The case of “The Employee Who Never Was”

By Jerry Kalish on Posted in Defined Benefit Pension Plans

How many times have we all “seen” the invisible dog being walked? Maybe too many times. But you probably haven’t seen this situation very often. The case of what I call "The Employee Who Never Was". It seems that a plaintiff filed suit against the plan administrator after being denied the plan’s $2,500 monthly benefit. Problem was, he was never an employee of the plan sponsor. Michael K. Wilson writes about this case in his post, Claimant Denied Benefits From ERISA Plan Sponsored By Company He Never Worked For on The Laconic Law Blog.

Mr. Wilson writes

In a rather strange ERISA case, a plaintiff filed suit after the ERISA plan administrator denied his claim that sought retirement benefits pursuant to a Plan titled Kroger 30-And-Out even though he was never an employee of Kroger.

The case is Beckner v. American Benefit Corp., et. al. (4th Cir. April 10, 2008). The 4th Circuit affirmed the denial of benefits. Here is a link (pdf) to the case courtesy of Mr. Wilson.

This case may seem strange to you perhaps. But not if you’re from the Land of Lincoln. The great State of Illinois and its various political subdivisions has a long history of paying salaries and benefits to people who don’t do any work. Unlike the case discussed above, these folks are, in fact, employees. They just have so much clout they don’t have to bother showing up for work. They even have a name. We call them “ghost payrollers” as for example “The Ghost with a Tan” whose move to Florida didn’t stop his city paychecks.

But if you want to get a job like this, don’t try myspace jobs$. Here’s what you get

No search results found. We couldn’t find any jobs for Ghost payroller. Please check the keyword terms you entered. You can also try using some other keywords, or enter fewer words to expand your search.

It’s the old adage. It’s not what you know. It’s who you know.

Note: Here’s a link to The Laconic Law Blog referenced above with the great tagline, Pithy Commentary On Employment Law In Virginia And Beyond. It’s published by Eric A. Welter, an employment lawyer and litigator with the Welter Law Firm, P.C. in Herndon, Virginia.

Another hat tip to BenefitsLink.

The incredible shrinking financial adviser

By Jerry Kalish on Posted in 401(k) Plans, Individual Retirement Accounts

No, advisers themselves aren’t getting smaller, it’s just that their numbers are. More of them are leaving the financial planning industry as reported by Plan Adviser citing a new report by Cerulli Associates, a research firm specializing in the financial service industry.  Cerulli’s Edge Advisor Recruiting Edition says that the number of financial advisers in the U.S. declined from 256,569 in 2005 to 245,831 last year.

And those entering the industry are getting older – quickly. According to Cerulli more than 62% of advisers were under age 30 when they entered the industry in the 1980s. By 2007, only 3% of financial advisers were under the age of 30. The reason, Cerulli notes, is that the job of financial adviser is increasingly becoming a haven for second-career professionals.

So where are the new advisers coming from then? According to Investment News, from other investment firms who recruit for advisers from each other. In other words, it’s a zero-sum game. In practical terms, it means that the boomers have a declining universe of experienced financial advisers to help them manage their retirement assets. 

My friend, Dr. Susan Mangiero asked the question the other day on her blog,  Pension Risk Matters, Do You Have Your Own Fiduciary? If not, why not? Maybe part of the answer to Susan’s question is that the good ones are just harder to find.

Picture credit: Grant Williams (August 18, 1930 – July 25, 1985) shown in his role of Scott Carey in the science fiction classic film The Incredible Shrinking Man. The film has become an existential cult classic. Released in 1957, and re-released in 1964, it was written by Richard Matheson. Here is a link to the trailer (ad preceeds) on videodetective.com.

“What we’ve got here is failure to communicate.”

By Jerry Kalish on Posted in 401(k) Plans

The phrase,"What we’ve got here is (a) failure to communicate" is, of course, the famous line from the 1967 film Cool Hand Luke starring Paul Newman. The quote is attributed to "Captain, Road Prison 36," who was played by the late, great American character actor Strother Martin. It’s become so much a part of the culture that it’s #11 on the American Film Institute’s list of the top 100 movie quotations in American cinema.

And that quote came to mind the other day after reading Rollover Systems’ article in their Weekly Exchange, Terminated Employees Can Be Toxic to the Health of Your Plan, by way of BenefitsLink. The LaRue decision, they say, demonstrates again why plan sponsors should distribute benefits to terminated employees. They go on to explain that

The necessity of communicating with ex-employees results in increases workload, plan costs, and your liability. (Ted) Benna says some former employees who harbor grudges against their ex-employers have used the non-receipt of plan information as a reason to file suit.

But the "What we have here is failure to communicate" situation goes beyond the non-receipt of documents. The grudge part that Mr. Benna alludes to has to do with the plan sponsor’s integrity – or lack thereof as perceived by the terminated employee.

It’s what Daniel P. Skarlicki, Laurie J. Barclay, and S. Douglas Pugh write about in their article, When explanations for layoffs are not enough: Employer’s integrity as a moderator of the relationship between informational justice and retaliation, in the March 2008 issue of the Journal of Occupational and Organizational Psychology published by the British Psychological Society. They say in the Abstract:

Victims of downsizing often perceive their layoff as being unfair, which can lead to various forms of retaliation. Informational justice, defined as providing employees with adequate explanations in a timely manner, has been prescribed as a way to mitigate the retaliation tendencies associated with unfairness perceptions. Few studies, however, have examined contexts in which informational justice might be more vs. less effective in this regard. In the present research, we explored whether employees’ perception of the employer’s integrity moderates the relationship between informational justice and retaliation among layoff victims. Results from a field and laboratory study suggest that informational justice helps manage retaliation only when layoff victims perceived that their employer had high (vs. low) integrity prior to the layoff. In Study 2, we found that perceived sincerity mediated the impact of informational justice by integrity interaction on retaliation.

So if we translate their academic research into practical retirement plan communication practices, the origins of retaliation, i.e., lawsuits, don’t begin with the employee’s termination but in the context of the employer’s past behavior. Effective, consistent communication and investment education can be good risk management.

Hat tip to our friend, Dr. Christian Jarrett, the Writer and Editor of the British Psychological Society’s Research Digest Blog,

“Bad boy” clauses aren’t passe after all – but sometimes it takes a judge to do the right thing

By Jerry Kalish on Posted in Employee Stock Ownership Plans

Back in the day – before ERISA – retirement plans had ‘bad boy” clauses. These were plan provisions under which a participant would forfeit his vested account balance if the participant was a “bad boy” for such actions as violating a non-compete clause or committing a criminal act. But ERISA did away with “bad boy” clauses. (See Susan Wynn’s post in her Pension Protection Act Blog, Bad Boy Clauses in Plan Documents).

ERISA’s prohibition against bad boy clauses generally precluded a court being able to order the retirement plan to pay out a participant’s benefits to a third party as restitution, even for a crime committed against the employer. But what if a crime was committed against the plan? Under these circumstances the Department of Labor or a Federal court could order the Plan Administrator to offset the plan’s losses against the participant’s account.

And now a recent case decided by the U.S. District Court for the Northern District of Alabama extended the circumstances under which a participant in an ERISA retirement plan could forfeit benefits because of his conduct. The case is Pension and Employee Stock Ownership Plan Administrative Committee of Community Bancshares Inc. v. Patterson, N.D. Ala., No. CV-04-BE-00531-S, 3/31/08. The Court allowed a bank ESOP committee to offset a participant’s account balance to repay damages to the ESOP.

The Court held that Kennon Patterson, former President and Chief Executive Officer of Community Bancshares, Inc. and Community Bank, breached his fiduciary duty to the bank’s ESOP by not disclosing his criminal acts against the bank to the ESOP committee of which he was a member  before the purchase of more company stock for the plan. Mr. Patterson used bank money to pay for building a 17,000 square foot home. The court said that Patterson not only committed fraudulent acts but also

knowing the Plan’s investment had been impaired by [his] own fraudulent acts, . . . failed to take any steps to protect the Plan’s assets. . . .

The case was reported by PlanSponsor (free registration required) by way of BenefitsLink.

Note: For an excellent discussion of qualified plan protection from creditors, see McKay Hochman’s commentary on the subject with a click through to an update for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.


Enough already about the Baby Boomers, what about Generation X?

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Employee Stock Ownership Plans, Individual Retirement Accounts, Public Employee Plans

View larger image.

Lost in the mass media focus on the Baby Boomers retiring is Generation X, the generation that follows. Depending on how they are defined, it’s the people born between 1965 and 1985 (age 23 to 43). I’ve written about them before, Not my generation that nobody seems to want. The "nobody" referred to are financial advisers who don’t seem to want them as clients.

And like the Boomers, Gen Xers also worry about their retirement prospects. But a new survey suggests Generation X is even more pessimistic. According to the survey published by Scottrade and BetterInvesting, over two-thirds of Americans aged aged 27 to 42 don’t think they will ever be able to stop working. This is in contrast to more than the 64% of respondents aged 55 to 64 who said they could retire and not worry, even though this group is much closer to retirement age.

Michael Rubin, a CPA and CFP, comments upon this survey on his blog, Beyond Paycheck to Paycheck, in his post, Retirement for Gen X: Black Hole or Perfect Storm?   The analogies are those of Chris X. Moloney, Scottrade’s chief marketing officer, who commented upon the study when he said

Gen X is in the middle of a ‘retirement perfect storm’ of very high expectations, low retirement savings and massive concern about the future of Social Security. It’s a black hole to them.

Mr. Rubin is an optimist. He says

I like the black hole analogy. But I’m glad we know about it now, when we can still do something about it.

Rachel is another optimist. She describes herself as "27 and working towards extremely early retirement".  Writing on her blog, Working for Rachel, she discusses the differences in the workplace causing The Financial Generation Gap. She writes

I’ve painted a grim picture here, but I’m not complaining–I think I’ve accepted all of the facts above without resentment. I haven’t ever known the world to be any other way. I’m still a cockeyed optimist. I believe that younger people still have a good chance of getting out of debt, buying real estate, retiring comfortably, and even retiring early. But for our generation, financial security requires total independence and total responsibility. We are the only ones we can count on when it comes to our financial futures.

Youth isn’t wasted on the young.

Picture credit: Generation X, acrylic on linen, 30"x40" from Temple’s TangleWave Art Gallery.

Pension Dumping: The Reasons, The Wreckage, the Stakes for Wall Street by Fran Hawthorne (Book Review)

By Jerry Kalish on Posted in Book Reviews, Defined Benefit Pension Plans, Pension Protection Act of 2006

Fran Hawthorne is an accomplished journalist who over the last 20 years has specialized in finding and writing about the intersection of corporate America and timely and sometimes contentious social issues. She’s written articles for publications such as Fortune, Business Week, and Institutional Investor and has authored books on such issues as the dangers of obesity drugs, the trade-off between campaign contributions and state bond underwriting, and Medicaid manipulation.

Now Ms. Hawthorne has turned her attention to an important issue that in today’s economy isn’t going away anytime soon, pension plan terminations. In her new book, Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street, Ms. Hawthorne takes an in-depth look on what happens when financially troubled companies terminate their defined benefit pension plans through bankruptcy.

I had the opportunity to interview Ms. Hawthorne who has, no doubt, a point of view starting with the title of her book. She builds a case about why pension dumping (her term) has become an increasingly common practice in the wake of bankruptcy and how investors are profiting off the wreckage.

Agree or disagree with her, her well researched book which includes case studies and interviews provides analysis and insight on the complicated and competing dynamics involved with the termination of a defined benefit pension plan:

  • Competing interests in bankruptcy court
  • The choices that unions have to make
  • The financial burdens assumed by the Pension Benefit Guaranty Corporation
  • The risks that investors take and the returns they look for
  • The issues that companies must deal with as they restructure

Ms. Hawthorne’s book should appeal to anyone involved with pension plans, e.g., CEOs, CFOs, HR professionals, union leaders, professional advisors, and policy makers. And if so, here is a link to Amazon.

Who has the richest retirement plan in America, the CTA or the MBTA?

By Jerry Kalish on Posted in Defined Benefit Pension Plans, Public Employee Plans

cta t logoIf you’re familiar with Chicago and Boston, then you’ll know that the CTA is the Chicago Transit Authority and the MBTA (also known as the "T") is the Massachusetts Bay Transportation Authority. But I never really thought about whose retirement plan was the richest in America until I saw this story carried by the BostonHerald.com, Critics blast MBTA’s costly pension plan.

So being a proud Chicagoan, my competitive nature kicked in when the story quoted Michael Widmer, president of the Massachusetts Taxpayer Foundation, as saying

It appears to be the richest retirement program in America. There’s no way we can afford the pension and health care benefits.

It seems that T employees can retire after only 23 years of service, with full health insurance. And then work for the state with no restrictions. Most state employees, said the article, can’t retire until they are 65 and are limited to where they can work afterwards.

But with all due respect to Mr. Widmer, let me invoke some civic pride here. Our CTA pension plan offers retirees premium-free health insurance, and allows some employees to retire at full pension in their 40s, after 25 years of service. The agency has tightened the requirements for those hired in 2002 and later, who must be 55 to retire.

Can these benefits be afforded? In 1993 the CTA pension plan was 99% funded, meaning it had funds available to pay nearly all of its projected expenses, according to the agency’s annual pension plan reports. Now the CTA’s pension funding ratio is the 34%, the lowest for any agency in the state.

And the fix? A tax increase, of course. As the result of protracted and contentious negotiations between the state legislators and the Governor, a funding package was passed earlier this year which included an increase in the sales tax that prevented massive service cuts. Part of the deal included a separate real estate transfer tax that will be used to help the CTA bail out its pension liabilities.

The tax, which used to be paid by buyers and now by sellers, will increase from $7.50 to $10.50 per $1,000 of sales price. Doesn’t sound like much? Let me do the math. Someone selling a home in a Chicago neighborhood with an average price of $262, 268 would pay $2,360 under the current tax rate. After the increase, they would pay $3,147 –  a 40% increase in a recessionary economy seeing falling real estate prices.

And so while we can match Boston’s costly transit retirement plan, I’ll concede that Boston does have it over Chicago in at least one respect. Boston’s transit system (which used to be called the MTA) – not Chicago’s – has a man named Charlie. Take a look.

https://youtube.com/watch?v=3VMSGrY-IlU%26hl%3Den

Investors, brokerage firms, and mandatory arbitration: so how has that worked out?

By Jerry Kalish on Posted in 401(k) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Individual Retirement Accounts

Last week Steve Rosenberg on his insightful Boston ERISA Law Blog tells us that Legal Rights That Are Protected In Courts, May Well Be Lost In An Arbitration. Steve comments on a recent Supreme Court case that parties may not contract among themselves for judicial oversight of an arbitration award under the Federal Arbitration Act. He says that

Probably the biggest barrier to arbitration serving as a forum for complicated commercial disputes is that the Federal Arbitration Act effectively provides no substantive oversight of an arbitration ruling, making the arbitrator’s ruling the final decision, and only allows judicial review for the purpose of addressing any serious procedural errors during the course of an arbitration.

But while arbitration is a choice for most parties to a commercial transaction, investors don’t have that option. Virtually all securities firms require investors dealing with them to resolve disputes by mandatory arbitration.

And since the 1987 Supreme Court case (Shearson/American Express v. McMahon) that held mandatory arbitration to be enforceable, the debate as to whether the investor gets a fair shake has raged on. And predictably, the industry says mandatory arbitration is fair while investor advocates claim the process is biased. A process that requires that one of the three arbitrators is affiliated with the securities industry, and the process itself is administered by the NASD rather an entity unaffiliated with the industry.

So how exactly has that worked out for investors? Not well according to a study, Mandatory Arbitration of Securities Disputes A Statistical Analysis of How Claimants Fare, released in June, 2007 by Edward S. O’Neal, Ph.D. and Daniel R. Solin. Their study was a statistical analysis of the results of the mandatory arbitration process during the 1995 – 2004 period.

They assessed almost 14,000 NASD and NYSE arbitration cases and found that claimant win rates and recovery amounts had declined significantly over time, and that claimants fared more poorly in large cases and in cases against larger brokerage firms. They estimated that that the expected recovery before legal fees and expenses in a large case against a top brokerage firm is only 12% of the amount claimed.

They concluded that

There may well be innocent explanations for fact that the chances of an investor recovering significant damages from a major brokerage firm are statistically small in mandatory arbitration. However, our data clearly indicates a decline in both the overall “win” rate and the expected recovery percentage against major brokerage firms, at a time when the misconduct of these firms reached its apex with the analyst fraud scandal.

The study was funded by the authors. Edward S. O’Neal, Ph.D, is a principal with Securities Litigation and Consulting Group, Inc. (SLCG) who completed the work while he was on the faculty at the Babcock Graduate School of Management at Wake Forest University. Daniel R. Solin is a securities arbitration attorney representing investors. He is also a Registered Investment Advisor and Senior Vice President of Index Funds Advisors, Inc..

You can download the complete report here (22 pages, PDF).

Hat tip to James J. Eccleston who publishes the FinancialCounsel blog. Jim heads heads the securities group at Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C. (SNSFE), a Chicago-based business law firm.

What every fiduciary should know about their brokers … and also their custodial banks, and financial contracts

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Employee Stock Ownership Plans, Fiduciary Matters, Individual Retirement Accounts, Public Employee Plans

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.

U.K. defined contribution plan sponsors trying to offload fiduciary risk

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Defined Benefit Pension Plans

Retirement plans in the U.K. and this country are a lot alike. Employers in both countries have shifted from defined benefit plans to defined contribution plans. Employers in both countries use a trust-based system complete with fiduciary responsibilities. And employers in both countries are understandably trying to limit their exposure to fiduciary liability. U.K. employers, however, are trying to offload any risk by entering into what is called “contract-based plans.”

These are arrangements in which the employer hires a single provider such as an insurance  company or an asset manager to run what’s essentially a series of individual pension policies. Beyond hiring a single provider, the employer has no responsibility for investment manager selection, fund monitoring, or employee education.

These contract-based plans seem to be gaining in popularity. According to the 2007 annual survey released by the the National Association of Pension Funds (NAPF), 56% of the U.K. defined contribution plans surveyed were trust-based plans compared with 89% two years earlier. The NAPF, a London-based industry organization representing more than 1,000 pension funds in the U.K., says that

This might suggest that some of the employers who have most recently closed their DB schemes to new entrants have substituted contract-based DC arrangements.

I take that as typical British understatement as many smaller employers have already made this change with more expected in the future.

So how do the regulators in the U.K. feel about employers trying to avoid governance responsibilities? Apparently, not enough by our standards. In January, The Pensions Regulator, the government agency that oversees all U.K. employer-sponsored pension plans, issued guidelines that encourage contract-based pension sponsors to voluntarily set up their own governance arrangements. There was no requirement requiring companies to follow its recommendation.

All of this is, of course, in marked contrast to ERISA’s requirement that fiduciaries are responsible for monitoring service providers. It takes me back to those thrilling days of yesteryear, pre-ERISA, during which most pension plans were individual policy plans purchased from life insurance companies. The remnant of which today are 403(b) plans. But that’s changing fast. (Here is a link to several 403(b) posts on Baker & Daniels BEC team’s new and excellent Benefits Biz Blog and to two of my own from last year, If it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b), Part I and Part II).

Source: March 31, 2008 article in Pension & Investments by Thao Hua, "More U.K. companies turn to contract plans. But alternative to trust-based DC plan may not be safeguard."


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