DOL Issues New Guidance on Locating Missing Participants

The U.S. Department of Labor ("DOL") has provided new guidance to plan fiduciaries of terminated defined contribution plans for locating missing or unresponsive participants in order to distribute their benefits.  The guidance, which comes in the form of Field Assistance Bulletin ("FAB") 2014-0, replaces the prior guidance provided in FAB 2004-02.

FAB 2014-01 outlines the mandatory steps that plan fiduciaries must take to discharge their duty to locate missing participants and provides acceptable options for distributing a benefit when participants remain unresponsive.

Background.  The inability to locate and make distributions to participants when terminating a retirement plan can present several quandaries for plan fiduciaries, including:

• Delaying the filing of the plan's final Form 5500.  All plan assets must be distributed from the plan's trust before a final Form 5500 can be filed.
• Voiding a favorable determination letter issued by the Internal Revenue Service ("IRS") in relation to the plan's termination.  In order to rely on an IRS determination letter, a plan administrator must make final distributions within a reasonable time following the plan termination.
• The Internal Revenue Code's mandate that fiduciaries must seek affirmative direction from plan participants when making termination distributions.

Prior Guidance.  To address these concerns, in 2004 the DOL released FAB 2004-02.  FAB 2004-02 provided plan fiduciaries with guidance on how to meet their obligations under ERISA to locate and distribute benefits to missing participants in the context of a defined contribution plan termination.  FAB 2004-02 advised plan fiduciaries to use the following methods to locate missing participants:

• Send notices by certified mail;
• Review related plan and employer records;
• Contact the participant's designated beneficiary; and
• Use the letter-forwarding services of the IRS or Social Security Administration ("SSA").

Internet search tools, commercial locator services and credit reporting agencies were also recommended as search resources.  FAB 2004-02 relied heavily on the IRS and SSA letter-forwarding programs.  Both of these programs, however, were recently discontinued.  (The SSA program ended in May of this year, and the IRS excluded retirement plans from its program effective August of 2012.)

DOL Safe Harbor Regulations.  In 2006, DOL issued regulations to provide fiduciaries of terminating defined contribution plans with "safe-harbor" procedures for making distributions to participants who do not affirmatively request distributions.  (See ERISA Regulation Section 2550.404a-3.)  These regulations specify the content and manner for providing notice to missing participants, as well as various options for distributing an unresponsive participant's account balance.  Distribution options include transferring the participant's account balance to:

• an interest bearing bank account;
• an individual retirement account ("IRA") in the participant's name; or
• the unclaimed property fund of the state in which the participant was last known to reside.

FAB 2014-01.  FAB 2014-01, which supersedes FAB 2004-02, reflects certain changes that have occurred over the last decade, including the expansion of internet search tools and the discontinuance of the IRS and SSA letter forwarding programs.  Similar to the prior guidance, FAB 2014-01 requires plan fiduciaries to take certain steps to locate missing participants in a terminated defined contribution plan and outlines certain additional steps that, in the DOL's opinion, plan fiduciaries must consider to fully discharge their duties under ERISA.

ERISA 404(a) requires plan fiduciaries to act prudently and solely in the interest of plan participants and beneficiaries. While DOL views the decision to terminate a retirement plan as a "settlor" function not regulated by ERISA, it maintains that steps taken to implement this decision are fiduciary activities, including steps taken to locate missing participants and distribute unresponsive participants' account balances.  Thus, FAB 2014-01 notes that in accordance with their duties of prudence and loyalty, plan fiduciaries must take reasonable steps to locate missing participants.

Required Search Steps.  Where plan fiduciaries are unable to locate participants through routine delivery methods, such as first class mail or electronic notice (i.e., e-mail), FAB 2014-01 indicates that plan fiduciaries must take the following steps (before concluding their search efforts for the missing participants):

• Send notices by certified mail;
• Review related plan and employer records;
• Contact the participant's designated beneficiary; and
• Use free electronic search tools (e.g., internet searches, public records databases, etc.).

DOL considers the failure to take these steps as a breach of fiduciary duty.

Additional Search Steps.  If all four required search methods are unsuccessful, plan fiduciaries must determine whether additional steps are appropriate.  In making this determination, plan fiduciaries must consider the size of a participant's account balance and the cost of further search efforts.  Additional steps include fee-based Internet search tools, commercial locator services, credit reporting agencies, information brokers, and investigation databases and similar services that may include charges. 

NOTE:  DOL maintains the position that plan fiduciaries may charge missing participants' accounts for search-related costs, provided the charges are reasonable.

Distributing an Unresponsive Participant's Account.  Where a missing participant remains unresponsive, a plan fiduciary must determine the appropriate method for distributing that participant's account balance.  FAB 2014-01 establishes a range of options for distributing benefits to unresponsive participants after a plan fiduciary has exhausted the search efforts described above.  Specifically, FAB 2014-01 identifies a preferred method and two alternative methods for consideration if the preferred approach is not viable.

NOTE:  These methods are the same as those provided under the DOL's 2006 safe-harbor regulation.

The preferred method for distributing a missing participant's account is to roll over the benefit to an IRA established in the participant's name.  DOL prefers this method because it avoids immediate taxation of the benefit and it is the option most likely to preserve the benefit.

NOTE:  Because the selection of an IRA provider and the manner in which the benefit will be invested in the IRA are fiduciary actions, plan fiduciaries are advised to rely on the DOL's 2006 safe-harbor regulations when effectuating rollovers missing participants' accounts to IRAs. 

Alternative methods for distributing a missing participant's account include:

• transferring the benefit to an interest-bearing account (in the name of the missing participant) in a federally insured bank; or
• transferring the benefit to a state unclaimed property fund. 

When deciding between these two options, the plan fiduciary must consider the attendant facts and circumstances, including bank charges, interest rates, and the process for searching the state's unclaimed property fund.  Before deciding to take either of these steps, however, the plan fiduciary must first conclude that using these methods is appropriate despite the adverse tax consequences to participants as opposed to the tax-free rollover to an IRA.

FAB 2014-01 clarifies that 100% income tax withholding is not an acceptable method for distributing a missing participant's account balance.  In the past, plan fiduciaries have withheld 100% of a missing participant's distribution, thereby essentially turning the benefit over to the IRS.  The DOL has confirmed that this method is objectionable because it does not necessarily result in an offset to the participant's income taxes and can deprive a participant of his or her benefit. 

Action Steps for Plan Fiduciaries.  Plan fiduciaries should review their plan procedures for missing participants and amend them, if needed, to conform to FAB 2014-01's guidance.  In addition, plan administrators should be sure to thoroughly document all steps taken to locate and make distributions on behalf of missing participants. 

While FAB 2014-01 specifically applies to locating missing participants in connection with a defined contribution plan termination, it may provide useful guidance in other similar circumstances involving missing participants, such as un-cashed checks and required minimum distributions.

Supreme Court Rejects Presumption of Prudence in Stock-Drop Cases

Recently, the Supreme Court handed down a unanimous opinion in the case of Fifth Third Bancorp v. Dudenhoeffer, rejecting a long-standing rule that  fiduciaries of individual account plans are entitled to a "presumption of prudence" when employer stock is offered as an investment option.  The Court's ruling impacts 401(k) plans that offer employer stock as an investment option as well as employee stock ownership plans that invest primarily in employer stock. 

Many employers offering employer stock as an investment option in a 401(k) plan have been subject to class action lawsuits arising from a substantial drop in their stock price causing participants to claim that the employer breached its duty of prudence and loyalty by allowing continued investment in the stock.  Prior to the recent Supreme Court ruling inDudenhoeffer, a key defense for employers in  "stock-drop" suits was the so-called "Moench presumption" of prudence, named after the 1995 decision by the Third Circuit Court of Appeals in Moench v. Robertson which was followed by a majority of Circuit Courts.

Application of the Moench presumption meant that a plan fiduciary's decision to remain invested in employer securities is presumed to be reasonable, unless the plaintiff can show that the fiduciary abused its discretion in continuing to make employer stock available as an investment alternative.   The rationale for the Moench presumption was based on an attempt to balance competing policy concerns that, on the one hand, would promote employee ownership, and on the other, protect participants against imprudent plan investments.  Thus, while ERISA requires fiduciaries to diversify plan assets and to act with prudence in making investment decisions, it also provides that in the case of plans offering employer stock as an investment, they are exempt from the duty to diversify investments and are also exempt from the prudence requirement, but only to the extent that prudence would require diversification. 

Lower Court's Decision.  The Dudenhoeffer case involved a 401(k) plan sponsored by Fifth Third Bancorp, which offered the company's stock as a plan investment option.  From July 2007 to September 2009, the stock's price dropped 74%, causing the plan to lose "tens of millions" of dollars, allegedly as a result of Fifth Third Bancorp's shift from conservative lending practices to being a subprime lender.  Participants filed a class action lawsuit in federal district court against Fifth Third Bancorp alleging that plan fiduciaries breached their duty under ERISA by continuing to include Fifth Third Bancorp stock on the plan's investment menu despite the fact that they knew or should have known that the company's business model put its value in jeopardy.

The District Court dismissed the claim on the basis that the fiduciary's decision was presumed to be prudent.  On appeal, however, the Court of Appeals overturned the District Court and ruled that the presumption is to be applied at a later stage in the litigation when there is a more fully developed court record.  The ruling by the Appeals Court inDudenhoeffer was at odds with the majority of courts which apply the presumption in the initial stage of litigation, meaning that in most stock-drop cases, participants are denied the opportunity to engage in discovery. 

The Sixth Circuit also ruled that to rebut the presumption, participants need only show that a prudent fiduciary acting under similar circumstances would have made a decision that the employer stock was an imprudent investment.  This ruling was also a departure from the majority as most courts require that a participant must demonstrate that the company was in "dire circumstances" or facing "impending collapse" in order to rebut the presumption.  The Appeals Court specifically rejected these "narrowly defined" tests for rebutting the presumption in favor of one that is easier for participants to prove.

Supreme Court Decision.  The Supreme Court vacated the Sixth Circuit's decision and directed the Sixth Circuit to reconsider whether the complaint inDudenhoeffer states a "plausible" claim for a breach of fiduciary duty.  In reaching its decision, the Court held that there is no "presumption of prudence" in favor of ESOP fiduciaries as there is no basis in ERISA that supports a special presumption of prudence for decisions made by ESOP fiduciaries.  Instead, an ESOP fiduciary's decision is subject to review under the same duty of prudence applicable to all ERISA fiduciaries, except that ESOP fiduciaries have no duty to diversify plan investments. While ESOP fiduciaries are not liable for losses that result from a failure to diversify, they are required to act with the care, skill, prudence and diligence that a prudent expert acting in like capacity and familiar with such matters would use to make and continue to hold the investment of employer stock.

According to the Court, in order to a claim for a breach of fiduciary duty, the claim must be based on plausible factual allegations of breach of fiduciary duty.  Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus, are insufficient to state a claim.  Further, the Court instructs that in order for a complaint to state a claim for a breach of the duty of prudence, a plaintiff must plausibly allege an alternative action that the defendant could have taken, that would have been legal and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the trust than to help it.  In so ruling, the Court held that a fiduciary's duty of prudence does not require a fiduciary to break the law and buy or sell company stock on the basis of insider information. 

One of the arguments advanced by Fifth Third Bancorp was that without the Moench presumption, an ESOP fiduciary would be subject to costly duty-of -prudence "meritless lawsuits" every time there was a drop is stock price.  The Court recognized this concern but concluded that the Moench presumption was an inappropriate way to weed out "meritless lawsuits."  Instead, the Court stated that the more important mechanism for weeding out meritless claims requires a "careful judicial consideration of whether the complaint states a claim that the defendant has acted imprudently."  Thus, courts must carefully scrutinize stock-drop complaints to determine whether they state a plausible claim for breach of fiduciary duty.

Implications.  Even though the Supreme Court specifically rejected the application of the Moenchpresumption, plaintiffs still face a high burden as they must plead specific facts in order to survive a motion to dismiss, such as the specific alternate action that the fiduciaries should have taken.  In addition, the Court has given ESOP fiduciaries several potential defenses as, according to the Court, they can rely on the stock market price as the best estimate of stock price.  Complying with the rules on insider trading is yet another potential defense a fiduciary can raise.  Finally, plan sponsors may want to consider the composition of their investment committees and whether an independent third party fiduciary should be hired to make the decision whether to continue to invest in or offer a company stock fund as an investment option.

IRS Issues Final Regulations to Clarify Tax Treatment of Payments by Retirement Plans for Accident, Health and Disability Insurance Premium

The IRS has issued final regulations that clarify the tax treatment of premium payments paid by qualified defined contribution plans for accident and health insurance where such payments are charged against participants' plan accounts.  Included within the final regulations is a new rule governing the tax treatment of premiums paid by defined contribution plans (and charged against participants' account) for disability insurance that provides replacement plan contributions when a participant becomes disabled.  The final regulations are effective for plan years beginning on or after January 1, 2015, but taxpayers may elect to apply the regulations to earlier taxable years.

Background.  Section 125 of the Code allows employees to pay accident and health insurance premiums on a pre-tax basis.  The Code also excludes from a participant's taxable income all proceeds received under accident or health insurance policies for injuries or sickness.  Additionally, Code Section 402(a) provides that distributions from qualified retirement plans are taxable to the participant in the year of distribution.  

Accident or Health Insurance Premiums.  The final regulations reiterate that, as a general rule, premium payments made from qualified defined contribution plans for accident or health insurance (including long-term care) are considered taxable distributions to the insured participant during the year in which the premium payments are made.  Certain statutory exceptions to this general rule exist, including: (i) premiums payments made on behalf of qualified public safety officers (Code Section 402(l)), and (ii) premium payments from a qualified retiree health account (Code Section 401(h)).  

Premium payments that are charged against a participant's defined contribution plan account are treated as a taxable distribution and are deemed as being made by the participant, not the employer.  In other words, the transaction is the same as if the participant purchased the coverage with after-tax dollars.  Therefore, proceeds received from an insurance policy whose premiums are paid by a qualified plan are generally excludable from the participant's gross income. 

NOTE: Where a participant took deductions for the insurance premium distribution, the insurance proceeds would be taxable.

Disability Insurance Premiums.  The final regulations provide that premium payments made by a qualified defined contribution plan for disability insurance that provides replacement plan contributions in the event of the participant becoming disabled are not treated as a taxable distribution to the participant if the following conditions are met:

• The insurance policy provides for proceeds to be paid to the plan if the employee becomes unable to continue employment because of disability;
• Proceeds from the insurance policy are credited to the participant's plan account; and
• The amount payable under the insurance policy does not exceed the reasonably expected annual contributions that the participant would have made or received during the period of disability, reduced by any other contributions made on the employee's behalf during the disability period.  (Future salary increases that the participant would otherwise have received during the period of the disability may be considered in determining the "reasonably expected" amount of the contribution that the participant would have made.)

Disability insurance policies that meet these conditions are treated as plan investments and any proceeds received are treated as a return on that investment as opposed to plan contributions.  Thus, proceeds from the disability insurance policy are not subject to Code rules that limit annual plan contributions.  In addition, insurance proceeds are not taxable to the participant at the time of payment.

The final regulations advise that the contribution disability insurance policies can replace:

• Pre-tax contributions that a participant would otherwise have made during the period of disability;
• Any related employer-paid matching contributions the employee would have received; and
• Any employer non-elective (or profit sharing) contributions.

Action Steps for Employers.  Employers that sponsor qualified defined contribution plans should carefully consider whether to provide employees with the option to purchase contribution disability insurance through the plan on a tax-favored basis.  Offering such disability insurance as a plan investment option is a fiduciary decision that will expose the employer to the risk of fiduciary liability.  Accordingly, employers that decide to offer disability insurance are advised to engage in an objective, thorough and analytical process to identify and select the right disability insurance policy. 

Before an employer decides to offer contribution disability insurance as an investment option under its qualified defined contribution plan, the underlying plan document must be reviewed to determine what amendments are needed.  Employers are advised to engage qualified employee benefits counsel to assist in the plan document review and amendment process. 

NOTE:  Marcia Wagner testified before the Internal Revenue Service regarding the appropriate treatment of disability insurance in the context of defined contribution plans and the very position that she espoused, by virtue of the regulations, is now the law of the land. 

IRS Issues Updated Circular 230 Regulations

The IRS has issued updated final regulations on Circular 230 that significantly revise the manner in which practitioners are required to advise on federal tax matters.  Circular 230 is a portion of the federal regulations that governs the conduct of individuals who practice before the IRS.  Practitioners who violate Circular 230's rules of conduct are subject to disciplinary actions ranging from monetary sanctions to suspension and disbarment from practice before IRS. 

This article primarily focuses on the final regulations' elimination of the covered opinion rules and the new requirements for written tax advice.  Specifically, the new regulations provide practitioners with relief from Circular 230's previously onerous rules, thereby replacing them with a more workable standard of care that is based on facts and circumstances.  Because the penalties for failing to meet Circular 230's requirements can be severe, practitioners must be aware of, and comply with, the updated regulations.

Covered Opinions.  The most significant change under the updated regulations is the elimination of the distinction between a "covered opinion" and other written tax advice.  The prior regulations provided very distinct rules depending upon which of these two categories of writing the advice was classified.  In fact, the rules on covered opinions were very complex and imposed onerous due diligence requirements that might exceed a client's expectations, whereas the rules for written advice not deemed as a covered opinion were far less stringent.

Because of the stricter requirements for covered opinions, practitioners made every effort to avoid inadvertently providing covered opinions to their clients.  To avoid  penalties relative to covered opinions under Circular 230, practitioners would include a generic disclaimer (i.e., a "Circular 230 disclaimer") at the bottom of emails and other correspondence which provides that tax advice is not being offered to the reader.  These disclaimers were often provided without narrow tailoring to the particular advice provided to the client and even where the correspondence did not involve a tax matter.

Recognizing that the covered opinion rules created onerous compliance obligations for tax practitioners while providing little benefit to taxpayers, the updated regulations provide a single, uniform set of rules governing all written advice furnished on federal tax matters.          

New Rules for Written Tax Advice.  The new rules governing written tax advice strive to maintain standards that require practitioners to act ethically and competently while remaining practical and flexible in view of today's practice environment.  Under the updated regulations, practitioners must satisfy all six of the following requirements when rendering written advice on a federal tax matter:

1. Base the written advice on reasonable factual and legal assumptions;
2. Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
3. Use reasonable efforts to identify and ascertain the facts relevant to the advice;
4. Not rely on the representations of others if reliance on them would be unreasonable;
5. Relate applicable law and authority to facts; and
6. Not take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

The updated regulations explain that the determination of whether a practitioner has met these requirements will be based on all facts and circumstances attendant to the matter, including those not contemplated by the written advice. 

Exclusions from Written Advice.  The updated regulations contain exclusions from what constitutes written advice.  For example, government submissions on matters of policy (e.g., commentary submitted to the IRS in response to proposed regulations) are not considered written advice.  Continuing education presentations that are provided to an audience solely for enhancing knowledge on federal tax matters are also generally excluded, unless such presentations promote or market transactions.   

Reasonable Practitioner Standard.  IRS will apply a reasonable practitioner standard when reviewing practitioners' compliance with the updated regulations.  The updated regulations identify situations where it is unreasonable for a practitioner to rely on the representations of others (in violation of Circular 230).  Specifically, it is unreasonable for a practitioner to rely on a representation if the practitioner knows or reasonably should know that a representation or assumption on which the representation is based is incorrect, incomplete or inconsistent.  Also, reliance is unreasonable where the practitioner knows or reasonably should know that:

1. the opinion of the other person should not be relied upon,
2. the other person lacks the necessary qualifications to provide the advice, or
3. the other person has a conflict of interest in violation of Circular 230.

NOTE: Practitioners should be aware that the requirement for reasonable reliance on others may create an obligation to inquire as to the advisor's qualifications and background.

In the case of written advice that the practitioner knows or has reason to know will be used by another in promoting, marketing or making recommendations to another taxpayer, IRS will give heightened emphasis to the additional risk caused by the practitioner's lack of knowledge of the taxpayer's particular circumstances. 

  

Conclusion.  The final regulations, which became effective June 12, 2014, provide welcome relief to tax practitioners and clients alike by simplifying the rules for providing clients with written advice on federal tax matters.  However, due to the subjective nature of the new rules, tax advisors who furnish written advice must ensure that they can demonstrate that their advice is reasonable in light of the surrounding facts and circumstances. Nonetheless, tax practitioners no longer need to incorporate Circular 230 disclaimers into their written correspondence.

ERISA's 40th Anniversary

This week marks the 40th anniversary of a landmark event that, along with Social Security, has shaped the retirement landscape in the United States. President Gerald Ford's signing into law of the Employee Retirement Income Security Act (otherwise known as ERISA) on September 2, 1974 is largely responsible for the evolution of the private retirement plan system. With 401(k) plans as its mainstay, ERISA has been largely successful in delivering broad-based retirement security to employees, as well as providing for a uniform, nationwide set of fiduciary and administrative standards.

Today, this system is being questioned, if not threatened, because of the perception that its coverage is limited and does not result in retirement readiness for those it does cover. This criticism is short-sighted, since it ignores the system's positive achievements and neglects how it has adapted to meet the needs of a modern, mobile workforce. The best way to ensure the retirement security of Americans is to preserve this system and improve it with better plan design and financial products.

The event that crystalized the need for pension plan reforms was the 1963 closing of Studebaker Corporation's automobile plant which caused many long-service workers to lose both their jobs and benefits promised under the company's poorly funded defined benefit pension plan. ERISA addressed the concern that private pension plans were mismanaged by setting new standards for the vesting and funding of benefits, introducing new reporting and disclosure rules and imposing certain standards of conduct on fiduciaries who manage plans. Subsequent legislation would amend ERISA in important ways, such as reducing the maximum age that a plan may require for participation and creating spousal rights through mandatory survivor annuities and qualified domestic relations orders in the event of divorce.

These reforms established the groundwork for the explosive growth of the private plan system. According to Department of Labor records, in 1975 this system covered not quite 45 million participants; however, by 2011 it had expanded to include nearly 130 million people. Over the same period, the growth in plan assets has been even more impressive, rising from $260 billion to $6.3 trillion, a more than 24 fold increase.

ERISA's original focus was on making defined benefit plans more secure for participants. These plans promise periodic payments for life, the amount of which is determined by a formula whose key variables include a participant's compensation and length of service. Since the plan mandates a specified level of benefits, it is the employer's responsibility to make sufficient contributions to fund this lifetime commitment.

In the 1980s, the prevalence of the defined benefit model began to give way to individual account plans which, as their name implies, provide a benefit equal to an account consisting of employer and/or employee contributions and their earnings. These defined contribution plans, which include the now familiar 401(k) plan, appealed to employers, because of the relief they provided from the investment risk associated with defined benefit plans. On the heels of the 401(k) plan came the hybrid plan, also known as a cash balance plan, which allowed considerably higher contributions helping participants build their nest eggs quickly.

Since defined contribution accounts were portable, this alternative also made sense for a workforce that changed jobs with increasing frequency. Moreover, highly mobile workers were better off, because defined contribution plans tended to have shorter vesting periods than their defined benefit counterparts. By the early 1990s, defined contribution plans had overtaken defined benefit plans in terms of assets and plan participants, a trend that has continued until they now predominate.

           

Notwithstanding its popularity and the fact that approximately 74 percent of full-time workers in private industry have access to a retirement plan of some sort, the private retirement system, as presently constituted, has been criticized for a lack of access by part-time employees and those working for small employers who are reluctant to establish a plan. Other complaints center on the investment risk now being shouldered by a workforce without a high level of financial literacy. One example of this issue was the Studebaker-like scandal that occurred in 2001 when Enron plan participants were unable to diversify their excessive holdings in employer stock. Critics also say that, even if plan participants accumulate an adequate level of retirement assets, they run the risk that they will outlive them.

The beauty of the private retirement system under ERISA is its ability to adapt to meet employees' needs. Automatic enrollment and automatic escalation of employee contribution levels (with the ability to opt out) are already being used to improve the take-up rate of employees who have plan access and can be enhanced by wider use, as well as legislation that would make them more effective. For workers without plan access, legislation could authorize these same techniques to overcome employee inertia in making contributions to IRAs.

Further, small employers could be encouraged to establish retirement plans for their employees by means of tax incentives, authorizing simpler plan designs that eliminate burdensome nondiscrimination testing of the relative amounts deferred by high and low wage earners and deeming certain of an employer's fiduciary duties satisfied in certain circumstances.

The issue of investment risk is being addressed by the further development and wider use of investment products that automatically diversify and rebalance plan accounts, a concept already legislatively approved and in use in the form of qualified default investment alternatives.

To promote lifetime income options, proposed regulations would require disclosure to participants of the level of periodic income that could be supported by their plan accounts, and work is underway to remove regulatory barriers to offering annuity options in 401(k) plans. In addition, longevity annuities with a lifetime income stream beginning as late as age 85 are now permitted, so that participants can manage a portion of their retirement assets until an advanced age and still have assurance that their retirement assets will not run out. To address participant resistance to committing assets to an annuity, consideration is being given to developing a 401(k) plan default investment in the form of a trial annuity with an opt-out clause.

ERISA critics would supplement the private retirement plan system with an expansion of Social Security or various government-controlled retirement programs that would diminish support for employer-provided plans and could eventually crowd them out. But these alternatives are flawed and do not offer the advantages of the current system. For example, Social Security is already under financial strain, and even if this were not the case, its expansion would reduce the low national savings rate, given that Social Security revenues are immediately spent by the government and the program's putative pre-funding is a special government bond on which a future generation will have to make good.

Other proposals currently in vogue aim to provide universal pension coverage for privately employed workers under programs run by the federal or state governments. These programs would provide for contributions at an annual rate that is only half the average rate currently enjoyed by participants under the current system, effectively downsizing retirement benefits when we should be thinking of increasing them. The proposals for government controlled systems also entail such unappealing features as taxpayer-subsidized investment returns and carry the potential for misallocating assets due to political pressure. Moreover, each program would require special dispensations from ERISA's fiduciary requirements, fracturing the nationwide scope of their application.

The private retirement plan system has been successful in providing and safeguarding retirement benefits for millions of Americans. It has demonstrated the capacity for growth and change that bodes well for meeting the needs of the future. As we celebrate ERISA's achievements, we should realize that the system it was designed to foster is the appropriate vehicle for ensuring that all Americans are retirement ready.

IRS Issues Guidance Providing Penalty Relief for Late Filing of Forms 5500

The Internal Revenue Service ("IRS") has issued two pieces of guidance that provide relief to retirement plan sponsors and administrators from the penalties that may be assessed under the Internal Revenue Code (the "Code") for delinquent Forms 5500 filings.  Plans that fail to timely file Form 5500 series annual reports can be subject to penalties under both Title I of the Employee Retirement Income Security Act ("ERISA") and the Code.  IRS penalties for delinquent Forms 5500 filings can reach $15,000 for each late return, plus interest.

The first piece of guidance, Revenue Procedure 2014-32 ("Rev. Proc. 2014-32"), sets forth a temporary pilot program that provides relief from Form 5500 late filing penalties for retirement plans that are ineligible to participate in the DOL's Delinquent Filer Voluntary Compliance Program (the "DFVC Program").  The second piece of guidance, Notice 2014-35, modifies the requirements for retirement plans to qualify for IRS late filing penalty relief by requiring ERISA-covered retirement plans to file Forms 8955-SSA with the IRS in addition to satisfying the requirements of the DFVC Program.      

Rev. Proc. 2014-32.  Rev. Proc. 2014-32 establishes a temporary one-year pilot program providing relief from Form 5500 late filing penalties to plan administrators and sponsors of retirement plans that are subject to the filing requirements of the Code but not subject to Title I of ERISA.  These plans include:

• small business plans that provide benefits only for the owner and the owner's spouse, and plans of business partnerships that cover only partners and their spouses (collectively, "one-participant plans"); and 

• certain foreign plans.

NOTE: Relief is not available where the IRS has already issued a CP-283 Notice (Penalty Charge on Your Form 5500 Return) to a plan sponsor or administrator in relation to the delinquent Form 5500. 

Under Rev. Proc. 2014-32, the IRS will not impose any penalty for delinquent Forms 5500/5500-EZ filings if the applicant submits a complete Form 5500 series return, including all required schedules and attachments, for each plan year for which the applicant seeks relief.  All returns submitted must be sent to the IRS in paper format and cannot be submitted electronically via the DOL's EFAST2 filing system.

Delinquent returns submitted under the pilot program must be marked, in red letters at the top margin of the first page, "Delinquent return submitted under Rev. Proc. 2014-32, Eligible for Penalty Relief."  In addition, a completed paper copy of the Transmittal Schedule provided in the Appendix of Rev. Proc. 2014-32 must be attached to the front of each delinquent return.

No penalty or payment is required under the temporary pilot program.  However, IRS has indicated that if the temporary program is replaced with a permanent program, a fee or other payment will be required.  Delinquent filers can submit an application for penalty relief under the temporary pilot program from June 2, 2014 until June 2, 2015.        

Notice 2014-35.  Since 2002, IRS has not imposed penalties relating to delinquent Forms 5500 filings where a plan administrator or sponsor has satisfied the requirements of the DOL's DFVC Program.  The DOL's DFVC program allows plans that fail to timely file their Forms 5500 to submit the late reports and pay a reduced civil penalty.  Retirement plans participate in the DFVC Program by filing an application and submitting the late Forms 5500. 

Notice 2014-35 updates the terms for retirement plans covered by Title I of ERISA to obtain relief from IRS penalties for failure to timely comply with the Code's Form 5500 filing requirements.  To obtain relief, the delinquent Form 5500/5500-SF must be filed electronically via EFAST2 in accordance with the requirements of the DOL's DFVC Program, and the delinquent Form 8955-SSA must be filed in paper format with the IRS.  If these requirements are met, IRS will not impose penalties for untimely filed Forms 5500/5500-SF and 8955-SSA.

NOTE: If a Form 8955-SSA is filed pursuant to Notice 2014-35, the filer must check the box on Line C, Part I (Special extension) on Form 8955-SSA, and enter "DFVC" in the space provided on Line C.

Delinquent Forms 8955-SSA must be filed with the IRS no later than 30 days after completing the DFVC filing for the late Form 5500/5500-SF, or December 1, 2014, whichever is later.  This requirement applies to all DFVC filings submitted via EFAST2 (i.e., all DFVC filings after December 31, 2009), regardless of whether the filing was submitted before the release of Notice 2014-35.   

NOTE: Form 8955-SSA must be used for years prior to 2009 even though Schedule SSA would have been filed for those years if the filing had been timely submitted to DOL.

For example, if a DFVC filing for a delinquent 2008 Form 5500 was submitted in 2012 and Schedule SSA was never filed for the 2008 plan year, a paper Form 8955-SSA must be filed with IRS for the 2008 plan year no later than December 1, 2014.     

Action Steps for Plan Sponsors and Administrators. Plan sponsors and administrators for one-participant plans and foreign plans are advised to confirm that all required Form 5500 filings have been completed.  Any outstanding filings discovered should be corrected while the opportunity to do so at no cost exists via the temporary pilot program created by Rev. Proc. 2014-32.  Plan sponsors and administrators should also monitor the development of the temporary program to see if it becomes permanent.  

Notice 2014-35 makes clear what retirement plan sponsors and administrators must now do to bring retirement plan Form 5500 and 8955-SSA filing obligations into compliance with IRS requirements. Retirement plan sponsors and administrators are advised to confirm that all required filings have been completed, and any outstanding Forms that are discovered should be corrected before IRS assesses a penalty in relation to the delinquency. 

Form 8822-B: What is it and Who Needs to File it?

To maintain correct ownership details, curb abusive tax schemes, and ensure that the correct individual is contacted regarding tax matters, the IRS has mandated new requirements to report a change in the identity of a "responsible party" for entities that have an employer identification number ("EIN").  Effective as of January 1, 2014, an entity (e.g.,a plan sponsor, plan administrator or plan trust) must report a change in its "responsible party" by completing and filing IRS Form 8822-B with the IRS within 60 days of the change.  Background.  As a general rule, every entity must obtain an EIN for tax filing and reporting purposes. To obtain an EIN, the IRS requires an entity to complete Form SS-4, "Application for Employer Identification Number." Before January 2010, the name and identifying number (i.e., social security number) of the principal officer, general partner, grantor, owner or settlor was reported on Form SS-4.  Effective January 2010, the IRS revised Form SS-4 to instead report the name and social security number of the entity's "responsible party."  IRS, however, believed that, in many circumstances, the individual originally reported on Form SS-4 was either acting on behalf of the entity or no longer in that position.    Who is a "Responsible Party"?  Form 8822-B instructions define "responsible party" as the "person who has a level of control over, or entitlement to, the funds or assets in the entity that as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets."    In the context of retirement plans, the IRS has published guidance as to whom is a "responsible party."  (See Issue 2013-8 of Employee Plans News.)  According to the IRS, a responsible party for retirement plans "is the person who has a level of control, directly or indirectly, over the funds or assets in the retirement plan."  For benefit plans where the entity that serves as the plan administrator is not the plan sponsor, such entity will have its own EIN.  Consequently, in cases where the plan administrator's "responsible party" has changed, a separate Form 8822-B must be filed.               Penalty for Failing to File Form 8822-B.  Currently, there is no penalty for failing to file a Form 8822-B.  However, entities that fail to provide the IRS with a current mailing address or the identity of its responsible party run the risk of not receiving a notice of deficiency or a notice of demand for tax, meaning that penalties and interest will continue to accrue on any tax deficiency.    Action Steps.  Going forward, plan sponsors and plan administrators are advised to report changes in their "responsible party" by filing Form 8822-B with the IRS within 60 of such change.  Currently, Form 8822-B cannot be e-filed.

Society of Actuaries Releases New Mortality Tables

Defined benefit pension plan sponsors use mortality tables for a variety of purposes, including calculating lump sum distributions and minimum contribution requirements.  The IRS mandates the mortality tables that plan sponsors must use when calculating lump sum distributions and minimum contributions obligations. 

Currently, plan sponsors must use the RP-2000 mortality table to determine present value lump sum conversions and minimum contributions.  The Society of Actuaries (the "SOA") published RP-2000, and it is based on data from over 20 years ago.  Given that the RP-2000 data is stale and that the Pension Protection Act of 2006 mandated a review of IRS-required mortality tables every ten years, the SOA, in 2009, began a study to update underlying mortality assumptions.

In February 2014, the SOA released "exposure drafts" of a new mortality table, RP-2014, and a new mortality improvement scale.  RP-2014 contained a new table for disabled life mortality, and separate tables for white collar and blue collar participants.  As expected, RP-2014 reflects longer life expectancies.  The SOA has asked the actuarial community to submit comments on RP-2014 on or before May 31, 2014.  After reviewing these comments, the SOA will issue a final report containing the RP-2014 and the new mortality improvement scale.  

IRS Notice 2013-49 contains the mortality tables that plan sponsors must use for the 2014 and 2015 valuation years.  These tables are predicated on RP-2000.  IRS is expected to require plan sponsors to begin using RP-2014 for the 2016 valuation year.  For accounting purposes, however, plan sponsors may elect to adopt RP-2014 earlier to determine pension liabilities.

While the final content of RP-2014 is unknown,the following is certain: in application, RP-2014, which reflects longer life expectancies, will produce larger pension liabilities and increase the cost of lump sum distributions and plan contribution obligations.  RP-2014 will also affect defined contribution plans, as annuities purchased with account balances will cost more and provide lower monthly benefits. 

In view of the imminent release of RP-2014, plan sponsors are advised to consult with their ERISA counsel and actuaries to formulate strategies to manage the increased pension plan liabilities and contribution obligations that will result.

Compliance Refresher: Fee Disclosure Deadlines

Effective as of July 2012, retirement plan service providers must provide plan sponsors with a disclosure regarding the compensation they receive for the services provided (i.e., the ERISA 408(b)(2) disclosure).  In addition, effective as of August 2012, employers that sponsor retirement plans with participant-directed accounts must disclose detailed investment-related information to participants using a comparative chart format (i.e., the ERISA 404(a)(5) disclosure).

Retirement plan sponsors and service providers are advised to review the timing requirements for these mandatory disclosures and determine whether any information requirements have changed since the original disclosures.  This article will review the distribution deadlines for each disclosure and if applicable, any transitional relief provided by the Department of Labor ("DOL").

408(b)(2) Disclosures.  The service provider fee disclosure mandate under the DOL's 408(b)(2) regulations became effective on July 1, 2012.  Accordingly, covered service providers must have provided such fee disclosures to all existing plan sponsor clients by July 1, 2012.  Service providers must provide updated fee disclosures to plan sponsors following a change in fee information as soon as practicable, but in no event later than 60 days after the change.  

Barring a change in fee information, service providers need only furnish updated fee disclosures to plan sponsors when the underlying service agreement is extended or renewed.  Where a service provider enters into a new service arrangement with a plan sponsor, it must provide the mandatory fee disclosure "reasonably in advance" of the commencement of services. 

It should be noted that recordkeepers are subject to additional 408(b)(2) disclosure rules.  In addition to providing a 408(b)(2) fee disclosure reasonably in advance of being hired, recordkeepers must also provide fee and expense information concerning the plan's investment options.  Instead of the 60-day deadline for providing updated disclosures after a change in fee information occurs, however, recordkeepers need only provide updated disclosures on an annual basis. 

404(a)(5) Disclosures.  The DOL's 404(a)(5) regulations require plan sponsors to distribute, on an annual basis, a comparative chart to participants that summarizes the plan's investment options as well as provide, on a quarterly basis, certain fee disclosures to participants. Plan sponsors must furnish the comparative charts on an annual basis, meaning at least once in any 12-month period.  

Plan sponsors of calendar year plans were required to furnish the first comparative chart by August 30, 2012, and the first quarterly fee disclosure by November 14, 2012.  Thus, if the 2012 Comparative Chart was provided to participants in August 2012, the next comparative chart (the "2013 Comparative Chart") need not have been provided until August 2013. 

DOL recently issued regulatory relief that affects the timing of plan sponsors' 404(a)(5) disclosures.  In Field Assistance Bulletin 2013-02 ("FAB 2013-12"), DOL provided plan sponsors with an additional six-month period for furnishing the 2013 Comparative Chart.  Accordingly, a plan sponsor that provided the 2012 Comparative Chart in August 2012 had until February 2014 to provide the 2013 Comparative Chart.  Many plan sponsors used this regulatory relief to "reset" the annual timing for the Comparative Chart so as to align its distribution with other participant disclosures and to also allow the 2013 Comparative Chart to reflect performance data for the full 2013 calendar year. 

Plan sponsors that, prior to the issuance of FAB 2013-02, had already taken steps or incurred administrative costs to furnish the 2013 Comparative Chart by the original deadline (i.e.,August 2013) were provided a similar six-month grace period for furnishing the next comparative chart (the "2014 Comparative Chart").  While plan sponsors must furnish comparative charts to participants on at least an annual basis, there is no restriction against plan sponsors distributing comparative charts on a more frequent basis.

Re-Cap of Fee Disclosure Deadlines.  The 408(b)(2) regulations require covered service providers to furnish disclosures to plan sponsors in the following four instances:  

1.  when the service provider is first hired,

2.  when a service provider has changes or corrections to its previous disclosures,

3.  when a service provider's contract or arrangement is extended or renewed, and

4. when the plan's record keeper has updated fee and expense information for the plan's investment options (but only on an annual basis).

With respect to the ERISA 404(a)(5) disclosures, the DOL (pursuant to FAB 2013-02) provided plan sponsors with a one-time additional six-month grace period for furnishing the annual comparative charts so that  distribution efforts could be coordinated with other participant disclosures.  Indeed, many plans have already availed themselves of this six-month grace period when distributing the 2013 Comparative Chart.  Plan sponsors that were in the process of furnishing the 2013 Comparative Chart when FAB 2013-12 was released have the opportunity delay furnishing the 2014 Comparative Chart until as late as February 2015.

IRS Issues New Guidance on Windsor's Application to Tax Qualified Retirement Plans

The IRS has issued additional guidance (i.e., Notice 2014-19) regarding the impact that the U.S. Supreme Court's United States v. Windsor decision will have on tax-qualified retirement plans.  In Windsor, the Court upheld a lower court's determination that Section 3 of the Defense of Marriage Act ("DOMA") is unconstitutional.  Section 3 of DOMA defined "marriage," for most federal purposes, as "a legal union between one man and one woman as husband and wife."  It goes on to state that "the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife." Immediately following the Windsor decision, the IRS released guidance that confirmed married same-sex couples would be treated as married for federal tax purposes if the marriage took place in a jurisdiction that legally recognizes same-sex marriages, regardless of where the couple resides.  (See Revenue Ruling 2013-17.)  Notice 2014-19 focuses on retirement plans that are qualified under Section 401(a) of the Internal Revenue Code (the "Code") and it provides guidance, in question and answer format, on the effective date and timing of plan amendments to implement Windsor. Effective Date.  As of June 26, 2013 (i.e., the date of the Windsor decision), qualified retirement plans must reflect the outcome of Windsor.  Between June 26, 2013 and September 16, 2013, qualified plan sponsors may elect to recognize only the same-sex marriages of those participants who reside in states where same-sex marriage is recognized.  Beginning September 16, 2013, qualified retirement plans must recognize all participants' same-sex marriages, regardless of whether the couple resides in a state that recognizes same-sex marriage.    Qualified plan sponsors may elect to recognize same-sex marriage before June 26, 2013, as long as all of the Code's qualification requirements are met.  The IRS has acknowledged that qualified plan sponsors who choose to recognize same-sex marriage before June 26, 2013 may unwittingly trigger requirements that are difficult to implement and create unintended consequences. Plan Amendments.  Qualified retirement plan documents that exclude same-sex spouses from the definition of "spouse" must be amended.  Where a qualified plan's terms are not inconsistent with the outcome of Windsor, a plan amendment is generally not required.  A clarifying amendment, however, may be useful for purposes of plan administration.  If no amendment is made to a qualified plan, it nonetheless must be operated in a manner that reflects the outcome of Windsor. Deadline to Adopt Plan Amendments.  The deadline for qualified plan sponsors to adopt a plan amendment to implement Windsor is the later of (i) December 31, 2014, or (ii) the applicable deadline under Section 5.05 of Rev. Proc. 2007-44.  (Section 5.05 of Rev. Proc. 2007-44 provides that plan sponsors must generally adopt plan amendments by the later of (i) the end of the plan year in which the change is first effective , or (ii) the due date of the employer's tax return for the tax year that includes the date the change is first effective.)  Code Section 436(c) Rule.  In general, under Code Section 436(c), an amendment to a single-employer defined benefit plan that increases plan  liabilities cannot take effect unless either the plan's adjusted funding target attainment percentage is sufficient or the employer makes  additional contributions to the plan, as specified under Section 436(c)(2).  Notice 2014-19 provides the following special rule for single-employer defined benefit pension plans: a qualified plan amendment that serves to implement Windsor and that takes effect on June 26, 2013 will not be treated as an amendment to which Code Section 436(c) applies.  In contrast, Code Section 436(c) does apply to a qualified plan amendment that serves to recognize same-sex marriage and that takes effect before June 26, 2013.  Action Steps for Employers.  Employers are advised to review retirement plan operations to ensure that their plans have been administered consistently with Windsor and correct any errors, if necessary.  Corrections involving the exclusion of same-sex spouses from rights under the plan should be made consistent with the IRS's correction methodology in Rev. Proc. 2013-12, and an IRS filing may be required, depending on the size of the error.    Employers should also notify employees of the changes to the rights of same-sex spouses to employer provided benefits under all benefit plans, including qualified retirement plans.  This may include email or written notifications requesting that same-sex spouses update their personnel records (to include their spouse's information) and re-soliciting beneficiary designations, as required.  Employers should proactively communicate to employees the changes that resulted from Windsor and obtain appropriate documentation for all employees in same-sex marriage as soon as possible.

DOL Proposal Requiring New "Roadmap" Guide for 408(b)(2) Fee Disclosures

On March 11, 2014, the U.S. Department of Labor (the "DOL") issued its long-anticipated proposal concerning a separate roadmap or guide (the "Guide") that would need to be included with a covered service provider's initial fee disclosures (the "Fee Disclosure") required by the final regulations (the "Final Regulation") under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").  The proposal ("Proposal"), which is in the form of an amendment to the Final Regulation, would require a covered service provider to provide a Guide to the responsible plan fiduciary (the "Plan Fiduciary") in certain circumstances in order to ensure that the Fee Disclosure is "evident and easy to find among other information that is provided."  The purpose of the Guide would be to help the Plan Fiduciary identify and find the relevant information contained in a Fee Disclosure that cross-references other documents or exceeds a maximum page length.   

 

The Proposal was foreshadowed in the preamble to the Final Regulation, which indicated that the DOL would be proposing additional guidance that would require covered service providers to furnish a summary or guide to aid Plan Fiduciaries as they reviewed the Fee Disclosures.  The DOL attached to the Final Regulation a sample guide for voluntary use only and reserved a place in the Final Regulation for such requirement in the future.  The wait is now over.  Under its Proposal, the DOL has now decided to require covered service providers to furnish a Guide, rather than a summary, to Plan Fiduciaries under certain circumstances.  The following highlights the key provisions of the Proposal, and our initial observations concerning its impact on the covered service provider community. 

 

Overview of Proposed Amendment.  The Proposal would add a new requirement, mandating that covered service providers furnish a Guide along with the Fee Disclosure if such disclosures are "contained in multiple or lengthy documents."  The covered service provider is the responsible party for providing the Guide, as it is adjudged by the DOL as being the best person to identify the location of what is often highly technical information found in multiple documents or in lengthy disclosures. 

 

Specifically, the Proposal states that the Guide must be provided if the Fee Disclosure (i) is not contained in a single document, or (ii) is contained in a single document that exceeds a specified number of pages.  In other words, the Guide would not be required if the Fee Disclosure were contained within a concise single document.  The DOL has reserved for comment the number of pages that would trigger the Guide requirement for a single-document Fee Disclosure. 

The Guide.  The Proposal contains specific requirements for the format and style of the Guide.  For each required disclosure item in the Fee Disclosure, the Guide must provide both a document and page reference, or some other sufficiently specific locator, such as a section number for a document or an electronic hyperlink that allows the Plan Fiduciary to easily find the Fee Disclosure item.  The DOL has requested comments as to the relative merits of a page reference versus a section reference. 

 

The Proposal does not change the required elements of the Fee Disclosure.  The Guide must disclose the location of the following eight categories:

• The description of services provided to the covered plan;
• The statement concerning services to be provided as a fiduciary under ERISA and/or as a registered investment adviser;
• The description of all direct compensation;
• The description of all indirect compensation;
• The description of compensation that will be paid among related parties;
• The description of any compensation for termination of the contract or arrangement;
• The description of all compensation (and/or a reasonable estimate of the cost to the covered plan) for recordkeeping services;
• For ERISA fiduciaries to investment products or recordkeeping platforms that make investment alternatives available, the description of compensation, annual operating expenses and ongoing expenses (or, if applicable, total annual operating expenses) for each applicable investment product or investment alternative.

The Guide must also identify a person or office, including contact information that the Plan Fiduciary may contact regarding the Fee Disclosures.  The Guide must be furnished as a separate document.

 

Electronic Disclosure.  The Final Regulation allows a covered service provider to furnish Fee Disclosures electronically, including disclosures provided through a website as long as the Fee Disclosure is readily accessible to the Plan Fiduciary and there has been a clear notification on how to access the Fee Disclosure.

 

The Proposal follows suit by allowing the Guide to be provided electronically, but the Guide must do more than merely provide hyperlinks to prospectuses or other documents.  Either a more specific link taking the reader directly to the required information must be furnished, or a page or sufficiently specific locator must be furnished in addition to the electronic hyperlink. 

 

Changes to the Guide.   Any change to the information provided in the Guide must be disclosed at least annually to the Plan Fiduciary.    

 

Effective Date.  The Proposal will be effective 12 months after the publication of a final rule concerning the Guide.   However, as noted below in Open Issues, the DOL is looking for comments and feedback in a number of areas, including the number of pages that would trigger the Guide requirement for a single-document Fee Disclosure.  The DOL has also announced that it will be conducting focus group sessions with fiduciaries to small pension plans after the end of the 90-day comment period, which may potentially extend the date of publication. 

 

Open Issues.  Items for which DOL seeks input and comment include the following:

• The number of pages that would trigger the Guide requirement for a single-document Fee Disclosure;
  • Related considerations for page format, font size, margin requirements that might allow for manipulation of the page length.
• Whether a document/page number or an alternative "sufficiently specific locator" such as a section number, would be the appropriate standard;
  • Should multiple alternatives be allowed, or should the final rule establish a single standard?
• The cost of implementing a specific page number requirement and web-based approaches, and the cost of technological requirements generally;
• Whether the separate document requirement for the Guide is likely to ensure that the Plan Fiduciary understands both the purpose and existence of the Guide;
  • Should the Guide contain specific language such as an introductory statement, or a statement as to its significance if furnished electronically?
• Whether the annual disclosure of changes to the Guide should be replaced by an annual disclosure of the entire Guide;
• Suggestions and data on any aspect of the Guide, including whether the Guide (or any suggested alternative) is feasible, cost-effective, and ultimately beneficial to the Plan Fiduciary; and
• The effective date of the new Guide requirement. 

Anticipated Impact on Service Providers

 

Many broker-dealer firms and record keepers currently use Fee Disclosures that cross-reference multiple documents (e.g., references to prospectuses, disclosures prepared for purposes other than ERISA compliance, or web-site information).  The Guide requirement may require a substantial re-engineering of the ERISA 408(b)(2) disclosure process for affected firms.  Even though the effective date is presumably many months away, the time and expense necessary to reconfigure a firm's disclosure process and to make the necessary technology changes may be significant, especially for larger firms with multiple offices and investment products.  A decision will need to be made in the relatively near future as to whether Fee Disclosures as modified by the proposed Guide requirement should be handled through internal staffing and resources, or outsourced to a third party provider that is capable of preparing the required Fee Disclosures for a fee .

 

The Guide requirement is not expected to have as large an impact on investment adviser firms.  Many registered investment advisers rely on their advisory agreement for purposes of complying with the Fee Disclosure rules.  Certain investment advisers may reference the firm's Form ADV Part 2 for 408(b)(2) fee disclosure purposes, but typically do not cross-reference any other documents.  If the length of their advisory agreements or cross-references to their ADV disclosures were to trigger the Guide requirement, investment adviser firms generally should be able to create any required Guide in consultation with counsel.

 

Final Thoughts.   The Guide is intended to supplement, rather than replace, a covered service provider's Fee Disclosure.  It is designed to serve as a "tool" to be used by the Plan Fiduciary, and the Guide should help Plan Fiduciaries navigate their respective covered service provider's Fee Disclosures.  At the same time, it will bring further attention to and place indirect pressure on the Plan Fiduciary to properly discharge its duty to evaluate the Fee Disclosure, assuming that the Guide achieves its intended purposes. 

 

Notwithstanding the costs and other challenges faced by the different members of the covered service provider community, it is important to remember that the overarching objective of the Guide is to facilitate an informed and thoughtful review of Fee Disclosures, which ultimately inures to the benefit of the plan and its participants.  Given that objective, we may see the Guide adopted by many covered service providers simply as a matter of industry best practices, even before the Proposal is finalized and actually implemented by the DOL. 

 

As the discussion continues among the DOL and the retirement community, we will be providing additional thoughts and insights on this development.