Peter Gulia

What Luke Bailey said. And on the IRS’s side of the negotiation is the penalty for each incorrect W-2 wage report and taxes and interest due from each failure to withhold income tax from wages for which § 401(k), § 403(b), or § 457(b) provided no exclusion. ****** Further, consider that some certified public accountants decline to be associated with a business organization’s income tax return if the return would include a position that depends on the retirement plan having been tax-qualified and the CPA knows the plan was not tax-qualified. Of those, many will proceed on receiving satisfactory assurances that the employer/administrator has engaged a lawyer or other practitioner for a correction that will be effective, retroactively, for the period of the tax return.

Many agreements include provisions for the retirement plan to pay the service provider’s fee—some in the first instance, and many after another anticipated payer did not pay after some specified period. (In my experience, a provision of this kind is common with recordkeepers. I suspect it is less common with TPAs. For investment managers and investment advisers, paying a fee from the assets managed or advised is common.) Some design factors include these: Make the retirement plan a party to the service agreement, or at least an intended third-person beneficiary of the service agreement. Make distinct a fee for a service that is a settlor (rather than plan-administration) expense. Collect from the plan only a proper plan-administration expense. Don’t collect a fee from the plan if the service recipient or the responsible plan fiduciary disputes whether the fee is owing. Design the timeline and method for collecting a fee so the service provider lacks discretion. Even if the service provider does not fear being a fiduciary, it should avoid self-dealing regarding its own compensation. In the agreement, specify the method for allocating the expense among participants’, beneficiaries’, and alternate payees’ accounts so the plan’s administrator will have instructed the service providers on the allocation. Recognize that collecting a fee might require a trustee’s, custodian’s, or insurer’s cooperation. Specify the administrator’s grant of the service provider’s power to collect its fee with enough clarity that the asset holder will accept the service’s provider’s instruction as binding the administrator and protecting the asset holder.

Belgarath, I think you’re right to see a risk; but the required analysis is not different from everything a fiduciary must consider. Following 29 C.F.R. § 2520.104b-31 treats a retirement plan’s administrator as having furnished the covered document. It does not excuse or relieve anything else. ERISA requires a fiduciary to use at least as much care, skill, caution, and diligence as would be used by someone who is “familiar”—that is, experienced—with the needs of a similar retirement plan and with the fiduciary’s role in serving such a plan. If a prudent-expert fiduciary would consider the risks you mention, an administrator must consider those risks. Yet, a fiduciary may (and often must) consider many factors, which might include managing plan-administration expenses. A fiduciary might find the potential advantages of a default-electronic-disclosure regime outweigh the potential harms. In some circumstances, nudging use of electronic systems might help improve security. Some service providers use records about when, from which internet service provider and connection, and which computer equipment an individual has accessed the plan’s website. A lack of such a baseline about what’s expected from the individual might make it easier for an impostor to get through with fewer challenges and weaker controls. An individual who has never used the computer system might suffer the weakest controls. If an administrator starts a default-electronic-disclosure regime, it might in the initial notice (which must include the individual’s specified electronic address the administrator will use) explain security risks so the individual has that information before she decides whether to allow the electronic regime. Beyond risks from the individuals, a fiduciary must consider the controls and security of the recordkeeper’s and other service providers’ systems, again using at least as much care, skill, caution, and diligence as would be used by someone who is experienced in managing the needs of a similar retirement plan.

Before even the earliest of the IRS’s fix-it procedures, I remember lawyers and other practitioners saying that most plans are tax-disqualified—it’s just that the IRS hasn’t yet made that determination. Although many of those remarks were merely flippant, some considered questions about an employer’s or payer’s duty in tax-reporting wages or a plan’s distribution. For example: 1. Imagine a plan’s administrator administered the retirement plan contrary to its governing documents (and contrary to a tax-qualification condition). Is the plan tax-disqualified? If the employer knows this happened, must the employer’s Form W-2 reporting treat amounts intended as non-Roth elective deferrals and matching contributions (if 100% vested and nonforfeitable) as not excluded from wages? 2. Imagine an insurance company, even if neither a trustee nor an administrator, is responsible for Form 1099-R reporting. Imagine it has full knowledge of the defect (perhaps because the bank or insurance company is the plan’s recordkeeper or its affiliate). Consider a single-sum distribution that, if the plan were a tax-qualified plan, would be an eligible rollover distribution. Must the insurance company code the distribution as not rollover-eligible? Must the payer decline to process a direct-rollover payment? (For both situations, assume the employer/administrator told the service providers the employer will not pursue any IRS correction, nor even self-correction. Assume also that nothing about the defect involves a § 401(a)(26) or § 410(b) failure. Assume the plan’s governing documents have nothing beyond an IRS-approved document and the employer is up-to-date for all amendments, including interim amendments.) If you were advising the employer or the payer, how would you analyze what it must (or need not) do?

Consider checking your client’s agreement with the custodian and each other service provider. Many retirement-services providers include in an agreement a customer’s warranties about its plan’s documents. Many agreements include a customer’s promise not to change any document that governs the plan except with the service provider’s written assent. Some agreements presume documents furnished by the provider are acceptable to the provider, and impose obligations about “outside” documents. While these service provisions often might not affect a plan sponsor’s ability to amend its plan, these provisions might affect a service provider’s obligations.

There are different ways for an executive to get some protection against her employer’s insolvency. While some use non-insurance arrangements, some use contracts with an insurance company or other insurance underwriter. The Internal Revenue Service has recognized some carefully arranged purchases of insurance against an employer’s inability or failure to pay an obligation as not funding a deferred compensation plan’s promise. For example, IRS Ltr. Ruls. 9344038 (Aug. 2, 1993), 8406012 (Nov. 5, 1983). Among the described facts, the participant paid for the insurance. Also, the participant negotiated the insurance, and did so without involving the employer. A letter ruling is not precedent. IRC (26 U.S.C.) § 6110(k)(3). Each taxpayer should get her lawyer’s advice. Because this insurance is an obligee’s personal protection against her employer’s inability or failure to pay deferred compensation, it is not a “plan” (or the employer’s) investment; rather, it is a participant’s personal insurance against one or more risks about her employer’s ability or willingness to meet its deferred compensation obligation. An insurer will underwrite this risk only if the insurer receives detailed financial information about the employer or obligor, and considers the information reliable. An underwriter might look (at least) for CPA-audited financial statements and minimum revenue and capital positions of the obligor. StockShield’s “Deferred Compensation Protection Trust” http://stockshield.com/our-products/deferred-compensation-protection-trust/ is a different idea. I’ve never evaluated it.

And don’t forget to revise the summary plan description. The plan identification number is an element of the required contents of a summary plan description. 29 C.F.R. § 2520.102-3(c).

Many governmental retirement plans have no provision for following a domestic-relations order. That Mississippi PERS has no responsibility to pay the non-participant might not preclude a court’s order that a retiree pay the non-participant. For one example, see https://courts.ms.gov/Images/Opinions/CO96560.pdf The non-participant might want advice from a lawyer knowledgeable in Mississippi domestic-relations law and courts’ procedures, including chancery practice.

A plan’s administrator might read carefully the governing documents’ provisions about a distribution to a beneficiary who is not yet an adult. Typical provisions permit paying a minor’s conservator or guardian, including a natural guardian (a parent). But a provision of that kind does not necessarily command paying such a fiduciary. Or if it does, there might be little or no constraint on a plan amendment. Also, a plan’s administrator might read carefully the governing documents’ provisions to check whether the plan’s termination undoes provisions that otherwise might have required a distributee’s consent to a distribution. If—after exhausting loyal, obedient, and prudent efforts to get the beneficiary’s choice about whether the beneficiary prefers money or a rollover—the beneficiary has not specified his or her choice, a plan’s administrator might obey the plan’s provisions (including recent amendments). What does the plan provide for a situation in which an adult beneficiary, after due notice, fails to specify the beneficiary’s choice between money and a rollover? Does anything in the plan’s governing document vary that provision regarding a minor beneficiary?

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If the plan’s governing documents allocated investment responsibilities to participants or they had a right to direct investment, might the plan’s administrator have breached an ERISA § 404(a) responsibility if the administrator did not meet the disclosure requirements of 29 C.F.R. § 2550.404a-5 for 2012 and later years. Even if the liability exposure to the one employee is both slight and remote, an employer/administrator might consider getting its lawyer’s advice about opportunities to reform, or at least amend, the document to state a plan that is not participant-directed (if that was, or is, the true intent).

29 C.F.R. § 2510.3-2(f) is not the only way to show that an employer didn’t establish or maintain a plan. Yet, courts’ decisions about arrangements for payroll-deduction pay-overs to buy voluntary insurance at least consider, and mostly apply, the somewhat similar rule—29 C.F.R. § 2510.3-1(j). While I have deep experience (from 1984 through 2005) about § 403(b) arrangements intended as a non-plan, all that experience was before the Treasury department interpreted IRC § 403(b) to require a written plan. Although I’ve advised charities (from 2006 through as recently as a week ago) about how to avoid involvement in claims decisions, none of those charities attempted to avoid establishing a plan. For many situations in which an employer believes it has a non-plan, the bigger risk exposure is that a participant’s surviving spouse discovers the spouse was not named as the participant’s beneficiary and learns that, if the plan is ERISA-governed (or a court so decides), the beneficiary designation might be invalid.

I am unaware of any published court decision that is on point for your question. Skillful lawyers could argue a wide range of possible interpretations. If your client is the employer and it prefers a non-plan, it might want its lawyer’s advice about: how strongly or weakly evidence beyond the document shows that the document’s provision was not the employer’s intent and is not employees’ reasonable expectation; whether the document may be equitably reformed to get rid of the scrivener’s error and state only provisions the employer intended.

If: the purpose and scope of the review is to review the plan’s or its administrator’s agreements with providers of services used for the plan’s administration, that review is reasonably needed for the plan’s administration, the fee is no more than reasonable compensation for the services rendered, incurring the expense is not contrary to the plan’s governing documents, and the responsible fiduciary loyally and prudently incurs that expense for the exclusive purpose of providing the plan’s benefits to participants and their beneficiaries, it ought to be an expense a fiduciary could pay from plan assets. For some partial subregulatory guidance: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2001-01a https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/settlor-expense-guidance

When I advised a charity that preferred not to be involved in claims decisions, we got each provider’s contract obligation that it will decide all claims without asking the employer for anything beyond furnishing factual information (not discretionary findings) the employer has and the provider reasonably needs. For an IRC § 403(b) non-plan, the trick is to get each provider’s obligation before the employer permits the provider “to publicize [its]products to employees” and before accepting a wage-reduction agreement that would specify a contribution to the provider. Likewise, the employer would avoid being a party to, or otherwise adopting or approving, an agreement, plan, or other writing that states, or without the employer’s assent could be amended to include, a contrary provision. Such a constraint narrows the available investment and service providers. If the employer had not obtained role-limiting provisions, a participant’s claim can result in the hard place Belgarath describes. Many employers, unwittingly or reluctantly, do things that establish or maintain a plan. And many businesspeople don’t understand that what an employer intended as a non-plan became a plan. Enforcement is almost none until a participant’s surviving spouse discovers the spouse was not named as the participant’s beneficiary (and learns that, if the plan is ERISA-governed, the beneficiary designation might be invalid). Even then, not everyone pursues it.

If ERISA § 404(c) applies, a fiduciary is not “liable for any loss, or by reason of any breach, which results from [a directing participant’s or beneficiary’s] exercise of control.” 29 C.F.R. § 2550.404c-1(a)(1). However, a plan does not fail to provide an opportunity for a participant, beneficiary, or alternate payee to exercise control over his or her individual account merely because the plan permits a fiduciary to decline to implement an instruction that would result in a non-exempt prohibited transaction. Because the conditions of the ERISA § 408(b)(2) exemption (or another prohibited-transaction exemption) include that the plan pays no more than reasonable compensation, a plan’s administrator might set an outer limit on a fee the plan’s directed trustee will pay under a directing participant’s, beneficiary’s, or alternate payee’s instruction. If a fiduciary sets such a limit, whether to draw the line at 250 bps, 150 bps, or something else involves risk-management and other practical choices. A fiduciary might prefer to set a limit so it imposes no more constraint than the fiduciary can show does no more than avoid a nonexempt prohibited transaction. Of course, any of this supposes the plan’s fiduciaries decided to allow an instruction to pay an investment adviser’s fee.

Because C.B. Zeller and others are generous in helping me, I thought I’d explain a way to resolve the 404a-5 question. I concur that no exception under the 404a-5 rule results because an individual incurred (or even negotiated) the fee. Rather, I think it’s feasible to state the disclosure the rule calls for. ERISA’s 404a-5 rule recognizes some expenses not apportioned among all individuals’ accounts. The yearly disclosure must include “an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis ([for example], fees attendant to processing plan loans or qualified domestic relations orders, fees for investment advice, . . .) and which are not reflected in the total annual operating expenses of any designated investment alternative.” 29 C.F.R. § 2550.404a-5(c)(3)(i)(A). For that explanation, one could write: If you hire an investment adviser to manage your individual account or advise you about how to direct investment, we may pay your adviser’s fees you instruct us to pay, and would charge your account for those payments. Quarterly statements must show “[t]he dollar amount of the fees and expenses described in paragraph (c)(3)(i)(A) of this section that are actually charged (whether by liquidating shares or deducting dollars) during the preceding quarter to the participant’s or beneficiary’s account for individual services[.]” But a yearly disclosure might explain an individual-incurred expense by a narrative, rather than specifying an amount, rate, or formula, especially for an expense not in the plan administrator’s knowledge. When a text includes a purpose statement, one may interpret the text according to its purpose. The rule describes its purpose as enabling directing participants, beneficiaries, and alternate payees “to make informed decisions with regard to the management of their individual accounts.” 29 C.F.R. § 2550.404a-5(a). If an expense is charged only according to a directing individual’s instruction to pay the fee, it seem reasonable to presume the individual had the information she stated in her instruction.

Thank you, everyone, for the further observations. In my experience (which includes hundreds of PWBA/EBSA investigations), I’ve never seen a Labor department investigator question whether advising a participant about how to direct investment for her plan account is a necessary service that plan assets can pay for. And the IRS in letter rulings decided that redemptions to pay the reasonable fees of a participant’s adviser are not distributions (and not reported on Form 1099-R) because they are plan-administration expenses. (At least three regulators—EBSA, IRS, and SEC—look for whether the payment arrangement is sufficiently documented, and for whether the adviser’s fees are reasonable, disclosed, and reported.) Some recordkeepers routinely pay, as instructed, the fees of an investment adviser affiliated with the recordkeeper. For example, Great-West (a/k/a Empower Retirement) will pay fees if the investment adviser is Great-West’s affiliate Advised Assets Group, LLC. Likewise, Fidelity Management Trust Company will do it if the participant’s adviser is Fidelity Personal and Workplace Advisors LLC or another FMR affiliate. So far, I’ve found few recordkeepers provide payment arrangements for investment advisers unaffiliated with the recordkeeper. I assume a directed trustee would want (1) the plan administrator’s or other named fiduciary’s approval; (2) the participant’s or beneficiary’s direction and instructions; and (3) the investment adviser’s warranties that the adviser is and will remain adequately registered; the fees are reasonable and sufficiently disclosed; and all conditions for a prohibited-transaction exemption are met. Does anyone know whether John Hancock, The Principal, or other providers will pay (assuming satisfactory instructions) fees of unaffiliated investment advisers?

BG5150 and C.B. Zeller, thank you. C.B. Zeller, for a plan that has no brokerage feature and restricts a participant's choice to core designated investment alternatives, have you ever seen an arrangement for paying an unaffiliated investment adviser at the participant's instruction? And other BenefitsLink commenters?

Informal poll and query for BenefitsLink readers: Considering only individual-account (defined-contribution) retirement plans that provide participant-directed investment: Does a plan with its recordkeeper’s or TPA’s help permit a participant to charge against the participant’s account the fees of an investment adviser unaffiliated with the recordkeeper or TPA? Always Often Sometimes Seldom Never When a recordkeeper or TPA allows such an opportunity, what conditions are imposed? What, if anything, does the recordkeeper or TPA require the adviser to sign to be recognized for a plan’s payment regime? Does the regime for paying an unaffiliated adviser’s fee allow any rate the participant instructs, or is there an upper limit?

Does the “written plan” for the § 403(b) plan refer to the collective-bargaining agreement or collective-discussion document so that the other document is a part of the § 403(b) plan? If there is a defect, a sound resolution would call for coordination about tax law and labor-relations law. If the public-schools employer does not use the same law firm for both, the employer should want the firms to collaborate. If you’re a service provider on this situation, consider asking the school business officer to instruct the law firms to receive information from you. (That’s if your contact wants to deal with the weakness.) Without your help, lawyers who lack practical experience with payroll and retirement plan administration might render advice that doesn’t meet the employer’s fully considered needs. Consider also that the employer might prefer not to get into this. While doing what’s needed to protect your work, try to avoid unnecessary writings that could make it easier for a State or local government auditor or an IRS examiner to spot a defect. Even if the problem is obviously not your fault, your firm might be blamed or punished.

Gilmore, thank you for the helpful information.

When the plan’s administrator is an organization (for example, the corporation, limited-liability company, or registered partnership that is the plan’s sponsor), does anyone affix as the signature, however “manual”, a signature of the organization’s name—for example, Worldwide Widget Company—rather than a human’s name?

BG5150, thank you.

Bird, thank you for your further observation. I too often see forms that use extraneous text, and ask for more items of information than is needed to decide the claim.