Tag Archives: 401(k)

The Trouble with 401(k) Investment Policies

Contributed by Rebecca Dobbs Bush, September 15, 2017

If I had a dollar for every time this conversation occurred…

Lawyer: Do you have a copy of your investment policy?

                Client: Who would have been the one to write that?  Us? Our broker/advisor?

Or, this one…

Lawyer: Is your investment advisor serving as a fiduciary to your plan?

                Client: What does that mean? How would I determine that?

17800977 - an ornate clock with the words time to invest on its faceThe most common area in which 401(k) plans are being scrutinized these days is in their selection and design of investment offerings. While participants often get to direct how their funds are invested, that direction is limited to only those investment offerings that an employer/sponsor makes available as part of the 401(k) plan.

Employers typically rely on investment advisors to help design the options available to participants. In some cases, options are limited depending on the total dollars invested in the plan. In many cases, the investment advisor provides the employer with a model investment selection policy to customize and adopt.

While a model policy is a helpful starting place, in many cases the employer, not quite sure what to do with it, never customizes the model policy and instead sticks it away in a file. The policy is then often forgotten and not reviewed or even referenced each time investment offerings are scrutinized. It is impossible to ensure the selection and design of the investment offerings is in line with the policy if the policy has been completely forgotten.

Every employer that offers a 401(k) plan should ask themselves the following:

  1. What fiduciary status does the plan’s investment advisor maintain? (i.e., who really has the final say on investment option design and selection for the plan?); and
  2. What is our 401(k) investment policy and what are we doing to make sure it’s understood and being followed by decision-makers for the plan?

An employer that can’t answer these questions is not only vulnerable to potential litigation, but also risks the potential of not maximizing the invested assets of all participants.

In most cases with a 401(k) plan, an employer is supposed to serve as a trusted fiduciary maintaining a multi-million dollar investment portfolio on behalf of their employees.  With that much at stake, an employer needs to make sure it is selecting and monitoring investments, along with a skilled investment advisor, carefully and diligently.

DOL’s Final Fiduciary Rule – What Does It Mean for Your 401(k)?

By: Rebecca Dobbs Bush

Every employer offering a 401(k) plan is faced with the decision about what investment options to make available to participants through their plan. Investment options carry different risks as well as different costs. The amount of total assets in a 401(k) plan can affect the variety of investment options an employer can make available to participants. Typically, a greater variety is available to larger plans. Most employer/plan sponsors aim to provide a diverse offering in order to allow participants a wide variety of options in directing their own investments. In designing available investment options, a plan sponsor generally relies on a third-party advisor. Those advisors may or may not maintain fiduciary status in regards to the 401(k) plan. Where an advisor does not maintain fiduciary status, an employer is ultimately the party responsible for selection and monitoring of available investment options.

401 KThe final rule issued by the DOL on April 8, 2016 aims to increase the level of responsibility for every third-party advisor to a 401(k) plan. Many advisors were typically held to a weaker “suitability” standard, met by recommending products that meet a client’s general needs and risk tolerance even where those same products may result in greater rewards for the advisor than competing lower-fee investments would. As a result of the final rule, those providing investment advice to retirement plan sponsors and participants now need to meet a “best interests” standard, meaning they must only offer advice in the best interests of plan participants and beneficiaries and must disclose any potential conflicts of interest.

So what should an employer that sponsors a 401(k) plan do in light of the DOL’s final rule? First, every plan sponsor should clarify the status of their current advisor. Is that advisor a registered investment advisor? Is that advisor a fiduciary to the 401(k) plan? Once the answers to those questions are confirmed, plan sponsors should be prepared for receiving and reviewing more disclosures from third-party advisors and lengthier service contracts.

Does Tibble Really Cause Trouble for Employers with 401(k) Plans?

Contributed by Rebecca Dobbs Bush

The articles claiming the U.S. Supreme Court decision in Tibble v. Edison International are plentiful.  Each one seems to claim with a great sense of urgency that a new increased liability is now imposed on employers.  If you read enough of them, the sky seems to be falling on all those who operate and administer 401(k) plans.  In reality, most of these articles appear to be quoting language from the decision completely out of context.  Where an employer has been advised properly, Tibble should not require any change in the administration of an employer’s 401(k) plan.

In Tibble, the Supreme Court basically made a decision about the statute of limitations and how it should be applied in the context of a lawsuit relating to 401(k) plan administration brought under ERISA.  The Supreme Court reviewed whether a “continuing duty” tolled the participants’ lawsuit (contrary to what the lower courts had determined).  In the end, the Supreme Court decided that a lawsuit filed in 2007 criticizing mutual funds selected back in 1999 (more than 6 years ago), could go forward.  Essentially, the lawsuit could go forward based on the theory that the employer didn’t just act when it selected the mutual funds, the employer also acted each time a decision was made to maintain that selection.

In its fairly brief written opinion, the Supreme Court stated absolutely nothing about what the scope of an employer’s “continuing duty” was.  In fact, the Court was pretty clear that their decision did not speak to that issue:  “The parties disagree, however, with respect to the scope of that responsibility.  Did it require a review of the contested mutual funds here, and if so, just what kind of review did it require?”  The Court went on to state, “We express no view on the scope of respondents’ fiduciary duty in this case.  We remand for the Ninth Circuit to consider petitioner’s claims that respondents breached their duties within the relevant 6-year period under §1113, recognizing the importance of analogous trust law.”

Common sense should have dictated to most employers that they cannot simply set up a 401(k) plan and then stick their head in the sand for the rest of the plan’s existence.  In addition, experienced ERISA counsel and 401(k) plan advisors have long been advising employers of this continuing duty and advocating for periodic review.

In the end, as Tibble does not provide any insight at all on the appropriate scope of the periodic review each employer should undertake, the Tibble decision is not going to be a reason or basis for diligent employers with 401(k) plans to change existing practices.  That said, if an employer hasn’t yet been advised to undertake periodic review of their 401(k) plan, that employer may want to consider seeking out a different source for advice on the administration of their plan.

401(k) Contribution Limits Increased for 2013

Contributed by Rebecca Dobbs

This October, the IRS announced cost of living adjustments increasing 401(k) contribution limits.  The new limits for 2013 are as follows:                             

  2013 2012
Maximum Elective Deferral By Employee                              $17,500 $17,000
Catch-Up Contributions (age 50 and over) $5,500 $5,500
Defined Contribution Maximum Deferral (employer/employee combined) $51,000 $50,000
Employee Annual Compensation Limit for Calculating Contributions $255,000        $250,000

As many employees base their deferral percentages on the maximum elective deferral allotted by the IRS, employers should advise employees of their ability to raise this percentage come 2013. 

For those employers with SIMPLE plans (savings incentive match plan for employees of small employers), permitted employee deferrals increase in 2013 from $11,500 to $12,000.

If participation in your plan is lacking, the raised limits on contribution deferrals also provides a reason for service provider(s) to come in and conduct educational meetings designed to help employees understand the value of a 401(k) plan.  Even if your company is not in a position to provide a match, the value of earning compounded interest on employee contributions cannot be emphasized to participants enough.

New Guidance Published on Required 401(k) Fee Disclosures

Contributed By: Rebecca L. Dobbs
 
We have previously written on the final regulations published on October 20, 2010 by the Department of Labor (DOL) with regard to the requirements of plan administrators to disclose plan and investment-related info, including fee and expense info, to participants.  We wrote on the subject again after additional final regulations were published on February 3, 2012 by the DOL with regard to disclosure requirements for covered service providers.
 
Now, the subject rears its head again as the DOL recently published further guidance on May 7, 2012 in the form of a Field Assistance Bulletin. Some highlights of the bulletin include the following:

  • Plan Administrators can furnish the information in one single document. The DOL has indicated it does not intend for participants to receive unnecessary duplicative information.
  • Although easier said then done, the disclosures should be specific to describe monetary amounts, formulas, percentage of assets or per capita charges – yet be written in a manner calculated to be understood by the average participant.  To assist further, the DOL provides several examples of language which it would view as consistent with these principles.
  • While it seems obvious, if administrative expenses are paid by forfeiture funds and/or the general assets of the plan sponsor (and there is no intent in the foreseeable future to charge participants), the administrative expenses do not need to be disclosed to participants.
  • But, be careful.  If administrative expenses are paid from revenue sharing received by the plan (and even though no fees or expenses are charged to individual accounts), explanation of the revenue sharing must be provided to participants.
  • Where fees and expenses are only associated with select investments, plan disclosures need to be made to all participants and not just those who have elected the specific investments.
  • Although the final rule requires participants be provided with a glossary of terms, the DOL will not be publishing a sample glossary for plan sponsors/plan administrators to use.
  • The disclosures do not have to be stand-alone documents.  They can be part of the SPD or included in participant statements as long as they are furnished in compliance with the applicable timing requirements in the regulations.

Remember, covered service providers are required to make disclosures by July 1, 2012 and employers/plan sponsors are required to make disclosures by August 30, 2012. The DOL indicates, however, that they recognize there may not be enough time to change current systems already in place. They also indicate the significance of the disclosure rules is too great to delay the deadlines for compliance yet another time. In turn, the DOL has made it clear in this newly published guidance that for enforcement purposes, they will take into account whether there has been good faith compliance based on a reasonable interpretation of the new regulations.  In such a case, enforcement actions should generally not be necessary.

DOL Delays Deadline for 401(k) Fee Disclosures

Contributed by Rebecca Dobbs

Almost two years ago, the Department of Labor (DOL) published an interim final rule outlining requirements forLabor and Employment Law News and Tips various types of service providers to disclose fees to plan sponsors/employers.  The DOL also announced additional regulations requiring employers to, in turn, notify plan participants of various fees and expenses being charged to the plan.  Due to a lack of clarity and confusion on the two sets of new disclosures, the DOL extended the implementation deadline pending publication of a final regulation.  This final regulation was recently published on February 3, 2012.

The new deadline for the disclosures required by 401(k) service providers to plan sponsors/employers is now July 1, 2012.  From there, employers will have 60-days (or until August 30, 2012) to comply with the disclosures they must, in turn, provide to employees.  A fact sheet on this final regulation can be found on the DOL’s web site at: http://www.dol.gov/ebsa/newsroom/fs408b2finalreg.html.

It remains to be seen whether the additional disclosures will increase 401(k) litigation or make it easier for participants to bring such litigation.  In theory, additional disclosures are generally a good thing in that they will assist participants in making educated investment choices and assist employers with monitoring plan fees and expenses.  However, a plan sponsor/employer must always be conscious of potential challenges to expenses and fees charged to a plan and prepare, for example, to be able to demonstrate a reason why it may have chosen a higher cost fund over a lower cost fund as an investment option in the plan.