror at the way our retirement plan system is rigged to rip off Americans struggling to save for retirement.

There were, of course, less emotional and more reasoned responses. One of which was fee-based financial planner, Roger Wohlner who in his blog post, My Thoughts on PBS Frontline The Retirement Gamble, pointed out where the documentary fell short.

Then in July, Yale law professor Ian Ayres mailed 6,000 letters to plan sponsors warning them they are paying too much for their 401(k) plans and encouraging them to make changes with the threat of exposure in some versions of the letter. The letter included a draft of a white paper written by Ayres and Prof. Quinn Curtis, an associate professor of law at the University of Virginia School of Law, entitled: Measuring Fiduciary and Investor Losses in 401(k) Plans.

While the industry view was that the study was terribly flawed, it once again put 401(k) plans and the financial service industry back into the spotlight.


Now back to the present. In February, 2015, the White House released a Council of Economic Advisors Report, The Effects of Conflicted Advice on Retirement Savings, indicating that the aggregate annual cost of conflicted advice is approximately $17 billion each year

On April 14, 2015, the DOL announced a re-proposal of the rule, which is now followed by a period for public comment. The DOL responded to demands from members of both parties in Congress by extending the original comment period and indicating that a public hearing will begin the week of August 10. It is likely that changes will be made when the Rule is finalized.

Nobody knows for sure how the re-proposed rule will actually affect 401(k) plan sponsors, participants, or the financial service industry. Opinions, of course, are not in short supply. The actual impact will play themselves out over time. But there is one thing about which I am confident. Retirement plan service models will change.

The Fiduciary Hierarchy

Picture2The recent Department of Labor’s re-proposed Fiduciary Rule has generated many opinions on how it will affect fiduciary service models. One constant, however, cuts through all of the debate: the Plan Sponsor still has the fiduciary responsibility to select and monitor those service providers.

But as you can see, there is a hierarchy of service models available in the 401(k) marketplace. Each of which offers Plan Sponsors a different level of support with regard to investment selection and monitoring. Here is a brief description of each in the order of lowest to highest fiduciary protection:

1. Due Diligence Support.

Providers offering this service have an evaluation process for the investment options they offer under their retirement programs usually known as due diligence support. The provider offers a wide array of funds, and plan sponsors use the tool to help construct an appropriate line-up for their plan. However, the plan sponsor is still responsible for selecting and monitoring the plan’s investment options.

2. Fiduciary Certificate or Warranty.

Providers offering this service provide a Certificate or Warranty generally available to plan sponsors if they select at least one fund in designated asset classes. There is due diligence support for evaluating their funds combined with last-resort fiduciary liability protection if numerous conditions are met.

3. Directed Trustee

Under this arrangement, an institutional Trustee will usually provide a custodial arrangement, and to take instruction from the Plan Sponsor that are consistent with the plan document and ERISA. Directed Trustees will usually disavow fiduciary status.

Section 3(21) Fiduciary 

Some 401(k) programs use the services of an independent Registered Investment Adviser (RIA) who agrees to become an investment advice fiduciary under section 3(21)(A)(ii) of ERISA. Under this service, the RIA recommends and monitors funds for the plan’s fund menu. However, employers are still responsible for selecting and monitoring the specific funds used on the menu.

5. Section 3(38) Fiduciary

Under this arrangement, the Plan Sponsor hires a Fiduciary to manage the investment process of its retirement plan. It must be an RIA, bank, or insurance company who is solely responsible for the selection, monitoring, and replacement of plan investment options.

6. Discretionary Trustee

There a few providers who will act as a Discretionary Trustee under Section 403(a) of ERISA. A  Discretionary Trustee goes beyond the investment services offered by a Section 3(38) Trustee by providing services such as a) custody of the assets, b) responsibility for Section 404(c) compliance, c) and c) 408(b)(2) fee disclosures.


Which fiduciary service is best? There is no “best” one. Each Plan Sponsor must decide based on its own situation. individual facts and circumstances. But here are some basics.

First, there must be an agreement between the Plan Sponsor and the service provider.

Second, the service provider must acknowledge its fiduciary status in writing.

Third, the Plan sponsor still has the duty to prudently select and monitor service providers.

As always, make sure to read the fine print, and consider having an ERISA attorney review the service agreement.

Who is responsible for service provider mistakes?

blameIt took nine years in the case of Butler v. United Healthcare of Tennessee to determine who was responsible for a denied group health benefit claim.

The patient, covered by her husband’s ERISA health benefit plan, sought treatment for inpatient rehabilitation for substance abuse. Treatment for which was denied by United. The patient ultimately received the benefits to which she was entitled.

The important takeaway from this case is who is responsible for the improper administration of a welfare benefit plans: the plan sponsor or claims administrator?

Here’s the short version.


After seven years’ worth of internal claims reviews, trips to the Federal district court, remands to the plan for reconsideration, the Federal District Court required United to pay benefits plus interest and $99,000 in statutory penalties for its “arbitrary and capricious” decisions. The statutory penalty was awarded on the basis of United’s failure to play fair under the Department of Labor regulations governing the internal claims appeal process.

On appeal, the U.S. Court of Appeals for the Sixth Circuit, agreed that United had improperly denied the group health claim, but reversed the lower court’s award of statutory penalties. However, the statutory penalty of up to $110 per day applies to Plan Administrators that fail or refuse to respond to participant’s requests for documents and information enumerated in Section 104(b)(4) of ERISA within 30 days.

United’s failure to comply with the claims review requirements under a different statutory provision was determined not to be subject to the statutory penalty for violating ERISA Section 104(b)(4).

The Court’s opinion also concluded that the ERISA statutory penalty could not be assessed against United because it applies only to the “Plan Administrator,” not just any service provider. The Court held that the plan sponsor was the “Plan Administrator” in the absence of any contrary designation in the plan document. Accordingly, United, as the claims administrator, could not be tagged with the statutory penalty.


This case reflects the real world in that the plan sponsor is almost always the “Plan Administrator” with ultimate responsibility for plan operations. It follows that plan sponsors, as fiduciaries, could be saddled with liability for the conduct of non-fiduciary plan service providers.

But note that the holding in Butler that statutory penalties do not apply to violations of the DOL’s claims review regulations is not universal, and some courts have ruled otherwise. So, it is entirely possible that a case like Butler in another jurisdiction could result in the assessment of statutory penalties against the employer in addition to the judgment against the service provider for payment of the contested benefits plus interest.


A typical service agreement for a “claims administrator” vests ultimate authority over claims decisions with the employer as Plan Administrator. At the same time, most employers hire a TPA or claims administrator so they are not involved in deciding claims.

In an insured welfare plan, claims decisions govern the expenditure of insurance company funds, so the employer’s supposed ultimate authority over claims is probably a fiction. However, employers should not have to spend lots of money in attorneys’ fees to prove that proposition in court. Here are two practical suggestions

  1. The service agreement with the TPA or claims administrator should indemnify the employer for any mistakes of the service provider.
  2. Adequate fiduciary insurance coverage should be considered for the employer and employees with administrative or investment responsibilities for the plan. Remember, the ERISA fidelity bond protects the plan, not its fiduciaries, so fiduciaries should never rely on a plan’s fidelity bond.

You can read the entire court decision here.

Image: Canstock Photo

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this article may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

What We Can Learn From Australia’s Superannuation


Superannuation is what Australia calls its retirement system, and they are doing something right.

According to the 2014 Melbourne Mercer Global Pension Index (8o-page report if downloaded), an annual study that ranks national retirement systems based on the relative importance of adequacy, sustainability, and integrity, Australia only trails Denmark graded A, and tied with the Netherlands graded B. The United States? Grouped with France, Poland, South Africa, Austria, and Brazil with a grade of C.

The subtitle of the Study, by the way, is “Including Trust and Transparency in Pensions”. Apparently an issue not unique to the U.S.

So what makes the Australian system so different, and according to the Mercer Study, better than ours? We’ll get the details when our friend, Paul Secunda, returns from Australia.

Paul, a professor of law at Marquette and director of the Law School’s labor and employment law program, recently earned a Senior Fulbright Scholar Award. He’ll spend the Fall 2015 semester in Australia as a Senior Fellow at Melbourne University Law School teaching and doing research focused on the country’s national pension program.

No doubt that he’ll bring back valuable ideas on how to improve our retirement system. But in the meantime, here’s my take on the difference between a grade of B and a C. It’s foresight.

In 1992, the Australian government introduced a major reform package addressing Australia’s retirement income policies. The concern was that increased in pension payments due to demographic shifts would place an unaffordable strain on the Australian economy.

Through a tripartite agreement between the government, employers and the trade unions, the country adopted a “three pillars” approach to retirement income consisting of:

  • A safety net consisting of a means-tested Government age pension system
  • Private savings generated through compulsory contributions to Superannuation
  • Voluntary savings through superannuation and other investments

Now can you imagine our government, employers, and the unions all agreeing on a national retirement income policy? That’s not a political question, it’s a hopeful one.

Hey! What’s My Number? How To Improve The Odds You Will Retire In Comfort (Book Review)

Cover-NEW-2014.11.18.6-600x900pxLet’s say, for example, you’re concerned about not having enough money saved for retirement. You’re certainly not alone based on the myriad number of polls, surveys, and studies that have been in the news. So where do you start?

You might start at Amazon and search under “Retirement Savings”. At this frozen moment in time when I’m writing this blog post, there were 12,618; or if you were a Prime member, you could whittle that number down to 10,576.

(If you’re an Amazon customer, consider signing up for Amazon Smile, though which Amazon will donate a portion of the purchase price to your choice of one of nearly one million charitable organizations).

Allow me to save you time and point you in the right direction. It’s Chris Carosa’s new book, What’s My Number: How to Improve the Odds You Will Retirement in Comfort.

If you’re someone who is in the retirement industry, it’s likely you know who Chris Carosa is. You may be a subscriber to his Fiduciary News or have read one of his many books, one of which I covered on this blog, 401(k) Fiduciary Solutions.

But that one was for us pension people as evidenced by the subtitle:

Expert Guidance for 401(k) Plan Sponsors on How to Effectively and Safely Manage Plan Compliance and Investments by Sharing the Fiduciary Burden with Experienced Professionals

But as you can see from the subtitle of his new book, How To Improve The Odds You Will Retire In Comfort, this one is written for those of you that are concerned about not having enough money to retire and would like expert guidance on the journey to get there. In plain language, Chris provides a 4-step process for that journey with a Retirement Readiness Calculator to check in along the way.

You can make up your own mind by checking out Chris’s book here.

In the meantime, I’m going to take the next step as a grownup beyond Robert Fughum’s best seller, All I Really Need to Know I Learned in Kindergarten. 

That’s Chris’, A Pizza The Action: Everything I Ever Learned About Business I Learned by Working in a Pizza Stand at the Erie County Fair.