mbozek

I concur with KJ: the crucial distinction between examples 8 and 9 is who has discretion to select the investment mgr. In 8 the plan fid selected investment mgrs who participants could appoint as advisors so the plan fid has a duty to monitor performance. In 9 the participant appoints the advisor without approval of the plan fid (plan does not designate advisor as investment advisor available to advise other participants in the plan). In example 9 the participant is the fid who has the duty to monitor the advisor's performance since the advisor is liable to the participant and not the plan fid for imprudent investing. The two cited cases I have read say the same thing: the fid who exercises discretion to appoint the investment mgr has the duty to monitor the mgrs performance. Since the plan fid did not appoint the mgr in example 9 under the plan, the plan fid has no duty to monitor performance.

JON: Perhaps you ought to ask all the TPAs and plan admin on this board whether they would want to add the duty of monitoring the investments made by participants in directed brokerage accounts to their overburdened list of responsibilites- I dont think too many have room in their budget for the additional expense. Second what would the plan monitor and what would the standards for monitoring be? Would the fid monitor individual trades or just investment styles, allowing some ("dogs of the dow", monte carlo analysis, etc) but not others (contrarian). What if the participant insisted on following the advisor's instructions for which he is paying a fee. Would the Fid have obtain the opinion of an independent investment advisor to review the advice of the participant's own manager and who would pay for such an opinion? If the fid removed the advisor does the fid now have a duty to appoint a sucessor acceptable to the participant and now have fid responsibility for investing the participants assets? I think there is greater risk of fiduciary liability where the fid assumes the duty to monitor advisors selected soley by participants than to the fid who does not monitor (since the duty to monitor conflicts with the duty of a plan fiduciary under the current 404© regs) because that fid assumes a duty to prevent losses due to decisions made by a person who is solely a fid selected by the participant. It give the participants deeper pockets to sue.

So then every plan that contains language that it complies with 404© is in violation of the plan terms and perhaps could be disqualfied by the IRS because it is not being administed in accordance with its terms. (Only kidding) As for Mr Chambers position that the DOL position on the duty to monitor also matters I dont think that an advisor must suspend his analytical abilities and not question the authority for such a position in the applicable law. One need only review the recently revoked DOL position regarding fees/expenses that could not be assessed on participants in Op 94-32A to recognize that the DOL takes unsupportable positions that are abandoned when challenged. What I have been trying to convey is that plan fids, sponsors, administrators and counsel cannot perform their duties in in an unsettled regulatory environment which promulgates alice in wonderland type rules ( "first the sentence, then the verdict") on fiduciary responsibility.

G: I am asking a simple question- How does the plan admin comply with the instruction requirement in plans that offer many mutual fund options and daily transfers? Does the participant give the instructions to an identified plan fiduciary who is obligated to comply? Is the vendor who handles the transfers a fid? In most of the 401(k) plans that I know of, the participants give their instructions directly to the fund family by phone or on the net. How is this different than giving instructions to a discount broker?

Ok- so how about sending duplicate instructions to the plan admin. But how does the plan admin get instructions in plans where there are 100s of mutuual fund options available to thousands of participants? Why is the directed brokerage compliance issue any different?

Most plans consider compliance to be effected by having duplicate confirmations sent to the plan fid. I have one question- How are instructions given to the fid in 404© plans that allow many mutual fund investment options (100 or more)? Does the fid review each instruction in plans that have thousands of participants and permit daily transfers.

For taxpayers in the lowest brackets a hardship loan may be the better option because the new tax law increases the amount of income taxed at the 10% rate and a married couple may get a greater tax benefit by using the standard deduction of about $8000 instead of itemizing the interest payments and taxes. It certainly better to increase the downpayment to reduce mortgage payments if there is little tax benefit to the mge deduction (e.g, someone in the 15%bracket benefits less from the deduction than some one in the 30% tax breacket).

Short answer- under ERISA the plan fiduciary is liable to pay Doe no 2 because 30k is his vested accrued benefit under the plan. Fid has a cause of action under state law against both record keeper and tpa for malpractice or breach of warranty of due care for their actions and joint and several liability which will be determined by a ct. (GB-There is no fid liability of vendors because employee's only claim for benefits under ERISA is against fid/plan. doe 2 has no claim against vendors.) Check admin agreements with the parties for the liability provisions - some vendors have limited recovery for mistakes. Since the amount is minimal the parties or their ins carriers will settle but the recovery may take years. The immediate problem is that the fid needs to come up with 30K for Doe 2. If doe 1 or his rep refuse to return the money the fid could pursue Doe no 1 for the 30k in Fed ct. but recovery will be expensive/difficult/lengthy since Doe 1 is incapacitated and had a reasonable basis to believe that the benefits were his. (Note- rep may not be able to voluntarily return money without ct approval which may take time and plan may be asked to pay for ct costs for getting approval.) Also fid will have to front legal fees for recovery effort with no guarantee of repayment. Guardian may need to be appointed by ct to represent Doe 1 which will take time. The fid could leave recovery effort to party who reimburses fid. The fid needs to retain counsel to sort this out and it will be expensive.

ERISA 510 prohibits discriminatory action against employees by employers in benefit plans. The cases are usually dismissed without trial or discovery because the employee does not allege facts in the complaint to show that employer action (e.g., termination) was taken to deny benefit rights. Anyway this is beyond the scope of the original post.

Unlike other companies E.g., Enron, where there was a long history of security law violations and complicity of financial intermediaries and the auditors over a period of years, Worldcom's bankruptcy was sudden and brought on by the disclosure that the CFO changed quarterly expense items to capital expenditures in order to meet the quarterly estimates of analyists over a period of several years. The CFO also deceived the outside auditors. Therefore investment managers who invested in World com have a defense that they relied on company reports that they reasonably believed to be accurate. Some state pension funds (NJ, Fla) have sued their investment mgrs for investing in other companies and sued companies for false reporting of earnings under the securities laws.

It is very difficult, almost impossible for an employee to prove termination in violation of ERISA 510 without an employer admission. The employee must prove that the reason for termination was expressly to prevent the employee from receiving benefits- the fact that the employer's benefit costs were reduced because of a reduction in force is not proof of a violation of ERISA.

Thank you for the update and analysis. I would be interested in any cases under ERISA that cite the duty to monitor by a fiduciary. Second I dont see how this applies to investment direction under 404© since example 9 explicitly states that the plan fid has no liability for imprudence of the advisor appointed by the participant, is not a co-fiduciary with the advisor and has no duty to determine the suitability of the advisor as an investment mgr. So how is a fid on notice of a duty to monitor under ERISA. Also the duty to monitor is too vague to be of any use since there are many recognized investment strategies that will appear unorthodox/imprudent at any particular point in time. For example, in contrarian investing the mgr invests in out of favor stocks that may perform on a below average basis for years before taking off and reaching full value. If a fid was to terminate a mgr because of prolonged below average performance would the fid be liable for imprudence under ERISA for the gains made in the stock after the mgr is removed? The problem with the duty to monitor is that the plan fid can be liable under ERISA for taking action adverse to the advice of investment mgr appointed by the participant who is the fiduciary to the participant.

Dick: In the absence of a QDRO your solution would constitute a forfeiture of vested benefits in violation of ERISA since a QDRO is one of the few exceptions to the requirement that a participant must be paid his vested benefits. There is also a case which holds that it is a violation of ERISA to withhold benefits in anticipation of DRO. The spouse may never appear because she is dead or does not want to pay for a QDRO. The plan has no obligation to track down a missing spouse and incur costs in the search to notify him/her of the impending payment because 12 years is a reasonable amount of time to file a DRO. Finally according to the facts no one is sure that the benefits were subject to divorce.

NP 403(b) plans are subject to the vesting provisions of ERISA which are the same as the IRC requirements for qual. plans. The IRS regs apply to the ERISA rules. There are very few IRS rules on discrimination in a 403(b) plan. IRS notice 89-23 requires that 403(b) plans operate in accordance with a reasonable good faith intrepretation of the applicable rules.

The purpose of the QDRO is to acknowledge the ex- spouse's rights to the pension. If there is no QDRO on record the employee can commence benefits without reduction. I dont think the ex spouse would have a right to the pension benefits if the QDRO was not approved prior to the time the benefits commence because of the doctrine of latches (unreasonable delay by spouse causes harm to the employee). This is different from a situation where the employee dies shortly after the divorce is issued but before a DRO can be presented to the plan admin.

GB: Headline in todays Wall Street Journal- "New Recipe for Cost Savings- Replace Expensive Workers". Circuit City recently terminated the highest paid 20% of its sales force to save money. Salary used to be considered a proxy for age, e.g. ,since older workers made more money than younger workers, firing the higher paid workers would be a violation of age discrimination laws. A few years ago the US Supreme Ct held that terminating a high paid older worker wasn't age discrimination if the basis for termination is to reduce cost of doing business. However, terminating employees to reduce pension costs (e.g., to prevent an employee from vesting in a benefit) would be considered a violation of ERISA.

1. 403(b) plan can provide deferred vesting on employer matching under same rules as a qp. The existing plan can be amended to add a match. 2. A tax free rollover from terminated 403(b) plan to qp is not permitted. 3. A 403(b) plan is cheaper and easier to administer than a 401(k) plan- no IRS qualfication required, 5500 filing is one page, no ADP testing which restricts deferral for HCEs, higher deferral limits for long term employees of certain nps, same loan and hardship provisions as a 401(k) plan, no IRS approval required for terminaton. 403(b) plans are not subject to mandatory amendments to prevent disqualfication. NP can adopt 457 plan for top hat group to increase employee deferral by additonal 12k in 2003. My question -why would the er want to adopt a 401(k) plan?

Only non profits that are tax exempt under IRC 501©(3) are eligible for a 403(b) plan. Other NP must establish a 401(k) plan for salary reduction. A 403(b) plan is cheaper to administer because it is not qualified, no ADP testing, no IRS approval is required, permits larger elective contributions for employees of certain nps and has simple 5500 filing. See IRS publicaton 571 for details. NP can also maintain 457 plan for top hat group to allow additional salary reduction of 12k in 2003. Distributions from terminated 401(k) plan can be rolled over to 403(b) plan. 403(b) plans are simple to install and require only board resolution.

How long did you use the house as your prmary residence? There is no cap gains tax on first $250,000 of gain (500K if married during this period) if u used the home as your primary residence for two of the five years prior to date of sale. IRC 121(b). (Note-the tax deferral for the purchase of a replacement home was abolished in 1997). Otherwise you are subject to st/lt cap gains tax. There is an IRS pub. on selling your home. You should consult a tax advisor to see if you can net investment losses against the cap gains on the house.

KJ: The difference between examples 8 and 9 is who selects the investment manager under the terms of the plan. In 8 it is the fid who designates investment mgrs who participants can appoint to manage assets in the plan under the terms of the plan. Thus the fid is responsible for the prudence of the investment mgrs overall but has no obligaton to provide investment advice to a part. on which mgr to choose. In Example 9 the participant selects the investment mgr and gives the mgr total discretion over investing the assets. In this case since the fid did not select the investment mgr. the fid has no liability for the mgr's imprudence. In example 9 the Fid has no duty to monitor the investment mgrs suitability to manage investments because the plan did not designate the mgr as an investment mgr. The preamble language implying fid responsibility under ERISA for decisions of a mgr not designated by the plan can be disregarded because it is not part of the regulation. My reason for citing it was to demonstrate that the DOL regards an investment mgr selected by a participant as managing plan assets so that the mgr's fees can be paid from the part. account under the plan but I do not agree that the plan fid would have fid responsibility to review the investment decisions of a mgr designated by the part. to manage assets in his/her account since the reg cleary states that a fid is not liable for any loss that results from the participant's exercise of control. reg. 404c-1(d)(2).

Why not adopt a board resolution recognizing the change in tuestees and then prepare a resignation of one trustee in writing and the appointment of the sucessor trustee along with his/her signatuare accepting appointment? The trustee change can be circulated as an smm.

While John's is good you should remember that you need to have a registered representative to trade stocks, bonds and other securities on a national exchange. You can avoid paying commissons on stock purchases by buying stocks through a DRIP- dividend reinvestment program where you buy a small number of shares directly from the corporation and then either reinvest the dividends or purchase more shares with direct purchases. Most DRIPs will accept IRA accounts. In fact dividends from drips can be counted as an IRA contribution as long as you have the requisite compensation for the year to make an IRA contribution. However, Drips are not free and there are charges for maintaining the account and for making trades. Some drips only sell/purchase stock on fixed days during a month. There may even be a web site for companies that offer DRIPs. But you still have to diversify your investment in drips the same as any other portfolio.

GB- why do you insist on classifying an incorrect ssn as an employment issue and not a issue for a plan admin? The penalities under IRC 6721(a)(2) apply to a plan admin who files an incorrect information return and are doubled in the case of an intentional failure. Clearly a plan admin who is aware that several participants are are using the same ssn has a duty to determine the correct ssn in order to pay distributions. Separate penalties also apply if the participant is provided with an incorrect 1099-R. Also since many plans/record keepers identify employees accounts by ssn, the plan admin must determine the correct identity / ssn of each participant to avoid a claim of failure to properly determine the correct benefits of each of the participants under ERISA. I am interested in the citations of authority for your position.

A one line plan amendment or board resolution is still cheaper than researching the issue. I would rather see the participants get the excess than the IRS.

The provison is called a fraudlent transfer of assets to defraud creditors and it is located in the bankruptcy code, not ERISA. It applies to any transer fo corporate assets, not just retirement plan contributions.