It’s not just us getting older. So are 401(k) and pension plans

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

How long do we have to keep retirement plan records is one of those questions that plan sponsors ask when they start to run out of file cabinet drawers. They’re familiar with their reporting and disclosure obligations that they have under ERISA, but ERISA also requires that plan sponsors retain the records that support the information included in the 5500 filing and other reports for a specific period of time. So exactly how long should plan sponsors retain plan records? As with all things ERISA, there is the legal part and the practical part. Here’s both.

The legal part of the answer is that all plan-related materials should be kept for a period of at least six years after the date of filing of an ERISA-related return or report. The records should also be preserved in a manner and format (electronic or otherwise) that permits ready retrieval. All records that support the plan’s annual reporting and disclosure should be retained.

While many plan sponsors retain firms like ours to provide certain reports and prepare the 5500 filing, the plan administrator remains ultimately responsible for retaining adequate records that support these reports and filings.

And now here’s the practical part of the answer. While plan documents and records should be kept for a period of six years after the date of the filing to which they relate as discussed above, best practices would be to keep certain records for the life of the plan. If a plan sponsor has to respond to an inquiry from a government agency or a request for information from a plan participant, a thick paper trail makes it easier to respond.

And with the new tax laws, retirement plans are not only getting older, they can get better.

How financial forensics uncovered the backdated stock option scandal

By Jerry Kalish on Posted in Employee Stock Ownership Plans

The backdated stock option scandal is one of those stories that continues to have legs. Last week two news stories appeared. The first was the publication of IR-2007-30, the announcement by the IRS of its initiative aimed to provide tax relief for those for rank-and-file employees affected by their companies’ issuance of backdated and other mispriced stock options.

The IRS will be offering employers the opportunity for them to satisfy the tax obligations of these employees. This program, however, will not be available for backdated options exercised by most corporate executives or other insiders. Only fair, right?

The second and far more interesting story to me (and other CSI fans) was the post in CFO Blog by Marie Leone, Senior Editor of CFO.com, Faster Than a Speeding 8-K. Ms. Leone reports on a speech by SEC Chairman Christopher Cox before members of the Practicing Law Institute on how the Enforcement Division used online reporting of stock option data to uncover the billions of dollars of backdates stock option awards. Ms. Leone also provides the interesting backstory and link to Chairman Cox’s speech.

Is there an ERISA connection? Well, the Department of Labor will require that Form 5500 be filed electronically for plan years beginning on and after January 1, 2008.

Breaking up is hard to do – and more complicated when retirement benefits are involved

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

In the world of ERISA, there are three parties to a divorce: the retirement plan participant, the ex- (called the alternative payee), and the plan administrator. Or, in the proper order: the participant, the administrator, and the ex-. Because the plan administrator is the person in the middle since he or she has to decide whether a domestic relations order that provides for child support or recognizes marital property rights in the participant’s retirement benefits meets the requirement of a qualified domestic relations order (QDRO) under ERISA.

If, in the determination of the administrator, the order is not a QDRO or if there are competing claims, then the order issued by a state court can’t be honored. And that’s where it gets complicated. Steve Rosenberg in his Boston ERISA and Insurance Litigation blog writes about competing claims in his post, ERISA, Interpleader and Qualified Domestic Relations Orders. In the case he discusses, the ex-wife and the girl friend of a deceased participant are both claiming insurance proceeds under an ERISA plan. So what happens now. Steve writes:

And then what happens next of course, is that the plan administrator, quite rightly, files an interpleader action asking the court to figure out which one of the two should get the proceeds. A plan administrator would err if it did anything else, as ERISA preemption and the plan’s terms would suggest that the girlfriend should get the proceeds, but this would be in direct contradiction of a probate court order; there is no reason for the plan and its administrator to be stuck between the rock of the plan and the hard place of the probate court order. And avoiding being stuck in this type of position is exactly why federal law allows interpleader in this situation.

Steve’s post is a reminder that plan administrators must have QDRO procedures in place to determine the qualified status of domestic relations orders and to administer distributions pursuant to qualified orders. Administrators are required to follow the plan’s procedures for making QDRO determinations.

Translated into practical terms, plan administrators should have the phone number handy of a qualified ERISA attorney.

NASCAR drivers are on their own at retirement

By Jerry Kalish on Posted in Defined Benefit Pension Plans

Once a year – or so it seems – as part of Super Bowl week, media coverage is given to stories about meager pensions provided to the older retired NFL football players. A major part of the reason is that these guys are not represented by the Player Association. But at least, they have pensions. And you’d think that all major professional sports have retirement programs. All do – except for NASCAR drivers.

Unlike the other professional sports – with one exception – the drivers are independent contractors. Their status isn’t unique to NASCAR. It’s the same in most every form of motor sports. Crew members who work for teams are employees who are provided benefits including 401(k) plans. That other exception as independent contractors is professional golfers.

But PGA members do have a retirement plan in the form of a deferred compensation plan in which part of their prize winnings are used to fund their retirement benefits. Nick Price has been quoted in Business Week as saying that golfers now in their mid-20s who have a career like his could have $30-$40 million in their pensions. Click here for the Business Week story on how the PGA plan works but you’ll have to navigate through the ads.

The difference between the two? Racing has been described as a sport that celebrates rugged individualism and personal responsibility. Drivers are on their own.

Comments on reversal of ERISA class action certification

By Jerry Kalish on Posted in 401(k) Plans

Last month with ERISA class action suits in the news, I blogged about a recent ERISA class action suit in which the Fifth Circuit Court of Appeals vacated a lower court’s decision certifying the case as a case action. Plan participants of the EDS 401(k) plan claimed that the fiduciaries of the plan improperly required them to purchase Company stock even after the stock became an "imprudent investment".

I said that I would leave  it to the attorneys to comment on the implications of this case on the current class action suit lineup. Alston & Bird did exactly that today in their ERiSA Litigation Advisory, Fifth Circuit Panel Reverses Class Certification in 401(k) Stock Drop Litigation: 

Several district courts have recently grappled with issues similar to the ones before the Fifth Circuit in Langbecker, and some have also determined certification to be inappropriate, at least in part. As the first circuit court to address these issues, the Fifth Circuit’s decision is of notable consequence and it provides defendants with authority to support their effort in defending against class certification.Given the importance of the issues and the forcefulness of the dissent, however, this decision may be headed for further review by an en banc Fifth Circuit.

Note: In referring to the U.S. Court of Appeals for the Fifth Circuit  in my prior post, I said that it has jurisdiction for the U.S. District Courts in Louisiana and Texas. I neglected to include Mississippi. Paul Secunda, assistant law professor at the University of Mississippi School of Law and a co-editor of the Workplace Prof Blog  kindly pointed out the oversight. Thanks for the correction, Paul.

Left out of the game. What to do when an employee isn’t offered 401(k)

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

It happens. An employee meets the 401(k) plan eligibility requirements, and the employer unintentionally does not offer enrollment at what should be the employee’s entry date. Roy Harmon in his Health Plan Law blog writes about a similar situation involving a group insurance benefit. The title of his post, “Instatement” In LTD Plan Appropriate Remedy Where Employer Fails To Enroll Employee, says it nicely. However, it required the employee having to sue the employer in order to receive benefits. The court, writes Mr. Harmon, opined that the employer acted as a fiduciary in its responsibility for benefit enrollment, and breached its fiduciary duty in the exercise of this responsibility.

Now having established that even an inadvertent mistake such as failure to a enroll an employee can be a serious matter, how does a 401(k) plan sponsor deal with a similar issue. “Serious”, by the way, in a 401(k) environment could mean the ultimate sanction, disqualification of the plan. Fortunately, it doesn’t usually require a law suit to make it right. The IRS has introduced a number of compliance programs starting in 1991 without them having to resort to disqualification.

These programs have been consolidated into the Employee Plans Compliance System (EPCRS), and IRS Revenue Procedure 2006-27, the most recent update of the EPCRS program, addresses the issue that started this discussion – an employer’s failure to offer 401(k) to an employee. The mechanics are beyond the scope of this discussion. The important consideration, however, is once found, employers should correct it as soon as possible. Out of sight, out of mind can have serious consequences.

A partial termination of a retirement plan: perfectly clear in the rear view mirror

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

A partial termination of a retirement plan is one of those things that you know  now what you didn’t know then. If it happens, then all plan participants must be fully vested. But there is no clear objective test as to when it happens. What got me thinking about this subject was yesterday’s article by Jon McLaughlin, Extinguishing Pension Plans By Partial Termination & Aggregation, that appeared in the The Business Law Society, a publication of students of the University of Illinois College of Law. Mr. McLaughlin writes:

This article explores the question of when successive reductions in plan participants should be aggregated for purposes of determining whether a partial termination occurred. The best guidance that the case law can currently render is that multiple reductions in force are aggregated, for purposes of determining whether a partial termination occurred, when they are related, meaning that they have spawned from the same “major corporate event”.

And non-lawyer that I am, I put the issue in the context of retirement plan administration. That is, if the partial termination occurs as a result of aggregation as written about by Mr. McLaughlin (rather than by a single event), then prior non-vested amounts of terminated employees may have been forfeited and reallocated to current employees or used to pay plan expenses. The result of which will require the plan sponsor to contribute money to restore the forfeitures which could be a sizeable amount.

So what’s a plan sponsor to do? Two things come to mind:

  • Consider the partial termination rule in the context of planning for a sale of part of the company, downsizing that will affect participation in the plan – and plan accordingly.
  • Determine whether it would make sense to submit the plan to the IRS for a ruling as to whether a partial termination occurred.

Now doesn’t this clarify the matter?

401(k) participant guide to target-maturity funds

By Jerry Kalish on Posted in 401(k) Plans

Target-maturity funds, a/k/a life cycle-funds, have made significant inroads into 401(k) plans, They’re now a common sight on the fund menus of many 401(k) platforms. The recent Department of Labor regulation on default funds in which target-maturity funds are one of the fund types that can provide fiduciary relief has further spurred their growth.

Target-maturity funds are not the same as asset allocations funds. Both provide the convenience of diversification using only one fund. But they differ. Asset allocation funds, a/k/a life-style funds, are based on risk tolerance, e.g., conservative, moderate, or aggressive. Target-maturity funds, on the other hand, are constructed to offer 401(k) participants a fund that matches their retirement date. The asset allocation changes over the years and becomes more conservative, i.e., less equity exposure, as retirement nears.

While much has been written about target-maturity funds from the plan sponsor’s standpoint, there has been little information available to 401(k) participants to help them decide whether to invest in these types of funds. Pamela Yip’s article in the Dallas Morning News, "Are life-cycle funds right for you?" provides an excellent guide that 401(k) participants can use to make that decision:

  • Pay close attention to fees.
  • Evaluate the performance of the fund over at least five years.
  • Evaluate the fund’s managers and their tenure.
  • Decide whether you’re willing to put all your eggs in one basket and let the fund handle your asset allocation.
  • Decide if a life-cycle fund complements your employer-provided benefits.
  • Choose a fund that will provide enough of a return to fight the ravages of inflation at retirement.

Here is the link to Ms. Yip’s article.

ESOPs as seen from France

By Jerry Kalish on Posted in Employee Stock Ownership Plans

Indeed a small world. Seniorcsopie.com, an on-line French publication for seniors/baby boomers carried this article today, "The employee stock-ownership plan : a way to save for retirement", that originally appeared in the Wall Street Journal on January 22, 2007. It’s about the ESOP that the New York designer Eileen Fisher set up to diversify her net worth. The article is in English with the rest of the publication in French. Here is the link to the Google-translated web page, and here is the link to the original French web page for you Francophiles out there.

Super Bowl teams in the spotlight, NFL retirees in the background

By Jerry Kalish on Posted in Defined Benefit Pension Plans

Baltimore doesn’t forget its Colts. And one of those former Baltimore Colts, Bruce Laird, (Baltimore Colts’ defensive back from 1972 to 1981 and a San Diego Charger in 1982 and 1983) wants to make sure that his former teammates and other retired NFL players are remembered in a more tangible way than street signs. Specifically, retirement benefits.

There are more than 400 retired NFL players that receive a very small pension and have no medical or disability benefits from the NFL. These former players have no power at the bargaining table because the NFL Players Association does not represent them. They did receive an increase from the Players Association recent ratification of the new Collective Bargaining Agreement, the subject of one of my recent posts.

Mr. Laird, running back Tom Matte, and other Baltimore Colts’ alumni are spearheading efforts to make the situations of the retired players a higher priority of the League and the Players Association as well as to educate the public and the media. These efforts include the formation of a new group announced by Mr. Laird in his recent post on the NFL Former Players blog:

We are pleased to announce the formation of a 501(c)(3) organization – legally designated as Baltimore Football Club, Inc., and operating nationally as either Fourth & Goal or Defending Champions – to advocate for pension and disability benefits, representation and other issues affecting retired players; and to raise funds on behalf of and to assist retired players in need.

And so while its Media Day tomorrow during this Super Bowl Week, it’s a story that most of the media haven’t been covering. One member who has is Ron Snyder of the Baltimore Examiner, and here’s a link to his coverage of these former NFL players.

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