Muddying the DC Waters: A Case for Simplification

Written by: Nick Curabba

We have blogged here in the past about the "DB-ification" of defined contributions plans.  By it we mean simply that as traditional defined benefit plans continue to be phased out of existence, the benefits community is increasingly looking to import some of the best features from those plans to the defined contribution world.  

The insurance industry, for example, is responding with a fervor of innovative product development that will help 401(k) plan participants to efficiently receive a guaranteed lifetime income stream from their account balances.  The mutual fund industry, likewise, has developed a suite of investment products designed to mimic -- at least from a participant's perspective -- professional asset management enjoyed by defined benefit plans.  At their most optimistic, consultants, plan professionals, and industry trade associations tout this development as a perfect solution to the apparent demise of defined benefit plans. 

Amid all this happy talk, Sherwin Kaplan of Thelen Reid Brown Raysman & Steiner last week in BNA's Pension and Benefits Blog put his finger on a troubling aspect of the new movement in defined contribution plans.  Along with importing some of the best features of the DB plans, might we also be importing the complexity and cost that ultimately led to the demise of DB plans in the first place?  Read the whole blog piece here. 

Many of us who have been engaged in the fee disclosure battles could hardly agree more with Mr. Kaplan.  The real danger to the continued enhancement of defined contribution plans, and to the voluntary nature of all workplace plans, is not that a handful of bad actors will cause some participants to suffer losses.  That is unfortunately going to happen regardless of the regulatory scheme in place.  The more pernicious result will be overreaction on the part of regulators that will drive employers away from voluntarily offering benefit plans at all. 

The concern about over-regulation is not a new one.  In fact, it is often times overused to the point of being ineffectual.  Mr. Kaplan's thoughtful piece reminded us, however, that benefit plan complexity is not exclusively the result of government intervention, but from a competitive marketplace of advisers and consultants.  To the employer, of course, the difference hardly matters.  More complexity comes at a price, and at some price the cost of sponsoring a plan will outweigh the benefits.  The real "losers" here are workers who may as a result have no workplace plan at all.

House Committee Would Require Greater 401(k) Disclosure

Written by: Nick Curabba

The House Committee on Education and Labor this week favorably reported expansive fee disclosure legislation sponsored by Chairman George Miller (D-CA).  The bill that survived the Committee markup was an amended version of Chairman Miller's original 401(k) Fair Disclosure for Retirement Security Act (H.R.3185), and would, among other things, require disclosures from plan service providers to plan administrators and from administrators to participants. The Committee action is the latest move in a ongoing trend among regulators and lawmakers to focus on 401(k) plan fees and disclosure. 

As we have blogged about already, for instance, the Department of Labor is currently in the middle of a three-phase regulatory project focusing on fee disclosure, the SEC has proposed new mutual fund prospectus requirements, and the federal courts are beginning to rule on the first wave of fee disclosure lawsuits.  The Miller bill -- even the scaled back version that the Committee approved -- would go further than any of the other measures to beef up the type and amount of information that would be required to flow between parties in a 401(k) plan. 

The new bill, while still expansive, was significantly moderated from the original version.  In the area of service provider disclosures, for instance, the original bill would have required bundled service providers to break down component service charges into 13 separate categories.  The revised bill requires charges to be separated into three primary buckets, with a fourth catchall category to be defined in greater detail by the Department of Labor.  Disclosure requirements to plan participants remain essentially unchanged from the original version of the bill, although the number of data points required to be shared with participants was reduced.

The modified bill also retained a controversial provision from the original that would require all individual account plans to include a passively-managed index equity fund as one investment alternative in the plan.  Most -- if not all -- Republican members of the Committee had objected to this provision, as had the plan sponsor community.  Somewhat surprisingly, perhaps, was the level of Democratic defection on this point.  During the Committee markup, several Democrats expressed reservations about supporting an index fund mandate, including Rep. Rob Andrews (D-NJ), who chairs the Health, Education, Labor, and Pensions subcommittee and who has established himself as a leader on employee benefit issues.

Rep. Andrews, in fact, offered an amendment to the Chairman's modified bill that would remove the express mandate for an index fund.  His amendment, which was adopted by the Committee, instead amends ERISA sec. 404(c) to require an index fund as a condition of meeting the requirements for a limited fiduciary liability safe harbor.  Republicans questioned whether Rep. Andrews's amendment was simply replacing a de jure requirement with a de facto one, since most plan sponsors will wish to retain 404(c) protection.  That point aside, the Andrews amendment carried the support of the Committee's Democrats -- including Chairman Miller -- and was added to the bill.

The future of H.R. 3185 is somewhat unclear.  Although Chairman Miller has said he plans to push for full House consideration of the measure this year, there is a likelihood that the House Ways and Means Committee will wish to exert its independent jurisdiction over retirement plans and consider its own legislation.  Chairman Miller said during the hearing that his bill has been drafted exclusively within Title I of ERISA to avoid dual Committee referral, but also acknowledged that Ways and Means Chairman Charles Rangel (D-NY) has indicated interest in drafting legislation.  If the tax writing Committee decides to move forward, the House will likely have a difficult time passing a bill this year, which is already shortened due to the Presidential election. 

More information about H.R.3185 is available on the Committee's website.

House Set to Pass Taxpayer Assistance Bill with Benefits-Related Provisions

Written by: Nick Curabba

The House of Representatives today has scheduled a vote on the Taxpayer Assistance and Simplification Act of 2008 (HR 5719).  At least two of the provisions of the bill may be of interest to readers of this blog. 

Section 12 of the bill would allow individuals to recontribute to an IRA amounts that were wrongfully levied against the account.  Under present law, even if the IRS is found to have wrongfully levied against an IRA and ordered to return the money to the taxpayer, the amounts taken from an IRA may not be able to be replaced because of contributions limits.  The provision in HR 5719 will create an exception to the IRA annual limits for amounts improperly levied to be replaced.  The IRS is also required to pay interest on any wrongfully levied amount that it must return.

Section 17 of the bill would require greater substantiation be provided by owners of health savings accounts (HSAs) prior to disbursements.  The bill uses the substantiation standard that is applied to flexible spending arrangements, and will subject any unsubstantiated distributions to income tax and a 10 percent penalty tax.  The provision reflects the general antipathy – if not outright hostility – House Democrats have for HSAs.  Rep. Pete Stark (D-CA), who chairs the Ways and Means Subcommittee on Health, has been quoted as referring to HSAs as a "new billion dollar shelter for the wealthy" and is clearly not going out of his way to encourage their growth. 

The business and benefits provider communities will likely weigh in to oppose this provision, which will generally make it more expensive for trustees and custodians of HSAs to administer the arrangements.  If the bill passes the House (which is likely), however, the substantiation provision will likely be included. Not only is it backed on policy grounds by senior Democratic tax writers, like Stark and Committee Chair Charlie Rangel (D-NY), it also is projected to raise $308 million is additional tax revenues over 10 years.  In the current budgetary framework Congress is working under, a "revenue raiser" like this is gold, making it very difficult to dislodge the provision from the bill.

Even if it passes the House, however, enactment this year seems doubtful.  The Senate has not yet moved on a companion bill, and the White House has registered its "strong opposition" to HR 5719 in a Statement of Administration Position issued to the House Rules Committee yesterday.  The SAP indicated the President would likely veto the bill if it arrived at his desk.

DOL Weighs in on Fee Disclosure

Written by: Nick Curabba

With all the recent attention to fee disclosure regulations and legislation, it may have been tempting to forget about all those law suits currently pending against plan sponsors and service providers.  After an initial flurry of activity, many of those cases have settled into discovery mode, where they will skip along under the radar for several months before any notable developments. 

One exception is Hecker v. John Deere, currently before the 7th Circuit on appeal from the Western District of Wisconsin.

The case is notable not only for its speed in getting to an appellate review, but because is marks the debut of the Department of Labor's involvement as unofficial litigant in these fee disclosure cases.  The litigating arm of the DOL, the Office of the Solicitor, filed an amicus brief with the 7^th Circuit last month arguing, among other things, that the district court was wrong to conclude that ERISA's statutory provisions exhaustively enumerate the information fiduciaries must disclose to participants.  Rather, depending on the circumstances, the Department argued that ERISA's general fiduciary obligations of prudence and loyalty may require that additional information be provided to participants and their beneficiaries.  The Department's brief noted that a fiduciaries duties of prudence and loyalty "forbid fiduciaries from misleading plan participants about their plans and can, in certain circumstances, require fiduciaries to disclose information that participants need to know to exercise their rights under the or protect their interests in the plan."

Apart from that somewhat expected position, the Department's brief is exceptional in its restrained and measured tone.  Rather than galloping into the fee disclosure fray fully supporting plaintiff's arguments, the Department pointedly took issue with some of the primary assertions in the complaint.  Plan service and investment providers will likely find much to like about the Department's brief, but one passage to love is its flat rejection of the argument that revenue sharing payments are always made from plan assets.  Just as the Department signaled in the preamble to the final Form 5500 revisions, it asserted again in the Hecker amicus that the receipt of revenue sharing payments does not confer fiduciary status on the recipient because the "sums paid do not constitute plan assets."

We suspect this will not be the last utterance by the Department's litigators in fee disclosure cases. But with a start like this, more from the Department might actually be a good thing.

Distributing 403(b) Annuities, Part II:

The 403(b) Plan Distributed Annuity

Written by: Bob Toth

As we had noted in a previous blog on this issue, the new 403(b) regulations permit the distribution of a "fully paid individual insurance annuity contract," as a distribution option upon the termination of a 403(b) plan.  We envision this as a particularly useful option in plans which are funded with individually owned annuity contracts, contracts over which the employer has little-if any- control. It gives the employer the ability to relinquish all of its obligations related to these pesky sorts of arrangements without having to actually force the distribution of funds from its terminating 403(b) plan. The regulations are silent, however, on just how these "fully paid individual insurance annuity contracts" should be treated in the absence of an employer. We had also noted in our blog that there is a useful analogy in the 401(a) world, that being the "qualified plan distributed annuity."

Bob Architect, one of the principal drafters of the 403(b) regulations at the Service, addressed the issue on a 403(b) panel I moderated (which also featured Cheryl Press) last Thursday at the IRS/ASPPA Great Lakes Benefits Conference in Chicago. Bob mentioned that the model for treating these contracts should be, indeed, the qualified plan distributed annuity.

This is a very helpful suggestion, as it now gives us a framework within which to start the conversation of what needs to be done to make this new creature work.  Under these sorts of annuities (do we dare give them an acronym, the "QPDA"?), the insurance company steps into the role of the plan administrator, and other qualified funds from other plans and IRAs amounts can technically be rolled into and out of them like IRAs.

They are NOT, however, IRAs, which means that loans can still be taken from them, and IRA reporting need not be done. Nor, for that matter, do Form 5500s need to be done.

So now there are a host of questions that can be really focused upon, as the 403(b) QPDA actually has no existence in either the statute or regulations. One of the key questions unique to the 403(b) world involves the individual 403(b) custodial account: is it to be treated as a QPDA, even though it is not an annuity contract?

This may be the opportunity to address the unanswered questions for the 401(a) QPDA, as well as the 403(b) QPDA, as there remain many of them. The 403(b) issues, however, are pressing because of their immediacy.

NAIC Weighs in on MetLife v Glenn

Written by: Nick Curabba

Hat Tip to Roy Harmon at the Health Law Blog for this interesting development in the MetLife v. Glenn case (about which we have blogged already).  It appears that the National Association of Insurance Commissioner (NAIC) has decided to weigh in on the upcoming MetLife v. Glenn case pending before the Supreme Court. 

A link to the NAIC brief is here. 

As the organization responsible for representing the interests of state insurance regulators, you can be sure the NAIC argues strenuously for the Supremes to rule in favor of a strong conflict of interest standard when an insurance company both acts as a claims administrator and benefit payor. Mr. Harman quotes Montana state auditor John Morrison as saying:

Our position is that insurance companies evaluating claims that they will have to pay always have a conflict of interest . . . Their denials definitely should not be given more weight than the evidence of workers and their employers that claims should be paid. 

Among other things, the NAIC brief proposes one way to deal with the conflict is to prohibit the use of insurance discretionary clauses all together, a position they have made clear with the formulation of the Discretionary Clause Model Act.  It remains to be seen how much deference the Court will accord the NAIC, but we think their brief makes arguments that will be hard to ignore completely.