Transcript Document
Keeping Current
Ilene H. Ferenczy and S. Derrin Watson
2010 Limits
Section
415(b)
415(c)
401(a)(17)
402(g)
414(v)
414(q)
416(i)
Limit
2009
2010
Actual
Amount Amount
COLA
Max DB Benefit $195,000 $195,000 $194,159
Annual Addition $49,000 $49,000 $48,540
Compensation $245,000 $245,000 $242,699
Deferral
$16,500 $16,500 $16,436
Catch-up
$5,500
$5,500
$5,479
HCE
Key EE Officer
IR 2009-94
$110,000 $110,000 $109,660
$160,000 $160,000 $157,754
What We Will Cover
New laws/RMD guidance
Regulations/proposed regulations/auto enrollment
Other IRS guidance
DOL guidance
403(b) changes
Other agencies
ERISA litigation
New Laws/RMDs
WRERA
Worker, Retiree, and Employer Recovery Act of 2008
President Bush signed December 23
Major items
DB asset smoothing/funding relief
Lump sum distributions < $5,000 (+ rollover) OK even if plan
underfunded
Eliminates gap period income for §402(g) corrections
§ 404(a)(7) deduction limit on a combination of plans does not apply if
employer DC contributions do not exceed 6% of compensation
Changes to EACAs
QDIA not required to have EACA
EACAs available to SEPs and SIMPLE IRAs
Permissible withdrawals don’t count against § 402(g)
Nonspouse Beneficiary Rollovers
New rules start plan years beginning in 2010
Nonspouse beneficiary $ treated as eligible rollover
distribution
So plan must cooperate with direct rollover
20% withholding (except for RMDs)
402(f) notice
Apparently must incorporate as part of PPA
amendment
WRERA Waiver
Code requires required minimum distribution (RMD)
each year starting RBD
Recent economic downturn resulting in significant
account decreases has increased RMD impact
Worker, Retiree, and Employer Recovery Act (WRERA)
of 2008 provides some relief to participants (plan and
IRA)
No IRS guidance except Notice 2009-9 for IRAs
The problem:
In a (rapidly) falling market, RMD calculation has a magnified
adverse effect
Last year’s balance determines this year’s distribution
Result is required distribution of higher percentage of account
The Solution?
WRERA waives RMD requirement for 2009
Query: Too little too late?
Waiver applies both to participants and to death
beneficiaries
Waiver applies to virtually all defined contributions
plans subject to RMD rules:
Qualified plans
403(b) plans
Governmental 457(b) plans
IRAs
Doesn’t apply to:
Defined benefit plans
Tax-exempt 457(b) plans
5-year Rule Extended
Death before RBD
If no DesBen or plan mandates 5-year rule and
beneficiary doesn’t roll over
Determine 5-year period disregarding 2009
Affects participants who die between 2004 – 2009
Examples:
Lenny dies 6/1/2010 with no DesBen
5-year deadline is 12/31/2015
Lenny dies 6/1/2009 with no DesBen
5-year deadline is 12/31/2015
If death
is in
2003 2004 2005 2006 2007 2008 2009 2010
5-year
2008 2010 2011 2012 2013 2014 2015 2015
deadline
Plan Treatment of 2009 “RMDs”
If plan distributes ERD
Plan must give 402(f) notice
Direct rollover (§401(a)(31)) option applies
20% mandatory withholding applies if participant elects to
receive rather than roll over
Normal rules
RMD is not eligible rollover distribution (ERD)
10% withholding, participant can elect out
WRERA rule for 2009 distributions
If plan distributes an amount that would be an ERD but for the
RMD rules
So is ERD because of RMD waiver
Plan generally treats as not ERD
No 402(f) notice
No direct rollover option
No 20% withholding on distribution (apply 10%)
BUT if ERD, plan may offer direct rollover
Notice 2009-82: WRERA RMD Guidance
Notice 2009-82:
Answers questions about application of WRERA RMD
rule
Including interaction of rule to eligible rollover distributions (ERDs)
Provides transition relief
Provides sample amendments
2009-82: Defined Terms
2009 RMDs: Amounts plan would have been required to
pay as RMDs for 2009 if WRERA hadn’t been adopted
Extended 2009 RMDs: One or more payments in a series
of substantially equal distributions (that include the 2009
RMDs) made at least annually and expected to last:
for life/life expectancy of the participant,
the joint lives/life expectancy of the participant and designated
beneficiary,
or for a period of at least 10 years
Note: Substantially equal distributions for life (or at least 10
years) are not normally ERDs
By definition distributions as slow as the RMD rules permit are
therefore not normally ERDs
2009-82: Transition Relief
2009 RMDs and Extended 2009 RMDs are ERDs
60-day rollover period for plan distributions of 2009
RMDs and Extended 2009 RMDs does not end before
November 30, 2009
60-day rollover period for IRA distributions of 2009
RMDs does not end before November 30, 2009
But 1-rollover/year rule still applies
IRS will not raise “operational failure” issue with regard
to whether, from January 1, 2009 to November 30,
2009:
Plan made, or did not make, distributions of 2009 RMDs or
Extended 2009 RMDs
Participants were NOT given the option to receive (or not
receive) distributions that include the 2009 RMDs
A plan offered or did not offer a direct rollover option for 2009
RMDs or extended 2009 RMDs
2009-82: Sample Amendments
Designed for adoption by employer
Not preapproved plan sponsor
Gives participant/beneficiary choice to receive, or
not receive or not receive 2009 RMDs and/or
Extended 2009 RMDs
Two alternative amendments
Participant receives unless election not to receive
Participant doesn’t receive unless election to receive
Plan can offer direct rollovers for:
2009 RMDs/Extended RMDs or for
2009 RMDs, but only if paid with additional amount which
would be ERD anyway
2009-82: Effect of Amendments
Sponsors may need to modify amendments to
conform to plan’s procedures and terms
Adoption deadline: Last day of 2011 plan year
(2012 for governmental employers)
2009 RMDs after November 30, 2009 must reflect
amendment chosen
Does not result in loss of reliance
Will not adversely affect status of preapproved plan
2009-82: Additional Questions
No need to amend IRAs for 2009-82
WRERA relief extensions of time:
Extends time for beneficiary to elect between life expectancy
rule/5-year rule
If participant died in 2008, nonspouse beneficiary has until
12/31/2010 to roll over to inherited IRA and use life expectancy
rule instead of 5-year rule
No other extensions
Can roll 2009 RMDs back into same plan if plan permits
20% withholding does not apply to 2009 RMDs
distributed in 2009 (but could apply if distributed in
2010)
If prior undistributed RMDs, first 2009 distributions are
prior RMDs
401(k) Regulations/Proposed Regulations
Automatic Rollovers
EACA/QACA final regulations
Safe harbor exiting proposed regulations
Safe Harbor Notice - General Timing
Requirements
Provide notice a reasonable time before beginning
of plan year
Deemed reasonable if given 30-90 days before start
of plan year
For calendar year plan, between:
October 3
December 2
After that, Employer must demonstrate
reasonableness
This standard applies to:
Classic safe harbor
QACA
EACA
Safe Harbor Notice - New Participant
If employee becomes eligible to defer later than 90
days before start of year (e.g., after October 3 in
prior year), then notice is deemed reasonable
during period:
Beginning 90 days before employee eligible
Ending on date employee becomes eligible
Can apply to:
New hires
New status (e.g., change from union to nonunion)
Merger/acquisition
New plan
Safe Harbor Notice –
New Rule from EACA/QACA Regs
“If it is not practicable for the notice to be provided
on or before the date specified in the plan that an
employee becomes eligible, the notice will
nonetheless be treated as provided timely if it is
provided as soon as practicable after that date and
the employee is permitted to elect to defer from all
types of compensation that may be deferred under
the plan earned beginning on the date the
employee becomes eligible.”
Safe Harbor Notice - English Translation
Try to give the notice by entry date
If not practical give it ASAP
But in any event in enough time that EE can elect to defer
from first paycheck
If it is after first paycheck, you’re late
Applies to classic safe harbor, QACA, and EACA
Expiring Deferral Elections –
EACA/QACA Preamble:
Commentators asked whether plans are permitted to limit
the duration of an affirmative election or to require
employees to make new elections.
Under the final regulations, automatic enrollment applies for periods
during which the affirmative election is not in effect.
Accordingly, a plan could specifically provide that an affirmative
election expires and, thus, require an employee to make a new
affirmative election if he or she wants the prior rate of elective
contribution to continue.
In the absence of a second affirmative election, the employee will be
automatically enrolled at the plan’s default percentage . . .
Expiring Deferral Elections –
2 Examples from Preamble
Example 1:
ER has QACA 2009 - 2011
Plan provides all affirmative elections expires 12/31/2010
All eligible employees who don’t make new affirmative
elections are automatically enrolled in QACA in 2011
Example 2:
Plan suspends elective contributions for 6 months after
making hardship distribution
“If the plan does not reinstate the affirmative election at
the end of the 6 months, the employer must automatically
enroll the employee.”
QACA/EACA Election Choices
Participants subject to the Automatic Deferral
Provisions. The Automatic Deferral Provisions apply to
(select one):
1. [ ]
All Participants. All Participants, regardless of any prior
Salary Reduction Agreement, unless and until a Participant makes
an Affirmative Election after the Effective Date of the EACA or
QACA.
2. [ ]
Election of at least Automatic Deferral amount. All
Participants, except those who, on the Effective Date of the EACA
or QACA, are deferring an amount which is at least equal to the
Automatic Deferral Percentage.
3. [ ]
No existing Salary Reduction Agreement. All
Participants, except those who have in effect a Salary Reduction
Agreement on the effective date of the EACA or QACA regardless
of the Elective Deferral amount under the Agreement.
4. [ ]
Describe:
Expiring Deferral Elections –
Hardship Possibilities
Whose job is it to remember to restart deferrals at
the end of 6 months after hardship distribution?
Remember, if EE has deferral election, and plan
doesn’t take out deferrals:
Operational failure
ER must make QNEC = 50% of missed deferrals + 100%
of missed match + earnings
Defense: Cancel deferral election when participant
takes hardship distribution
Participant can make new election at end of six months
How to Implement
“A plan could specifically provide that an affirmative
election expires”
Looks like it requires specific plan language
How about “Plan administrative may announce, on
uniform and nondiscriminatory basis, that deferral
elections are cancelled as of a given date”???
Risky
How about expiration date printed on deferral form?
How about cancellation on hardship distribution form?
Expiring Deferral Elections –
Revocation of Election
Presumably plan forms could allow participant to
revoke election
Places participant in same position as if no deferral
election made
Thus subject to automatic enrollment
Different from affirmative election to defer zero
Exiting SH - Match
Exiting rules as they apply to
safe harbor matching
Requires:
30 day advance notice to EEs
Reasonable opportunity to change deferrals
Amendment to remove/reduce match
Funding of match accrued through date of amendment
Current year testing for entire plan year (loses SH
status)
Exiting SH - New Option for SH Nonelective
Proposed regulations
Taxpayers may rely
Can exit SH nonelective but allow plan to continue
Must follow same rules as SH match
Eligibility for new rule: Substantial business
hardship — Factors include:
The employer is operating at an economic loss,
There is substantial unemployment or underemployment
in the trade or business and in the industry concerned, or
The sales and profits of the industry concerned are
depressed or declining
Thursday Afternoon
Exiting SH –
Other Notes from Proposed Regulations
Preamble:
You must pro rate the §401(a)(17) limit
You must actually amend plan before exit takes place
Can’t wait for end of year
You lose SH top-heavy exemption
Content of exit notice to participants:
The consequences of the amendment,
The procedures for changing deferral elections, and
The effective date of the amendment.
Illustration: Comp Limit Problem
Plan provides standard enhanced match (100% of
deferrals up to 4% of compensation) computed on a
payroll by payroll basis
Max. 2009 match = 4% X $245,000 = $9,800
Diamond Jim monthly paychecks:
Gross compensation: $50,000
Deferral: $1,500
Match: $1,500
Match will stop in July
ER eliminates SH match effective 6/30/09
Match allocated to Jim = $9,000
Maximum match for Jim = $4,900
Automatic Enrollment
New final EACA/QACA regulations
QACA:
Generally effective years after 2007
Major changes/clarifications:
Timing issues on minimum automatic deferrals
Timing for start of automatic deferrals
No hardships from QACA employer contributions
EACA
Generally effective years after 2009
Major changes/clarifications
EACA need not include every plan participant
But if it doesn’t, then no 6-month rule
No midyear EACAs for existing participants
Timing on permissible withdrawals
Workshop 22
Automatic Enrollment Guidance
Rev. Rul. 2009-30
2 issues on automatic enrollment plans:
Approves non-uniform change
Default deferral increases by greater of:
1% of compensation or
30% of percentage raise, rounded to nearest 1%
So EE getting 6% raise has 2% auto increase
Result: Fine outside EACA or QACA
Gives an example of midyear increase in default %
Calendar year QACA; auto deferral goes up April 1
Assume participant has first QACA
Rate
Plan
Code
auto deferral 7/15/10
date
date
Result: OK for EACA or QACA
3%
7/15/10 7/15/10
under “portions of years” uniformity
4%
4/1/11 1/1/12
5%
4/1/12
1/1/13
6%
4/1/13
1/1/14
Notice 2009-65
Automatic Enrollment Sample Language
Notice 2009-65 is sample language to add
automatic enrollment features
Written as basic plan/adoption agreement format
Won’t adversely affect prototype reliance or status as a
prototype
Employer can modify to conform to plan procedures
Amendment alternatives:
EACA with permissible withdrawals
Automatic enrollment without EACA/QACA features
Some quirky features which could trigger operational
failure
Notice 2009-66, 67
SIMPLE IRA Automatic Enrollment
Notice 2009-66:
SIMPLE IRA can have automatic enrollment
SIMPLE IRA can limit auto enrollment to new EEs
A SIMPLE IRA can use an automatic increase feature for
default deferrals
Annual SIMPLE notice contents
EE’s rights to move deferrals to a different financial
institution apply to default deferrals
SIMPLE IRAs subject to ERISA can qualify for QDIA
fiduciary protection.
Notice 2009-67: sample amendment SIMPLE IRA
sponsors can use to add automatic enrollment
features to their arrangements
Notice 2008-108
Rev. Proc. 2009-36
Circular 230
Rev. Proc. 2009-31, 32
Notice 2009-68
Notice 2009-75
Cumulative list
Governmental plans
ERPA
Paid Time Off
Sample 402(f) notices
Rollover to Roth
Other IRS Guidance
Notice 2008-108 Cumulative List
Cycle D plans must amend for PPA even if 2009
plan year ends after January 31, 2010
Alternative – file in Cycle E
Cycle D plans can include HEART provisions
But IRS won’t review them
Qualified reservist distribution extension treated as part of
PPA amendments
Workshop 31
Rev. Proc. 2009-36 Governmental Plans
Confirms that governmental plans can choose to be
in Cycle E (deadline 1/31/11), instead, of cycle C for
EGTRRA restatement
Make election by filing Cycle E determination letter
request
Must comply with Cycle E cumulative list (issued end of
2009)
Determination letter expires 1/31/14
So employer returns to Cycle C
Remedial amendment period for governmental
plans requesting determination letters expires 91
days after end of first legislative session which
begins more than 120 days after final IRS
determination
ERPA in Action
ERPA designation now available
Pass 2 examinations
Get PTIN
File Form 23-EP
Pay fee
Allows practitioner to represent client before IRS on
Plan audit
EPCRS
5500 series
Determination letter
Workshops 17, 38, 44
Rulings on Paid Time Off (PTO)
Two recent Rev Ruls on qualified plan contributions
of unused PTO plan credits
Example:
Plan provides gives EEs 240 hours of PTO/year. Unused
credits expire at end of year. ER will make retirement
plan contribution for expiring credits.
Mary (salary $25/hour) uses only 200 credits in 2009. ER
contributes $1,000 to Mary’s PS account.
Jack (salary $10/hour) quits midyear, with 50 unused credits. ER
contributes $500 to Jack’s PS account.
Many variations possible
EE has choice of cash or plan contribution
PTO plan may allow carry over of some hours but not full
year’s worth
Characterization of Contribution
Employee has choice between receiving cash or
having plan contribution:
401(k) elective deferral
Subject to §402(g) limit
Included in ADP test
Subject to match unless document says otherwise
Included in comp like other deferrals
Employee does not have choice of receiving cash:
Nonelective (PS) contribution
Tested under §401(a)(4)
Probably requires general test
Not included in compensation
Watch Out for Post-Severance Issues
PTO paid after severance may or may not be
compensation depending on terms of document
Check post-severance comp amendment
If it isn’t comp, you can’t defer out of it
PTO paid in year following severance may be only
comp for year
Example:
Doug severs 12/28/2009
Unused PTO credits $1,000
ER credits PTO to 401(k) plan 3 paychecks after termination
(January 31, 2010)
Maximum PS contribution $500; pay Doug $500
Otherwise violate 415 compensation limit
Other Ruling Conclusions
Unused PTO contributions to qualified plan do not:
Adversely affect plan’s qualification
Cause amounts contributed to be taxable to participant before
distribution from plan
Does not subject PTO to Code §409A as something other than
bona fide sick and vacation leave plan
EE taxed on PTO payments in year of payment, not year
credited
Assume calendar year employer and plan
If
401(k) plan credits PTO payments to participant’s account as of
12/3109 (or earlier) and
ER contributes by 30 days after extended tax due date
Then they are 2009 annual additions
Otherwise, they are 2010 annual additions
Plan Document Considerations
If PTO payments are elective deferrals:
Check deferral election forms
May want separate election for PTO
Make it clear whether general election applies to PTO
If PTO payments are not elective deferrals:
Likely must amend plan to allocate properly
Consider amendment to provide for contribution
Can’t do it in standardized prototype
Notice 2009-68: New Sample 402(f) Notice
Takes into account recent law changes
Two sample notices
Pre-tax only
Roth
Participant with both Roth and pre-tax gets two notices
Can omit clauses not relevant to plan:
Voluntary after tax contributions
Net unrealized appreciate
Notice 2009-75: Rollover to Roth Guidance
Taxable income on rollover of pretax to Roth =
taxable income if it had been distributed
But no special rules like net unrealized appreciation
Before January 1, 2010, pretax rollover to Roth
possible only if:
Modified AGI not exceed $100,000 and
If married, file joint return
Otherwise wait until 2010 or roll to traditional IRA then
convert to Roth in 2010
Rollover from Roth plan to Roth IRA
Not taxed (whether or not qualified)
No limitations
Workshop 5
Investment advice
Madoff memo
2550.408g-1
Funding notice
DFVC Calculator
EFAST 2
FAB 2009-01
Summary Prospectus
FAB 2009-03
DOL Guidance
On hold
Investment Advice Regulations on Hold
Bush administration finalized regulations
broadening ability to give investment advice to plan
participants
Went beyond statute
Effective January 21, 2009
Obama administration put on hold
Current status – limbo until November 18, 2009
Whatever Happened to Fee Stuff?
Bush DOL proposed regulations on:
Fee disclosure from service providers to plans
Investment and expense disclosure from plans to
participants
They got as far as OMB
And there they stayed
There’s a new sheriff in town
Madoff Issues
Duties Of Fiduciaries In Light Of Recent Events
Regarding Bernard L. Madoff Investment Securities
LLC
Principles
Prudence
Loyalty to participants and beneficiaries
Appropriate steps
Request disclosures about Madoff exposure
Seek advice about likelihood of loss
Appropriate disclosures to fiduciaries, participants
Consider whether the plan has claims:
Against fiduciaries intermediaries
Against Madoff estate
FAB 2009-01
Guidance on annual funding notice
Required for DB plans subject to PBGC
Replaces summary annual report
Includes model notice
Deadline:
Large plans: 120 days after plan year end
Small plans: 5500 filing
No need to provide notice to PBGC for single
employer DB plans unless underfunded by > $50
million
DFVC penalty calculator
Strongly encouraged for delinquent filer cases
https://www.askebsa.dol.gov/dfvcepay/calculator
EFAST 2
Coming in 2010 to a 5500 near you
Mandatory electronic filing
Each signer must get credentials from DOL
And not reveal them to anyone
Also preparers and transmitters using IFILE
5500-SF (Short Form) available for small plans
5500-EZ will remain a paper form
Form SSA will be filed (on paper) with IRS
Workshops 11, 32
DOL FAB 2009-03
New rule: delivery of a mutual fund Summary
Prospectus to participants satisfies ERISA 404(c)
requirement to furnish a prospectus
Background: 404(c) regs require plan to provide a
participant the opportunity to obtain sufficient
information to make informed decisions regarding
plan investment alternatives
For mutual fund, provide most recent prospectus provided
to plan
Either immediately before or immediately after investment
Other disclosures also required
Summary Prospectus
DOL conclusions re Summary Prospectus
Short-form document
Written in plain English in clear, concise format
Provides key information about mutual fund that is useful to
participants
Provides internet address leading to “statutory” prospectus and
other information free of charge
Satisfies 404(c) prospectus disclosure requirements
So: out with the Profile; in with the Summary
Prospectus
403(b) Changes
Notice 2009-3 Extensions
Final 403(b) regulations imposed written plan
requirement
Generally, 403(b) plans had to be in writing by December 31,
2008
No written plan requirement for 2009 if:
1. Written plan adopted by December 31, 2009 “that is
intended to satisfy the requirements of” the final regs
2. During 2009, the sponsor operates the plan in
accordance with a reasonable interpretation of the final
regulations; and
3. Before the end of 2009, the sponsor makes its best
efforts to retroactively correct 2009 operational failures
under EPCRS principles
Workshop 39
Announcement 2009-34 403(b) Prototypes
Draft Revenue Procedure for 403(b) prototype
program
Draft 403(b) plan language
Determination letter program to follow
If apply for determination letter or entitled to
prototype reliance, remedial amendment period
applies
Field Assistance Bulletin 2009-02
Beginning in 2009, 403(b) plans must file full Form 5500
with all attachments
Don’t have to include old contracts on 5500/audit if:
1. The contract or account was issued to a current or former
employee before January 1, 2009;
2. The employer ceased to have any obligation to make
contributions (including employee salary reduction
contributions), and in fact ceased making contributions to the
contract or account before January 1, 2009;
3. All of the rights and benefits under the contract or account are
legally enforceable against the insurer or custodian by the
individual owner of the contract or account without any
involvement by the employer; and
4. The individual owner of the contract is fully vested in the
contract or account.
Workshop 57
Other Regulatory Agencies
Truth in Lending Disclosures
Revisions to Regulation Z
Retirement plan loans to participants exempt
Loan can’t exceed vested account balance
Doesn’t matter if plan subject to ERISA
Applies to
Qualified plans
403(b) plans
Governmental 457(b) plans
Effective for loans after June 30, 2010
Doesn’t apply to plan credit card loans
Red Flags Rule
FTC requires organizations to adopt identity theft
rules related to extension of credit
Don’t apply to qualified plans loans treated as
directed investment of participant account
Pension Litigation
ERISA Litigation
Issue
Supreme Court
Cases
Kennedy v. DuPont Savings &
Investment Plan
The Big News!
Fee Cases
Heckert v. Deere
Tibble v. Edison
Scoreboard
Scrivener’s Error
Yikes!
Dumb Case of the
Year Award
Always an education …
64
The Supremes
Um, no …
There you go!
65
Kennedy V. DuPont Savings and Investment
Plan
Facts:
Husband designates wife as beneficiary of 401(k) plan
Husband and wife divorce; divorce decree states that wife
was “divested of all right, title, interest, and claim in and to
… [a]ny and all sums … the proceeds [from], and any
other rights related to any … retirement plan, pension
plan, or like benefit program existing by reason of
[husband’s] past or present or future employment.”
No QDRO presented, and divorce decree does not qualify
as a QDRO
Husband completed beneficiary designation for the
pension plan (but not 401(k) plan) in favor of his daughter
Husband died
Q: who gets the money?
Kennedy v. DuPont Savings and Investment
Plan
Unanimous court said:
5th Circuit said that the wife’s waiver was an
impermissible assignment or alienation to the Estate
Court disagreed – wife had nothing to assign until
husband died, and waiver is not an assignment, anyway
Court also noted that a QDRO is used to assign benefits
to an alternate payee and is, therefore, an inappropriate
way for the former spouse to disclaim rights to the benefit
(i.e., there is no alternate payee)
Court said waiver was invalid because it was not a plan
document
Plan provided manner for husband to provide benefit to daughter
(and he did it for the DB plan)
The plan should not have to look to documents outside its purview
to determine who gets the money
Kennedy v. DuPont Savings and Investment
Plan
Additional thoughts
Some plans contain provisions automatically revoking
beneficiary designation to spouse if there has been a
divorce
Is that a good thing?
Should a plan have clear rules re beneficiary
designations?
Fee Cases
Hecker v. Deere (7th Cir.) – Case Dismissed
Facts
Deere engaged Fidelity Trust as directed trustee and
recordkeeper (and it manages 2 of the fund options)
Available investments: 23 Fidelity mutual funds, 2 Fidelity
managed funds, Deere Employer Stock Fund
Fees charged were the same as were offered on open market
Fidelity Research was investment advisor for the mutual funds
Participants also had option to use “BrokerageLink” – an
SDBA with access to 2,500 additional funds managed by
different companies
Hecker v. Deere (7th Cir.) – Case Dismissed
Allegations:
Fidelity Funds charged excessive fees
Revenue sharing between Fidelity and Fidelity Trust
resulted in excessive fees and revenue being provided for
purposes other than for the benefit of participants
Lack of transparency and lack of communications about
fees to participants
Deere failed to properly monitor Fidelity
Hecker v. Deere (7th Cir.) – Case Dismissed
Trial court found (and appellate court affirmed):
Deere had complied with all of ERISA’s disclosure
requirements
(No obligation to disclose revenue sharing)
Fidelity was a directed trustee with no responsibility to
choose investments, so not a fiduciary
ERISA §404(c) applied: 20+ designated funds had fees
of 7-100 b.p.s and 2500 other funds had full range of
fees, so participants could control fees
Hecker v. Deere (7th Cir.) – Case Dismissed
Key points of note:
If any problems with the Fidelity Funds were eliminated
through the offering of the SDBA (i.e., even if the Fidelity
funds were not good, the participants had 2,500 other
funds to choose from), can a plan sponsor avoid liability
with regard to its choice of funds by simply offering an
SDBA?
7th Circuit said no: this ruling is limited to the unique facts of this
case
One of the considerations by the court was that the
Fidelity Funds offered by Deere were also offered to the
public, so that “the expense ratios necessarily were set
against the backdrop of market competition.” Does this
fact mean that the fees were, per se, reasonable?
Hecker v. Deere (7th Cir.) – Case Dismissed
Key points of note:
ERISA §404(c) requires the participants to know what
they are paying in fees. What happens after that – e.g.,
revenue sharing – is not required by the law or
regulations to be disclosed. Once the fees are paid to
Fidelity, they cease to be plan assets, so that their use by
Fidelity to pay management fees to Fidelity Trust does not
relate to the plan anymore and neither needs to be
disclosed nor can be a misuse of plan assets.
Fidelity was not a fiduciary, as it had no discretion (all
fund choices were ultimately those of Deere)
Tibble v. Edison – Central District of California
Good example of court analysis on fairly broad
range of issues
The case involves motions for summary judgment
by plaintiffs and defendants
Facts:
Southern California Edison (SCE) had self-directed plan
with 6 options.
Union negotiations in 1998 led to agreement under which
SCE would expand options to a much broader array of 50
including 40 “retail” funds (implemented in 1999)
Actual options chosen by Trust Investment Committee
(TIC) (membership appointed by SCE’s CEO)
Tibble v. Edison
Facts (continued):
Hewitt was recordkeeper and received 12b-1 and sub-TA
fees, which it used to offset what SCE paid for
administrative services
Plan document provided that SCE would pay
administrative expenses until amendment in 2006, which
added, “net of any adjustments by service providers.”
Tibble v. Edison
Issue #1: SCE engaged in PT when Hewitt reduced
the fees charged to SCE because it received
consideration for its own personal account
Court rejected this
Said SCE did not engage in the transaction at all, the TIC
did
Court found that TIC was independent of SCE,
notwithstanding the fact that its members were appointed
by SCE
Plaintiffs showed no evidence that TIC was influenced by
SCE
To have this PT, the party controlling the transaction must
be the party benefitting, and this did not exist
Result: summary judgment in favor of defendants
Tibble v. Edison
Issue #2: SCE engaged in PT when Hewitt reduced the
fees charged to SCE because the TIC acted in favor of
SCE (an adverse party) in a transaction with the plan
Argument was that SCE’s interests were adverse because the
fees it previously paid were charged to the plan instead
Court rejected this
To have this PT apply, the TIC would have had to be
representing both the mutual funds and the plan – i.e., the two
“adverse” parties to the transaction
Proper place for this claim would be a violation of TIC’s duty of
loyalty, not the PT rules
But, by the way, there is no proof that TIC acted on SCE’s
behalf
Result: summary judgment in favor of defendants
Tibble v. Edison
Issue #3: Failure to follow terms of the plan
Plaintiff’s claim that use of fees paid to Hewitt to reduce cost of
administration violated plan terms that provided that SCE
would pay plan’s administrative costs
Court rejected this
Court noted that the expense ratios of the funds would have
been the same regardless of what Hewitt did with the fee
income, and that there was no indication that the mutual funds
would have refunded the fees back to the plan – therefore, no
harm done to participants
Court found that the language of the plan did not explicitly
prohibit the use of revenue sharing to offset recordkeeping
costs, so the plan administrator (i.e., benefits committee) did
not violate plan by so allowing
Plan language did not put fiduciary on notice that revenue
sharing would be impermissible
Tibble v. Edison
Issue #3: Failure to follow terms of the plan
Facts indicated that this was discussed extensively in
collective bargaining process
Facts also indicated that the plan participants were
notified at least 17 times through the SPD or other
brochures that fees from the mutual funds were being
used to offset Hewitt’s charges
In light of facts that the fees were disclosed, that they
would have been charged in any event to the plan
participants, and the fact that the decision to use the fees
for the admin expenses did not harm the participants,
court sided with defendants
Result: summary judgment in favor of defendants
Tibble v. Edison
Issue #4: The trustee (State Street) retained the
float from money set aside for distributions between
the time of the set aside and the time the
distribution was paid
Court analyzed the same way as issue #3 and found in
favor of defendants
No evidence that State Street delayed distributions to
increase float or that the retention of the float was not in
accordance with industry standards
Tibble v. Edison
Issues #5 & 6: Allowing State Street to retain the
float was a PT because it represented a direct or
indirect transfer to, or use by, a party in interest of
plan assets or a dealing with plan assets for SCE’s
own account
Court gave leave to rebrief, because there were gaps in
the information provided
Tibble v. Edison
Issue #7: SCE breached duty of loyalty by virtue of
the fees to Hewitt
Not a violation of fiduciary duties if the plan sponsor
receives an “incidental benefit”
However, some evidence had been provided in the
summary judgment motion that could indicate that the
funds were decided upon because of the level of revenue
sharing. It could also indicate the opposite.
Court decided that this issue should go to trial
Tibble v. Edison
Issue #8: Fiduciaries were imprudent because they
used retail mutual funds, sector funds, a money
market, as opposed to a stable value fund, and a
unitized Edison stock fund
Are retail mutual funds imprudent, per se, because fees
are greater? The court said no.
Union asked for retail funds and it is not a breach to do what the
participants want
Analysis is to compare funds to other retail funds, and to ensure
proper procedure in choosing the funds
Sector funds are commonly included in plan portfolios and
were requested by the union
Money market funds have less risk and are commonly
used
Tibble v. Edison
Issue #8: Fiduciaries were imprudent because they
used retail mutual funds, sector funds, a money
market, as opposed to a stable value fund, and a
unitized Edison stock fund
While unitized stock fund keeps more cash on hand:
Permits faster trades
Was requested by the union
Trustees closely monitored cash needs
Result: Court granted summary judgment to the
defendants on all these issues
Tibble v. Edison
Issue #9: Does ERISA §404(c) apply?
Some courts have found that §404(c) does not apply in
relation to breach of loyalty because of conflicts of interest
Court here agreed with that, so that, even if Edison can
show compliance with §404(c) regs, it may not be
considered to be free of claim of breach of loyalty
Status of Schlichter Fee Cases
Name
Class Cert?
Status
Deere
Y
Dismissed
ABB
Y
Dismissal Denied
Bechtel
Y
Settled
Boeing
Y
Dismissal Pending
Caterpillar
N
Dismissal Pending
Cigna
Y
Pending awaiting Deere Decision
Edison
Y
Partial grant of defendants’ motion for S.J.
Exelon
Y
Dismissal granted in part
Gen Dynamics
N
Dismissal denied
Int’l Paper
Y
Dismissal pending
Kraft
Y
Dismissal pending
Lockheed
Y
Dismissal denied
Northrup
N
Plaintiff appealed rejection of class
Unisys
N
Dismissal pending
Scrivener’s Error
88
Cross v. Bragg (4th Circuit)
Very scary scrivener’s error case
Facts:
1996 restatement of a plan mis-stated the benefit formula,
giving participants a much larger benefit
No benefit was calculated using the new (wrong formula)
– the old formula was always used
Problem was discovered in 2002
89
Cross v. Bragg (4th Circuit)
Facts (cont’d.):
Plan administrator determines it is a scrivener’s error
and an EPCRS filing is done requesting the right to
retroactively amend the plan to conform to the intent
IRS agrees and retroactive amendment is adopted in
2003
Participants sue for the higher benefits
90
Cross v. Bragg (4th Circuit)
What happened in court:
Plan claimed that it was a scrivener’s error
Actuary who prepared the plan so testified and attested
Plan asserted that no participant had relied to his/her detriment on
the wrong formula
IRS agreed
Lower court granted summary judgment in favor of the
plaintiffs: no “mistake” for contract purposes, so no
reformation allowed
91
Cross v. Bragg (4th Circuit)
What happened in court (cont’d.):
4th circuit agreed that contract law applies
To have a “mistake” that can be reformed under contract
law, need:
Mutual agreement as to contract terms by both parties and a
document that does not reflect that mutual agreement; or
Unilateral mistake as to what the document says coupled with
fraud on the other party’s side
92
Cross v. Bragg (4th Circuit)
What happened in court (cont’d.):
Court found that there was no mistake on the
part of the participants – no proof was brought
forward as to their intent under the “contract”
An interesting concept, seeing as how the participants
neither sign the contract nor have a say in how it is
amended (unless they are union employees)
Court also found that the law and the supreme
court in Curtiss-Wright emphasized that the
documents needed to be reliable
The right to reform a document “rests exclusively
with the courts” – Yikes!
93
Cross v. Bragg (4th Circuit)
What happened in court (cont’d.):
And the IRS resolution?
For tax purposes only
Courts, not the IRS, have the jurisdiction to resolve
contested participant claims
What does this mean for EPCRS?
Scrivener’s error correction was always dicey, and
even the procedure, itself, acknowledges that it is not
binding on participants or the DOL
In a really expensive case, would declaratory
judgment be a better approach? But how could the
employer ever win under this case?
94
The Stupid Case of the Year
95
The Stupid Case of the Year
Actually, the case itself is not stupid, just the defendant
Solis v. Current Development Corp
Appeal of district court decision to enforce consent decree,
remove Klein as trustee, force sale of property, and order Klein
to make restorative payments
Facts:
Mr. Klein is the sole shareholder of CDC and the plan trustee
DOL levies fines for late filing of Forms 5500
Klein uses plan money to pay the legal fees to defend on the late
filing issue
DOL gets involved and sues
DOL and Klein enter into consent decree under which Klein pays
back the legal fees and promises to terminate the plan and to
distribute assets to plan participants
At the time of the consent decree, plan assets consisted of
$900,000 in cash and a parcel of real estate
The Stupid Case of the Year
Solis v. Current Development Corp
Facts (continued):
Klein gives the participants a choice: take cash or take an interest
in the plan
All but one participant takes the cash (Klein and wife entitled to
97% of remaining assets)
The valuation of the real estate used to pay out participants was
$1.7 million (earlier appraisal)
However, unbeknownst to the participants, Klein had received an
offer to buy the land for $2.3 million 3 weeks before paying out the
participants, which he turned down because he perceived it was
too low
DOL finds out, gets court to appoint independent trustee to sell
the land and to pay out the other participants properly
Independent trustee ultimately sells the property for $2.6 million
The Stupid Case of the Year
Solis v. Current Development Corp
Facts (continued):
Independent trustee also audits the plan books and finds that
Klein had engaged in several other prohibited transactions to the
tune of $170,000 (legal expenses for defense against DOL, legal
expenses for IRS audit, subsidy of full-time salary of company
employees, defraying overhead costs of company)
$17K of these additional PTs were paid after the court removed
Klein as a trustee
Klein said: consent decree put him in an untenable
position, where he was forced to either underpay or
overpay participants
Court said: No justification for using $1.7 million when the
property could have been sold for $2.3
Moral: Don’t mess around with the DOL