Peter Gulia

Even if both a right and a duty to vote is "passed through" to each participant, beneficiary, and alternate payee, the plan's trustee or other fiduciary might need to vote shares attributable to a participant, beneficiary, or alternate payee who breaches his or her duty to vote. About the need for a special-purpose independent fiduciary, the regularly-serving trustee should ask herself: 'How would I prove that my analysis and decisions were unaffected by my interests and were taken solely to achieve the retirement plan's exclusive purpose?'

The plan’s administrator might consider a possibility that the examiner has a mistaken view simply because the examiner lacks enough knowledge to apply the rule. One possible way to counteract a mistaken view is to get an employer-benefits lawyer’s carefully written explanation of the right interpretation and application of the rule. (Many EBSA examiners don’t get enough guidance from their supervisors and national office, and a better examiner is open to education if the memo is succinct, clear, and fair-minded.) Although a fiduciary might be reluctant to spend the plan’s money on legal advice to educate an EBSA examiner, doing so might be less expensive than “giving in” to a wayward examiner.

If an insurance contract provides only incidental life insurance protection and was issued before September 24, 2007, it can be treated as a contract held under a 403(b) plan. 26 C.F.R. §§ 1.403(b)-6(g), 1.403(b)-11(f). If it is so treated, the contract might continue to receive contributions.

Thanks, Matt; that idea simply hadn't occurred to me. So let me make the hypo a little harder. Assume that there is no explanation for the service provider's failure to furnish information (and that the responsible plan fiduciary is unaware of any circumstances that might explain why the service provider could not furnish information). Could it ever be imprudent to fire a non-responsive service provider?

The ERISA 408(b)(2) rule says that if a service provider has failed to furnish the required information, despite the responsibile plan fiduciary's follow-up efforts, and the missing information relates to future services, "the responsible plan fiduciary SHALL terminate the contract or arrangement as expeditiously as possible, consistent with [the fiduciary's] duty of prudence." A service provider that can't or won't in more than four months' time answer this information request shows by its conduct at least that it doesn't care about following relevant law, and perhaps that it lacks competence or capability for the service that it's supposed to perform. In what circumstances would it somehow not be prudent for the plan fiduciary to get rid of such a weak service provider?

Without staking out any particular view, consider that it’s not entirely right to say that the plan can never have a loss on a participant loan. Although the typical loan terms include repayment through wage deductions, it’s possible for a borrower’s employment to end and for the borrower to be unable or unwilling to repay the loan. A typical individual-account plan allocates both sets of cash flows and accruals on a participant loan to the account of the participant who borrowed. When the repayments the account has collected are less than the loan’s full loan principal and interest, the participant’s account has at least an opportunity loss on that investment. When the repayments the account has collected are less than the loan’s principal, the participant’s account has a negative return on that investment. Consider also that a typical participant loan isn’t meaningfully secured. In theory, a plan could collect on an unrepaid loan by redeeming the participant’s other investments. (And keep in mind that those investments might have declined to a current value less than the outstanding loan receivable.) In practice, a plan’s administrator might decide (or be directed) to leave the “real” investments as-is and treat the defaulted loan as having a cash value of zero. A carefully written plan could provide that a participant directs the plan’s fiduciaries on how to handle his or her defaulted loan. See ERISA § 404©(1)(B). (The practices might be different for a loan made by an insurance company, rather than from direct plan assets.) Moreover, with a participant loan, only 50% (or less) of the account is real security for the outstanding loan. With a mortgage loan, 100% of the real property is security for the loan. ERISA’s rule for what is a reasonable rate of interest – “... commensurate with the interest rates charged by persons in the business of lending money for loans [that] would be made under similar circumstances” – is nonsense. There is no truly similar loan that a commercial lender makes. One might analogize some aspects of a participant loan to a mortgage loan, in which the lender bears some risk that the value of its security interest could have a value lower than the outstanding loan receivable. But what prudent banker should make a loan for which the borrower can, by his or her unwise investment decisions, seriously devalue the lender’s security interest? (There’s a reason why a mortgage lender requires its borrower to maintain fire and homeowner’s insurance.) Besides, what marketplace loan do you know about in which the lender and the borrower are the same person? Despite those and other inherent difficulties of trying to state a hypothetical fair-market-value for something that doesn’t have a market, one can view both laws’ reasonable-interest conditions as an attempt to provide for the loan a potential income meant to approximate what might have been the account’s investment return had the loan not been allowed and the account remained invested in assets other than a participant loan. Because both government agencies’ efforts necessarily deal with hypotheticals, intelligent minds could find a wide range of interpretations. But let’s return to the main purpose: the fiduciary who decides the participant loan interest rate must administer the plan “for the exclusive purpose of providing [the retirement plan’s] benefits to participants and their beneficiaries[.]” Why not provide the loan with an interest rate that helps the participant restore his or her retirement savings?

Even when it's not required, a plan's administrator might prefer to use its claims procedure. With a troublesome inquirer, running the claims procedure is an efficient way to get the inquiries to end. Telling an inquirer 'you're welcome to put in writing your request, your explanation of whatever you believe you should get, and whatever evidence and other information you would like the plan's admministrator to consider' can be a powerful way to say (politely) 'put up or shut up' or 'what happened wasn't the fault of the plan's people'. One reason that it can be so effective is that the procedure might in fact be sufficiently open-minded and fair. In my experience (advising on about 100,000 beneficiary disputes), the inquirer/claimants recognize that the plan has offered a fair procedure and that the denial decisions were fair decisions on the evidence submitted. The procedure also allows an inquirer a moment to reflect on his or her frustruations, which often are really about the death and what the partificipant failed to do. Many claimants go away moderately content, at least feeling that they were heard. Running that kind of claims procedure also gets some legal advantages. If a plan's administrator ran its proper claims procedure, there are significant protections if there is a court proceeding later. A court should require a plaintiff to make his or her case within the plan's administrative record (without any evidence not submitted under the claims procedure). And a court defers to a plan administrator's finding unless it is so obviously wrong that it had to be an abuse of discretion. A participant's quasi-spouse, child, or another person who feels that the participant should have made a beneficiary designation might feel frustrated or even betrayed. Even the most secure customer service representative reacts to an emotional caller. A few dollars and a modest effort put into a procedure can help make an unpleasant situation at least manageable.

Although I often might give different advice based on the particular plan administrator's circumstances, here's an approach that some administrators use for an executor's inquiry. Don't respond to a query simply because the inquirer presents himself or herself as a personal representative. First, require an original or court-certified copy of the order that made the appointment. Second, require the inquirer to give you a written assurance (under penalties of perjury and stating awareness of the criminal punishments for the Federal crime of making a false statement to an employee-benefit plan) that he or she needs the information to prepare an estate tax return that he or she is required to file. Next, read the court order you obtained and consider relevant Federal and State law about the appointee's duties to consider whether his or her statement about the tax-information need is fitting. (Whether through ignorance or deceit, an inquirer often asserts powers and duties that the inquirer doesn't have.) If there truly is a tax-return need, a plan's administrator might furnish information about the account balance, but might not reveal information about the identity of any beneficiary. To appease a personal representative who is worried about his or her duty to collect assets of the decedent's estate, a plan administrator might inform such an inquirer: "The estate is not the beneficiary." To anyone who gets belligerent, a response can be 'you're welcome to file a claim', and the administrator will react to it under the plan's claims procedure. Consider too that an ERISA-governed plan often might legitimately decline to furnish information to anyone other than the beneficiary. And for those who work as a recordkeeper or TPA, rather than as the named plan administrator, consider being careful to do no more than what the plan administrator has instructed you to do (whether under a particular or standing instruction).

QDROphile, jpod, and KJohnson, thank you for the good help. After reading the cases you mentioned (and many others), I'm ready to advise my pro bono client that the uncertainty can't be cured - in either direction. (Even obtaining an ERISA Advisory Opinion wouldn't be a conclusion, because a court need not follow it.)

In ERISA Adivosry Opinion 96-12A, the Labor department advised that a cafeteria plan was not an ERISA-governed plan. The key to the Opinion's analysis is that the cafeteria plan itself does not provide any welfare benefit. The paragraph below quotes the Opinion's analysis but replaces each reference to "Group Health Plan" with "individual health insurance contracts". "[T]he function of the Pre-Tax Plan is to provide a method by which employees may receive tax-favored treatment of contributions that are in any case required under [each individual health insurance contract]. The provision of this tax-favored treatment, however, is not the equivalent of the provision of a benefit enumerated under section 3(1), and it does not appear that the Pre-Tax Plan itself provides any enumerated benefit. It is therefore the position of the Department that the Pre-Tax Plan, as currently structured, does not constitute, in itself, a separate employee welfare benefit plan within the meaning of section 3(1)." I recognize that this is selective quotation because the Labor department also said that the arrangement for making contributions tax-favored was somehow "part of" the group health plan. Even if that "part of" idea made some sense concerning the Topco Associates, Inc. Group Health Plan mentioned in the Opinion, it's hard to see how an employer's payment of an amount to its employee is "part of" an individual health insurance contract - a contract that by its law and terms can have only the insurer and the individual as parties. BenefitsLink mavens, do you think that there is a good argument that: (1) Only each individual insurance contract provides a health benefit of a kind described in ERISA's definition of a welfare plan. (2) The employer's willingness to reimburse its employee's substantiated premium payment provides only money and tax treatment, not any health benefit. (3) Each individual insurance contract is not established or maintained by an employer. Rather, each insurance contract is established and maintained by its two parties - the insurer and the individual, neither of which is the individual's employer. Or what should make me nervous about this argument?

A small employer, in seeking to facilitate health insurance coverage for some of its employees, found that pricing for individual health insurance contracts is more favorable than any group (or association-sponsored) contract. The amount that the employer is willing to pay toward some employees’ health coverage is enough to reimburse 100% of the premium under the insurance contract that each employee selected. This would not involve a § 125 election, because there is no choice to get cash wages or any other taxable benefit. Assume that those entitled to reimbursement, as a subset of the employer’s employees, would meet IRC §§ 105&106 nondiscrimination rules. If the ONLY thing that an employer does is reimburse a substantiated health insurance premium [Revenue Ruling 61-46, 1961-2 C.B. 25] and the employer carefully avoids any ‘involvement’ regarding the individual insurance contracts, does such an employer “maintain” a group health plan? If so, is that ‘plan’ governed by ERISA? If there is an ERISA-governed plan, is it also governed by HIPAA? (COBRA is a non-issue because there are only a few employees.) Being able to arrange this so that it’s not a plan (while still getting ‘health’ treatment for Federal income and FICA taxes) really matters because the employer won’t do anything that requires it to administer a plan.

GMK, thank you for confirming what I expected. And just to be clear, if a plan chooses the Investor shares (or doesn't qualify for another class), Vanguard pays 10 bps to Ascensus (the recordkeeper)? And do we know whether Vanguard is willing to pay the 10 bps (or some different allowance) to some other recordkeeper?

The usual suggestion to the employer is to lawyer-up. If there is any trustee other than the employer or its people, consider also that even a fully directed trustee should (separately) lawyer-up. Even if the trust agreement and all other plan and trust documents, taken together, state consistently a perfect allocation of the duty to collect contributions to a fiduciary other than the trustee, even a fiduciary with a very narrow scope can't entirely stay out of responsibility because ERISA 405 imposes some minimum responsibilities concerning a co-fiduciary's breach.

About Vanguard's package for a retirement plan under $20 million, Vanguard's website says: "You can choose funds that use Vanguard Investor Shares or funds that use the lowest-cost Vanguard share class available. The plan receives credit for all Vanguard Investor Share assets, which can reduce and potentially eliminate out-of-pocket recordkeeping fees. Using funds with the lowest-cost share class can allocate expenses evenly across all participants if you decide to cover costs using a per-participant fee." I'm not seeking particular price information, but rather wondering whether anyone has done some comparison (assuming a plan would qualify for the lower-cost share class) between choosing the "Investor" shares to get indirect compensation against the recordkeeper's fees and using lower-cost shares so that participants' accounts bear the recordkeeper's fees directly? (Assume that the employer doesn't pay the plan's administration expenses (or that the amount the employer is willing to pay is constant for all possible fee configurations).) Within the range of plans that can qualify for lower-cost shares, is there ever a situation in which it would be to the plan's advantage to choose the deliberately more expensive shares?

Beyond one or more fiduciaries' possible breaches of duties to collect the trust's property, to obey the plan's and its trust's terms, and to act prudently, consider that the plan might have a tax-qualification defect (at least if the employer intends that the plan qualify under Internal Revenue Code section 401(a)). Ordinarily, a qualified plan must allocate amounts no less often than once a year. To the extent that the settlement payment was not allocated to the plan trust's reserve for plan-administration expenses, it ought to have been allocated among participants' accounts. Even if (a few years ago) no document precluded and the plan's fiduciaries acting with impartiality and in prudence could have decided to allocate the entire settlement payment to the plan trust's reserve for plan-administration expenses, the fact that the payment was not collected might call into question whether the fiduciaries made such an allocation decision, and it might be difficult to prove that they made that decision. In pursuing a restoration and correction now, a fiduciary should consider what series of decisions balances efficiently and effectively among the ERISA 404(a)(1) duties, many of which are in tension one to another. Further, each currently-serving fiduciary should at least consider whether the plan would benefit from decisions made by a separate fiduciary who is independent of every fiduciary who breached a duty to the plan (either directly or by failing to pursue reasonable efforts to remedy another fiduciary's breach). It's easier to make such a decision to engage an independent fiduciary if the appointing fiduciary knows that fiduciary liability insurance or the employer's resources would respond to meet the expenses caused by the fiduciaries' breaches. If it is obviously not feasible to engage an independent fiduciary, each fiduciary might consider whether getting and following a lawyer's written advice could help a compromised fiduciary manage the self-dealing involved in making decisions that relate to one's previous conduct. All that theory said, it seems likely that the circumstances BTG describes would result in intense cost-benefit pressure, pushing a fiduciary to make PRACTICAL decisions. A good fiduciary makes those hard decisions, and documents his or her reasons for selecting the solutions used and, perhaps more importantly, rejecting others.

Does the employer have the employee's detailed time records that would prove to an examiner's satisfaction that the employee really used 1,333 hours of work to administer a plan that has for the year only one valuation and, one assumes, only one cycle of distributions?

Circular 230 is the name of a publication that reprints the Treasury department’s rules governing practice before the Internal Revenue Service [31 C.F.R. Part 10]. Since 1884, a Federal statute grants the Secretary of the Treasury power to regulate practice before the Internal Revenue Service. See 31 U.S.C. § 330. In late 2004, Congress amended the statute so that the Treasury department may impose standards for written advice, and may censure or fine a practitioner and his or her employer. See 31 U.S.C. § 330(d). To make it hard for a taxpayer to assert that he, she, or it reasonably relied on tax advice, the rules impose professional standards. For a writing that’s a covered opinion, a practitioner must meet these IRS standards – even if a practitioner and her client otherwise would agree to a different scope or standard of care. Those IRS standards call for much more care than a client ordinarily is willing to pay for. Instead, many practitioners use warnings that explain how a writing can’t be used. If a retirement-plans business truly doesn’t provide tax advice, there might be no advice that needs to be excused from whatever IRS standard would apply to the advice that isn’t rendered. But how confident are you that everything in all of your writings would be understandable to whoever reads it as NOT tax advice?

An important starting point is reading the written plan. Even if relevant law might permit a plan to provide to a participant a benefit regarding an expense for medical care of a person who is not the participant's dependent, that does not by itself mean that a particular plan provides that benefit.

We’d like to believe that a non-fiduciary recordkeeper shouldn’t have to be the one to police the plan fiduciary, but .... For some related points, see these threads: http://benefitslink.com/boards/index.php?showtopic=50132 http://benefitslink.com/boards/index.php?showtopic=49482

Consider that whether a service agreement with a recordkeeper is an executory contract that a bankruptcy estate might assume or reject could turn on exactly which person is the recordkeeper's counterparty. If the agreement is with the (nonbankrupt) plan and the agreement requires or permits payment of the fees from plan assets, bankruptcy law might not come into play. But the plan's administrator, trustee, or other named fiduciary holds whatever termination rights the plan provides. If the agreement is with the bankrupt business organization, bankruptcy law might call for the assume-or-reject drill. (But remember that the debtor or its bankruptcy trustee has a statutory duty to continue administering the plan if the debtor was the plan's administrator before the bankruptcy.) In either situation, it's not easy for a bankrupt plan fiduciary (or its bankruptcy trustee) to terminate or reject the recordkeeper's services for a practical reason. The way a recordkeeper ends its service is by delivering the records to the plan's administrator (or according to its instruction). It's not easy for a plan of a bankrupt employer to hire a new recordkeeper. A recordkeeper should consult its expert bankruptcy lawyer to consider what claims to file, and what procedural steps to take, to protect the recordkeeper's fees.

Another issue is how to allocate against participants' accounts the plan's expenses in obtaining and compiling the 404a5 information. For example, if a plan in 2012 spends $25,000 to build a method for retrieving and compiling the information (and expects to use that method for at least the next few years), it might not be fair to allocate all of that expense to 2012 participants. Perhaps some of the expense should be allocated not only to the second half of 2012 but also to 2013, 2014, and later years. If so, how many later years? Does a plan fiduciary have a way to estimate a "useful life" for the method built to comply with the 404a5 rule? And if that useful life is many years, should one put an upper limit on the period by which we "amortize" this expense so that the expense of doing the allocating won't become disproportionate to the amounts to be allocated? And for whatever one decides to allocate against participants' accounts for a quarter (or some other period), is it the same dollar amount per account, or is it proportionate to account balances? If one says proportionate by account balances, do we really believe that the 404a5 information furnished to a participant with a $600,000 account is one hundred times more valuable to her than it is to a participant who has a $6,000 account? Or is there some other reasoning for why the expense should not be allocated equally to each participant?

For the plan that has more than 100 investment alternatives, the plan's administrator selected about 20 of them and the other 80+ are specified by the plan's documents as a settlor act. The administrator thought about trying to persuade the plan's sponsor (which is not my client) to change its mind, but he believes that's a lost cause. He also considered whether he might have a duty not to obey the plan's documents, but hasn't (yet) found the reasoning that would support such a conclusion. He is aware of the studies that suggest that some participants might be harmed by a burden of too much choice. But it's not an easy leap to say that the plan's provisions are inconsistent with ERISA.

One difficulty I'm grappling with is what steps to take when a plan has more than one hundred investment alternatives.

Is there an alternate track for the business owner, with his lawyers' and accountants' advice, to evaluate: Is it possible that treating the plan as tax-disqualified could be less expensive than the corrections?

Hear everything you're observing about sales methods (and I've heard many that are much worse). But the statutory exemption and its interpretive rule seem to contemplate that it is the fiduciary adviser (not the plan sponsor/administrator) that engages the independent auditor and bears that expense. If an adviser can exempt the PTs under the old law, why would the adviser take on the extra expense to get itself no greater relief? Or is a new advertising label so valuable that the fiduciary adviser will pay the extra expenses for it?