Form 5500

[k man]

the plan is a 403(b) with employee deferrals only. however, it is invested in mutual funds in a custodial account. Everything is handled by the employer through a TPA. ie. distributions, deferrals etc. would this be subject to Title I of ERISA and have to file a form 5500 under the new rules? are there other factors i am not considering?

[QDROphile]

Q: Do you think the DOL was lying in its most recent field assistance bulletin on the subject or do you think that the DOL was lying in all the years prior to the bulletin or do you think the DOL just lost its mind and sense of shame?

If any arrangement can remain exempt, the one you describe seems to be a candidate. How is that for equivocation?

[k man]

ok then humor me please for a second and tell me what factors if any would make a strictly employee deferral custodial plan subject to ERISA.

[TLGeer]

Three ways to be ERISA-exempt-

1-Church plan

2-Governmental plan

3-"open market" plan

Assuming the first two don't apply, the remaining question on your stated facts is whether

"(2) All rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or by any authorized representative of such employee or beneficiary;

(3) The sole involvement of the employer, other than pursuant to paragraph (f)(2) of this section, is limited to any of the following:

(i) Permitting annuity contractors (which term shall include any agent or broker who offers annuity contracts or who makes available custodial accounts within the meaning of section 403(b)(7) of the Code) to publicize their products to employees,

(ii) Requesting information concerning proposed funding media, products or annuity contractors;

(iii) Summarizing or otherwise compiling the information provided with respect to the proposed funding media or products which are made available, or the annuity contractors whose services are provided, in order to facilitate review and analysis by the employees;

(iv) Collecting annuity or custodial account considerations as required by salary reduction agreements or by agreements to forego salary increases, remitting such considerations to annuity contractors and maintaining records of such considerations;

(v) Holding in the employer's name one or more group annuity contracts covering its employees;

(vi) Before February 7, 1978, to have limited the funding media or products available to employees, or the annuity contractors who could approach employees, to those which, in the judgment of the employer, afforded employees appropriate investment opportunities; or

(vii) After February 6, 1978, limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances. Relevant circumstances may include, but would not necessarily be limited to, the following types of factors:

(A) The number of employees affected,

(B) The number of contractors who have indicated interest in approaching employees,

© The variety of available products,

(D) The terms of the available arrangements,

(E) The administrative burdens and costs to the employer, and

(F) The possible interference with employee performance resulting from direct solicitation by contractors; and

(4) The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by such employer in the performance of the employer's duties pursuant to the salary reduction agreements or agreements to forego salary increases described in this paragraph (f) of this section."

Your statement that only mutual funds are available raises an issue under the reasonable choice requirement, because annuities are not the same sort of financial instrument as mutual funds. As a result, a mutual fund and an annuity wrapped around the same mutual fund are different and the annuity can only be turned down, consistently with the exemption, if there is, otherwise, a reasonable choice.

[k man]

Three ways to be ERISA-exempt-

1-Church plan

2-Governmental plan

3-"open market" plan

Assuming the first two don't apply, the remaining question on your stated facts is whether

"(2) All rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or by any authorized representative of such employee or beneficiary;

(3) The sole involvement of the employer, other than pursuant to paragraph (f)(2) of this section, is limited to any of the following:

(i) Permitting annuity contractors (which term shall include any agent or broker who offers annuity contracts or who makes available custodial accounts within the meaning of section 403(b)(7) of the Code) to publicize their products to employees,

(ii) Requesting information concerning proposed funding media, products or annuity contractors;

(iii) Summarizing or otherwise compiling the information provided with respect to the proposed funding media or products which are made available, or the annuity contractors whose services are provided, in order to facilitate review and analysis by the employees;

(iv) Collecting annuity or custodial account considerations as required by salary reduction agreements or by agreements to forego salary increases, remitting such considerations to annuity contractors and maintaining records of such considerations;

(v) Holding in the employer's name one or more group annuity contracts covering its employees;

(vi) Before February 7, 1978, to have limited the funding media or products available to employees, or the annuity contractors who could approach employees, to those which, in the judgment of the employer, afforded employees appropriate investment opportunities; or

(vii) After February 6, 1978, limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances. Relevant circumstances may include, but would not necessarily be limited to, the following types of factors:

(A) The number of employees affected,

(B) The number of contractors who have indicated interest in approaching employees,

© The variety of available products,

(D) The terms of the available arrangements,

(E) The administrative burdens and costs to the employer, and

(F) The possible interference with employee performance resulting from direct solicitation by contractors; and

(4) The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by such employer in the performance of the employer's duties pursuant to the salary reduction agreements or agreements to forego salary increases described in this paragraph (f) of this section."

Your statement that only mutual funds are available raises an issue under the reasonable choice requirement, because annuities are not the same sort of financial instrument as mutual funds. As a result, a mutual fund and an annuity wrapped around the same mutual fund are different and the annuity can only be turned down, consistently with the exemption, if there is, otherwise, a reasonable choice.

it is not open market. they can only choose from a menu of funds determined by the fiduciaries. and they are neither a church or a government. just a not for profit.

[QDROphile]

And who engaged the TPA and what control is exerted over the TPA? And what about all the 403(b) compliance the sponsor is responsible for, especially with an open market arrangement -- the plan needs all those contracts to make the providers communicate and behave? The DOL says it can be done, but none of us would have said so five years ago, and neither would the DOL.

[k man]

so do you think it is an ERISA plan or not?

[ERISAnut]

so do you think it is an ERISA plan or not?

It's not ERISA. 403(b)s have been running non-compliant for years. The IRS merely stepped in to apply controls to the abuses and began to hold the Employer responsible for what the IRS has failed to do for years. Hence, the majority of the new rules are imposed by the IRS; and should not be construed to change the position that the DOL has maintained for years.

It's not ERISA. The Control in with the employee. The employer's involvment is very limited to activities that are ministerial in nature.

[TLGeer]

Probably is subject to ERISA. Final answer would depend on understanding the process, including what other investment options were considered, if any were turned down and if so why. Responsiveness to suggestions for other options would also matter.

This issue has a lot of ramifications not ordinarily considered, other than the Form 5500. For example, how do you reconcile the part-time exclusion under 403(b) with ERISA minimum service rules-you don't, and the 403(b) part-time rule becomes essentially unusable. Plus, you have J&S compliance and ERISA notice and statement rules apply, inter alia.

A misclassified plan can generate a lot of penalties.

[Guest mjb]

Probably is subject to ERISA. Final answer would depend on understanding the process, including what other investment options were considered, if any were turned down and if so why. Responsiveness to suggestions for other options would also matter.

This issue has a lot of ramifications not ordinarily considered, other than the Form 5500. For example, how do you reconcile the part-time exclusion under 403(b) with ERISA minimum service rules-you don't, and the 403(b) part-time rule becomes essentially unusable. Plus, you have J&S compliance and ERISA notice and statement rules apply, inter alia.

A misclassified plan can generate a lot of penalties.

Tom:

Where is the authority for your statement that the plan is "probably" subject to ERISA. The problem is that the DOL has refused to provide any guidance on what is reasonable choice for 30 years since the regulation was issued which means that the DOL has no standards for enforcing this provision. The DOL is aware that there are many small NP who maintain SR plans with only one carrier or MF b/c there are too few participants to support multiple choices. If you have any citation for your opinion I would love to see it.

If the DOL believes that these plans are subject to ERISA then it can revise the regs instead of providing vague standards which do nothing more than define the ambiguity inherent in the operative definition "Revelant circumstances may include but would not necessarily be limited to the following types of factors..."

It sems to an impartial observer that the "relevant circumstances" can be one or more of the circumstances in A - F or other circumstances determined to be relevant by the employer.

[TLGeer]

Given the lack of specific authority, should I then charge you to produce authority that the plan is not subject to ERISA? Or is probably not? Or is not probably? No, I shouldn't. I won't engage in asymmetrical debate, and nor should you.

Your response seems to assume that each stated factor constitutes, in and of itself, a safe harbor. They are not. Each is a component in a multiple factor, more or less impressionistic, analysis/judgment. The phrase "may include but would not necessarily be limited" requires that each factor at least be considered for relevance and that the claimant (DOL or a participant, beneficiary or spouse or former spouse) can raise other factors. Just as an example, I would not want to be arguing a multi-factor case against a former spouse denied QDRO/QJSA rights when the plan has already paid benefits and the claim is economically against the employer.

Notice my reference to the treatment of discarded options and the treatment of suggestions for additional options. My basic view of the law here is that turning down additional options requires a judgment that they are in some sense duplicative or that they would unduly increase plan costs. Suppose, arguendo, that the plan includes a low-fee Wilshire index mutual fund, and a participant suggests an annuity with the same fund inside an annuity, but the annuity both eats 20% of the gains and and guarantees no losses on amounts invested over 5 years. Does rejecting the annuity leave the plan with a reasonable array? How do you argue against including in the plan the reduced risk of loss inherent in the annuity for participants who seek a lower risk than the market has shown over the last few weeks? Can anyone state, as a matter of law, what is reasonable? No.

The factors are not safe harbors, and all judgments as to the adequacy of the array are inherently factual and inherently subject to second guessing, eventually by a court considering assessing one or more, or all, of the penalties a wrong classification would cause. Are you prepared to list all of the risks of bad classification, and then say that an all mutual fund, restricted array of funds will always qualify? I hope, for your sake, and that of your clients, you would not.

Given the looseness of the facts, my answer is infinitely better that the other responses here. In essence, assume the worst, design a process that provides enough opening for materially different options, and make sure that any suggested alternative has been turned down because it is fundamentally duplicative. Beats the bejabbers out of failure to comply with ERISA.

If the TPA can't handle more than one place to send money, then the employer have chosen the wrong TPA. There are truly product-neutral common remitter/TPA providers out there whose fees don't vary based on where the money is sent. Hiring one that is not up to the requirements of the law is just a bad choice, not a reason to ignore the requirements of the DOL regulations. Justifying a failure to comply with the law based on inadequate service providers is sometimes referred to as the "Streetcar Named Desire" defense, or "I have always relied on the kindness of strangers." That may be a useful tactic, but it ain't a legal defense.

Just in case you're thinking I'm an idiot, I am aware of the DOL statement that 2 options may be enough, as to which I have 2 responses. First, the DOL appears to have been following my father's rule of ask a stupid question, get a stupid answer; does anyone really believe, given the ana;ysis of the DOL under the QDIA rules, that two selections is enough? Second, does anybody believe that two funds (or 3 or 5 or 8) inside of a single trading platform is the DOL's two? You may, but I don't.

If you will attend to the tenor of my posts, you will see that (1) I have listed the factors involved in determining relative probability, (2) I have described some, but not all, of the risks inherent in treating plan as ERISA-exempt when it is not, or may not be, (3) I have clearly stated that further inquiry is required, and (4) I have cautioned against undue risk-taking and the sort of simplistic, facile analysis of the other responders. If you have a better approach, please advise.

I have to say that I find your "DOL is aware" argument surprising. The DOL is also aware that lots of employers don't comply with effective availability, or the writing requirement that has been inherent in the statute all along, or proper application of loan and hardship rules. This does not mean that these are acceptable in the future? Does my knowledge that an NBA referee fixed games makes that acceptable in the future? FYI, that's called a reductio argument.

Last, I fully agree that the regulation is badly done. Please address all such comments to the DOL, and not to me. The last time I looked, I had no capacity to change them, only to advise clients how to so their best to avoid the myriad penalties in ERISA. The complexity of the regulations clearly requires a complex analysis, and the proposed simplistic analyses surely require a change to some form of bright-line test that DOL could have done easily in connection with the issuance of the 403(b) regulations by the IRS. Given the DOL's history of vague factual discussions of fiduciary duties (yes, I know they are not technically relevant, but they show a mindset or analytical preference) and the tendency to think about process rather than result, I would not hold my breath, or advise my clients that complex regulations are simple.

[Guest mjb]

So the answer is you dont have any authority to support you position.

[k man]

So the answer is you dont have any authority to support you position.

this plan has 15-20 fund choices. maybe 6 fund families and the money is not sent directly to them. it is sent to as custodian.

[Guest mjb]

Just in case you're thinking I'm an idiot, I am aware of the DOL statement that 2 options may be enough, as to which I have 2 responses. First, the DOL appears to have been following my father's rule of ask a stupid question, get a stupid answer; does anyone really believe, given the ana;ysis of the DOL under the QDIA rules, that two selections is enough? Second, does anybody believe that two funds (or 3 or 5 or 8) inside of a single trading platform is the DOL's two? You may, but I don't.

...

I have to say that I find your "DOL is aware" argument surprising. The DOL is also aware that lots of employers don't comply with effective availability, or the writing requirement that has been inherent in the statute all along, or proper application of loan and hardship rules. This does not mean that these are acceptable in the future? Does my knowledge that an NBA referee fixed games makes that acceptable in the future? FYI, that's called a reductio argument.

At the time the above regulation exepting 403b plans from ERISA if they provided reasonable choice was adopted in 1978, between 80-90% of all 403b assets were invested in TIAA-CREF which offered only two options: a fixed annuity and a variable annuity. The DOL never suggested that this type arrangement would be subject to ERISA.

[Guest mjb]

So the answer is you dont have any authority to support you position.

this plan has 15-20 fund choices. maybe 6 fund families and the money is not sent directly to them. it is sent to as custodian.

Kman:

Q- What was the procedure for selecting the providers? Did the TPA select the fund families/choices, was there any input by employees, such as an employee committee, did any providers solicit the employer to be vendors under the plan?