Professional Ethics

[Andy the Actuary]

Some argue ethics are ethics; others, that ethics are a function of how much money is involved and what's at stake.

The struggling not-for-profit IHELPU has a frozen DB plan covering 200 participants where the FT=$4 million and assets = $7 million. IHELPU engages you to conduct a plan spinoff/termination study so they can recapture the $3 million and stay afloat. You've been the actuary for the IHELPU pension plan for years and they've always paid you out of the pension trust, except the cost of FASB. You tell them in writing up front that the study will cost 35K and that further this is an expense that should be borne by IHELPU and not the pension trust. You complete the study and send IHELPU an invoice which states on it that this is not an expense that should be borne by the pension trust. You promply receive a check and low and behold it is drawn on the pension trust. You call the executive director and he says if you want to get paid, cash the check. You remind him of the agreement and caveat regarding the legal issues and he cries that IHELPU's cash flow is in the toilet.

You know that it could be two years or so before IHELPU enjoys the asset reversion if their Board even decides to proceed with the spinoff/termination. Just to compound the situation, your office rent is coming due and owing to this lovely economy, your accounts receivable are coming in slow. Times are tough and you've been pushing your credit limit. You also know that if you go above the ED's head to the Board that that will be the end of you (you can't even get to the Board without the ED's involvement).

Any comments other than I need more to do so I don't have time conjure up situations like this?

[david rigby]

What does the plan say about allocation of excess assets? If it gives the excess to participants, this entire action may violate the plan itself.

IHMO, you've followed the Code of Professional Conduct. May need to review some ASOPs for a more complete answer.

BTW, under Precept 9, I don't think you can "advise" the plan sponor's auditor and/or attorney of this situation.

Cash the check.

Except for the 2 year delay to get the asset reversion, this could be viewed as "no harm, no foul" (assuming excess assets to the ER under the plan).

[QDROphile]

This is not business ethics, but as an ERISA matter you should be sure you are dealing with the plan fiduciary, or be advising the plan fiduciary about what is happening. I realize that the plan administrator is "the employer" for many plans, and the plan documents often do not specify which sentient beings represent "the employer" for plan purposes, so you are left with uncertainty about the identuty of the proper sentient beings unless you are dealing with the board.

[Andy the Actuary]

What does the plan say about allocation of excess assets? If it gives the excess to participants, this entire action may violate the plan itself.

For sake of discussion, assume Plan states excess assets revert to employer.

[jpod]

Andy: Assuming as you do that this is not a proper expense for the plan (and I think you are correct), why are you not a party in interest and a disqualified person and if you are why are you not participating in a per se PT (if you cash the check)?

[tymesup]

Note this awkward situation could be avoided if the employer were allowed to access funds in this well-funded plan. 401(k) participants are allowed to take loans and hardship withdrawals from their accounts; the poor sponsor does not have these options.

One could argue that it is not good for employers to be able to withdraw funds from a trust because this could adversely affect participants. Note, however, that this prohibition provides a powerful disincentive to fund a plan, which also adversely affects participants. Clearly, we need a complicated set of rules and regulations to determine when a sponsor can withdraw funds. Throw in an excise tax and maybe some additional funding requirements and I think we have a winner.

[GBurns]

From my perspective as a non-lawyer, Cash the check.

You have given written advice by means of the notice on the invoice.

You have advised the ED and verbally explained.

You have advised the client's authorized Officer, namely the ED.

You have no knowledge regarding any arrangements or compensatory agreements or accounting contra entries between the Trust and IHELPU, so your knowledge of the funding of the check is limited to the name of the payer of the check.

You have done as much as you can practically and prudently do.

The only remaining issues are, What could be the penalty for cashing the check ? Is that possible penalty more than the amount of the check?

[masteff]

Fact 1: it is your expert opinion that plan should not pay the expense, rather the ER should.

Fact 2: you know (presumably because it's printed on its face) that the check issued to you is from the plan and not from the ER.

Fact 2 violates Fact 1. If you cash the check, you will create the direct consequence of a plan fiduciary completing a potential prohibitted transaction. This makes the check tainted because cashing it results in another entity incurring an ethical violation. Therefore cashing the check would make you tainted.

The question for your review is: could a prudent person potentially agree w/ the ED's decision to pay an expense from the plan's assets despite your more conservative opinion to the contrary?

Question: speaking of questionable practices, could someone figure out a way for me to count this for my annual 2-hour ethics CPE requirement?

[SoCalActuary]

Fact 1: it is your expert opinion that plan should not pay the expense, rather the ER should.

Fact 2: you know (presumably because it's printed on its face) that the check issued to you is from the plan and not from the ER.

Fact 2 violates Fact 1. If you cash the check, you will create the direct consequence of a plan fiduciary completing a potential prohibitted transaction. This makes the check tainted because cashing it results in another entity incurring an ethical violation. Therefore cashing the check would make you tainted.

The question for your review is: could a prudent person potentially agree w/ the ED's decision to pay an expense from the plan's assets despite your more conservative opinion to the contrary?

Question: speaking of questionable practices, could someone figure out a way for me to count this for my annual 2-hour ethics CPE requirement?

Sure, for $300 per hour, plus travel expenses, you can come to my office and listen to me tell you this slowly for two hours.

[Andy the Actuary]

Thank you for all your comments. Can anyone float me a loan until I can get a bonafide payment?