The Impact of Peer Pressure on Workplace Ethics

When we think about lying, cheating, and stealing in the workplace, we may think it's always bad people doing bad things. But sometimes good people lose their moral compasses because of peer pressure.

That was the conclusion of the recent study, Underestimating Our Influence Over Others' Unethical Behavior and Decisions conducted by Bohns,  Roghanizad, and Xu at the University of Waterloo in Ontario, Canada.

The British Psychological Society reported on this study in their blog post, It's Easier Than You Think To Get People To Commit Bad Deeds, published on their Research Digest blog.

The study, they say, suggests that many people will agree to perform a bad deed rather than say no to avoid social discomfort.

But here’s the thing. It’s also easier than you think to get people to do the right thing. They go on to point out the

"... truly startling finding from this work, the researchers said, is not how many people are willing to lie or vandalise, but rather "the lack of awareness people appear to have of this tendency when they are in a position to influence someone else's ethical behaviour."

And maybe this lack of awareness can be addressed by education. The financial service industry often gets maligned, and sometimes deservedly so. However, the organizations that represent financial service providers do emphasize ethics, and in many cases, make it a continuing education requirement.

In my world, it's the American Society of Pension Professionals and Actuaries (ASPPA). An interactive Ethics Workshop will be a major part of ASPPA's five regional conferences in 2014 called ASPPA On Tour. The first one is on Thursday and Friday, January 23-24, 2014 in Los Angeles. If you're in the benefit business and in the neighborhood. please stop by.

Image Source: Richard Niolon Ph.D.

Posted In Ethics , Fiduciary Issues
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Managing the 401(k) Data Deluge and How to Avoid Problems

No, that's not the Matrix pictured on the right. It's simply a visual representation of a special report by The Economist a little over three years ago, Data, Data Everywhere,

In that report, The Economist reported that Wal-Mart handled more than one million customer transactions every hour, feeding databases estimated at more than 2.5 petabytes. That's the equivalent of 167 times the books in America's Library of Congress.

401(k) plans don't have nearly the Wal-Mart-like amount of data, but it can still seem overwhelming. Consider the array of transactions that flow from a 401(k) plan - including contribution sources such as employee pre-tax and Roth after-tax contributions, employer contributions, and rollover contributions. Not to mention investment changes such as allocation changes, and account re-balancing,

The result?  Mistakes happen. We all know the litany of what can go wrong, and in many cases, has gone wrong:

  • The plan document is not in compliance with the law and Internal Revenue Service and Department of Labor regulations.
  • The terms of the plan have not been followed, e.g., definition of compensation .
  • Employee contributions have not been timely deposited.
  • The 401(k) limits have been exceeded.
  • The plan does not meet the non-discrimination rules.
  • The loan provision has not been properly administered.

Fortunately, the Internal Revenue Service (IRS) and the Department of Labor (DOL) have established self-correction programs to fix plan mistakes. But the key to managing the 401(k) data deluge and avoiding mistakes is prevention.

In the view of the IRS, it’s about establishing and maintaining good internal controls, and has been holding a series of teleconferences on just that.

One last week was conducted by Monika Templeman, Esq., Director of Employee Plan Examinations and Janice Gore, Employee Plans Exam Area Manager in our own Great Lakes Region. They stressed that good internal controls can:

  • Eliminate or reduce errors in plan administration
  • Help identify and correct errors using the Self Correction program
  • Help a retirement plan audit go smoother

They also announced that IRS has repackaged the 401(k) Questionnaire (as the QSAT (Questionnaire Self Audit Tool), scheduled to be released in 2013. The QSAT will help plan sponsors find, fix and avoid costly mistakes, and provides questions an IRS examiner would ask.

There is another benefit to having good internal controls. If you’re a Plan Sponsor, Plan Administrator, or anyone who exercises discretion or control over plan operations, you are considered a fiduciary. Good internal controls are essential to properly meeting your obligations… and avoiding personal liability.

How to go about it? That’s a topic for another day.

Posted In 401(k) Plans , Fiduciary Issues
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Miscommunicating the Benefit Plan, Still The Same

Bob Seger and the Silver Bullet Band on their Rock and Roll Never Forgets Tour this Spring. Still The Same.

And still the same is the miscommunication that sometimes happens between the employee and the employer about the benefit program.

It could be, for example, the Summary Plan Description and plan document don't gibe as discussed in my earlier blog post, Plan Administrator between rock and hard place when plan document and Summary Plan Description conflict.

Or it could be what was the employee was told and what the plan document says are different. Consider this, for example. Employee seeks verification that her surgery would be covered before undergoing treatment. Customer service representative confirms coverage. Claim denied after surgery. Employee files lawsuit.

Not a made up set of facts, but a real case which was the subject of a recent article, Seventh Circuit Makes Damages More Available for Employees Given Wrong Information About Benefits, written by McDermott Will & Emery attorneys, Prashant Kolluri and Nancy G. Ross.

I’m not an ERISA attorney so I'll the leave the legal analysis and the application of this case to other situations including retirement plans to them.

But there's a practical aspect to all of this. Simply, we can expect more of these conflict situations to arise as the aging workforce retires and take distributions; and as the Affordable Care Act changes the health insurance landscape.

My suggestion? Employers should consider having an experienced ERISA attorney review the plan documentation: plan document, Summary Plan Description; and any other employee communication or handbooks that discuss benefits. File that expense under Risk Management.

Old Time Rock and Roll Note: The song, Still The Same, written and recorded by Bob Seger in 1978, peaked at number 4 on the U.S. Billboard Hot 100. It was on his tenth studio album, Stranger In Town.

Posted In 401(k) Plans , Fiduciary Issues
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"How to Rock a Part Time Job". But benefit coverage is another matter

 That’s a picture from Episode 12, How to Rock a Part Time Job, that ran on the Nickelodeon sitcom, How To Rock, on  April 21, 2012.

In case you haven't seen the show, here’s the premise courtesy of Wikipedia:

The show centers on Kacey Simon (Cymphonique Miller), a popular girl who was once mean, and whose status goes down after she must briefly wear braces and glasses. Ignored by her fellow mean girls, Kacey finds a new way to express herself through music by becoming the lead singer of the pop/hip-hop band Gravity 4 with Stevie (Lulu Antariksa), Zander (Max Schneider), Nelson (Noah Crawford), and Kevin (Christopher O'Neal). The success of the band, now renamed Gravity 5, begins a rivalry with Kacey's former group The Perfs, a rival band featuring her former friends, and now archrivals Molly (Samantha Boscarino) and Grace (Halston Sage).

In the aforementioned Episode 12, Stevie helps Kacey gets a job at Danny Mango's so Kacey can pay her mom back for a large credit card bill. But when Kacie finds out that employees can get free smoothies, she gives too many away getting herself and Stevie fired.

Got it?

So kids, here’s the question. Other than free smoothies, are Kacey and Stevie covered under Danny Mango’s benefit programs?

In the new world of health care, it’s a relevant question. There’s much discussion now about the extent to which employers will move many of its employees to part-time status, i.e., the less than 30 hours a week threshold under the Affordable Care Act, so they would not be required to provide health insurance benefits.

Sarah Kliff, who does an excellent job covering health policy for the Washington Post, recently reported on this matter in her regular Health Reform Watch, Will Obamacare lead to millions more part-time workers? Companies are still deciding.

But from a retirement plan standpoint, there really isn’t much to decide. Many employers do not want to include part time employees for both cost and discrimination testing purposes. However, the IRS issued guidance in 2007 regarding the extent to which part-time, temporary, seasonal, and project employees can be excluded under qualified plans, including 401(k).

Plans that are improperly drafted to exclude part-time and other non–full-time employees or exclude them in actual operation of the plan can be disqualified resulting in significant adverse tax consequences.

So here are the takeaways for an employer concerned about this issue:

  1. Review both the plan document and plan operation to determine whether these employees were validly excluded from plan participation.
  2. Make any necessary corrections either to the plan document or corrective contributions  under an appropriate IRS correction program.

Now as to providing health insurance coverage for part-time employees. That's definitely a "kids don't try this home" issue. Talk  to an attorney experienced with health insurance.

Posted In 401(k) Plans , Fiduciary Issues
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Fiduciary, Benjamin, Fiduciary

With apologies to anyone associated with the 1967 ground breaking movie, The Graduate, my headline is a riff on the scene to your right featuring a young Dustin Hoffman as Benjamin, and the late character actor, Walter Brooke, as Mr. McGuire.

Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.
Benjamin: Exactly how do you mean?
Mr. McGuire: There is a great future in plastics. Think about it. Will you think about it?

If the Graduate were made today, there’s a good chance that the one word would be “fiduciary”. Well, maybe not “fiduciary” exactly, but a word (or two) related to it like “investments”, “stock market”, or “financial services”.

And there’s also a good chance that one of those jobs in the financial service sector would be with a 401(k) service provider in which fiduciary services have become an integral part of its offering.

Since the beginning of 401(k) plans in the early 1980s, 401(k) service providers have introduced an increasing number of services to stay competitive with other providers. Not surprisingly, most 401(k) plan providers now offer some sort of fiduciary support to help employers manage their fiduciary responsibilities with respect to plan investments.

There are different levels of fiduciary support in the marketplace; and thus, it’s important for plan sponsors (themselves, fiduciaries) to understand the differences. In general (very general), here are the five levels of fiduciary support services available in the marketplace in the order of highest to lowest fiduciary support:

  1. ERISA Section 403(a): Trustee with full discretion.
  2. ERISA Section 3(38): Independent advisory firm with full responsibility for selecting and monitoring plan investments.
  3. ERISA Section 3(21): Independent advisory firm providing participant directed investment choices.
  4. Due Diligence Support: An evaluation process with regard to the investment options providers offer under their retirement programs.
  5. Fiduciary Warranty: A Certificate of Warranty that is generally available to plan sponsors if they select at least one fund in designated asset classes.

Which one of these fiduciary support services is best? There is no “best” one. Each plan sponsor must decide based on individual facts and circumstances such as availability, cost, and other factors.

And here’s the important takeaway: All fiduciary responsibilities cannot be delegated away. The plan sponsor always retains the responsibility to monitor the service provider on a periodic basis.

Posted In 401(k) Plans , Fiduciary Issues
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FPA/Plans Tools Blog added to our Blogroll

Welcome to FPA/Plans Tools and their new blog to the group of us that blog about retirement plan matters.

Their goals are to provide informative content on ERISA cases, as well as their proprietary  ERISA Litigation Index, which discusses cases filed in federal court so that advisers and plan sponsors can stay current on litigation activity.

The blog and index are written by David J.Witz, managing director; Thomas E. Clark, Jr., director of fiduciary oversight; and Justin D. Witz, IT director.

You can subscribe here.

Posted In 401(k) Plans , 403(b) Plans , Fiduciary Issues
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The 401(k)/403(b) Investment Manual: Book Review

In the almost 7 years I have been writing this blog, I have written a number of book reviews about 401(k) plans and investing that have tracked the retirement plan industry.

Not surprising since all of the authors are experienced, independent professionals that have something - let's make that a lot - to say, and have significantly added to the dialogue about retirement savings. All of which are well worth the purchase price in either their print or digital versions.

Now here's another. It's James Watkin's recently published book, The 401(k)/403(b) Investment Manual.

In addition to meeting all of the aforementioned characteristics, the subtitle adds another dimension: What Plan Participants and Plan Sponsors REALLY Need to Know. It's one of the few recent books that speaks to both the employer and the 401(k) participant.

Jim is both an attorney and investment professional with a string of professional designations, and his book focuses on:

  1. Helping both employers and 401(k) participants better understand the financial service industry, and
  2. Doing so in a relatively short period of time.

You can buy it on Amazon for $13.23 with two day delivery if you're an Amazon Prime member.

You can also follow Jim on his two blogs:

Posted In 401(k) Plans , 403(b) Plans , Book Reviews , Fiduciary Issues
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Updating the Moat: Modern Risk Management Strategies for Fiduciaries

Back in the Day – the Day being as far back as the ancient Egyptian settlement of Buhen in 1860 BC – moats were excavated around castles and settlements as part of their defensive system.

In today’s terms, we would call it “risk management”. So with some editorial license, I’ll use the moat metaphor to discuss how fiduciaries can shore up their defenses and improve their governance practices. Here are a few suggestions to accomplish those objectives.

1. Appoint an individual or committee as plan administrator.

Formally designating a plan administrator is required by ERISA. Practically, it accomplishes two key things: It lays the groundwork for a clearly delineated claims procedure that might better meet the test of challenge, and it exempts the employer/plan sponsor, senior management and board of directors from being involved in any benefit disputes.

2. Carefully review the principal policy provisions of fiduciary liability insurance you have/are considering.

This includes the insuring clause, persons or organizations not insured insurance exclusions, recourse, subrogation and the deductible. Also, consider whether you are covered against ERISA civil penalties. DOL levies a 20% penalty for an amount recovered through either a court decision or settlement for breach of any fiduciary responsibility.

3. Be aware of the scope of indemnification coverage.

ERISA voids any indemnification provision that relieves a fiduciary of responsibility: A fiduciary cannot be indemnified from plan assets. DOL has interpreted that to mean that it is permissible to have an indemnification agreement between the employer and a plan fiduciary. In other words, a fiduciary can be indemnified from the assets of the employer. However, the employer's bylaws may have to be amended to provide indemnification to employees, officers or directors who are acting as fiduciaries, if permitted by state law.

4. Make sure investment responsibility has been properly delegated.

Here are a few questions to answer:

  • Does the plan document expressly authorize the delegation of responsibility to an investment manager?
  • Is the investment adviser a bank, registered investment adviser or an insurance company qualified under state law to manage plan assets?
  • Has the named fiduciary, with respect to control or management of plan assets, appointed the investment manager?
  • Most important, but often overlooked: Has the investment manager acknowledged in writing that he or she is a plan fiduciary?

If the answer to the last question is no, then you may still be responsible for the investment decisions of an otherwise qualified investment manager.

5. Understand that selection of service providers is a fiduciary decision.

Among the obvious criteria is selecting a service provider are qualifications, references and industry standing, and reasonableness of fees. Remember that there is a further fiduciary obligation to monitor your provider's performance. And, of yes, make sure that you meet the requirements of the new Department of Labor fee disclosure regulations.

6. Assume your plan will be audited.

There are two federal agencies with oversight over defined contribuion plans: the IRS oversees tax aspects of retirement plans, while DOL manages reporting, disclosure and fiduciary aspects of retirement plans.

The IRS wants to ensure that the plan actually exists; plan documents and amendments have been executed; contributions have actually been made; participation, funding, vesting and other requirements and limitations have been met; prohibited transactions have not occurred; and there are no discrepancies between the various reports filed by the employer and the plan, such as corporate tax returns, plan tax returns, W-2s and 10dstment policy statement.

Picture: Caerlaverock Castle, shown from the air, built in Scotland in approximately 1220.

Posted In 401(k) Plans , Fiduciary Issues
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Risk Management Strategies for Business Owners for New Department of Labor Fee Disclosure Rules

Today our firm and Mike Cavanaugh and Tim Webb, Registered Investment Advisors at Know Your Options, Inc., sponsored a special briefing for corporate attorneys on the new fee disclosure regulations impacting their clients.

Our briefing at the University of Chicago Gleacher Center was provided  to help them provide their clients with the guidance and strategies necessary to successfully manage their fiduciary responsibilities.

Special thanks to our Guest: Speaker Attorney Tim McCutcheon, General Manager of , Wolters Kluwer Law & Business.

Our presentation follows: 

The New Retirement Plan Fiduciary Environment

Posted In 401(k) Plans , Audio/Visuals , Events , Fiduciary Issues

"Don't Worry, Be Happy" shouldn't be the theme song of 401(k) fee disclosures

Don't Worry, Be Happy, is, of course, the title of Bobby McFerrin's 1988 hit song. Since then, it's seeped into our culture. If you want to fully incorporate it into your life, you can download the ring tone.

I'm suggesting, however, that it shouldn't be the attitude of employers who have received 408(b)(2) service provider fee disclosures, and think that's all there is to it.

Rather, once received, employers and other fiduciaries have the affirmative obligation to determine whether there are any conflicts of interest and whether fees are "reasonable" for the services being provided. What's "reasonable" you're going to ask. Stay tuned. 

Bobby McFerrin is very much around these days. He tours regularly, and September13-15, 2012, he will be opening the 25th anniversary of Jazz at Lincoln Center in New York.

Posted In 401(k) Plans , Fiduciary Issues
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If you’re in and around the 401(k) world, you know who Chris Carosa, CFTA, is. And if you don’t you should. Most of us know him as a prolific author who is the Chief Contributing Editor of, a superb source of information and commentary about the fiduciary aspects of retirement plans.

Chris now has put it all together in his new book, 401(k) FIDUCIARY SOLUTIONS, which covers all 401(k) compliance issues (and how to deal with them), in a single reference source, the official publication date of which is today.

So what’s exactly in his book? The book’s subtitle says it all:

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

Here are just some of the nuggets found in the 320 pages that comprise Chris’ book:

  • The Best Way 401(k) Plan Sponsors Can Benchmark Their Plans
  • 4 Essential Elements the DOL Requires of Every Retirement Plan
  • 5 Important Duties Every ERISA Fiduciary Must Fulfill
  • Everything an ERISA/401(k) Fiduciary Needs to Know About
  • Who Is and Who Isn’t a Registered Investment Adviser?
  • How Should a 401(k) Plan Sponsor Construct an Appropriate Investment Policy Statement?
  • 3 Reasons Why the 401(k) Fiduciary Should Use Both Active and Passive Funds to Reduce 
  • Avoiding Decision Paralysis: How to Create the Ideal 401(k) Plan Option Menu
  • 3 Ways 401(k) Plan Sponsors Can Help Employees Make Better Investment Decisions

You get the picture.

So where to get the book? It’s available on Amazon, of course, but Chris is offering a special $5 discount off the $34.95 retail price through April 30, 2012. You can click here, and then enter the $5 coupon code: 29WLLWA9.

Posted In 401(k) Plans , Book Reviews , Fiduciary Issues
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Meet the "ERISA Account", the newcomer to the small 401(k) plan scene

Let me introduce you to the “ERISA Account”, a relative newcomer to the small 401(k) plan market. It’s been part of the large and medium plan market for some time. Only recently has it migrated down stream because of (yes, you guessed it) the increased regulatory emphasis and fiduciary attention to fee disclosure.


ERISA Accounts are sometimes referred to as “ERISA Budget Accounts”, “ERISA Expense Accounts, “Expense Recapture Account”, or “Revenue Sharing Account”. We use the term ERISA Account because it succinctly describes the essence of what it is:

A plan level account that captures excess income collected by the recordkeeper that can be used to pay eligible plan expenses or even allocated to participants.

Let’s separate this discussion into its elements: 1) where the income comes from, and 2) how it can be used.

Where the Income Comes From

A mutual fund charges a fee that encompasses all the various fees that a participant is charged to invest in the particular fund. It's usually referred to as the Expense Ratio. In addition to the management fee charged by the fund manager to manage the fund assets, the Expense Ratio may include:

  • 12(b)(1) Fee: the fee paid by the mutual fund to a 401(k) provider or broker for including in it in the plan and servicing it after the sale.
  • Sub Transfer Agent (Sub-TA) Fees: the fee paid by the fund when it subcontracts the participant accounting to transfer agents, e.g., bank or trust company, to execute, clear, and settle trades, and maintain shareholder ownership records. These organizations are called Sub-Transfer Agents.
  • Provider Compensation: the fee paid by the fund to the service provider, sometimes referred to as Revenue Sharing, for administrative or contract owner or participant services provided on behalf of the fund.

The Expense Ration is usually stated as a percentage of assets under management, and is netted from mutual fund performance rather than being paid directly by the plan.

How the Income Can Be Used

At some point, the income received by the recordkeeper becomes excessive, i.e., more revenue that is needed to run the plan, and can be used to pay plan level expenses or reallocated to participants.

Plan Expenses

The expenses that can be paid by the plan are part of that ERISA basic: a fiduciary must “act for the exclusive purpose of providing benefits to plan participants and defraying reasonable expenses of administering the plan.”

The Department of Labor says that reasonable administrative expenses could include:

  • Plan amendments required by change in law
  • Plan amendments necessary to maintain tax qualified status
  • Nondiscrimination testing
  • Recordkeeping
  • Plan accounting
  • Preparation of Form 5500

Plan assets, however, cannot be used for “Settlor Functions”, i.e., those expenses that are for the benefit of the employer. Settlor Expense could include:

  • Studies of options for amending plan to maintain tax qualified status or for meeting new legal requirements
  • Terminating plan
  • Testing to explore plan design
  • Union negotiations about plan provisions

The Department of Labor also permits participants to be charged for the reasonable cost of transactions attributable to individual participants, e.g., loans, QDROs, hardship withdrawals, calculations to determine benefits under various distribution alternatives, and benefit distributions.

Allocation to Participants

In addition to paying for reasonable plan expenses, funds in an ERISA Account may be reallocated to participant accounts pro-rata based on their account balances at the end of the year, or on a per capita basis. Note, however, that funds must be used by the end of the plan year. They cannot be rolled over to another plan year, or returned to the employer.

Plan Documentation

As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.


Not all 401(k) plans will see excess income that can be used in an ERISA Account. However, as we move more into the “Age of Transparency”, expect to see ERISA Accounts more prevalent in the small plan market. And what’s a “small plan’? We’ve seen $1 million plans with ERISA Accounts. 

Here's a link to our Special Report, THE DELEGATION OF RESPONSIBILITY FOR 401(k) INVESTMENTS: How Board Members and Officers Can Maximize Their Protection Against 401(k)
Fiduciary Liability

Posted In 401(k) Plans , Fiduciary Issues
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Some fiduciary services are more equal than others

One thing you can say for sure about the 401(k) business, it’s responsive to the needs of the marketplace.

Since the beginning of 401(k) plans in the early 1980s, 401(k) service providers have introduced an increasing number of services to stay competitive with other providers. We've seen the proliferation of such features as:

  • Daily valuation
  • Loans
  • Self-directed brokerage accounts
  • Web access
  • Investment education tools
  • Multi-share classes
  • Index funds
  • ETFs 
  • Target maturity funds
  • Participant Investment advice

Now with the increased focus by the Department of Labor on the fiduciary aspects of 401(k) plans, the market place has responded. 401(k) providers offer services allowing fiduciaries to delegate some or all of their responsibility for plan investments. But as the headline says, some fiduciary services are more equal than others.

So here is a brief description of the services available in the order of lowest to highest fiduciary protection:

  1. Due Diligence Support. Employers use the provider's evaluation process with regard to the available investment options. It's usually known as due diligence support. Employers use this tool to help construct an appropriate line-up for their plan, but they are still responsible for selecting and monitoring the plan investment options.
  2. Fiduciary Certificate or Warranty. Employers receive a Certificate or Warranty generally available to plan sponsors if they select at least one fund from the provider’s lineup in designated asset classes. In addition to due diligence support for evaluating their funds, employers have last-resort fiduciary liability protection if numerous conditions are met.
  3. Acknowledgment as a Fiduciary under Section 3(21)(A)(ii) of ERISA. An independent registered investment advisor (RIA) agrees to become an investment advice fiduciary under section 3(21)(A)(ii). The RIA recommends and monitors funds for the plan’s fund menu. However, employers are still responsible for selecting and monitoring funds on the menu.
  4. Acknowledgment as a Fiduciary under Section 3(38) of ERISA. As in #3 above, employers use the services of an RIA. But with this service, the RIA agrees to become an investment advisor fiduciary under Section 3(38) of ERISA.  A Section 3(38) arrangement t represents the most comprehensive level of fiduciary support possible under ERISA since the RIA assumes all responsibility for selecting and monitoring the funds.

Which one is best is a decision that each fiduciary has to make based on his/her individual facts and circumstances. But remember, all fiduciary responsibilities cannot be delegated away. The responsibility remains to monitor the service provider on a periodic basis.

Posted In 401(k) Plans , Fiduciary Issues
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Four misconceptions about fiduciary liability insurance

With the increasing spotlight on fiduciaries and their responsibilities for ERISA plans, many employers are asking themselves whether it’s time to buy fiduciary liability insurance.

With personal assets on the line for breach of fiduciary responsibility, there is no “one size fits all” answer. But, if you are a fiduciary considering fiduciary liability insurance, here are four misconceptions that can get in the way of proper decision making:

  1. The ERISA Fidelity bond protects my personal assets. Not at all. Fidelity bonds which are required by ERISA provide coverage for acts of fraud or dishonesty but only for the benefit of the plan and the plan’s participants. It does not protect the fiduciaries themselves for liability claims.
  2. I’m covered under our Employee Benefit Liability (EBL) policy. Not entirely. EBL insurance policies cover many claims arising out of errors or omissions in the administration of a benefit plan, but may not cover other aspects of fiduciary liability, e.g., investment of plan assets.
  3. I’m covered under our Directors and Officers (D&O) policy. Usually not. These types of policies generally only cover directors and officers for their activities in that capacity and not as plan fiduciaries. They generally exclude coverage based on violations of ERISA.
  4. I would be indemnified against any personal liability. Maybe yes, maybe no. ERISA specifically precludes a plan from indemnifying a fiduciary for breach of fiduciary responsibility. So who’s left? The employer who even if willing, may not have the financial resource to indemnify or may be restricted to do so by state law.

Fiduciary liability insurance can not, of course prevent law suits. But in conjunction with sound plan management, it can be an effective part of your risk management program. In other words, you can’t eliminate the risk, but you can maximize the protection. Consider talking to your property and casualty broker or consultant about fiduciary liability insurance.

Posted In 401(k) Plans , Defined Benefit Pension Plans , Fiduciary Issues
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"Watching the Detectives": The ERISA version

That’s Declan Patrick MacManus pictured above, but we know him by his stage name Elvis Costello, the English singer-songwriter of Irish heritage. The picture is actually the cover art for Watching the Detectives, the 1977 single by Elvis Costello and his backing band, the Attractions, which gave him his first UK hit single.

It’s my pop culture segue to our own ERISA version of “watching the detectives”. However, in our world, the “watcher” is the Department of Labor (“DOL”) and the “detectives” are the accounting firms charged by ERISA with performing an independent audit as part of the Form 5500 filings for qualified retirement plans with more than 100 participants.

And it’s not exactly front page news that the DOL doesn't exactly view CPAs as rock stars when it comes to ERISA audits. I wrote about the DOL’s concern about audit quality almost four years ago on this blog, Department of Labor seeks comments on guidelines for ERISA auditor independence.

Recently, our friends at Employee Benefit News carried an article, Legal Alert: Keeping A Watchful Eye On Retirement Plan Auditors, written by Frank Palmieri, a partner with the Law Firm of Palmieri & Eisenberg. Mr. Palmieri writes about an initiative by the DOL.concerning ERISA audits.

That initiative consists of the DOL issuing letters to accounting firms who perform ERISA audits requesting copies of work papers and management letters. The purpose of which is, quite simply, to detect errors in the administration of qualified retirement plans and for plan sponsors to correct those errors.

But here’s the rub. The law doesn’t permit the DOL to take direct enforcement action against the plan auditor for substandard work. They can, however, take indirect enforcement action against the Plan Sponsor, the Plan Administrator and the person who engages a plan auditor, by imposing civil penalties.

Why? Because the selection and monitoring of service providers, including plan auditors, is a fiduciary function. In that regard, you may find helpful the discussion of the "dos and don'ts for hiring an auditor" in my July 1, 2009 Employee Benefit News article, All You Need To Know About ERISA Audits

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Fiduciary Issues
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Things to do as a fiduciary

Each week Nevin E. Adams, JD, PLANADVISER Editor-in-Chief writes a column called IMHO (In My Humble Opinion), and he's always a good read.

He's just published a two-part series that's an excellent, common sense approach for fiduciaries that's definitely worth keeping handy. It's called “To Do” List: 10 Things You’re (Probably) Doing Wrong—or Not Doing Right—as a Plan Fiduciary.

His 10 things are:

  1. Not having a plan/plan investment committee.
  2. Not HAVING committee meetings.
  3. Not keeping minutes of committee meetings.
  4. Not having an investment policy statement.
  5. Not removing “bad” funds from your plan menu.
  6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.
  7. Depositing contributions on a timely basis.
  8. (Not) monitoring providers on a regular basis.
  9. Not following the terms of the plan document.
  10. Not realizing who is a fiduciary—and what that means.

To get the full picture, here are links to the complete columns: Part 1 and Part 2.

Posted In 401(k) Plans , Fiduciary Issues
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The practical side of being a fiduciary

That's Les Stroud pictured above whose TV show, Survivorman, is one of my favorites. One of my other favorites is Bear Gyylls show, Man Versus Wild.   

Both are survival experts who go toe-to-toe with some of the harshest environments on the planet and come through alive.

So if you'll grant me some editorial license, Les's picture is the visual metaphor I'm using for the harsh environment in which fiduciaries must operate. And it is harsh out there.

Buffeted by the most complex set of forces since ERISA arrived in 1974, plan fiduciaries today must cope with heightened compliance enforcement by the Internal Revenue Service and the Department of Labor, increasing litigation by plan participants and tightened fiduciary liability insurance markets.

But despite all these forces that are swirling around, there are indeed some practical ways that fiduciaries can effectively manage their responsibilities. Here is a link to my column in the August issue of Employee Benefit News in which I discuss this matter. (Free registration may be required).

Employee Benefit News is an employee benefit publication which provides free newsletters including  seminars and podcasts from industry experts, and online content for plan sponsors. One of their other publications, Employee Benefit News Legal Alert, also carried  my article. You can check all of their publications here.

But I do have one nagging question. Les Stroud is Canadian. Bear Grylls is British. Would I be too much of a homer if I asked where are the Americans?

Posted In 401(k) Plans , Employee Benefit News columns , Fiduciary Issues
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What every fiduciary should know about their brokers ... and also their custodial banks, and financial contracts

I've got that queasy feeling again in my stomach.

The recent collapse of Bear Stearns gave me flashbacks to the 1990s during which we struggled with insolvency issues affecting ERISA plans.

If you were around back then, you’ll remember the insurance companies that failed or were seized by insurance regulators as a result of failed investments in real estate or junk bonds. And it was not just these companies. The financial stability of the rest were called into question in 1991 by the four insurance company rating services that downgraded their ratings on the claims paying ability of virtually every life insurance company in the country.

And you may also remember the insolvencies of Mutual Benefit Life Insurance Company and the infamous Executive Life Insurance Company whose GICs and annuities had been used to fund retirement plans - and what was involved to get these issues resolved for plan participants.

But that was then and this is now. Or is it? The recent volatility in the credit markets reminds fiduciaries yet again of the need to be proactive in protecting the assets of plan participants. This time around potential insolvency issues involve plan assets held by brokers, custodial banks, and financial contracts such as repos, swaps, securities lending, etc.

James Stewart writing in the Wall Street Journal after the Bear Stearns collapse tells us no worries because Safety Nets Protect Brokerage Accounts.

But with all due respect to Mr. Stewart, if you’re a fiduciary out there, you need to have more than a "feel good moment" after reading his article. A good starting point is to read the K&L│Gates law firm's recent Financial Services Alert, "Key Insolvency Issues for Broker-Dealers, Custodial Banks and Counterparties to Repos, Swaps and Other Financial Contracts." Here is what they say about evaluating whether assets are sufficiently protected.

A key to evaluating whether your assets and financial contracts with a broker, custodial bank or counterparty are sufficiently protected is to know your contractual and statutory remedies. As shown above, these vary with:
  • The type of broker: U.S. or offshore;
  • The type of security-holding arrangement: “customer name” or street name;
  • The amount of leverage on a securities account: fully paid or on margin;
  • The existence of other contracts with a broker and its affiliates, which might be cross-collateralized by the same assets;
  • The type of assets covered: securities or other types (commodities, currency, etc.);
  • The type of contract: securities brokerage or other types (repos, swaps, etc.);
  • Whether the broker carries “excess SIPC” insurance, and if so the coverage limits;
  • Whether assets and cash at a bank are held in a trust or fiduciary capacity;
  • Whether a financial contract is the type that qualifies for the “safe harbors” from the automatic stay in a bankruptcy or an FDIC receivership or conservatorship;
  • Whether your institution is the type that qualifies for exercising termination remedies under the “safe harbors” from the bankruptcy stay.
This list illustrates that the degree of exposure for financial arrangements with brokers, custodial banks and counterparties can vary widely. Some assets and contracts will be entitled to greater protection, in terms of distribution priorities, account insurance and termination remedies. Others may be more vulnerable and risk a lower percentage recovery in the event of an insolvency. Each asset and contract must be evaluated separately to determine where it lies on that continuum.

Here is a link to the complete K&L│Gates Financial Services Alert.

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Fiduciary Issues , Individual Retirement Accounts , Public Employee Plans
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Department of Labor enforcement criteria and 401(k) deposits

While my main focus is qualified retirement plans, I try and stay up to date on what is happening in the world of welfare benefits, i.e., health plans, etc. After all, both types of benefit plans are subject to ERISA's reporting, disclosure, and fiduciary rules. And both types, of course, are regulated in these areas by the Department of Labor (DoL). And so I found Roy Harmon's post today on his Health Plan Law blog, EBSA "Targeting Criteria" Enhancements Lead to Large Enforcement Gains, of great relevance to my world of qualified retirement plans. EBSA is the Employee Benefit Security Administration which is that part of the DoL that is responsible for ERISA regulation and enforcement.

One of the targeting criteria that Mr. Harmon mentions is information received as a result of complaints from participants, fiduciaries, informants, or other sources in the community. The most common source of complaints is, I have observed, participants. The reason?  Their 401(k) contributions have not been timely deposited. Easily discovered in a 401(k) environment of daily recordkeeping with internet access.
The DoL takes the same view of late 401(k) deposits as the IRS does of late payroll tax deposits. Dim. "Timely" according to DoL regs requires that employee contributions be deposited in the 401(k) plan on the earliest date that they can reasonably be segregated from the employer’s general assets, but not later than the 15th business day of the month following withholding or receipt by employer. This has come to be known as the "15-day rule".

But there is no such rule. The DoL has taken the view in its audits that the deadline under the timely standard almost always occurs prior to the 15th day of the month following withholding. The deadline in almost every case has turned out to no more than one to two weeks following withholding and, in many cases, to be no more than a few days following withholding depending on the employer’s individual facts and circumstances, i.e., the manner in which payroll taxes are withheld.

And there is nothing that causes employee morale to fall through the floor quicker than late 401(k) deposits.

Posted In 401(k) Plans , Fiduciary Issues
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Retirement plan pitfalls for plan sponsors to avoid

Most of the retirement plan coverage in the mass media is about bad things happening to employees or some aspect of the Pension Protection Act of 2006. So it's always good when a writer points out to plan sponsors that they have certain obligations in managing their retirement plans and the problems to avoid.

Marc Miller does exactly that in his article, Business Owners Beware of Retirement Plan Pitfalls, that appeared recently in the Oroville California Mercury Register.  Mr. Miller cautions business owners to:

  • Retain plan records
  • Distribute employee notices
  • Make prudent investment choices
  • Make timely salary deferral deposits

All basic, of course, and I am sure not intended to be all-inclusive. So in light of increased compliance activity by the regulatory agencies, here are a few other areas to which plan sponsors should pay special attention.

The Department of Labor which oversees fiduciary, reporting, and disclosure aspects of retirement plans has a special focus on these two areas:

  • Timely salary deferral deposits. No, not a word processing glitch, but to emphasize again the importance of remitting employee contributions to 401(k) providers as soon as possible.
  • Fees paid by a retirement plan.

The Internal Revenue Services which oversees the tax aspects of retirement plans has a special focus on these four areas:

  • Discrimination testing.
  • Plan loans.
  • Vesting.
  • Military leave issues.

And one issue becoming increasing important - security of retirement plan data.

Posted In 401(k) Plans , Fiduciary Issues
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