401(k) AdvisorIn Partnership with: The ERISA Law Group, P.A.

www.wklawbusiness.com

The Insider’s Guide to Plan Design, Administration, Funding & Compliance

BRIEFLY

VOLUME 23, NO. 10OCTOBER 2016

Plan Loans … Do We Really Need Them?James E. Turpin, FCA

S ometimes when we consider optional plan provisions in designing a plan for a client, it is apparent that some of these options are not worth the underlying administrative issues. One of the fi rst things I take off the table is plan loans.

Of course, then the client puts it right back on the table saying, “My employees won’t sign up for the plan without a loan provision.” Th en, I remind him that they are prob-ably not going to sign up anyway, which is why we are discussing having either a safe harbor matching contribution or a 3% employer safe harbor contribution. And, we go on from there.

Th e client does have a point about plan loans being a feature that may encour-age more employees to actively participate in their 401(k) plan. Certainly, increasing participation was an important consideration for plan sponsors prior to the advent of safe harbor plans. From a paternalistic view, increasing participation is important as it means employees are more likely to save for retirement, which should be the goal of every retirement plan. However benefi cial a loan provision is in your plan, it is not necessarily going to increase participation by rank-and-fi le employees. Moreover, plan loans invariably create problems for employees, plan administrators, plan sponsors, third-party administrators, and recordkeepers.

First, let’s look at some of the rules that apply to plan loans. As a general rule, ERISA and the Internal Revenue Code prohibit a participant from encumbering his or her benefi ts (e.g., plan benefi ts cannot be used as collateral on a loan). Th is non-alienation rule has a couple of exceptions, and a loan from the plan to a participant that meets certain criteria is one of the exceptions. Some of the basic requirements for participant loans include the following:

Th e plan document must provide for participant loans;Th e plan administrator or plan sponsor must adopt a written loan policy that outlines the requirements for obtaining a plan loan and any applicable restrictions on such loans; [Editor’s note: Many existing policies violate ERISA.]Th e maximum plan loan cannot exceed the lesser of 50% of the participant’s vested accrued benefi t, or account balance, or $50,000;A plan loan must be repaid within 5 years unless the loan is for the purchase of the participant’s principal residence, in which case the loan can be for up to 15 years;Th e loan must bear a commercially reasonable rate of interest; Th e loan must be repaid in level installments which are at least quarterly;Th e loan is evidenced by an enforceable promissory note; andLoans cannot be provided in a manner that is more favorable for highly compen-sated employees than for nonhighly compensated employees.

3 New Department of Labor Advice Resource

4 Document UpdateDoes the Employer Have the Right Procedures?

5 Legal UpdateWhat the DOL’s Final Fiduciary Rule Means for Plan Committees

6 Q&AQ&A with Heather Abrigo Regarding the Current State of DOL Service Provider Investigations

8 Benefi ts CornerForum Selection Clause RejectedAdvice for Young Plan ParticipantsIRS Softens Harsh Distribution RuleLouisiana Flooding Prompts IRS Relief

10 Regulatory & Judicial Update

11 Industry InsightsThe Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2015

12 Last Word on 401(k) PlansWhat Is the Context?

2 401(k) ADVISOR

A couple of observations about these rules. First, the $50,000 limitation is reduced by the highest outstanding balance in the prior 12 months on any other plan loans. Th is eff ectively eliminates rolling over a loan within the plan unless there is suffi cient room within the limitation for an entirely new loan that would repay an existing loan. It is pos-sible for the plan to provide a loan of up to $10,000, even if this amount would exceed 50% of the participant’s vested interest in the plan. However, the Department of Labor does not allow a participant to use more than 50% of their vested interest in the plan to secure a plan loan, which means the plan would need additional collateral on a loan that exceeds 50% of the participant’s vested interest.

With the movement to electronic platforms for many plan functions, there is a question as to whether obtain-ing a loan through an online system that does not actually require the participant to sign a promissory note creates a validly enforceable promise to pay. Plus, the plan may require spousal consent for loans that exceed certain limits (such as $5,000) where a distribution of the same amount would require spousal consent. Generally, it is hard to document notarized spousal consent through an electronic platform.

You look at the rules. Th ey seem to be fairly straightfor-ward. So, what could go wrong?

Participant John has a vested account balance of $30,000 and wants to borrow $12,000 from the plan. So far, this

doesn’t seem to be a problem because $12,000 is less than $15,000, which is 50% of his vested account balance. But wait, what does the plan say about loans to participants? If the box that says “No loans” is checked, then everything should stop at this point, but does not always. However, if it does say loans are permitted, then you need to review any specifi c loan provisions in the plan itself as well as the loan policy and then provide John with an application for the loan.

Why does John need to fi ll out a loan application? After all, it is his own money that he is borrowing. True, but mak-ing a loan is a fi duciary decision on the part of the trustee and if John has previously defaulted on another plan loan, it may be that making a loan to him is not prudent. So, the application process allows the plan administrator and the trustee to document the request for a loan and to inform the participant of the terms and conditions of the loan before any loan documentation is prepared and funds disbursed. Th e application will also specify if the loan is for purchase of a residence, meaning a longer repayment period would be permitted.

Now, what rate of interest will the plan charge for the loan? It has to be commercially reasonable, which is not well defi ned in any of the rules other than it is what a bank would charge a borrower under similar circumstances. One view is this is similar to the owner of a certifi cate of deposit borrow-ing from the bank using the CD as collateral. In that case, the

401(k) AdvisorThe Insider’s Guide to Plan Design, Administration, Funding & Compliance

© 2016 CCH Incorporated. All rights reserved.

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Editors — The ERISA Law Group, P.A. (www.erisalawgroup.com)

Jeffery Mandell, Esq. is founder and President of The ERISA Law Group, P.A. His practice is concentrated solely on ERISA matters for clients coast-to-coast. Mr. Mandell is a nationally recognized practitioner, speaker, and author on ERISA topics, and is the founder of Employee Benefi t Publications and Seminars. He assists his clients in achieving their employee benefi t objectives, including keeping their plans in compliance with ERISA’s numerous, ever-changing requirements.

John C. Hughes, Esq. is a shareholder in The ERISA Law Group, P.A. He counsels clients on all types of plan-related issues including fi duciary responsibility, plan design, qualifi cation, administration, correction, mergers and acquisitions, and litigation. John is a former Board Member and President of the Boise Chapter of the Western Pension & Benefi ts Council.

Contributing Editors

William F. Brown, Esq.Milwaukee, WI

Michael P. Coyne, Esq.Mary Giganti, Esq.Waldheger Coyne

Ilene H. Ferenczy, Esq.Ferenczy Benefi ts Law Center LLP

John P. Griffi n, Esq.Charles D. Lockwood, Esq.Actuarial Systems Corporation

Peter Gulia, Esq.Fiduciary Guidance Counsel

Douglas S. Neville, Esq.Greensfelder, Hemker & Gale, P.C.

James E. TurpinThe Turpin Consulting Group, Inc.

Marcia S. Wagner, Esq.The Wagner Law Group

Publisher

Richard Rubin

VOL. 23, NO. 10 • OCTOBER 2016 3

© 2016 CCH Incorporated. All rights reserved.

rate would be 150 to 200 basis points above the CD interest rate. In today’s market, that would mean a rate of 2.5% to 3% is acceptable. Another view is the rate should be what the bank would charge a good business customer or some-thing like prime plus 1% or 2%. Regardless of your approach, the rate charged needs to be consistent for all similarly situ-ated loans, although the rates may vary as market conditions change. Of course, plans may charge a variable rate, but this adds unnecessary complexity to the record keeping on the loan and rarely yields suffi cient additional return to make the added administrative burden worthwhile.

Okay, we know the amount of the loan and the inter-est rate, now how is it going to be repaid? You need level installments made at least quarterly. For most loans, it is far more practical to have them repaid through payroll deduc-tions with the repayment schedule based on the frequency of payroll. Just be sure that the loan will be fully amortized within 5 years (or 15 years for a residential loan).

Now, all of the above is reduced to a promissory note and amortization schedule. Th e note gives the plan a lien on the participant’s account balance for the outstanding balance and notifi es the participant of what happens if he defaults on the loan. Wait a minute, the payments are coming out of his paycheck. So, how could he default on the loan? First, he could rescind the authorization for the payroll deduction. Second, he could quit, be fi red, go on medical leave, get laid off , etc. In any of these instances, the payments stop and the loan would go into default.

If there is an event allowing a distribution of benefi ts to the participant, the loan would be distributed to the partici-pant as an in-kind distribution. Th is happens when the loan

balance is off set against the total value of the participant’s benefi ts. Instead of a distribution of $30,000, John receives $18,000 in cash and $12,000 as the note, and then is taxed on the entire $30,000 unless he rolls the cash portion of his distribution over to another plan or IRA. It is possible to roll over the loan to another plan, if the plan of John’s new employer will accept the loan as part of his transfer.

If there is not a distribution event, the default results in a deemed distribution for tax purposes of the value of the note. In other words, John would have to pay taxes as though he received a distribution of the outstanding balance of the note. Th is doesn’t make the note go away, and technically John still owes the balance on the note.

At any step in the process from determining the right to a loan in the fi rst place, making sure payments are made and deposited to the plan in a timely manner, not identifying a default at the proper time, making a second loan when the loan policy specifi es only one loan at a time is permitted, a payment schedule or payment amount that won’t amortize the loan within fi ve years or worse. All of these mistakes sim-ply cost the plan sponsor time anxiety and money to fi x the problem. Generally, the benefi t of off ering loans turns out to not be worth the hassle, potential expense, and downside that is created by these possible mistakes.

Next time, we will look at examples of actual loan mis-takes and how they are corrected through EPCRS.

James E. Turpin is the President of the Turpin Consulting Group, Inc, in Longview, Washington. He can be reached at 505-888-7000 or JTandME@aol.com.

“a simplifi ed explanation of the law” and “is not a legal inter-pretation of ERISA, nor is it intended to be a substitute for the advice of a retirement plan professional.” It then goes on to ask the user some preliminary questions and provide basics relating to the topic. Th e preliminary questions are aimed at determining whether the user’s plan is subject to ERISA. For example, one of those early questions is “Is your plan a gov-ernmental or church plan?” and there is a brief discussion as to what that means. Th en, the user is brought to a page that provides a listing of questions that can be clicked on to bring them to a discussion of the answer, such as “What are fi duciary responsibilities?” Th e discussion pieces are each approximately one page. Th ere are 13 categories including “What are my liabilities as a fi duciary and how can I limit them?,” “Is hiring a service provider a fi duciary function, and if so, what do I

T he Department of Labor (DOL) has released a new resource called “elaws.” Th e DOL Web site describes elaws as aimed at the following: “Th e elaws Advisors

help employees and employers learn their rights and respon-sibilities under Federal employment laws.” Th e “Advisors” are Web-based presentations that address various topics via an interactive links and questions that are intended to educate the user. Th e Advisors are not focused on ERISA issues alone, but cover a broad range of topics including those relating to pay, health and safety, veterans issues, FMLA, etc.

Th e fi rst ERISA-related Advisor became available this summer. It is called the “ERISA Fiduciary Advisor.” Th e ERISA Fiduciary Advisor starts by describing the focus of ERISA and explaining who might be a fi duciary. Th e intro-duction also prominently states that the Advisor is providing

New Department of Labor Advice ResourceJohn C. Hughes, Esq.

4 401(k) ADVISOR

would not already possess the basic information that is there. However, of course, repetition and re minders are not bad.

John C. Hughes is a shareholder with Th e ERISA Law Group, P.A. in Boise, Idaho. He can be reached at 208-342-5522 or at john@erisalawgroup.com.

need to do?,” “What help is available for employers who make mistakes in operating a plan?,” and “Tips for Employers with Retirement Plans.” Th ere are also links to other resources.

Th e information provided is extremely basic. It is dif-fi cult to determine if it will provide assistance in the complex world of ERISA. It is also diffi cult to imagine that someone interested enough to locate and walk through this resource

look for accounts that are the subject of an involuntary distribution;specifying sequencing rules for which subaccount to charge a distribution against;specifying what a participant, benefi ciary, or alternate payee must or may do to render and deliver a valid investment instruction;specifying which of a series or set of investment funds (such as target date: funds) is a participant’s default investment;furnishing summary plan descriptions (and summaries of material modifi cations);furnishing information required under Rule 404a-5 and other rules concerning participants’ investment direction;using Internal Revenue Service correction procedures;using Employee Benefi ts Security Administration correc-tion procedures;withdrawing a participating employer.

We could describe several more points, but one gets the idea.

Now that we have a list, let us ask a few questions:

How many of these procedures does your plan have?Are you confi dent you could fi nd all of them?Would you be embarrassed if you had to produce them for an investigation or litigation?Have you required each worker who must follow a proce-dure to complete training on the procedure?Has the employer had turnover of the people who admin-ister the plan?Have you done anything to test whether the plan’s opera-tions follow a procedure?Could a smart claimant (or regulator) use your procedure to show you do not administer your plan according to its terms?

I n “Does the Employer Have All the Procedures?” in 401(k) Advisor’s January 2015 issue, we explained that “preap-proved” documents used for retirement plans often state

many commands or permissions for provisions that are not stated in the document, but instead must or may be stated in a written “policy” or “procedure.” Th e article suggested fi ve ways in which an absence of a procedure might be a violation of the Employee Retirement Income Security Act of 1974 (ERISA) or a breach of a fi duciary’s responsibility to admin-ister the plan. (For simplicity, this article assumes a plan’s sponsor or a committee is the plan’s administrator, and refers to both as the employer and, in this article’s questions, you.)

Imagine an employer took the article’s hint, and listed the prototype or volume-submitter document’s mentions of procedures the employer must or should make. What might an employer fi nd?

In skimming documents provided by big recordkeepers, I found many provisions calling for an employer, as a docu-ment’s user, to adopt written procedures on several points including those on:

counting eligibility service, accrual service, and vesting service;specifying timing of, and limits on, a salary reduction agreement;specifying conditions for accepting a rollover contribution;considering claims (at least those required under ERISA Section 503);qualifi ed domestic relations orders;determining whether a participant has a hardship;deciding whether a claimant is a participant’s named benefi ciary;deciding whether a claimant is a participant’s default benefi ciary;specifying the account balance that triggers an invol-untary distribution, and how often the employer will

DOCUMENT UPDATE

Does the Employer Have the Right Procedures?Peter Gulia, Esq.

VOL. 23, NO. 10 • OCTOBER 2016 5

© 2016 CCH Incorporated. All rights reserved.

And here’s the overall question: Would a prudent fi duciary neglect to get its advisors’ help in designing, checking, implement-ing, and testing the employer’s written policies and procedures?

Peter Gulia is a lawyer with Fiduciary Guidance Counsel, which focuses on advising retirement plan fi duciaries and service providers. You can reach him at 215-732-1552 or Peter@PeterGulia.com.

Do you know when each procedure last was updated?How do you know that each procedure remains correct under current law?Did you get an unambiguous assurance? Did a “not advice” disclaimer negate the assurance?If you incur a loss or expense because you relied on an assurance or advice, would you have a clear legal remedy to recover the money you lost or spent?

investment-related communication that “would reasonably be viewed as a suggestion [to] engage in or refrain from tak-ing a particular course of action” as fi duciary in nature even if the communicator does not intend to give defi nitive advice (whether on a primary basis, or otherwise). As these consul-tants will no longer be able to take the position that they are not ERISA fi duciaries, the change in status has a number of possible implications for retirement plan committees.

First, because there is a concept under ERISA known as co-fi duciary liability, retirement plan committees’ potential fi duciary liability under ERISA is increased. In part for that reason, although more so for the uptick in fi duciary litigation in the past few years, retirement plan committees members might wish to review and possibly increase their fi duciary lia-bility insurance. Th is fi duciary liability insurance is entirely separate and apart from the ERISA fi delity bond, which only deals with losses due to fraud or dishonesty.

Second, the level of disclosure that a fi duciary makes to retirement plan committees is diff erent from the disclosure by a nonfi duciary. For example, a fi duciary must furnish information with respect to its direct and indirect compensa-tion as well as the confl icts of interest of interest arising from its business model.

Th ird, because of a perceived higher risk of liability as a fi duciary, the fees charged by a service provider that is now being treated as a fi duciary may be higher. Th at could be relevant from a retirement plan committee’s perspective, because it needs to sign off on the compensation being paid to the service provider as reasonable. Payment of unreason-able compensation to a service provider is a prohibited trans-action under both the Internal Revenue Code and ERISA.

Finally, to the extent that a service provider is acting as a fi duciary, retirement plan committees will want to confi rm the manner in which the service provider is dealing with potential confl icts of interest.

A s most readers are aware, on April 6, 2016, the U.S. Department of Labor (DOL) released its fi nal rule on fi duciary investment advice and its related exemptions

(Fiduciary Rule) that greatly expands the list of activities that make one a fi duciary and the entities that will be treated as fi du-ciaries under ERISA. Th e Fiduciary Rule is a signifi cant regula-tory initiative, and thus it is important to understand how it impacts retirement plan committees’ fi duciary responsibilities and committee relationships with plan service providers. Th is article will focus on some of the implications the new Fiduciary Rule will have on retirement plan committee responsibilities.

Immediate Eff ect. At its narrowest scope, the new Fiduciary Rule will have no eff ect on plans that already have strong retirement plan committees comprised of qualifi ed internal representatives aided by independent fi duciaries. Th at is, the Fiduciary Rule generally does not expand upon the activities that will result in fi duciary status for retirement plan committee’s members, since retirement plan commit-tee’s members are currently ERISA fi duciaries because of their responsibilities for the management of the plan and its assets. Th e new Fiduciary Rule does not alter the fi duciary duties that ERISA currently imposes on plan fi duciaries: the duties of loyalty, prudence, diversifi cation of plan assets, acting for the exclusive benefi t of plan participants and benefi ciaries, and administering plans in accordance with their terms.

Retirement Plan Committees and Service Providers. Where the new Fiduciary Rule will have an eff ect on retirement plan committees will be in dealing with service providers who in the past may not have regarded themselves as fi duciaries. For example, in the past, a consultant who was making recommen-dations that might be perceived as advice could avoid fi duciary responsibility by saying he or she did not render advice “on a regular basis,” or that a recommendation was not intended to serve as the “primary basis” for investment decisions. Th e Fiduciary Rule takes a broader approach and characterizes any

LEGAL UPDATE

What the DOL’s Final Fiduciary Rule Means for Plan CommitteesMarcia S. Wagner, Esq.

6 401(k) ADVISOR

involving rollovers can have fi duciary implications, and as a result, there may be fewer rollovers from the various plans that are maintained by the plan sponsor, that is, there will be more terminated vested participants with account balances in these plans. Although this will most likely not directly aff ect plans in 2016 or 2017, retirement plan committees will need to start considering how to address the implications this will have on plans in the near future.

Big Picture. Retirement plan committees will need to make sure that they have a fi rm understanding of the Fiduciar y Rule and put the proper policies and procedures in place to address the increased responsibilities they have in monitoring the interactions of individual and entities that will be deemed fi duciaries under the new Fiduciary Rule.

Marcia S. Wagner is the Managing Director of Th e Wagner Law Group. She can be reached at 617-357-5200 or Marcia@WagnerLawGroup.com.

Investment Education and Distribution. Another area in which the new rules will have an eff ect, although operationally more upon human resources rather than retirement plan committees, is with respect to investment education and distribution options. Th e DOL recognized the importance of being able to provide investment educa-tion and distribution information to plan participants. It also recognized that the Fiduciary Rule could cause those responsible for providing this information at the plan level to be treated as fi duciaries. Th erefore, the DOL created spe-cifi c conditions that allow for those responsible to not be subject to the Fiduciary Rule. Communications in both of these areas will need to be monitored by retirement plan committees to ensure that a line is not inadvertently crossed converting a permissible nonfi duciary communication into a fi duciary one.

IRA Rollovers. Th e new Fiduciary Rule also extends ERISA investment fi duciary coverage to IRAs. Transactions

In this Q&A session, we asked Heather Abrigo, counsel with the fi rm of Drinker Biddle & Reath in the Los Angeles offi ce, to discuss service provider investigations. Ms. Abrigo is an employee benefi ts attor-ney and assists public and private sector plan sponsors, third-party administrators, and other pension service providers in all aspects of employee benefi ts including qualifi ed retirement plan and health and welfare issues. Ms. Abrigo also assists with Department of Labor investigations and Internal Revenue Service audits. Ms. Abrigo can be reached at 310-203-4054 or heather.abrigo@dbr.com.

QWhy is the Department of Labor (DOL) focusing on service providers?

AWell, I can say that I do not think it is a surprise that the DOL is focusing on service providers. With recent

regulations regarding fee transparency, it was just a matter of time that their focus would be on service providers. From what we can tell, it would appear that the DOL is focusing on service providers for three reasons. First, we see an intensi-fi ed focus on prohibited transactions. Th e DOL has seen an increase of prohibited transactions by service providers which is the primary reason for their focus. Second, there has been an increased and growing awareness by the DOL of the infl u-ence that service providers have over retirement plan opera-tions. Th is likely came from investigations of plans. Th e third

focus has been the DOL’s concerns over confl icted advice that adversely impacts participants. Th is is also emphasized with the issuance of the DOL’s fi duciary regulation. Specifi cally, in announcing the fi nal rule, the DOL stated that:

Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products. Th ese confl icts of interest do not always have to be dis-closed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors.

Th e DOL indicated that the fi nal fi duciary rule will “pro-tect investors by requiring all who provide retirement invest-ment advice to plans, plan fi duciaries, and IRAs to abide by a ‘fi duciary’ standard—putting their clients’ best interest before their own profi ts.” Lastly, the DOL in their report on the proposed fi duciary rule referred to a 2005 SEC study that “… conclude[d] that consultants with confl icts of interest may steer plan investors to hire certain money managers or other vendors based on a consultant’s (or an ‘affi liates’) other business relationship and receipt of fees from these fi rms

Q&A

Q&A with Heather Abrigo Regarding the Current State of DOL Service Provider Investigations

VOL. 23, NO. 10 • OCTOBER 2016 7

© 2016 CCH Incorporated. All rights reserved.

rather than because the money manager is best suited to the plan’s needs.” Confl icted advice by service providers has been a concern of not just the DOL but other government agen-cies. Now, there is a directed focus by the DOL on protecting plans and their plan participants, and the goal of these inves-tigations is to make sure that there are protections in place.

QWhat is prompting these service provider DOL investigations?

A For the most part, these investigations appear to be part of the DOL’s continuing Consultant/Adviser Project

(CAP). CAP is and has been an ongoing initiative of the DOL. Th e purpose of the CAP project is to focus on “the receipt of improper or undisclosed compensation by employee benefi t plan consultants and investment advisers.” Th e most critical element in bringing enforcement actions under CAP is to establish that the service provider is a fi duciary. Th e primary goal of the DOL and CAP is to ensure that plan fi ducia-ries and participants receive comprehensive disclosure about service provider compensation and confl icts of interest. Th is was evident with the issuance of the ERISA 408(b)(2) disclo-sure regulations in 2012, the subsequent 404a-5 participant disclosure guidance, and now, the DOL fi nal fi duciary rule. With all of this activity, it is clear that the DOL is concerned with transparency and making sure that the fees paid to ser-vice providers by plans are properly disclosed as well as fi du-ciary status and a description of services. Lastly, I would be remiss if I fail to mention that that the Employee Benefi ts Security Administration (EBSA) will also conduct criminal investigations of potential fraud, kickback, and embezzle-ment involving advisers to plans and participants.

QWhat is the DOL looking for?

A Th e Department of Labor is primarily focused on the receipt of compensation, the disclosure of such

receipt, and whether there are any prohibited transactions involved in connection with the receipt of such compensa-tion. What is important to note is that even if the com-pensation is disclosed by the service provider, the DOL is looking to see if such compensation violates ERISA. One way that it could violate ERISA is by virtue of whether the adviser/consultant used their position with a benefi t plan to generate additional fees for itself or its affi liates. Th is can sometimes happen when there is one service provider that is providing a multitude of services to not just the ben-efi t plan, but also to the Company. In such circumstances, the potential for engaging in a prohibited transaction is increased and thus, the receipt of compensation must be carefully examined.

Q How does the investigation start?

A Generally, there is a standard letter that is sent out to the service provider that indicates a date for the on-site

examination. Th e letter will give a time period that is being covered by the investigation and most commonly it spans 3 years. Th ere will also be a voluminous request for docu-ments that is attached to the initial letter. Th e letter will give a deadline for when the documents are due, and in what form the documents should be submitted.

Q So what does the service provider do fi rst?

A Th e service provider should fi rst try not to panic. In my experience, the biggest reasons for panic by service

providers are because of timing issues. Th e list of documents and information is extensive and the timing is very short. So, what service providers need to know is that they can nego-tiate both the timing of their response (e.g., get an exten-sion) and the volume of materials. However, let me tell you the most important thing that service providers should do. Th is is especially true if they don’t have time to make the investigation a priority and/or are not sure what to look for. Th ey need to get help and primarily from experienced ERISA counsel. Many times I have been asked to assist with inves-tigations, when all of the initial documentation has already been submitted and after the initial interview has been given. My biggest piece of advice to service providers facing a DOL investigation is to never just put the documentation together and send everything to the DOL. Service providers should always review the materials fi rst to see what issues there might be. I like to counsel my clients that it is better to know their weaknesses and problems areas prior to the DOL pointing them out. In some cases, we have been able to fi x certain issues that we found during our initial review.

Q What are some of the problems that service providers encounter during the initial production?

A As I mentioned, the biggest problem is the timing. Depending on the DOL investigator, you may either be

able to negotiate for a longer period of time to response, or send them what you have readily available with the balance of information/documentation to be provided under sepa-rate cover. Furthermore, it is important to note that some of the information and/or documentation being requested may not be available and/or even applicable. Th e request for documents and/or information is over-inclusive and the service provider should realize that not all requests may be applicable.

8 401(k) ADVISOR

liaison with the DOL. Th ird, if issues come up during the investigation remember that under certain circumstances you can resolve them without agreeing to “settle.” Fourth, if there are issues that come up, check with your E&O car-rier to ensure that there aren’t any notifi cation requirements. Lastly, do not get overwhelmed. If you are starting to get overwhelmed that is a sign th at you need help. Don’t be afraid to reach out to an ERISA attorney to assist with the DOL investigation.

Q Do you have any fi nal pieces of advice for service providers who are and/or might be facing a DOL

investigation?

A Yes. First, be organized. Th is is especially important because of the voluminous amount of documentation

and information you are providing during the investigation. Second, get competent assistance and designate someone from your organization to lead the investigation and be the

Forum Selection Clause Rejected

Many plan sponsors have been adding plan provi-sions that restrict where a lawsuit regarding the plan may be brought. For example, a federal district court in Illinois recently considered an ERISA plan provision that provided that “the only proper venue for any person to bring a suit against the Plan or to recover Benefi ts shall be in federal court in Harris County, Texas.”

ERISA states that an action involving an ERISA plan “may be brought in the district where the plan is adminis-tered, where the breach took place, or where a defendant resides or may be found.” Th e forum selection clause in the Illinois case eff ectively limited this provision to one locale. Th e court looked to the policies surrounding ERISA and concluded that there is a public policy to provide ERISA plaintiff s with “ready access to the Federal courts,” with the better interpretation being that ERISA protects a plaintiff ’s ability to fi le suit in a convenient forum. Th e court ruled that the forum selection clause was unenforceable and then used a traditional forum non conveniens analysis to determine that the best forum for the suit was in the Southern District of Illinois, where the plaintiff lived and the alleged breach of the plan occurred.

Th e plaintiff had purchased a life insurance policy with spousal coverage as an employment benefi t off ered by BP, with premiums deducted from her wages. She then divorced her husband and informed BP, but was allegedly not told that there would be any issue with maintaining the coverage on her now ex-spouse. Th e SPD apparently had a clause that permitted spousal coverage after a divorce. BP continued to deduct the premiums for spousal coverage for another 15 years, but the related life insurance company, also a defendant, declined to pay the death benefi t after her ex-spouse died.

Th e court acknowledged that there were other rulings that would have accepted the plan provision in question.

In particular, the Court of Appeals for the Sixth Circuit has ruled the policy of “ready access” is met so long as the plaintiff has a venue in “a federal court.” Smith v. AEGON Cos. Pension Plan, 769 F.3d 922, 931-9 32 (6th Cir. 2014). Th is is the only appellate court ruling on a forum selection clause in an ERISA plan. Th e Illinois ruling may signal that the courts are going to take a closer look at such clauses, particularly when the case involves a single participant or benefi ciary seeking benefi ts in litigation against a large plan sponsor.

Advice for Young Plan Participants 401(k) plans are getting a lot more media attention

these days. One of the latest is a post on the CNBC Web site entitled “Five 401(k) tips for recent grads.” It begins by noting that starting retirement savings “takes a dose of determination and a bit of strategy.” Its fi rst tip is the obvi-ous “Start now.” If the worker can get into the employer’s 401(k) plan, then he or she should take advantage of it right away. If the plan has a waiting period, then the new worker should get in the habit of saving anyway, diverting the planned 401(k) election to an emergency fund or to pay down high-interest debt or student loans. Th e goal should be to save 10 percent of annual pay. Second, the participant should defer at least enough to receive the employer’s full matching contribution, if any. Unfortunately, even many experienced employees fail to do so, which is just “leaving money on the table.” Th ird, the participant should review the plan’s investment options and make selections that bal-ance growth and risk, without putting everything into “one basket.” Th e participant should also consider the fees on the investment choices. Although index funds and exchanged-traded funds are supposed to have lower fees, that is not necessarily the case, and the participant should confi rm that these investment off erings are actually low cost. Fourth, the participant should take advantage of any investment advice

BENEFITS CORNER

William F. Brown, Esq.

VOL. 23, NO. 10 • OCTOBER 2016 9

© 2016 CCH Incorporated. All rights reserved.

that is available through the plan, even if there is a charge for it. Apparently, a common mistake of young participants is opting for an overly conservative strategy, not realizing that their long time horizon allows for more growth poten-tial. If no advice is available, the participant should consider the plan’s target-date fund. Finally, the younger participant should consider tax impacts as well. A Roth 401(k) defer-ral, funded with after-tax funds, is often eff ective for these employees, who will probably face higher tax brackets later in their employment history.

IRS Softens Harsh Distribution RuleWhen an account holder receives a distribution payable

to himself from a retirement plan or an IRA of an amount that is eligible for rollover to another plan or an IRA, IRC Sections 402(c)(3) and 408(d)(3) provide that the distribu-tion is not taxable if it is transferred to an eligible plan or an IRA within 60 days from the date the participant received it. Th e Treasury Secretary may waive the 60-day rollover requirement “where the failure to waive such requirement would be against equity or good conscience.” Rev. Proc. 2003-16 establishes a letter-ruling procedure for applica-tions for this waiver. Th e Treasury has now issued Rev. Proc. 2016-47, eff ective August 24, 2016, that greatly changes the process for a participant who misses the 60-day deadline. Of course, all of these potential problems can be avoided if the participant processes the distribution as a direct rollover to the recipient plan or IRA.

Th e new revenue procedure off ers a simplifi ed approach for the participant who misses the 60-day deadline. Th e par-ticipant can prepare a “written self-certifi cation” to the plan administrator or “IRA trustee” that the contribution to the recipient plan satisfi es the new requirements. Th e IRS has provided a model letter for this purpose. Section 3.04(1) states that the administrator or trustee can rely on the self-certifi cation when determining whether the rollover has sat-isfi ed the conditions for a rollover waiver, unless that entity has “actual knowledge” to the contrary. Subsection (2) states that the self-certifi cation is not an IRS waiver but that the “taxpayer may report the contribution [to the new plan or IRA] as a valid rollover unless later informed otherwise by the IRS.”

Section 3.02 of the procedure states the conditions for self-certifi cation. Th e IRS cannot have previously denied a waiver request for any part of the distribution, the participant must have missed the deadline for one or more of 11 diff erent reasons, and the rollover must be made to the plan or IRA

“as soon as practicable after the reason or reasons listed … no longer prevent the taxpayer from making the contribution.” Th e last condition is automatically met if the contribution is made within 30 days after the taxpayer is no longer prevented from making the rollover.

Th e 11 acceptable reasons are expansive. Among others, they include an error by the fi nancial institution either making or receiving the distribution, misplacing the distribution check (so long as it was never cashed), mis-taken deposit into an account believed eligible to receive a rollover, severe damage to the participant’s residence, death or serious illness of a family member or serious ill-ness of the participant, a postal error, or the participant’s incarceration.

Finally, Revenue Procedure 2016-47 adds new authority that allows the IRS to grant a waiver of the 60-day rollover requirement during “the course of examining a taxpayer’s individual income tax return.”

Louisiana Flooding Prompts IRS ReliefTorrential rainstorms in the Baton Rouge area have

prompted the IRS to release what appears to be unprec-edented relief. IR-2016-115 and Announcement 2016-30 explain that victims of the “Louisiana Storms” who have “retirement assets in qualifi ed employer plans” can obtain a loan or hardship distribution “to alleviate hardships caused by the Louisiana Storms.” Th is includes participants directly aff ected by the disaster or participants living outside the disaster area who take out a loan or a hardship distribution to assist a child, parent, grandparent, or “other dependent who lived or worked in the disaster area.” Th e plan “can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food or shelter.” Th e plan can also “relax” any documentation requirements. Th e plan administrator “may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution” unless the administra-tor has “actual knowledge” to the contrary. Th e plan does not have to otherwise allow for hardship or other in-service distributions to make hardship distributions for this pur-pose, although a defi ned benefi t plan or money purchase plan may not do so. Th e plan can also ignore the rule that a 401(k) participant cannot make deferrals for six months after receiving the distribution. Th e plan sponsor does not have to adopt a plan amendment to permit such loans or hardship distributions in advance, although an amendment will apparently be required.

10 401(k) ADVISOR

REGULATORY & JUDICIAL UPDATE

Item Statement Status

ERISA allows for indemnifi cation of co-fi duciaries.

Chesemore, et al. v. Fenkell, et al., U.S. Court of Appeals, Seventh Circuit, Nos. 14-3181, 14-3215, and 15-3740, July 21, 2016

Validating a 30-year precedent, the Seventh Circuit has ruled that ERISA’s foundation in principles of trust law allows courts to order equitable rem-edies of contribution or indemnifi cation among co-fi duciaries. Accordingly, a functional fi duciary that controlled hand-picked ESOP trustees, was required to indemnify the trustees for breach of duty in executing a leveraged buyout at an infl ated price that resulted in signifi cant losses for ESOP participants.

David Fenkell founded and controlled Alliance Holding, a company that specialized in purchasing and selling ESOP-owned, closely held companies with limited marketability. In a typical transaction, Fenkell would merge the ESOP of an acquired company into Alliance’s own ESOP, hold the company for a few years (keeping management in place), and then spin it off for a profi t.

In accordance with its business model, Alliance acquired Trachte Building Systems, Inc. in 2002 for $24 million. Trachte maintained an ESOP which, incident to the acquisition, was folded into Alliance’s ESOP.

Fenkell anticipated that Trachte could eventually be sold in fi ve years for $50 million. However, Trachte’s profi ts and growth stalled and no inde-pendent buyer would meet Fenkell’s expected price. Accordingly, Fenkell “offl oaded” the company to Trachte employees in a complicated leveraged buyout, which involved the creation of a “new” Trachte ESOP managed by trustees selected and controlled by Fenkell; spinning accounts in the Alliance ESOP off to the new Trachte ESOP; and the purchase by the new Trachte ESOP (using employee account assets as collateral for debt) of Trachte’s equity from Alliance. At the conclusion of the multiple interlocking transactions, the new Trachte ESOP had paid $45 million for 100 percent of Trachte’s stock and it incurred $36 million in debt.

Th e purchase of the stock was infl ated and the debt load proved to be unsustainable. By the end of 2008, Trachte’s stock was worthless.

Current and former employees who participated in the old Trachte ESOP, Alliance ESOP, and the new Trachte ESOP subsequently brought suit under ERISA, charging Alliance, Fenkell, and the trustees of the new ESOP with breach of fi duciary duty. Th e trial court found that the trustees and Fenkell and Alliance breached fi duciary duties to the employees. However, because Fenkell and Alliance controlled the trustees and directed the infl ated leveraged buyout transaction, they were determined to be most at fault and ordered to indemnify the trustees. Fenkell did not challenge his liability for fi duciary breach, but appealed the indemnifi cation order.

On appeal, Fenkell maintained that ERISA does not authorize indemni-fi cation or contribution among co-fi duciaries. ERISA Section 405(b)(1)(B) contemplates the allocation of fi duciary obligations among co-fi duciaries, but does not specifi cally mention contribution or indemnity as a remedy. Courts, however, are allowed, under ERISA Section 502(a)(3), to fashion appropriate equitable relief in response to a claim by a participant, benefi ciary, or fi du-ciary. Th e United States Supreme Court has interpreted “appropriate equi-table relief ” as encompassing remedies that were typically available in equity. CIGNA Corp. v. Amara, 563 U.S. 421 (2011).

ERISA authorizes courts to order contribution or indemnifi cation among co-fi duciaries based on degree of culpability.

continued on page 12

VOL. 23, NO. 10 • OCTOBER 2016 11

© 2016 CCH Incorporated. All rights reserved.

INDUSTRY INSIGHTS

The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2015ICI Research Perspective, Vol. 22, No. 4 July 2016 Sean Collins, Sarah Holden, James Duvall, and Elena Barone Chism

Plan Sponsors Select Service Providers and Investment Arrangements

Plan sponsors select the service providers for their 401(k) plans and choose the investment options off ered in them. Th e costs of running a 401(k) plan generally are shared by the plan sponsor and participants, and the arrangements vary across plans. Th e fees may be assessed at a plan level, a participant-account level, as a percentage of assets, or as a combination of arrangements.

Exhibit 1 shows possible fee and service arrangements in 401(k) plans. Th e boxes on the left highlight employers, plans, and participants, all of which use services in 401(k) plans. Th e boxes on the right highlight recordkeepers, other retirement service providers, and investment providers that deliver invest-ment products, investment management services, or both.

Th e dashed arrows illustrate the services provided. For example, the investment provider off ers investment products and asset management to participants, while the recordkeeper provides services to the plan and the participants. Th e solid arrows illustrate the payment of fees for products and services. Participants—or the plan or employer—may pay directly for recordkeeping services.

In addition to paying for plan level recordkeeping ser-vices directly from participant accounts, such services can be paid by participants indirectly (solid arrow from par-ticipants to investment providers) through the investment expenses they pay for investments held in their 401(k) accounts.

Th e full text of the report can be accessed at https://www.ici.org/pdf/per22-04.pdf.

Exhibit 1 A Variety of Arrangements May Be Used to Compensate 401(k) Service Providers

Employer/PlanRecordkeeper/

Retirement serviceprovider

Participants Investment provider(s)

Services providedFee payment/Form of fee payment

Direct fees: dollar per participant;percentage based on assets; transactional fees

Recordkeeping/Administrative

payment(percentage

of assets)

Expense ratio (percentage of assets)

Direct fees: dollar per participant;percentage based on assets;transactional fees

Recordkeeping and administration;plan service and consulting; legal, compliance, and regulatory

Participant service, education, advice, and communication

Asset management; investment products

Recordkeeping;distribution

Note: In selecting the service provider(s) and deciding the cost-sharing for the 401(k) plan, the employer/plan sponsor will determine which combinations of these fee arrangements will be used in the plan.

Source: Investment Company Institute.

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12 401(k) ADVISOR

October/9900504683

LAST WORD ON 401(k) PLANS

What Is the Context?Jeffery Mandell, Esq.

T here are always never ending countless legal changes and initiatives with ERISA plans. I refer to regulatory and statutory developments, and case law developed

through litigation. A recent dramatic change is the U.S. Department of Labor’s fi nalization of its fi duciary defi nition confl ict of interest regulations. Th is initiative was fought hard during the regulatory process, and now it is challenged in court.

Th is piece does not debate the merits of the new law. Many publicly applaud the new regulation, many privately applaud it but will not publicly applaud it, and others decry it. Might it help to put this initiative in the broader context of ERISA?

Let’s look at the words underlying the ERISA acronym. Employee, Retirement, Income, Security. ERISA’s objective is unambiguous and direct. It is intended to protect employees’ retirement security. Th at is it. Advancing employees’ retire-ment is ERISA’s sole purpose (except somewhat otherwise as applicable to ESOPs). When viewing the new regulations or other legal changes, the compelling question is whether they advance or impede employees’ retirement security.

Many individuals, employers, and institutions have fought hard against any number of changes in ERISA throughout its history. I have fought some of those bat-tles as well, and I certainly think ERISA is already a beast without the addition of new requirements. But, again, let’s consider the context. Many small employers hated, and still hate, the top-heavy rules. Th e Internal Revenue

Code’s nondiscrimination requirements also pose diffi cul-ties. Questions: Would employees who otherwise would be left out of the retirement system be covered by a plan but for these requirements? Would minimum contributions be made for them? ERISA history makes clear the answers.

Some assert government should not place additional restrictions on employers’ plans. Th e simple answer is that no employer is required to have a plan. But, if the employer wants any of the one-of-a-kind tax benefi ts for itself and its employees, if the employer volunteers to have a plan, then there are rules. No diff erent than a speed limit.

Many opposed the fairly recent fi duciary Section 408(b)(2) disclosures, and the participant level 404a-5 disclosures. Again, let’s consider the context. Will/do these initiatives promote employees’ retirement income, for example, by educating the employer and employees, and in negotiat-ing better fees? Should employers and employees have this information about fees, expenses, and services?

My point is this: ERISA was created to help employees retire. When considering the good or bad of a legal change or initiative, it is appropriate and necessary to keep in the forefront ERISA’s standards and broader context.

Jeffery Mandell is the President of Th e ERISA Law Group, P.A. in Boise, Idaho and co-editor of this publication. He speaks, writes, and represents clients throughout the United States. He can be reached at 208-342-5522 or at jeff @erisalawgroup.com.

While the federal courts of appeal have split on the issue of indemni-fi cation, the Seventh Circuit has long held that ERISA’s grant of equitable remedial powers and its foundation in principles of trust law permit courts to order contribution or indemnifi cation among co-fi duciaries based on degree of culpability. [Free v. Briody, 732 F. 2d 1331 (7th Cir. 1984).] Th e court was not inclined to overturn Free, concluding that indemnifi cation and contribution reside within a court’s equitable powers and are consistent with principles of trust law within which ERISA operates.

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