Jon Chambers

Carol, if you read the 404© regs carefully, they don't mandate prospectus distribution. They define information that must be provided to participants, and information that must merely be made available. Since the prospectus includes both categories of information, distributing the prospectus represents a safe way to meet the 404© information dissemination requirements. But a well-designed fact sheet can satisfy the required information requirement, and as long as the prospectuses are still available, 404© compliance is still achieved. This approach would seem to meet Anne's objective of avoiding confusing employees with the prospectus. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

And how about the fiduciary issues (enticing investment in company stock through the greater rate of matching contributions)? And SEC registration and prospectus issues (how the arrangement is described in the 11K filings)? I'm not sure that these are per se violations, but they look awfully strange. And I recall that no benefit (other than matching contributions) can be conditioned on participation in a 401(k) arrangement. Does a conditional incremental matching dependent on the participant's investment selection violate this requirement? Without knowing the answers to any of these questions, I'd suggest that the benefits philosophy behind this structure is flawed. It seems to me that the sponsor would be better served by taking company dollars (or stock) earmarked for the incremental match, and using these funds to make an across the board profit sharing contribution on behalf of all employees. The company could continue to offer stock as an option on equivalent terms with the other menu choices. Stock ownership would be more broad based (everyone would own some) and the appearance of coercion/enticement would be eliminated. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Most likely, the "hourly" are union employees, so there are no coverage or comparability issues. Loan availability isn't a protected benefit. Many companies use loans as a collective bargaining "chip" in exchange for some other concession from the union. If my guess is correct, the union doesn't want the loan feature badly enough to negotiate it into the plan, and the company won't give up the feature without some concession. And no, this isn't illegal. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

A company called Newkirk (I believe they are in NJ) does a good job with investment descriptions. Note that they are not "prospectuses", but probably meet the basic 404© information dissemination requirements. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

At a former employer (Big 5 accounting firm), we used to do loans at a round dollar amount, adjusting the final payment a few dollars (generally, the last payment was lower). No one seemed to have a problem with this approach. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

To get a sense of the relative responsibilities of the various trustees, I'd recommend reading their model trust agreements, paying close attention to the indemnification and hold harmless agreements. In terms of limiting liability, the following lists arrangements from most retained liability, to least retained liability: Fully passive, non-discretionary directed trustee (we'll do whatever we're told to do, no questions asked, no matter what) Non-discretionary directed trustee (we'll do whatever we're told to do, unless we know it's against the law) Active directed trustee (we'll generally do what we're told, but we'll investigate the reasonableness of the direction) Active discretionary trustee (we'll do what we think is right) As an example of the distinction between passive and active trustees, if a sponsor stops sending in salary deferrals, the passive trustee won't do anything. The active trustee would investigate why contributions weren't received as scheduled. I've seen active directed trustees resign over this issue. There is a difference, although it's subtle (until you need it). ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

I'm working with a company that offers both a money purchase pension plan and a 401(k)plan. Currently, they self-administer and self-trustee the plans. Both plans offer individual brokerage accounts. Employees are permitted to open a single brokerage account to hold contributions from both plans. For reporting purposes, the company performs a pro-rata allocation of assets/transactions, etc. to determine activity in each plan. Although I can't cite any legal authority, it seems that this approach has some issues: 1) Do you have a master trust if assets from two plans are commingled in a single brokerage account? 2) Are you accurately tracking benefit accruals (given that the MPPP and 401(k) plans have different distribution options) when you do a simple pro rata allocation to determine gains, etc. in each plan (presumably, the 401(k) plan receives contributions at a different frequency than the MPPP)? Has anyone else experienced this type of fact pattern? Is there any legal authority supporting (or prohibiting) a single brokerage account for multiple DC plans? Opinions? ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

If you are looking for investments and admin, Standard Insurance is pretty reasonable. Their base fee is $1250, plus $27/participant (up to 100). Their annuity fee is 0.86% (assuming no broker is involved and taking a commission). And they have a contribution credit, that reduces these fees some. Best of all, their fund options are multi-family, true no-load including some very competititive low-cost funds from Vanguard and others. I'd suggest that the underlying fund options would make Standard a more attractive alternative than fund companies like Kemper, MFS or Pioneer. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Hi Greg. Class A has both a front end load (sales charge), and a relatively low 12b-1, or "trail". Class B has a back-end load (CDSC), if you sell before a prescribed date (typically 5-7 years), and a higher 12b-1 fee. Most qualified plans offer Class A shares, and waive the front end load. The broker (if there is one) receives a much lower payout on the load-waived Class A shares. Typically, there is no broker, and the 12b-1 is used as a revenue share to the plan trustee and/or recordkeeper. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Thanks for the updated info Leo. Sorry I didn't see your update earlier. I have the following observations: 1) Most courts have held that the SPD governs over the plan document, since the document was never communicated to employees. So keeping the "net profits" language out of the SPD probably means that your former employer doesn't get to use that provision as an out. Unfortunately, it may take DOL litigation, or a suit on your behalf, to get your former employer to acknowledge this issue. 2) Your former employer probably breached their fiduciary responsibility to operate their plan in accordance with its terms by reporting you to Prudential as 0% vested. If Prudential knew that you are in fact vested, they may share co-fiduciary responsibility for treating your account fairly. This depends somewhat on the nature of their fiduciary relationship with the plan. For example, if they are trustee, that imparts more responsibility than if they are just the custodian. You may want to talk to Prudential, mention the co-fiduciary liability rules, and see how they react. 3) Forfeitures of match can't be returned to the employer. This would be a prohibited transaction. They can be used as an offset against future matching contributions. If Prudential returned plan assets to the employer, they almost certainly breached their responsibility. 4) If money was deducted from your paycheck, and not deposited, the DOL should help you recover these funds (with earnings). Unless your former employer is bankrupt, it should just be a matter of time and persistence to get these matters addressed, because the facts seem to be on your side. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

1) No one knows what will happen with these or any funds in 2000. 2)These Fidelity Advisor funds have 0.25% 12b-1 fees attached (assuming you are in class A shares). I prefer funds that don't have these 12b-1 fees. 3)Equity-Income and Growth Opportunities are both Large Cap Value funds, so comparing them against "the market" is nonsensical, if you are using the S&P 500 to proxy the market. Relative to other Large Cap Value funds, the two funds performed in the 65th and 61st percentiles respectively in 1999. Over the trailing three year period, the funds performed in the 45th and 19th percentiles. Over the past one and three year periods, both funds underperformed the S&P/Barra Large Value index. 3) These two funds have relatively similar characteristics. If they are your only two holdings, you are not particularly well diversified. 4) NB Genesis has historically been a top-performing small cap value fund. Due to its relatively low turnover, it has drifted to the small cap blend category. It has underperformed the average small blend fund over most review periods (one, three, five years). It has also underperformed the Barra Small Value index over these periods. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

I haven't looked at the asset regs recently, but used the term "segregate" because that's the terminology I remember from the regs. My point was that if the assets (contributions)are in fact segregated, they de facto become part of the trust, regardless of the title of the account, or whether or not the new trustee accepts them. Using the logic of the regs, if the assets aren't part of the trust, they aren't "segregated". I agree with your general conclusion that it makes sense to title the account as being owned by the trust. Hope this helps. Jon

1) It sounds like a prohibited transaction to me. Broker is a party in interest to the plan in two capacities (participant and broker). I'm an investment advisor (fee only), not an attorney, so this is not a legal opinion, but I'm not aware of any class exemptions that would solve this PT. 2) There are no disclosure rules that apply to other participants. 3) It's unclear whether the co-fiduciary liability rules apply to the Investment Company that knows about the situation. Assume (a) that the IC is a fiduciary; and (B) that the situation is a PT. In this scenario, IC would be liable if they did nothing to "cure" the problem.

I think this one is pretty clear. The compensation from which the deferral is deducted needs to be related to "service". So, if the comp is for the last paycheck, which trails the termination date, it relates to service, and can be deferred. If it is severance pay, or salary continuation, or LTD, for example, it can't be deferred. As an aside, many companies automatically set the deferral percentage to zero at termination, to avoid impermissible contributions, and to avoid trailing contributions hitting the participant's account after the participant has already received a lump sum distribution (e.g., a sales professional receives trailing commission compensation several months after separation from service, and after the account has been distributed). If this trailing compensation were contributed to the plan, the plan would have to make a second distribution.

There are several issues here: 1) Trustee approach does not conform to industry standard, which is to accept and invest contributions according to participant's new elections, without lifting the blackout (some providers do a "gray out", where participants have access to information about new contributions, don't have access to pending transfer amounts). 2) Investment according to participant elections isn't required. You do this to get 404© relief, and to keep participants happy. Since 404© relief is transactional in nature, having contributions invested according to some reasonably prudent default arrangement is fine, and doesn't taint the relief for the remainder of the plan. 3) 404© relief (generally) requires that participants be permitted to transfer funds at least quarterly. As long as the blackout doesn't go much past 12 weeks, and the mapping is reasonable, you probably have 404© relief through the mapping period. 4) Although I don't understand why the new trustee refuses to accept the ongoing contributions, to meet the DOL asset regs, the plan sponsor merely needs to segregate the contributions as plan assets, and invest them prudently. These separate assets are technically part of the trust. Given the relatively brief time frame, a money market seems like a prudent (although potentially unpopular) investment. But interest on the money market would have to be allocated to participants--the sponsor couldn't keep the interest.

Be careful with this approach. Depending on how its handled, the fee payment MAY count as an annual addition. There's a PLR or Revenue Ruling on the issue. From memory, if the fee payment is a reimbursement, rather than payment of an invoice, it counts as an annual addition. If only one fee is paid in this manner, that may also have implications. Sorry for the partial answer--no time to do the research. Jon

I've done quite a bit of work on this topic. In the interest of brevity, I wont attempt to support my assertions. Three quick observations: 1. Plan sponsor doesn't bear fiduciary responsibility for investment results achieved by participants when they follow advice from an appropriately designated advice fiduciary. 2. Plan sponsor does bear fiduciary responsibility for properly selecting the advice provider (i.e. sponsor must do appropriate due diligence). 3. Anyone providing advice and charging a fee who is not an SEC registered investment advisor is exposing themself and the Plan sponsor to significant liability for regulatory action from the DOL and/or SEC. Finally, several bundled providers (e.g. Fidelity) are walking a very fine line between "education" and "advice", offering services perceived as advice but positioned as education. In these circumstances, the sponsor should clearly document why they offer the program, and their understanding of the service. Jon

In response to questions to ask, the PWBA Advisory Council Working Group recommended the following questions for Plan sponsors monitoring or considering changes to investment options (warning--this is moderately long): "The following are examples of questions which fiduciaries may consider in hiring and monitoring the performance of a service provider. Given the wide range of plan needs, it is impossible to provide a complete list of questions which will be applicable to all plans and all circumstances. Nevertheless, the Working Group believes that the following are representative of the types of questions to which fiduciaries should seek answers to satisfy their obligations as fiduciaries under ERISA. A. ISSUES FOR FIDUCIARIES WHO ARE HIRING A SERVICE PROVIDER 1) What service or expertise does the plan need? Is the service or expertise necessary and/or appropriate for the functioning of the plan? 2) Does this service provider propose to provide the service that is necessary or appropriate for the plan? 3) Does this service provider have the objective qualifications to properly provide the service that is necessary and/or appropriate for the plan? Generally, the fiduciary should seek the following information that will vary with the type of service provider being retained:  business structure of the candidate  size of staff  identification of individual who will handle the plan's account  education  professional certifications  relevant training  relevant experience  performance record  references  professional registrations, if applicable  technical capabilities  financial condition and capitalization  insurance/bonding  enforcement actions; litigation  termination by other clients and the reasons 4) Are the service provider's fees reasonable when compared to industry standards in view of the services to be performed, the provider’s qualifications and the scope of the service provider's responsibility? 5) Does the plan have a conflict of interest policy that governs business and personal relationships between fiduciaries and service providers and among service providers? Does the plan require disclosure of relationships, compensation and gifts between fiduciaries and service providers and among service providers? 6) Does a written agreement document the services to be performed and the related costs? B. ADDITIONAL ISSUES WHEN HIRING AN INVESTMENT MANAGER 1) Does the Plan have a Statement of Investment Policy? Some or all of the following issues may be addressed by a Statement of Investment Policy: (See Department of Labor Interpretive Bulletin 94-2.)  Evaluation of the specific needs of the plan and its participants  Statement of investment objectives and goals  Standards of investment performance/benchmarks  Classes of investment authorized  Styles of investment authorized  Diversification of portfolio among classes of investment, among investment styles and within classes of investment  Restrictions on investments  Directed brokerage  Proxy voting  Standards for reports by investment managers and investment consultants on performance, commission activity, turnover, proxy voting, compliance with investment guidelines  Policies and procedures for the hiring of an investment manager  Disclosure of actual and potential conflicts of interest 2) What is the position to be filled? Why is the Plan hiring an additional investment manager? Is the Plan replacing a terminated manager with a manager of the same investment style or hiring an additional manager with a different investment style? Is the hiring of this manager consistent with the Statement of Investment Policy? 3) Does the Investment Manager have the objective qualifications for the position being filled? (See questions concerning qualifications above.) Does the candidate qualify as an investment manager pursuant to ERISA section 3(38)? 4) How does the investment manager manage money? What is the manager's performance record and how does the manager achieve his performance? What are the risks of the investment manager's style and strategy compared to other styles and strategies? Do you understand what the manager does and the risks involved? Is this risk level acceptable in view of the return? How do this manager's investment style and strategy fit into the portfolio as a whole? (See Department of Labor Regulation 29 CFR 2550.404a.1, Investment Duties, and letter from Olena Berg, Assistant Secretary for Pension and Welfare Benefits Administration, to Honorable Eugene A. Ludwig, Comptroller of the Currency concerning the Department of Labor's views with respect to the utilization of derivatives in the portfolio of pension plans subject to the Employee Retirement Income Security Act.) 5) How does the investment manager measure and report performance? Does the process ensure objective reporting? 6) Is the investment manager a qualified professional asset manager? What is the investment manager's process to comply with the prohibited transactions provisions of ERISA? 7) What is the investment manager's process to insure compliance with the plan's investment policy and guidelines? 8) What is the investment manager's record with respect to turnover of personnel? 9) Has the manager's investment style been consistent? 10) Has the investment manager been terminated by plan clients within a relevant time period and why? 11) Has the ownership of the investment manager changed within a relevant time period and how will this affect the ability of the manager to perform the services needed by the plan? 12) What are the investment manager's fees? Are the fees reasonable in comparison with industry standards for the type and size of the investment portfolio? Does the fee structure encourage undue risk taking by the investment manager? 13) Does the investment manager have a personal or business relationship with any of the plan fiduciaries, or with another service provider recommending the investment manager? If a relationship does exist, how does it impact on the evaluation of the objective qualifications of the investment manager and the recommendation? 14) If the plan has adopted a directed brokerage arrangement with a broker affiliated with the plan's investment consultant, how does the investment manager determine when to use broker affiliated with the investment consultant? What are the per share transaction costs? 15) Does the investment manager have insurance which would permit recovery by the plan in the event of a breach of fiduciary duty-by the investment manager? What is the amount of the insurance? Who is the insurance carrier? C. ADDITIONAL ISSUES WHEN HIRING AN INVESTMENT CONSULTANT. 1) What is the role of the investment consultant? Are the investment consultant's duties clearly stated in the Statement of Investment Policy and/or the contract with the Investment Consultant? 2) Does the Investment Consultant:  Monitor and advise concerning asset allocation  Monitor and advise concerning riskiness of investment strategies, styles and individual investment managers  Monitor and advise concerning the performance and riskiness of Investments under the direct investment control of the fiduciaries  Monitor and advise concerning the compliance of the investment managers and direct investments with the Statement of Investment Policy and Investment Guidelines  Accept fiduciary responsibility in writing for all or some of the services it performs? Does the contract state specifically for which services the consultant accepts fiduciary responsibility? 3) Is the investment consultant's fee reasonable when compared to industry standards in view of the services to

Class Y shares are institutional, and pay no commissions. They are also the "best deal" that Putnam offers for funds. With no commissions, and no less expensive fund option (at least from Putnam), the PT issue almost certainly goes away. With A, B or C class shares, Sub C may need to meet one of the class exemptions discussed above.

Actually, a net profits requirement for a match is not that unusual, when the match is funded annually and is fully discretionary. But I agree that the facts here are confusing. There are many reasons why a participant might not get a match. No match in general, last day requirement, 1000 hours, etc. It sounds as though Leo got a match, but it wasn't distributed. If that's the case, and he's vested, he has a legitimate grievance. Perhaps the match was accrued but not funded, so distribution is delayed. We're just speculating without more information and the SPD.

It's not necessarily a problem, but it could be. A key fiduciary responsibility is the ongoing monitoring of investment options. Given the brief facts, I'll assume there is no Investment Policy Statement (IPS) defining expectations for the funds. The good news about not having an IPS is that you haven't violated IPS review criterion. The bad news is that it would be relatively easy for a plaintiff to claim that the fund is underperforming by some measure, and that the trustees haven't provided sufficient oversight. Lack of any review over a five year period would support this claim. And perceived impropriety with a close relationship between the administrator and the investment advisor would be another bad fact, even if it isn't a prohibited transaction. Where is the investment advisor in this scenario? Most reputable advisors will schedule periodic reviews at least annually. We're an advisory firm, and we review most qualified plan funds quarterly, in a formal written report. Have the trustees violated any defined regulations? Probably not. Have they behaved imprudently, and exposed themselves to potential litigation? Probably so. What would happen if they were sued? Ask an attorney, I don't know. Hope this helps, Jon

Yes, and yes. If the employer pays fees (instead of reimbursing), it's probably not an annual addition.

I'd say it depends on the size of the organization and the class of Putnam shares being considered. If shares are Class Y, then there are no significant PT issues. If shares are A, B or C, and Sub C will receive commissions, then there are numerous potential PT and fiduciary issues. More info would be helpful.

At least one large West Coast plan sponsor that I know of runs a coverage test to check whether their brokerage account minimum ($1,000 in their case) is discriminatory. They find that it isn't. This may be conservative, but I believe it's an appropriate approach. I'd suggest that an account vendor with a high minimum (e.g. $5,000) could introduce fiduciary selection issues for the plan sponsor. Why was the high minimum vendor selected when a vendor with a lower minimum could have been chosen? Hope these brief thoughts help, Jon

A couple of clarifications: 1) Almost all participant directed plans are exempt from the SEC prospectus distribution requirement. Generally, the only plans that are subject to the requirement are plans where the employee controls investment in employer securities (e.g. a 401(k) plan offering company stock as an investment option). Plans offering insurance products (such as were cited by GBURNS) are not subject to the prospectus requirement by virtue of the SEC class exemption, not by virtue of the insurance offering. Thus, pursuing a prospectus equivalent through the State DOI would be a waste of time. 2) Despite the absence of a requirement to provide prospectuses, most well-run plans make prospectuses available, because it's almost impossible to comply with 404© without this type of disclosure. Most plans offering insurance products should be able to offer prospectus type disclosure (including information on expenses, returns, investment approach, etc.) If they can't, I'd suggest seeking out a different set of investments. Jon Chambers