Retirement Plans and the Troubled Asset Relief Program

Written by Both Toth and Nick Curabba

Set against the dramatic House vote and ensuing market plunge yesterday, it might be easy to overlook the possible direct implications the Emergency Economic Stabilization Act might have had (and still may have) on qualified plans. 

The centerpiece of the Administration's proposal to rescue the financial services industry was to be the creation of a Troubled Assets Relief Program, or TARP.  Under TARP, the Secretary of Treasury was to be given broad discretion to purchase troubled assets from banks and other entities that hold what has come to be known as "toxic paper."  As defined in the legislation, the Treasury Secretary was authorized to buy from financial institutions any "residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability."  Other types of instruments could later be defined as "troubled" by the Treasury Secretary after consultation with the Fed Chairman.

Ok, first question: Why should plan sponsors and service providers care about legislation targeting financial institutions?  The term "financial institution" is defined in the bill to include banks, insurance companies, savings associations, and broker/dealers that hold troubled assets.  The list of financial institutions is non-exhaustive, however, and the House drafters were careful to say other similar types of entities could fall into the definition.  At first blush, though, even with a broad definition of "financial institution" it seems like a stretch to put qualified retirement plans in the same category as a bank or insurance company.  But another section of the bill would have directed the Treasury Secretary to do just that.

When considering which troubled assets should be purchased, the Treasury Secretary would have been required to consider, among other things, purchasing troubled assets held by or on behalf of qualified pension plans, section 457 plans, and section 403(b) plans.  So, if this bill had been adopted, any plan out there holding a troubled asset would have had to consider participating in TARP.  Not surprisingly, the bill contains no guidance or relief to plan fiduciaries on that decision, perhaps inviting by silence stronger regulatory oversight from the Treasury or Department of Labor on how pension plans will participate in the program.

Second question: Why should we care about a bill that is defeated?  Clearly the final rules are not yet fleshed out, and we do not know what the new proposals will look like or even if there will be a final package. But the original effort gave us some clues as to what some in the Administration and Congress are thinking.  There is no indication that the authority to buy troubled assets from retirement plans was a particularly controversial component of TARP. If Congressional negotiators pick up the fallen bill and work around the edges to attract an additional dozen or so votes needed for passage, the authority to purchase plan assets may survive. 

In anticipation of that possibility, we've started to think about just how it would work. It will be interesting to see what sort of product issues arise involving insurance company separate accounts and general accounts, as well as collective trusts. How will mutual funds be affected? What prohibited transaction rules will be involved, if any?  What kinds of disclosures to participants will be required, and how will it impact the new proposed Department of Labor regulations?  Will a fiduciary be able to rely on the Treasury Secretary's valuation of the troubled asset without being exposed to fiduciary liability for selling a plan asset for too little?  And something odd … it seems that those self-directed brokerage accounts in 401(k) plans will be covered as well.

As always seems to be the case with complex legislation, an initial review leads us to believe that there is more complexity here than meets the eye.