Peter Gulia

Is the participant still employed by the employer that sponsors or participates in the retirement plan?

Apart from the Form 5500 question: If a plan’s governing documents grant the plan’s administrator discretion about whether to pay or omit an involuntary distribution, shouldn’t an administrator fear that discretion? If a fiduciary has that discretion, must the fiduciary decide loyally and prudently “for the exclusive purpose of [] providing benefits to participants . . . ”? Must a fiduciary decide whether paying or omitting the distribution is in the participant’s best interests? If so, must a fiduciary use ERISA § 404(a)(1)(B) “care, skill, prudence, and diligence” to form that discretionary decision-making? What facts must or should an administrator consider in deciding whether to pay or omit a discretionary involuntary distribution? (The underscore is not mine.)

The Treasury’s rule looks for “a legally enforceable agreement”, and says it may be “a document that is delivered through an electronic medium under an electronic system that satisfies the requirements of § 1.401(a)-21[.]” And: “The agreement does not have to be signed if the agreement is enforceable under applicable law without being signed.” 26 C.F.R. § 1.72(p)-1/Q&A-3(b) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72(p)-1 Consider that for many plans “applicable law” might be ERISA’s title I, which supersedes a State’s law. And under other Federal law, a signature, contract, or other record may not be denied legal effect, validity, or enforceability solely because it is in electronic form, or because it was formed using an electronic signature or electronic record. 15 U.S.C. § 7001(a). “The term ‘electronic signature’ means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” 15 U.S.C. § 7006(5). So, a mouse-click on an I-accept button might be an electronic signature that makes a legally enforceable agreement to repay the participant loan. Still, I’d like to read the answers to Santo Gold’s query.

If there is an ambiguity about what the plan provides, an administrator might prefer an interpretation that’s logically consistent with not only ERISA’s title I but also other Federal laws, including the Family and Medical Leave Act of 1993 if it applies. “With respect to pension and other retirement plans, any period of unpaid FMLA leave shall not be treated as or counted toward a break in service for purposes of vesting and eligibility to participate. Also, if the plan requires an employee to be employed on a specific date in order to be credited with a year of service for vesting, contributions or participation purposes, an employee on unpaid FMLA leave on that date shall be deemed to have been employed on that date. However, unpaid FMLA leave periods need not be treated as credited service for purposes of benefit accrual, vesting and eligibility to participate.” 29 C.F.R. § 825.215(d)(4) https://www.ecfr.gov/current/title-29/part-825/section-825.215#p-825.215(d)(4). This is not advice to anyone.

Paul I, thank you for the extra information. I’m thinking only of funds, whether mutual funds, collective investment trust funds, or insurance company separate-account funds. And only for situations in which all of the plan’s investment alternatives are funds, all with a daily share or unit price and daily liquidity. And I’m thinking of circumstances in which the limits must be applied with nothing beyond the recordkeeper’s computer systems. Does any recordkeeper offer this (assuming the customer plan has enough purchasing power)? Or is the professors’ idea a nonstarter?

Whether a plan’s sponsor or fiduciary should set a limit on a participant’s use of any designated investment alternative and, if one does, whether to set those limits uniformly for all or a subset of investment alternatives or with differing limits based on the sponsor’s or fiduciary’s views about possibilities for wise or unwise uses that might differ with each investment alternative are important questions. But a plan’s sponsor or fiduciary might neither need nor want to think about those questions if the plan’s recordkeeper can’t or won’t apply limits.

Some recordkeepers limit, according to the plan sponsor’s or a plan fiduciary’s instruction, the percentage of a participant’s or other directing individual’s account invested in employer securities. Fidelity’s offer of services about bitcoin calls for the plan’s fiduciary to specify a percentage limit on how much of an individual’s account may be in bitcoin. But are those capabilities particular to those investment alternatives? Or does a recordkeeper have capabilities to apply a percentage limit to any designated investment alternative?

A responsible plan fiduciary, before engaging an investment manager or investment adviser, might negotiate: whether the firm may or must not use information that is or was available to the firm because of its engagement with the plan; whether the firm may or must not solicit an individual who has or had some relation regarding the plan; how the firm must act when, unsolicited, a participant, beneficiary, alternate payee, or fiduciary approaches the firm; what warnings and disclosures the firm must give, in its service for the plan, and in communicating with an individual who might be a prospective client; restrictions against advice that could interfere with the plan’s purpose or interests; anything more the responsible plan fiduciary, with the plan’s lawyer’s advice, finds could help protect the plan; anything more the responsible plan fiduciary, with the fiduciary’s lawyer’s advice, finds could help protect the fiduciary personally (to the extent the fiduciary can do this without breaching its responsibility to the plan); and appropriate indemnities, backed by the firm’s strong financial position, to protect the plan. Whatever the engagement and its terms, a responsible plan fiduciary might use prudent oversight to see that the firm obeys the terms, including expressed or implied promises that the firm follows applicable law and relevant law. Also, a plan’s fiduciary might manage the plan’s communications and the firm’s communications to warn, conspicuously and clearly, a reader, viewer, or listener that no plan fiduciary and no employer evaluated the firm’s suitability for services beyond those the plan contracted, which do not include advising individuals (or don't include anything beyond information about how a participant exercises her rights and obligations under the plan). Both sets of communications might refer to disclosures public law requires, and admonish an individual to read the firm’s and other advisers’ disclosures carefully before the individual decides anything about any adviser. A plan’s sponsor might use time-bar, governing-law, exclusive-forum, and other dispute-resolution provisions. This is not advice to anyone.

Before imagining potential corrections, a service provider might first evaluate whether it wants as its client a person that acts without asking for advice.

Whether it’s good or bad for an individual to seek advice from a bank, trust company, insurance company, or registered investment adviser (let’s neutrally call any of these a “firm”) that has served as an investment manager or investment adviser regarding an employment-based retirement plan in which the individual is or was a participant turns on the facts. From an individual’s perspective, here’s only a few of many points that might matter: Is the employment-based plan a governmental plan, a church plan, a plan for which all participants are not an employee, or an ERISA-governed plan? (This might relate to how the plan selected the firm.) Whichever kind of plan, does the responsible plan fiduciary of the employment-based plan prudently or ineptly manage the plan’s relationship with the firm? Or does the individual not know? Were the firm’s communications to the individual within, or a breach of, the firm’s agreement with the employment-based plan? Might the individual perceive the firm having been engaged for the employment-based plan as some suggestion that the firm would be a capable provider of advice for an individual? If so, is the perception a sensible or unwise inference? Would the individual’s engagement of the firm breach the individual’s agreement with her employer or former employer? Would the firm’s acceptance of the individual as its client breach the firm’s agreement with the employment-based retirement plan? Are there circumstances in which giving candid advice to the individual could harm the employment-based plan? Are there circumstances in which giving candid advice to the employment-based plan could harm the individual? Does the firm have a compensation conflict about whether the individual should invest under the employment-based plan or an individual arrangement? Does the firm meet all conditions of the prohibited-transaction exemption? What evidence will the individual get? Beyond that conflict, has the firm delivered disclosures that enable the individual to evaluate all others of the firm’s conflicts? Does the individual need independent advice to understand potential consequences of the conflicts? Did the individual observe the firm’s work for the employment-based plan? Is or was the firm loyal or disloyal in its services for the employment-based plan? How does or would the individual know? Is or was the firm prudent or imprudent in its services? How else will the individual evaluate the firm’s capabilities and services? If the individual has a spouse, what are the spouse’s observations about the firm? This is not advice to anyone.

And if your inside counsel or outside counsel hasn’t supplied you with agreements and form letters to support the instructions and protections described, consider engaging Ferenczy Benefits Law Center with its 17 smart people.

From my quick search in House-passed H.R. 1 (the “One Big Beautiful Bill”): I found no amendment to titles I, III, or IV of the Employee Retirement Income Security Act of 1974. I found nothing that would amend the Internal Revenue Code’s conditions for a tax-qualified or eligible retirement plan. Section 110016 would revise Internal Revenue Code § 25B’s credit to include contributions to a § 529A ABLE account in qualified retirement savings contributions. Beyond ERISA and the tax Code, amendments of the Administrative Procedure Act, the Congressional Review Act, and other law would call for yet more elements of information to be included in rulemakings and reports to Congress. These could lengthen the work it takes to make a rule or regulation. Section 112211: “The Secretary of the Treasury may not regulate, prohibit, or restrict the use of a contingent fee in connection with tax returns, claims for refund, or documents in connection with tax returns or claims for refund prepared on behalf of a taxpayer.” I’m not counting changes to retirement plans for US government employees. Did I miss anything retirement-plans practitioners care about?

Ian Ayres and Quinn Curtis, in Retirement Guardrails: How Proactive Fiduciaries Can Improve Plan Outcomes (2023), suggest several ideas to improve participant-directed investment. They suggest that a plan sponsor need not be limited to a binary choice of including an investment alternative, or leaving it out of the plan’s menu. If a goal is preventing some participants’ unwise use of an investment while not depriving participants of the availability of that investment, the professors suggest limiting a participant’s allocations to such an investment. I’ve seen percentage restraints applied to an employer-stock fund, but haven’t seen this for other funds. Does any recordkeeper offer a service of limiting, according to the plan sponsor’s specifications, the percentage of a participant’s account that may be invested in a fund?

Imagine an employer believes it can’t or won’t, even with a nondiscretionary service provider’s help, administer an individual-account (defined-contribution) retirement plan. The employer prefers to engage a discretionary 3(16) service provider for as many responsibilities as it will take. Are there some kinds of plans for which, considering size or some other fact or circumstance, a 3(16) provider won’t offer its services?

On a straightforward reading of the statute, the Securities Act of 1933 § 3(a)(2) exemption for an interest or participation under a retirement plan’s trust “for a single employer” might not fit regarding a multiple-employer plan. Similar issues are in play about Investment Company Act of 1940 § 3(c)(11). But the SEC’s staff have issued several no-action letters on particular situations in which the distinct employers, while not one employer under I.R.C. § 414(b)-(c)-(m)-(n)-(o), are otherwise closely related. Or some involve circumstances in which applying the statute would burden a retirement plan beyond what the SEC staff assumes is the harm Congress meant to legislate against. A search in a law publisher’s database retrieves those no-action letters. (It’s difficult to discern what does not get no-action relief because an applicant or its attorney would—after a conference or a less formal communication reveals that the desired response would not be forthcoming—withdraw the request.) Also, one might evaluate whether an interest or participation under a retirement plan is a security. This is not advice to anyone.

Some assert that an investment partnership’s ownership of an investee, without more, does not connect the partnership and the investee under I.R.C. § 414(c) if the investment partnership is not a trade or business. Instead of trying to sort out difficult questions of law with likely difficulties about ambiguous facts, consider—with your lawyer’s advice—asking your client to instruct you about the assumptions your client prefers you to use in performing your services. This is not advice to anyone.

Do you yet know whether: the buyer buys the target’s shares (or capital interests), or buys the target’s assets? the buyer assumes the target’s retirement plan? the buyer requires the target to terminate its retirement plan before the closing? And here’s a practical suggestion: Consider getting and collecting now an advance retainer for more than what you estimate as your full fees for any services you might provide. (After the closing, the target might have no money in its till, or might have it only until the target pays the target’s sellers.) This is not advice to anyone.

Here’s a further way to think about the situation Santo Gold describes. Imagine that beyond the plan’s trustee there is a bank, trust company, securities broker-dealer, or other financial-services business that serve as the trustee’s custodian of the plan’s investments. Imagine that the daughter, supposedly acting as the trustee’s agent, instructs the custodian to redeem investments. Does the agreement the trustee made with the custodian obligate the custodian to act on the trustee’s agent’s instruction? Does the agreement even permit the custodian to act on the trustee’s agent’s instruction? What if the powers to act for the trustee, even if otherwise valid under the State and Federal laws governing the effect of the power-of-attorney document, are contrary to the retirement plan’s or its trust’s governing documents? Or are contrary to applicable law governing the plan’s trust? If the daughter lacked authority to instruct the custodian, or an authority was invalid under the plan, its trust, the custodian’s agreement, or an applicable law regarding any of them: Is the custodian liable for the consequences of having acted without a valid instruction? Should the custodian lawyer-up?

Of plans that provide a default investment intended as a qualified default investment alternative, many provide only a permanent QDIA, but some provide a time-limited temporary QDIA, “designed to preserve principal[.]” 29 C.F.R. § 2550.404c-5(e)(4)(iv)(A) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404c-5#p-2550.404c-5(e)(4)(iv)(A). Some plan sponsors choose this so a defaulted-in participant who claims an early-out permissible withdrawal (if the plan provides it) would not suffer a principal loss on the investment. After an initial period runs out, the QDIA becomes the permanent QDIA. This is a plan sponsor’s plan-design choice; but it might be influenced by a service provider’s preference or service condition.

I imagined some possibility that the distributee didn’t receive the check that paid the involuntary distribution. Further, the distributee might not have received (or might not have read) a notice that the unrequested distribution would be paid. Following TPApril’s description, it seems the involuntary distribution was not destined for a default rollover to an IRA. The plan’s administrator might know only that a payment was not collected, but might not know why it was not collected. We’re commenting without having read: the plan’s governing documents, the trust agreement or declaration (if any), a group annuity contract (if any), a custodian’s agreement (if any), the recordkeeper’s service agreement, and an agreement with a default IRA provider (if any). While a plan’s administrator might wish a recordkeeper’s services would include some about uncollected payments, we don’t know what this recordkeeper was obligated (or even permitted) to do.

QDROphile, thank you for helping me think about diction and grammar. I meant that in 2020, after coronavirus, the numbers of thefts and other frauds were beyond what had been ordinary.

Five years ago (near a coronavirus outbreak) United States mail was unreliable. Also, thefts and other frauds were extraordinary. Before deciding what to do next, a plan’s administrator might consider whether to investigate some circumstances surrounding the uncollected payment. Some might investigate a little even if the expense is disproportionate to the distribution’s amount.

Under a State’s law, there might be constraints on a public-school employer’s authority: A public-school district or other political subdivision of a State has no more power than State law grants it. Many States’ enabling statutes allow a public-school employer to collect and pay over salary-reduction contributions to a § 403(b) contract, but don’t allow other contributions. State law might preclude a public-school employer from retirement provisions beyond participating in the Statewide retirement systems. To the extent (if any) that State law requires or permits collective discussion with an employees’ association or other collective-bargaining group, that process might restrain a governmental employer. However, sometimes a superintendent’s, principal’s, or other executive’s employment agreement is custom-negotiated. Agreements of that kind often require vetting by the school attorney and approval by the school board.

Whether a pairing or grouping of entities is or isn’t treated as one employer or otherwise related matters not only for qualified retirement plans’ coverage and nondiscrimination conditions but also for ERISA title IV about liabilities to a pension plan, including withdrawal liability to a multiemployer plan; general debtor-creditor law, including equitable-remedies law; bankruptcy law, insolvency law, or both; Federal, State, municipal, and international tax laws, whether for income, value-added, or other indirect taxes; and financial-statements accounting. A private-equity shop might use many lawyers to fine-tune the arrangements.

Private-equity investors often use strategies to order carefully rights and relations regarding investees, and often design these to keep investees separate from one another and from each investor. Beyond carefully defining and allocating each capital interest, profits interest, or income interest, an investor might assert that it is not “a trade or business”, and so is not to be combined with any other investor nor any investee. Don’t get involved in trying to sort out what is or isn’t a § 414(b)-(c)-(m)-(n)-(o) employer. Get your client, preferably with its lawyers and accountants, to instruct you on what you are to assume in performing your services. This is not advice to anyone.