Benefits In Brief

Both the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”) generally prohibit fiduciary investment advisers from receiving compensation from the investment vehicles that they recommend to plan participants and IRA holders.  However, the Pension Protection Act of 2006 amended ERISA to create a new statutory exemption from the prohibited transaction rules that is designed to expand the availability of fiduciary investment advice to participants in individual account plans and IRAs, subject to specific safeguards and conditions.

Offering employees the opportunity to invest in the stock of their employer through a tax-favored vehicle like a Code Section 401(k) plan or employee stock ownership plan (“ESOP”) must have seemed like an innocuous idea at one time.  Indeed, Congress expressed its approval of such arrangements by creating special tax benefits for both the sponsors of such plans (in the form additional deductions) and participants in them (in the form of favorable tax treatment on unrealized appreciation in the value of employer stock).  Yet these “employer stock funds” are now the quickest path to the courthouse for employers that sponsor them and fiduciaries that administer them.

Target-date funds have become increasingly popular with 401(k) plan investors in recent years. A target-date fund (“TDF”) is typically a mutual fund that contains a mix of underlying investments and automatically adjusts the asset allocation (stocks, bonds, cash equivalents) within the fund’s portfolio according to a selected “target date” such as retirement. As a participant approaches the "target date," the fund moves its allocation to more conservative investments (e.g., bonds and cash) and away from riskier investments (e.g., equities).

In late January the United States Court of Appeals for the Seventh Circuit (whose jurisdiction includes Illinois, Indiana, and Wisconsin) weighed in yet again on the extent to which ERISA’s fiduciary duty rules apply to the selection of 401(k) plan investments. As you may recall, the Seventh Circuit issued one of the most important rulings on this topic in recent years in Hecker v. Deere & Co. (2009), a case challenging as imprudent the fees attached to such investment options. Now, just two years later, the court appears to have reconsidered its analysis in Hecker, adding even more murkiness to these muddy waters.

In an effort to improve its enforcement efforts and better protect participants from service provider conflicts of interest and self dealing, the Department of Labor issued proposed regulations on October 21, 2010, that would significantly expand ERISA’s definition of a “fiduciary.”  These regulations will, when finalized, replace guidance issued in 1975 which governs when investment advisors become subject to ERISA’s fiduciary duties. 

When is it appropriate to accept the sticker price listed on a product without asking the salesman for a better deal?  Maybe never, at least if you’re a fiduciary of a $2 billion 401(k) plan spending the participants’ money, according to a federal court in California.  (Tibble v. Edison International, 7/8/2010).  That’s true even if an independent consultant advises you to buy the higher-priced product.

The analysis of a federal district judge last year in a decision dismissing a class action complaint that challenged Deere & Co.’s 401(k) fee practices generated a great deal of excitement about 401(k) brokerage windows. The court seemed to imply that the existence of such an investment portal – through which participants may invest their plan accounts in almost any mutual fund or security – insulated the plan sponsor from claims that the plan’s core funds were too expensive or otherwise imprudent. That analysis is currently being tested as the parties appeal the judge’s decision. It has also drawn a cool reception from the Department of Labor.

As we reported in our last issue of Benefits in Brief (Volume 2008, No. One, p. 1), the Supreme Court’s latest foray into ERISA left open many questions about the liability of ERISA fiduciaries and the remedies available to plan participants. In LaRue v. DeWolff, Boberg & Assocs., the Court opened the door for individual participants in defined contribution retirement plans (e.g., 401(k) plans) to sue for losses suffered in their own accounts. Although the Court’s ruling allowed Mr. LaRue to proceed with his claim against his employer, it did not decide whether his employer was, in fact, an ERISA fiduciary which could be liable for Mr. LaRue’s alleged losses.

Like almost 70 million other Americans, James LaRue elected to save money for retirement through his employer’s 401(k) plan. When administrative errors reduced his account balance by nearly $150,000, Mr. LaRue sued his employer in federal court under ERISA to recover that amount. Initially, he lost. In a decision handed down on February 20, 2008, however, the United States Supreme Court resurrected his claim, in an apparent victory for Mr. LaRue and similarly situated 401(k) plan participants. (LaRue v. DeWolff, Boberg & Associates, Inc.) Unfortunately, the Supreme Court’s decision raises more questions than it resolves.

The Pension Protection Act of 2006 (“PPA”) amended ERISA to provide fiduciary relief for certain default investments when plan participants do not provide investment direction. The DOL has now issued final regulations, which will take effect on December 24, 2007, under which plan sponsors may enjoy a “safe harbor” from certain fiduciary liability.

Imagine that you are a 401(k) plan participant who, over the course of many years and at a significant sacrifice to your take-home pay, has accumulated a hefty account balance. As your retirement date approaches, you decide to move your plan balance from the moderately aggressive equity funds in which it had been invested to a conservative money market fund . . . The problem, however, is that – for reasons unknown – your transfer request was never implemented. The market plunged, and now your once-admirable account balance has been reduced by $150,000. After consulting your attorney, you conclude that those who are responsible for administering your plan have breached their fiduciary duties under ERISA, and you file suit to recover your losses. Easy case, right? Well, maybe not.

As you probably already know, President Bush signed the Pension Protection Act of 2006 (the “PPA”) into law on August 17, 2006. Some PPA provisions became effective as of the date of enactment; others preserve existing laws that were set to expire in 2010; and still others are not effective until mid-2007 or 2008. This article summarizes some of the important provisions of the PPA that are effective as of plan years beginning on or after January 1, 2007 – or which apply to distributions, notices, or other events that will occur on or after that date.

Under an automatic enrollment feature, employees accumulate retirement savings through payroll deduction by default – unless they make an affirmative election to opt out of the program. For the past several years, in keeping with the federal government’s efforts to shore up the nation’s retirement savings, government agencies have actively encouraged such arrangements under employer-sponsored defined contribution plans.

The Department of Labor (“DOL”) recently issued guidance regarding the distribution and allocation of mutual fund settlement payments made to employee benefit plans and their participants. This guidance is directly related to SEC enforcement actions alleging late trading and market timing activities. As a result of these actions, numerous mutual funds have established settlement funds.

An Advisory Opinion recently issued by the Department of Labor may come as quite a shock to many personal financial planners and investment advisors. According to the DOL, ERISA’s prudence, exclusive benefit, and prohibited transaction rules apply to many of the bread-and-butter recommendations that these professionals give, if their advice relates to assets held in qualified individual account plans. An Advisory Opinion recently issued by the Department of Labor may come as quite a shock to many personal financial planners and investment advisors.