MoJo

I disagree on unitization being more appropriate with thinnly traded stock. The problem there is that if the market cannot absorb the stock the day following the day the net sale instructions are given, the selling pressure may cause the price to tumble, further harming those who remained in the fund. This can also cause liquidity problems (i.e. if the sales don't occur, you're short of cash for the subsequent day's instructions...). I've also been involved in litigation where some enterprising factory workers pooled their accounts, bought stock on Friday (and got that closing price), sold on Monday (when the plan was buying from the Friday transactions, and the price was rising), and then bought again on Tuesday. The resulting whipsaw effect on the price was substantial, and the service provider (who insisted on unitization) coughed up $140,000 to make the participant's whole. Also, be wary of not having sufficient cash for transactions, especially in a declining market for the stock. I was involved in a situation where a retired senior exec, who had a substantial amount in company stock sold at the peak - about $1.2 million. The fund had only $50,000 in cash and, of course, the price dropped. Still in litigation on that one. To make unitization work, prep work is essential - check average daily volume, price movements, institutional holdings, plan holdings, participant holdings (average, and high), and then put in place brakes that are communicated to the employees so that if there is insufficient cash on hand, they get the next day's price, not todays....

Actually, both of the other answers are right. My experience has been that "actual" participants have been the basis for charges, but as vendors take over more responsibility for eligibility tracking and determination, the trend is in favor of "eligibles" as the basis for charges.

Uh, was REA even effective when this guy retired in 1983? I haven't looked it up, but I thought REA applied post 1984....

My guess, MJ, is that only partial distributions were made because the actual balances aren't known, or may be adjusted as a result of expenses yet due to the recordkeeper/service provider/trustee. Once a final valuation is complete, and plan expenses settled, balances will probably be distributable. Rest assurred that except for legitimate and reasonable plan expenses, the balance will be paid to the particpants.

While I agree MPPPs may not be dead, I agree they are less desireable in the current corporate climante. The flexibility of contributions is indeed a big benefit to the corporation, and frankly, Appleby, I've not seen anyone make a decision of employment on retirement benefits - at least not the "qualified" kind. As for the permanence issue, yes it should be a concern, but the rule is not that it be permanent - just that it was intended to be permanent when it was established. Terminating a plan as a result of a tax law change, IMHO, is justification enough.

I concur, R. Butler. And to compound that problem. including "extraneous" terms within the note may make it non-negotiable (which isn't necessarily a problem, but may foreclose various options), and may be unenforceable. I also agree that it would be a state by state determination - the note must be legally enforceable under state law. The worst possible situation would be a provision in the note that makes in totally unenforceable - which could then render it a PT at least, and a breach of a fiduciary duty at most. I personally don't like notes cluttered with things other than an unconditional promise to pay a sum certain at a certain time (or over time).

R. Butler - intentional may have been the wrong word. Of course the loan at the time it is initiated must be a bona-fide obligation and not a sham transaction. But, after that, what's the problem with a participant electing to discontinue payments on a loan? People do that everyday with respect to other bona-fide obligations?

Well, personally, I think that provision would be inappropriate in a plan, and it highlights the issue in this thread. If ERISA preempt, then the provision is unnecessary. If ERISA doesn't preempt, then the inclusion of such a provision is superfluous, and possibly a violation of state law. Lets not assume that just because a provision is in a plan that it is an ERISA protected provision. You can put lots of things in a plan document, and as long as it isn't a violation of ERISA or the Code, it should be given effect - but if it is in violation of state law and not an ERISA related provision, it won't, despite being in an ERISA plan. Furthermore, as was pointed out above, failure to comply with the state law, absent ERISA preemption, may have dire consequences. If this is such a concern, why does the plan have a loan provisions? WHat is the problem, if the plan allows loans, in allowing an intentional default?

I think the distinction between negative elections and loan repayments is that negative elections affect a benefit contribution - a concept which is central to the idea of a qualified retirement plan containing a CODA - that of providing retirement income or income deferral. Loan repayments are in fact ancillary to the benefit - indeed, loans themselves are not part and parcel of the benefit, but rather are an INVESTMENT of the plan, which has been exempted from the PT consequences for political reasons. Loans, and their associated repayments have no relevance to the purpose of the plan, which is to provide retirement income (or at least income deferral). Now, before you say "wait a minute - whether a loan is repaid or not does affect the ultimate benefit" consider that if ANY investment of the plan goes bad, benefits are affected. That doesn't mean ERISA preempts investment management laws, or "blue sky" regulations, or anything else. Loans are investments. they aren't central to the purpose of the plan. The means of electing a deferral amount, being so central to the benefit to be provided, may as well be an area of exclusive federal jurisdiction, but last time I checked, the issue was still being litigated. Cases are pending in AZ, CA and NY (that I know of), and the DOL has not "officially" given an opinion on negative elections (although unofficially, they - at least PWBA - has indicated that it seems ok - it'll be interesting to see whether the other parts of the DOL - specifically those charged with enforcing worker rights - believes that negative elections are a good thing).

Ah, R. Butler.... I have been fortunate to have once worked with Dean Hopkins, an attorney in Cleveland who fought the IRS in the case of O'Neill v. Secretary (IRS), (1969, I think).... The case basically forced the IRS to recognize partnerships as employers of the partners for purposes of providing qualified plan benefits. Up till that point, the IRS had issued regulatory guidance indicating that partners in partnerships were not employees for purposes of receiving benefits (I realize this is a huge oversimplification of the issues in this case).... Nonetheless, Dean's trademark line was that "the IRS' opinion in its regulations are but one interpretation of the law, and not necessarily a correct one." The same may hold true for the DOL and its advisory opinions.... I wouldn't advocate a wholesale disregard for agency pronouncements, but alas, I feel compelled to always ask "why?" Explain to me how the method of repayment of a participant loan "relates" to an employee benefit plan. The method of repayment has nothing to do with the provision of benefits, nor with purpose of the loan feature. It generally is dictated as a matter of administrative convenience, and *arguably* as an easy means for the fiduciaries to fulfill their obligation as fiduciaires to seek repayment. It is by no means the *only* way in which to accomplish these goals, and while deference must be given to the fiduciaries in selecting how to implement such a feature, these policies surrounding the implementation are not part of the statutory and regulatory framework that surround such a feature (ie, the PT exception language in ERISA, and the Section 72 requirements in the Code).... Far too often we assume that something that "touches" a plan, "relates" to it for purposes of preemption. In our federalist-republic form of government, that is not (always) the case. If in fact it were, then virtually every activity I do (as an attorney and consultant with respect to qualified plans) would be regulated by ERISA - as what I do affects the benefits that participants ultimately receive (including plan design, interpretation, negotiations, etc.). I thank God that such is not the case....

Perhaps I'm being dense here, but why would ERISA preempt state withholding laws? The ability to get a loan from a plan may be an ERISA/Code preemption issue, but the form of repayment is not - and under the doctrine of preemption as implemented in ERISA, ERISA only preempts state law only to the extent it relates to an ERISA covered plan. Payroll deduction for repayment of a loan does not, in my humble opinion, "relate to" a benefit plan - it relates to the source of funds for purposes of repaying a loan. It appears that the fact that the loan is from ERISA plan is only incidental. Consider this - a DB plan makes a loan to a contractor as an investment (prudent? maybe not, but certainly legit...). If the contractor defaults on loan, is the resultant action to enforce it now an ERISA based action, with jurisdiction vested in federal courts, merely because the loan was from an ERISA plan? I think not. My policy has always been to allow the participant to stop payment through payroll deduction, then to default the loan. Of course, as a good fiduciary, one should *still* attempt to collect the loan..., but that would be a different thread....

Gee, if that's how long it takes to process a loan, I'd find another service provider! :-) Just kidding. The approaches I've seen include limiting the amount of the loan to something less than the regulatory maximums (ie only take into account 90% of the account balance when the loan is initiated to calculate the 50% limit to account for market fluctuations - but of course, the plan needs to say this...), and actually speeding the process up so the loan is issued when requested (same day, or next day) but is made subject to the condition subsequent of approvals, etc. Neither is elegant, and each has disadvantage, but in reality, I think speed is the key. Issue the loan quickly after request, and you minimize the problem.

The reason I said auto enrollment is a recipe for disaster if implemented for any reason other than inertial inaction is because the other reasons STILL exist after the participants are enrolled. I think in your case, you've exhibited this situation. Why haven't most people auto-enrolled moved their money (such that you said right amount/right investment was necessary for fear of lawsuits 30 years hence?). I applaud your company's attitude about the plan - it is a good benefit, and employees should partake of it, and auto-enrolling them should be perceived as a positive. Unfortunately, too many times I've had clients come to me (I'm in-house counsel for a bundled service provider) wanting to implement auto-enrollment because the CEO can't defer enough. Wrong reason.... Its a more complicated decision than that. Those that don't evaluate the situation appropriately are looking at: 1) lots of opt outs; 2) lots of POST ENROLLMENT opt outs (with either lots of small balances left in the plan, or potentially disqualifying "negative contributions" to correct); 3) increased distrust by employees who's take home just went down; 4) increased requests for loans and hardships (gee, this is a christmas club account, isn't it?); and last but certainly not least: 5) SIGNIFICANTLY increased fiduciary liability - not only is the plan sponsor now responsible for investment decisions (remember, 404© only kicks in after AFFIRMATIVE action by the participant) - how many sponsors are monitoring the "default" fund as being appropriate (especially after the last year or so of market turmoil), AND with respect to the amount auto-deferred (gee Mr. Employer, I thought you knew best and 3% defferral over the last 30 years should have been sufficient for me to retire on...). Key here is to 1) know what auto-enrollment is intended to solve (i.e. inertia, again); and 2) DO EVERYTHING POSSIBLE to get the auto-enrolled participant engaged in the plan and making decisions for themselves (whether it be deferral changes, investment changes, or even taking a loan - anything, as long as it evidences active participation in the plan).

Not to add confusion to here, but why is participation so low? In my experience, if participation is low because of inertia - ie, a workforce that just hasn't gotten around to it, then auto enrollment is the solution. However, if the reason is something else (lack of understanding/information, low wages, cultural issues, etc.) then auto enrollment is a recipe for disaster. Those problems are better solved through target education and other means.

Are there any other parties involved that the TPA has to pay (i.e. a broker/consultant)? I'm seeing more plans wrapped with an asset based fee to provide compensation to a variety of other parties that may have brought the business in, or may be performing some additional service (some legitimate, some not so legitimate) on behalf of the plan. I agree with the prior posts - the issue isn't one of the fee being asset based, but rather whether the comp is reasonable in the aggregate - which is something that needs to be monitored on-going.

Been there, done that (very politely, I might add) and still threatened with jail. Depends on the judge!

The plan is in fact a liability of the company, and the trustee needs to marshall all of the assets AND liabilities. They usually forget about the latter part of that statement. If it was a responsibility of the company, it now becomes the responsibility of the trustee in bankruptcy. I'd be interested in a cite too - as I've had this battle with them as well....

I think the clear answer is no, the bankruptcy court can't do anything the plan doesn't provide for, nor can it cause the plan to violate ERISA. But.... That said, the court could probably force the company to amend the plan to provide for loans - if its consistent with the Code and ERISA (ie, in the best intersts of the plan and the participants, provided on a relatively equal basis, yada yada yada). It would be an extraordinary step, but possible. Also keep in mind, under ERISA you may be able to refuse to comply with the order, but the order is the order of a judge, and they take those things personally. Pack your toothbrush when you appear to show cause why you shouldn't be held in contempt.... ;-)

Bypass the bankruptcy trustee and go straight to the court. There is a way (I'm not an expert here) to get the bankruptcy trustee to act....

I've done the hope thing. I would suggest prayer....

I'm actually surprised that the trustee would accept an indemnification. The only real protection is to enforce their fiduciary obligations, or possibly to resign (but only if doing so would not further injure the plan). In fact, an indemnification may INCREASE liability, as it is clear evidence that the trustee knows of the problem, and has taken no steps to correct the defect.

Ouch. Well, unfortunately, I've had to deal with this situation myself. The trustee in bankruptcy should assume responsibility of the plan, at least pending court approval of a substitute "Plan Administrator." I've seen the trustee in bankruptcy continue to act as plan administrator, I've seen a third party (usually a lawyer) act as such, and I've seen the trustee/recordkeeper assume that responsibility (although usually with a lot of kicking and screaming). The trustee of the plan should make an appearance in the bankruptcy, file a proof of claim for the past due contributions (which may or may not be declared trust assets - I wouldn't hold my breath), and to seek instructions on disbursements. Good luck.

Unless, of course, the fund menu selected by the employer includes collective trusts managed by the "directed trustee." Then, the directed trustee, while not selecting the fund line up, does in fact have fiduciary control over the underlying assets of the collective trust, which are in fact considered assets of the plan's trust, and make them, by definition, a true fiduciary under ERISA. Bottom line: Titles and agreements are irrelevant. Function determines what liability attaches under ERISA. Discretion in management of the plan, *any* handling of assets (except in the most ministerial of ways), and the regular dispensation of investment advice for a fee are what makes one a fiduciary.

I like that approach, RCK, but under state law, can one even make an irrevocable assignment of pay? I'd bet that that is not universally true, (it certainly isn't in Ohio)and the existence of that language in a plan document certainly wouldn't override state law....

Clearly a bankruptcy stays collection on the loan, but does not alter the tax consequences of defaulting on the loan. In some cases, discharge of indebtedness does not create taxable income, but a deemed distribution does. Interestingly, there isn't an answer (that I've found) with respect to the original question posed - although I agree with the prior posts. Automatic deduction is but a convenience for repayment of the loan, and if the participant says "stop," I think state based wage and hour laws would require that you stop the deductions. Some have argued that "ERISA preempts," but I haven't seen any cogent reason why. ERISA requires that the terms of the loan be boba fide, not that the terms of the loan be enforced over other obligations (i.e. what happens if a court orders wage withheld child support payments? Would ERISA say not until after the loan payment is deducted? I think not). Anyhow - I'd make the participant demand, in writing that deductions stop, then stop payments and run through the delinquent payment process in the loan policy, then default the loan....