In the world of science and engineering, a black box is a device or system or object which can be viewed solely in terms of its input and output without the user knowing how it works. In the world of ERISA, a black box can be an actuarial valuation, the report that your actuary provides you on an annual basis telling you how well – or not well – your defined benefit pension plan is “funded”.
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:
- 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.
- 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.
- 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.
- 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.
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:
- 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.
- 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.
- 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.
- 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.
“Dear Urban Cyclists: Go Play in Traffic” but don’t forget about tax-favored commuter transit benefits
The Dear Urban Cyclists: Go Play In Traffic part of the headline is the one authored by P.J. O’Rourke in his recent article in the on-line edition of The Wall Street Journal.
Not exactly the same point of view – literally or figuratively – as that taken in the picture below from the blog post What You Missed This Morning…In Chicago. It’s a view many cycling commuters get while heading south on their way to work in downtown Chicago … on nice days, that is.
P.J. O’Rourke, of course, is the noted political satirist and author, whose article was tagged by The Wall Street Journal as "P.J. O’Rourke on the Scourge of Bike Lanes".
Some people "get" Mr. Rourke and others don’t as represented by the 204 comments (to date) on his article. You can decide for yourself.
The second part of the headline, "but don’t forget about tax-favored commuter transit benefits" is my unabashed way to leverage off of Mr. O’Rourke’s article to segue to the topic of commuter transit benefits about which I have written before. (That it may also may help improve SEO is another plus).
Simply stated, under Section 132 of the Internal Revenue Code, an employer may reimburse an employee up to $20 per month for reasonable expenses incurred by the employee in conjunction with his or her commute to work by bike.
It’s also a timely reminder about the availability of tax-free benefits on this April 15, the traditional tax return filing deadline. This year, however, IRS has approved April 18, 2011 as the tax filing deadline for 2010 personal tax returns and extension requests in observation of Emancipation Day in the District of Columbia.
You can find additional information on the Bicycle Commuter Tax Provision: Frequently Asked Questions posted on The League of American Bicyclists website.
The other union benefit crisis: multiemployer (Taft-Hartley) plans
The political and often emotional debate over unions continues to escalate, a timeline for which is reported in the Washington Post’s article, Protests Over State Budget Cuts, Anti-Union Bills Spread Throughout U.S.
The focus, of course, is public employee unions. But flying under the radar – or rather limping – are the issues affecting multiemployer benefit plans. Those are benefit plans most always established under the Labor Management Relations Act of 1947 also popularly referred to as the Taft-Hartley Act from which these plans get their name.
Unlike single employer plans, Taft-Hartley plans are structured as follows:
- The plan is collectively bargained with each participating employer who each contributes to the plan.
- The plan and trust assets are managed by a joint board of trustees comprised of equal representatives of management and labor
- The plan covers employees who frequently move between employers in the same industry, e.g., trucking, retail, and construction.
The number of employees covered under these plans is nowhere as prevalent as it was in years past when union membership was significantly higher. Such was the case during my early involvement with ERISA in the mid-1970s which included administration of multiemployer plans. At that time, union membership was approximately 26% of the non-agricultural workforce.
But much less now as reported by the Bureau of Labor Statistics in January of this year:
- In 2010, the union membership rate, the percent of wage and salary workers who were members of a union, was 11.9% with 14.7 million union workers.
- In 1983, the first year for which comparable union data are available, the union membership rate was 20.1% with 17.7 million union workers.
Despite this precipitous decline, there are approximately 10 million employees in nearly 1,500 multiemployer plans who are covered for health and retirement benefits.
For these plans to continue to be viable, they have to overcome three difficult challenges:
- Financial and demographic
- Legislative
- Judicial
Our blogging buddy, Paul Secunda, one of the editors of Workplace Prof Blog and Associate Professor of Law at Marquette University, takes on this topic in his recent Research Paper, The Forgotten Employee Benefit Crisis: Has The Moment of Truth Arrived for Multiemployer Benefit Plans? He provides some suggestions how to overcome the three challenges highlighted above.
Paul says in his conclusion:
This article provides a first time look at the numerous challenges that face Taft-Hartley plans in the post-global recession and post-health care reform world in which we now live. It has sought to offer some future internal, legislative, administrative, and judicial reforms with which to overcome the financial, legislative, and judicial challenges that these plans now face.
The outlook today no doubt looks bleak, but this article seeks to shine the light on how various structural and substantive plan reforms may help Taft-Hartley plans survive these difficult times. Although the pain of the present is not pleasant for Taft-Hartley plans nor for the employees whose retirement, health, and other welfare plan interests they represent, the hope is that through this necessary recalibration and restructuring multiemployer benefit plans will become stronger, with more secure participants and beneficiaries in the near future.
His article is scheduled for publication in November in the Cornell Journal of Law and Public Policy, but you can download it here.
Federal and State agencies “T”ing up employers for worker misclassification
A "T", or technical foul, is part of the game of basketball. If you’re a fan of the game, you know it’s any infraction of the rules which doesn’t involve physical contact such as unsportsmanlike conduct.
The retirement plan equivalent of a "T" is when an employer misclassifies a worker in situations regarding whether:
- The worker is an independent contractor or an employee, or
- An employee hired through a staffing agency/Professional Employer Organization (PEO) must participate in the client company’s retirement plan covering other employees.
The referee equivalent in these situations could be the Internal Revenue Service, the Department of Labor, State agencies, or all of them who have stepped up enforcement.
The financial consequences of misclassification could be costly in terms of income tax withholding; other employment related payments such as FICA, FUTA, state unemployment, and workers compensation; and retroactive inclusion in the retirement program.
Staying with the basketball metaphor, I cover the issue of independent contractor vs. employee in my recent blog post, Benefits Fouls, for BenefitsPro.com.
The other side of the court involves leased employees and whether they are actually employees solely of the client company or the client company as a co-employer with the PEO. It’s a complicated topic that attorney Charles C. Shulman covers throughly in his article, Leased Employees and Employee Classification, on his Employee Benefits and Executive Compensation Blog.
So if you have any concerns about how you are classifying workers, then take a time-out and consult with your tax advisor. And even if you don’t have any concerns, a periodic review of the status of each "non-employee" might be helpful to avoid a "technical foul".
“When I’m Sixty-Four”… Eh, better make that 75
When I’m Sixty-Four is, of course, one of the classic songs by The Beatles, written by Paul McCartney (credited to Lennon/McCartney) and released in 1967 on their Sgt. Pepper’s Lonely Hearts Club Band.
The theme is about aging with a young man singing to his lover about his plans of them growing old together.
It was also one of the songs in their 1968 animated film, Yellow Submarine, the video for which follows:
https://youtube.com/watch?v=h3chFhCP5mQ%3Frel%3D0
But that was in 1967 when retiring at that age was still a reality. No yellow submarine today – not with Americans’ confidence in their ability to afford a comfortable retirement at a new low. The "75" in the headline is a reference to Olivia Mitchell, a professor of insurance and risk at the Wharton School, who says that some employees may have to stay in the workforce to age 75 or older.
Retirement preparedness, or lack thereof, will be the focus of my new weekly column for BenefitsPro the new blog published by Benefit Selling Magazine. Here is a link to my first post, The Challenge Ahead: Helping Employees Better Prepare For Retirement.
Geraldine Ferraro’s ERISA legacy
Geraldine Ferraro who died yesterday at age 75 was a political trailblazer.
She was, of course, the first woman named to a major-party presidential ticket when Walter Mondale picked her to be his Democratic party running mate in 1984. But while the Mondale-Ferraro ticket lost 49 out of 50 states to the Republican ticket of President Ronald Reagan and Vice President George Bush, let’s not forget her ERISA legacy.
Then Congresswoman Ferraro authored the Retirement Equity Act of 1984 (REA) which was designed to protect participants’ spouses who were mostly women from losing retirement benefits earned by their husbands.
REA provided that protection by amending ERISA in several important ways to:
- Permit employees to leave and return to a job without sacrificing the pension credits built up unless the breaks in service exceed 5 consecutive years or the amount of time the employee worked at the job before leaving, whichever is greater.
- Provide protection against loss of participation and vesting credits when a woman or man is absent for specified parental reasons. These cover absences for pregnancy, childbirth, or adoption.
- Require plans to provide automatic survivor benefits for spouses of vested participants even if the participant dies before retirement.
- Prevent employees from waiving survivor benefits without the written consent of their spouses.
- Permit the assignment of pension benefits in divorce cases when there is a valid judgment, decree, or court order relating to child support, alimony payments, or marital property rights.
- Offer some vested former employees a new opportunity to choose preretirement survivor benefits and joint and survivor annuity benefits, provided certain conditions are met.
Her nomination for Vice President, a watershed moment. Her ERISA legacy, monumental.
March Madness in the workplace
Yes, it’s that time of year again when March Madness takes over many workplaces for the next three weeks. Outplacement firm Challenger, Gray and Christmas, Inc. estimates that employees will spend 8.4 million hours watching games from the office.
But let’s not even consider the lost productivity issue. Let’s just compare it to the amount of time employees spend on other matters…such as their 401(k) plan.
Just saying.
The 2% Social Security tax cut: spend, pay down debt, or contribute to 401(k) plan?
That 2% cut in Social Security taxes (from 6.2% to 4.2%) was supposed to stimulate the economy.
But according to Martin Crutsinger’s and David Pitt’s recent article on Blomberg BusinessWeek, the tax cut has little impact on the economy in January. Consumers increased spending by only 0.2% in January, the smallest increase since last June.
It’s a big number, an estimated $110 billion that workers will receive from the Social Security tax cut. That means about $1,000 to $2,000 in additional income for most families and approximately $4,000 or more for families with two high-income earners.
So what’s it going be, pay down credit card bills, deal with higher gas prices, more personal spending, or use the tax savings to put more away for retirement? Some of that $110 billion with perhaps an employer match plus the tax deferral can help close the retirement income gap.
And yes, it is effective only in 2011, but you gotta take advantage of the opportunities when they’re available.
