Viewpoint: How to Minimize the Risk of Retirement Plan Litigation

Many employers have paid millions to settle lawsuits brought to them based on their excessive fees in their retirement plans. It's the employer's responsibility to ensure that retirement plans are created for the most benefit for those who partake in it. Read this blog post to learn more.

What do Estee Lauder and Costco have in common? Both are defending themselves against lawsuits alleging mismanagement of 401(k) accounts, as retirement plan litigation under the Employee Retirement Income Security Act (ERISA) proliferates.

LinkedIn was added to the list in August, when a class-action lawsuit was filed alleging the firm mismanaged its 401(k) plan. And, on Sept. 18, a federal judge rejected a petition by AutoZone Inc. to dismiss allegations of ERISA violations filed by 401(k) plan participants.

In recent years, employers as different as Princeton University and WalMart have paid millions of dollars to settle lawsuits brought by employees alleging excessive fees in their retirement plans.

At the heart of many of these cases are allegations that employers' retirement plan oversight committees tolerated high fees and poor investment performance. Retirement plan committee members are fiduciaries who, under ERISA, are responsible for ensuring that the plan operates in the best interest of its participants.

Attracting Lawsuits

Companies settling ERISA lawsuits are typically accused of failing to pay adequate attention to the retirement plan, such as by failing to remove or replace poor or overly expensive investment choices and allowing vendors to charge above-market fees. The old adage that an ounce of prevention is worth a pound of cure is relevant here.

Law firms are combing through ERISA plan annual filings to identify worthwhile 401(k) targets, looking for expensive or poorly performing investments and high recordkeeping costs. ERISA complaints now include tables and charts comparing a targeted plan's investment performance and expenses with average or best-available practices, to persuade courts that a trial is in order.

Law firms comb through ERISA plan filings to identify worthwhile targets.

Adopting Best Practices

Plan sponsors can't completely eliminate the risk that they will be sued by current or former plan participants, but companies can minimize the risk by adopting best practices—such as those listed below—for making plan investment and management decisions.


The committee should include interested employees, including representatives of HR, finance, legal and rank-and-file employees. A well-functioning committee has a range of talents and perspectives to help it make effective decisions.

The committee should operate under a written charter, setting out the responsibilities of the committee and its procedural rules for appointing members, holding meetings, voting, and hiring advisors and experts as needed, for example. The charter need not be overly rigid or specific but should be drafted to reflect how the committee will operate.


ERISA is complicated, and committee decisions have direct impacts on employees' retirement income. Committee members must act solely in the interest of plan participants and make decisions as a "prudent expert." Ask vendors to have their top technical experts conduct training, and ensure that the training is tailored to plans of your size.


While having an investment policy statement (IPS) is not generally a requirement for 401(k) plans, it is an important document as it may help show that the committee acted prudently and in the plan's best interests in evaluating investments. The IPS should include specific language describing the process by which investments are selected, monitored and replaced when necessary.

It is not advisable to list the plan's current investments within the IPS, as this list may change over time and the IPS may not always be consistent with the website your participants visit to manage their accounts.


Sponsors of 401(k) plans have spent millions of dollars settling allegations that they had overly expensive funds, in many cases retail-share classes rather than institutionally priced investments.

The expense ratios that 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000, reports the Investment Company Institute, a trade association for financial services firms. In 2000, 401(k) plan participants incurred an average expense ratio of 77 basis points (0.77 percent) for investing in equity mutual funds. By 2019, that figure had fallen to 39 basis points (0.39 percent), which is a 49 percent decline.

For plan sponsors of all sizes, it is imperative to document efforts to maintain the lowest possible investment expenses.


How do your plan's funds compare to similar offerings? There is no shortage of high-performing, low-expense funds to choose from in each investment category. While the retirement committee can't forecast future investment performance, it can determine prudent funds based on their track record.

If investment evaluation isn't your forte, get expert help from an investment adviser that accepts fiduciary responsibility for investment recommendations.


If the menu needs to be revamped, just do it. The small inconvenience of explaining to employees why changes are being made is better than responding to document requests arising from litigation for failing to let go of underperforming funds.


Many mutual funds share a small portion of their expense ratio fees with plan administrative firms, which may reduce the costs that plan sponsors pay administrative firms for services such as recordkeeping of participants' investments, providing statements and distributing literature. Fund share classes with no revenue-sharing, however, have lower expense ratios and slightly better investment performance.

If revenue-sharing is in place for any fund being offered through the plan, audit it periodically—at least annually—and ensure that it is reducing plan expenses that might otherwise be paid by participants.


All plans should grill their recordkeepers and other vendors on whether they charge the very lowest administrative fees available. When plan sponsors don't pay administrative fees themselves, a best practice is to charge participants a flat recordkeeping fee (perhaps subsidizing small balances) rather than using revenue-sharing funds to pay the recordkeeper a fee based on the percentage of assets in plan accounts.

If plan sponsors engage an investment adviser, it's also preferable to pay them a flat-dollar fee rather than a fee that fluctuates based on plan assets. Advisers should not be thinking about how recommended changes in a fund lineup will affect their pay.

In all circumstances, evaluating fees on a flat-dollar amount or dollars per participant will provide useful comparisons to fees based on a percentage of assets under management in the plan.


Recordkeepers and other vendors negotiate best when they perceive that they may lose you as a customer. As a fiduciary, you and your team need to play hardball at times. Don't worry about hurting the feelings of the vendor's personnel—you're the fiduciary with potential liability, they're not. Benchmark your administrative fees and consider issuing a request for proposal (RFP) for administrative services every few years.

Even though plans may not have changed much, vendors have, and they should be able to lower costs or provide additional services.


Maintaining good records is a must but understand that any and all plan-related documents can wind up in the hands of class-action attorneys. Meeting minutes and e-mails should be carefully written and demonstrate a prudent process, to avoid casting the plan or committee in a bad light.


Vendor contracts should be negotiated, not rubber-stamped. Keep track of promises made in RFP responses and finalist presentations. A vendor's oral promises should be documented within their service agreement. Insist on performance guarantees so your plan will be compensated for any service lapses.


Fiduciaries should not sign away their option to use federal courts to resolve conflicts with vendors. Plan sponsors can always choose to arbitrate a dispute, as vendors prefer this. Just don't sign any contracts agreeing to compulsory arbitration of any and all disputes.


Ensure that hackers don't steal your employees' account balances. Ask recordkeepers about their security practices, experiences in defeating hackers, and resources committed to maintaining strong cybersecurity.

Obtain a written commitment in the service agreement that the vendor will reimburse participants who followed account security guidelines and, through no fault of their own, had their accounts depleted.

Summing Up

There are several things a company can do to protect against 401(k) litigation. Have the retirement plan run by a committee of dedicated, knowledgeable employees. Hire independent expert advisers to help with investments, vendor oversight and training. Make sure that all fees are competitive, using benchmarking and RFPs as needed. Use an objective fund scoring methodology and replace underperforming investments. Document decisions and pay attention to process.

SOURCE: Scott, P. (22 September 2020) "Viewpoint: How to Minimize the Risk of Retirement Plan Litigation" (Web Blog Post). Retrieved from

Retirement accounts at ‘serious risk’ as COVID-19 spurs bankruptcies

The coronavirus pandemic has disrupted many things around the world, let it be the workplace, schools, everyday life habits, and it has even disrupted retirement accounts. In the nine months of COVID-19 hitting businesses, bankruptcies and lawsuits have risen and caused many questions. Read this blog post to learn more.

If there’s one thing clients have always relied on in troubled times, it’s that last bastion of savings, the retirement account — whether it be a 401(k) or an IRA.

But we’re now into the ninth month since COVID-19 hit our shores and nothing can be taken for granted. Business closures, bankruptcies and lawsuits from creditors have soared, calling into question even that formerly unassailable bulwark. That’s why it’s crucial that advisors know which accounts can be protected in bankruptcy and in non-bankruptcy lawsuits — and which cannot.

Make no mistake: Not all possess the same safeguards. Retirement accounts carry a number of different protections. These layers of defense shield IRA owners and company plan participants from bankruptcy and general (non-bankruptcy) creditors. In addition, levels of protection vary widely from state to state. In the current environment with so many small businesses on the brink of closing and struggling employees in limbo, increased bankruptcy filings are placing retirement savings at serious risk, especially when these might be the only funds available for a personal bailout.

ERISA plans: The gold standard
Most employer-sponsored retirement plans, such as 401(k)s, fall under the Employee Retirement Income Security Act of 1974 guidelines and receive creditor protection at the federal level. ERISA offers the gold standard of protection up to an unlimited amount against both bankruptcy and non-bankruptcy general creditor claims.

To illustrate, let’s take the hypothetical example of “Mark,” a successful contractor who flips houses. He has a 401(k) plan set up for himself and the employees of his sole proprietorship. Mark’s current plan balance is $1,500,000.

Recently, however, there was an accident at one of his construction sites, and Mark is being sued personally. Even if Mark loses the lawsuit, the assets in his 401(k) remain protected by ERISA up to an unlimited amount. Additionally, if Mark were to declare bankruptcy, his 401(k) would be off limits to bankruptcy creditors.

Going solo = greater exposure
The same protections do not, however, hold for solo 401(k) plans.

Often, business owners worried about potential lawsuits keep their retirement funds in their so-called solo-K because they believe it to be fully creditor proof, as opposed to an IRA.

Butsolo 401(k) plans are not covered by ERISAand have no creditor (non-bankruptcy) protection under that law. Plan balances will only receive non-bankruptcy creditor protection available under applicable state law.

These plans do, however, receive full bankruptcy protection under the bankruptcy code. This is also the case with other non-ERISA company plans such as SEP and SIMPLE IRAs, non-ERISA 403(b) plans and 457(b) governmental plans.

Bankruptcy and IRAs
Traditional and Roth IRA contributions and earnings are protected from bankruptcy under federal law up to an inflation-adjusted cap — currently $1,362,800.

Is this a sufficient limit?

If the maximum amount was contributed to an IRA each year from 1975 to 2020, there would be $141,500 in contributions — $158,500 if the IRA owner qualified for age 50 catch-up contributions available beginning in 2002. It is unlikely that the earnings, even for those who contributed the maximum each year, would push an IRA balance over $1,362,800.

But what about rollovers from plans to IRAs? Do these dollars count against the $1,362,800 cap?

They do not. Former company plan assets (previously protected by ERISA while in the plan) rolled to an IRA will obtain unlimited bankruptcy protection under the bankruptcy code. As an added bonus, rollovers from SEP and SIMPLE plans also do not count against the $1,362,800 cap.

As an example, let’s conjure up “Sheila,” an attorney with a $2,000,000 balance in her company’s ERISA 401(k) plan and a $700,000 balance in her IRA, which is composed entirely of contributions and earnings.

In April, Sheila retired from her law firm and in May rolled her 401(k) into her IRA. Sheila’s IRA is completely shielded from bankruptcy. The bankruptcy code protects her $2 million 401(k) rollover up to an unlimited amount, and the $1,362,800 cap is enough to cover her original IRA balance.

Note that in this example, Sheila did not need to keep her 401(k) and IRA dollars separate to retain the maximum bankruptcy protections. However, from an administrative standpoint, it could make sense for some individuals to keep rollover assets separate via a conduit IRA to avoid confusion.

Lawsuits and IRAs (non-bankruptcy)
General creditor protection (e.g., when a person wins a judgment in court against the account owner) for IRAs, Roth IRAs and IRA-based company plans like SEPs and SIMPLEs is based on individual state law — and these state-level, non-bankruptcy protections vary widely.

As such, it is important to understand your client’s state coverage, especially before advising the client to roll over ERISA plan dollars into an IRA.

As mentioned, ERISA-covered plans enjoy full bankruptcy and general creditor protection. While all former plan dollars remain protected in bankruptcy by the bankruptcy code after a rollover to an IRA, these same dollars do not retain unlimited general creditor (non-bankruptcy) protection. Assets rolled from an ERISA plan to an IRA will now fall under the applicable state-level protections. These state safeguards may be comparable to ERISA levels, or they may be significantly less so.

For instance, the hypotheticalDr. Kapp” changed employers and is deciding what to do with his $400,000 401(k) plan. His profession exposes him to malpractice lawsuits. If Dr. Kapp rolls the assets from his work plan to an IRA, the $400,000 will be fully protected in bankruptcy. However, he will be limited to the general creditor (non-bankruptcy) protections offered under state law.

Instead, Dr. Kapp elects to roll his former plan assets into the 401(k) plan offered by his new employer. That way, he ensures the $400,000 will retain 100% ERISA protection from both bankruptcy claims and any malpractice judgments against him.

Inherited IRAs and bankruptcy
In a landmark decision released in 2014,Clark v. Rameker, the U.S. Supreme Courtruled unanimously that inherited IRAs are not protected in bankruptcy under federal law.

Since only "retirement funds" are protected under the bankruptcy code, the primary issue before the court was whether an inherited IRA is, in fact, a retirement account. The Supreme Court decided that inherited IRAs do not contain “retirement funds” because:

1. Beneficiaries cannot add money to inherited IRAs;

2. Beneficiaries of inherited IRAs must generally begin to take RMDs, regardless of how far away they are from retirement; and

3. Beneficiaries can take total distributions of their inherited accounts at any time and use the funds for any purpose without a 10% early distribution penalty.

As a result, the favorable bankruptcy protection afforded to such funds under the bankruptcy code does not extend to inherited RIAs.

Bankruptcy timing and rollovers in transit
IRAs and retirement accounts protected under the bankruptcy law are generally shielded only as long as the funds remain qualified. Creditors will sit patiently until retirement dollars are withdrawn to snatch them as unprotected assets.

However, these funds remain safeguardedas long as they are qualified dollars. If funds are withdrawn, the law protects these dollars while they are out of the IRA in transit to the new IRA or retirement account. This protection applies to 60-day rollovers as well as trustee-to-trustee transfers. An individual only receives this protection if bankruptcy paperwork was officially filed while the funds were still in the retirement account. Timing is key in such cases. Funds already out on rollover when bankruptcy is declared lose all protection.

IRAs and the LLC shield
IRAs enjoy specific levels of protection against “outside” claims, i.e., claims brought personally against the IRA owner.

But what happens when a claim is brought against an investment within the IRA? The answer is that such “inside” claims may not only devastate the IRA but could also put an IRA owner’s personal non-qualified assets at risk. Inside claims can be mitigated with the use of a limited liability company (LLC).

The imaginary “Blake” owns a self-directed IRA worth $500,000 that invests entirely in a local Jet Ski rental and watersports company. He did not use an LLC within the IRA to acquire the rental business. Blake has other personal assets worth $1.5 million.

Last summer, a Jet Ski renter had an accident and suffered a catastrophic injury. After almost a year of litigation, the renter won a $2 million judgment against the IRA.

All of Blake’s IRA assets could be reached because the claim arose from activities of the IRA investment. His personal assets could also be at risk. But if Blake’s IRA had been invested in an LLC that subsequently purchased the water sports company within the IRA, the LLC structure would have protected both the IRA assets and Blake’s personal assets against the $2 million judgment.

Be keenly aware of outside vs. inside claims and how to mitigate certain risks with an LLC.

Clear and present danger
Add the ongoing COVID-19 outbreak to our litigious society with the increasingly looming possibility of bankruptcies, all under the watchful eye of SEC Reg BI, and educating clients on available safeguards becomes increasingly vital.

That education holds even more true for financial advisors in whom clients have placed their trust and financial futures. Understanding the levels of bankruptcy and non-bankruptcy protections afforded to both workplace retirement plans and IRAs is now a must to safeguard the dreams of post-work life clients have worked so hard to achieve.

SOURCE: Slott, E. (10 September 2020) "Retirement accounts at ‘serious risk’ as COVID-19 spurs bankruptcies" (Web Blog Post). Retrieved from

4 best practices for implementing a gamification-based compliance training system

Many employees may dislike and even disengage when their employer mentions implementing training sessions. Continue reading to learn how implementing a gamification-based training system can help improve employee engagement.

For most employees, compliance training is the Brussels sprouts on the kid’s plate of working life. Everyone knows it’s good for you — one mistake could lead to violations, accidents, reputation issues and maybe a not-so-friendly visit from regulatory body officials — but most workers turn up their noses and disengage when it’s time to dig in.

Considering that merely a third of American workers report feeling engaged at work as it stands, anything that makes matters worse is dangerous. Why risk inflaming indifference — not to mention spending money for on-site instructors — with dull-as-dry-toast workshops?

A far better bet is to embrace technology and go virtual. Of course, online-based compliance training won’t guarantee heightened participation or enthusiasm unless they have one specific aspect: gamification.

Gaming elements can turn any virtual compliance training learning management system (LMS) into an immersive experience. ELearning compliance training participants can enjoy customization and flexibility while getting up to speed on the latest rules, guidelines and protocols. With LMS gamification, HR managers and chief learning officers can cultivate and retain top talent. Best of all, it’s far easier to get buy-in for a robust LMS system with badges, bells and whistles than it is to make a pile of Brussels sprouts disappear from a toddler’s tray.

What exactly is so exciting about game-based learning? In essence, the process prompts active and immediate participation because of extra motivation in the form of rewards. Whether it’s badges or points, these features make eLearning interesting and enjoyable.

In one study, workers who enjoyed themselves retained concepts 40% better than those who weren’t having fun. As you might guess, this is what game-based learning is all about. Engaged employees who rapidly earn rewards are less likely to make errors, so they naturally increase a company’s bottom line and lower the likelihood of compliance fees and penalties. Plus, according to research from TalentLMS, 87% of employees report that gamification makes them more productive.

Merging gamification with training makes plenty of sense. It’s also easy to build a gamification-based compliance training LMS by following a straightforward LMS implementation checklist.

1. Identify your training goals and gaps. Before you can find the best LMS for your needs and move forward with an implementation project plan, you need to spot the inefficiencies of your existing compliance training program. For example, your strategy might not facilitate real-world applications. Knowing this, you would want a compliance training LMS that bridges gaps and imparts practical experience.

2. Discover what motivates and drives employees. Employee gamification only works when employees are properly incentivized, so find out what motivates your team based on their backgrounds and experience levels. Whether a task is challenging or boring, people respond better when they are internally driven to succeed.

Do you need an intuitive LMS with a personalized dashboard? Are the introverts on your team more driven by badges and points than by a sense of competition? Conduct surveys to gauge expectations, and try to follow a 70:20:10 model of training amplified by gaming to foster experimentation and collaboration.

3. Choose the right rewards for desired outcomes. With the plethora of LMS choices on the market, you can select from rewards and mechanics that lead to the exact behaviors and criteria you desire. Want employees to achieve safety online training certifications? Reward “graduates” with points after they have displayed their proficiency. Reinforce favorable behaviors without punishing workers who lag behind. Carrots are far more effective than sticks.

4. Invest in a feature-rich, gamification-supported LMS. Your LMS should not only be user-friendly, but it should also be a portal to game-based learning support and an online asset library. Ideally, your gamified learning platform should include themes and templates that allow you to design visually appealing rewards without reinventing the wheel. Just make sure you have game-based reporting on your side, which makes it simple to track employee performance, completion rates, and other LMS metrics.

Implementing a gamification-based compliance training strategy requires careful budgeting, planning, and analysis. Once you find an LMS platform that delivers the features you need within your price range, you’ll be on your way to mitigating risks and retaining superstar employees. And thanks to gamification, everyone can have a little fun along the way.

SOURCE: Pappas, C. (10 October 2018) "4 best practices for implementing a gamification-based compliance training system" (Web Blog Post). Retrieved from

Severance plans: How savvy employers can stay ERISA compliant

How can employers’ severance plans stay ERISA compliant? There are significant advantages associated with ERISA severance plans. Continue reading to learn more.

An employer’s promise to provide severance benefits may be written or oral, formal or informal, and individual or group. Determining whether an ERISA plan already exists, or whether an employer wants its severance arrangement to be subject to ERISA, is an important consideration in determining an employer’s obligation and liabilities associated with a severance arrangement.

There are significant advantages associated with a severance arrangement that is an ERISA plan as discussed in detail below. An employer, however, cannot unilaterally decide that the severance arrangement is an ERISA plan. Instead, an employer, when designing and administering a severance arrangement, can take definitive steps to ensure that the arrangement is treated as an ERISA plan.

Employers may assume that the first step to ensure the existence of an ERISA plan is to have a written plan document, which is required by ERISA. Surprisingly, this is not necessarily determinative as to whether an ERISA plan exists. Courts have held that ERISA plans can exist without a written plan document and vice versa.

Case law has provided the broad outlines of the nature of an ERISA-governed severance plan. An essential characteristic of ERISA severance plans is that, by their nature, they necessitate “an ongoing administrative scheme.” Courts have looked at the following indicators when determining what constitutes an ongoing administrative scheme:

  • The employer’s discretion in determining (1) eligibility for benefits or (2) available plan benefits
  • The form of payment such as lump sums versus periodic payments
  • Any ongoing demand on the employer’s assets such that there is an ongoing scheme to coordinate and control the distribution of benefits
  • Calculations based on certain factors such as job performance, length of service, reemployment prospects, and so forth.

Severance plans or arrangements that normally do not require an ongoing administrative scheme, and therefore, do not implicate ERISA, are plans that have lump-sum payments that are calculated under a formula and are mechanically triggered by a single event (such as termination). Where severance payments are made over time (through payroll, for example) and/or additional benefits (such as continuation of benefits or outplacement services) are provided, the severance arrangement is likely subject to ERISA.

As a practical matter, whether severance arrangements are ad hoc or recognized in a formal plan document, they may end up providing ERISA-covered benefits. In a dispute, an employer generally prefers that ERISA applies because of ERISA’s preemption of state laws. Preemption protects employers from state laws that may favor employees and generally limits the dispute to an ERISA claim for benefits, thereby avoiding the potential exposure to punitive, extra-contractual or special damages under state laws. In addition, ERISA’s claim procedure, which provides a pre-litigation administrative process for dispute resolution, will apply if proper plan language is provided. If employees with a severance claim fail to faithfully follow the ERISA claims procedure, their lawsuits may be dismissed for failure to exhaust administrative remedies.

Typically, the plan document gives the employer, in its capacity as plan administrator, the discretionary authority to interpret the plan’s language and make decisions about the plan. If the employee follows the claim procedures and the claim is denied, the decision-making process of the employer (or its designee) if done properly, is given deferential treatment by a reviewing court. Moreover, in many cases, judicial review is limited to only those matters addressed in the administrative record of the claim. In other words, many federal courts would decline to consider factual matters that were not raised by the employee in the claim procedure process.

Another consideration for the savvy employer is that severance benefits are almost always considered to be “welfare” benefits. Welfare benefits, as opposed to pension benefits, are afforded an extremely low level of protection under ERISA. Essentially, the employer’s exposure as to promised severance benefits is only as broad as its express contractual commitment to them. By appropriately documenting the benefits with “best practices” language (such as specifying that the amendment or termination of benefits may be done with or without advance notice), employers can take advantage of the opportunity afforded by the relatively thin protections provided by ERISA. On the other hand, poor or no documentation of a severance arrangement may leave an employer with difficult-to-prove assertions as to what severance commitments were actually made.

In summary, an ERISA-governed plan provides an employer with significant advantages in litigation. In addition, a severance arrangement subject to ERISA will enjoy the powerful benefits of ERISA preemption and the ERISA claims procedures.

SOURCE: Rothman, J.; Ninneman, S. (3 October 2018) "Severance plans, Part 1: How savvy employers can stay ERISA compliant" (Web Blog Post). Retrieved from

Civil Penalties Adjusted with Interim Final Rule for ERISA Violations

Released by the United States Department of Labor through The Federal Register on July 1, 2016.

Effective August 1, 2016, the amounts for civil penalties will be adjusted as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

The interim final rule made adjustments to the civil monetary penalties enforced by the Employee Benefits Security Administration (EBSA) under the Employee Retirement Income Security Act of 1974 (ERISA). The adjustments apply to penalties assessed after August 1, 2016, whose violations occurred after November 2, 2015.
Some highlights of the new penalty amounts for ERISA violations include:
  • The maximum penalty for failure/refusal to properly file a plan annual report (Form 5500) increased from $1,100 per day to $2,063 per day the Form 5500 is late.
  • The maximum penalty for failure to provide a Summary of Benefits Coverage under the Public Health Services Act increased from $1,000 per failure to $1,087 per failure.
  • The maximum penalty for failure to provide an automatic contribution arrangement notice under ERISA increased from $1,000 per day to $1,632 per day.
  • The penalty for providing required CHIP notices under ERISA is increased from $100 per day to $110 per day
  • The maximum penalty for failure of a multiple employer welfare arrangement (MEWA) to file a report required by regulations issued under ERISA increased from $1,100 per day to $1,502 per day.
  • The maximum penalty for failure to furnish reports (e.g., pension benefit statements) to former participants and beneficiaries or maintain records increased from $11 per employee to $28 per employee.
  • The maximum penalty for failure to comply with ERISA requirements relating to genetic information increased from $100 per day to $110 per day.

To read the full release from The Federal Register, click here

Fact Sheet

Fiduciary Rollout: DOL to Extend a Hand

Original post

WASHINGTON -- As the dust begins to settle after the Department of Labor issued its hotly contested fiduciary regulation, one of the key officials who led the rulemaking initiative says that he anticipates issuing clarifying guidance on an ongoing basis as industry feedback trickles back on how the rules are working in practice.

“This is a major undertaking and that we need to be mindful of what impact it's having as people are implementing it,” said Timothy Hauser, a deputy assistant secretary at the Labor Department, on Tuesday at a policy forum hosted by the Investment Company Institute. “We need to have the courage to make changes and to be responsive as problems emerge. And I can assure you we have every intent of doing so."

The ICI is a trade group that has been sharply critical of the rulemaking process.

Rule opponents have argued that many firms would be more likely to abandon middle-income clients planning for retirement, rather than submit to the contractual provisions relating to best-interest advice. But Hauser noted that the department made changes as it redrafted the final rule, in a bid to make the provisions less burdensome.


Hauser took pains to explain that that process is still ongoing, insisting that he will entertain further tweaks to the rule and will publish clarifying guidance, likely in a question-and-answer format on a "rolling basis."

"We did our level best, really, to try to find the legitimate concerns and objections people had to what we were doing and try to be responsive," Hauser said. "We'll continue to do that as we move forward."

At the same time, Hauser offered a strong defense of the rule and the underlying rationale for the department's effort to crack down on conflicted advice in the retirement sector.

"The basic idea, first and foremost, is that we want advice to be in the customer's interest rather than in the interest of the adviser," he said. "The basis for this project — the reason we undertook this in the first place — was our belief that there was a significant problem in this marketplace."

The department's solution: update its rules under the 1974 Employee Retirement Income Security Act to extend fiduciary obligations to financial professionals working with retirement savers and plans, a threshold that is generally met when an adviser makes an investment recommendation and in turn receives compensation, Hauser said.

Hauser acknowledged that the ERISA statute has a "strong default position against conflicts of interest," but pointed out that the new rule explicitly permits conflicts such as commissions and proprietary products, provided that advisers offer up-front disclosures and aver in a binding contract that they will act in their clients' best interests.

That so-called best interest contract exemption has been one of the chief complaints of industry critics. But Hauser was quick to remind his audience that the rule will have minimal impact on advisers who offer advice that is free of conflicts.

"[T]there's nothing in the natural order of things that requires people to receive conflicted compensation streams as a condition of giving advice," he said. "However, we also don't outlaw conflicted compensation streams. The firm can continue to get commissions, it can get 12b-1 fees, it can get revenue sharing, it can get the variety of third-party payments."

Hauser continued: "But there's a quid pro quo for that. There's a basic deal that you need to strike with your customer, by and large, if you want to do that, and the deal is simple. You have to make a commitment to the customer that you're going to act in their best interest, and it needs to be enforceable."


Hauser also said the DoL is not looking at the rule as a vehicle for a punitive enforcement policy. Instead, he said that the department is hoping to serve as a resource for affected firms and to work with them in a collaborative spirit as they implement the new rules.

"Our primary efforts are not going to be about finding people to sue, it's going to be about helping people to comply," he said. "Any problems you're wrestling with, issues you're trying to deal with, operational issues you're confronting — we'd love to hear from you, we'd love to be able to give advice. I would much rather get advice out early rather than have you build entire systems only to have us say, 'Nah, we don't think that complies.' I think it's in all our interest to make this work."

New Concerns for Employer Plan Sponsors Under the Fair Labor Standards Act and ERISA § 510

Original post

The Affordable Care Act (ACA) anti-retaliation provisions have been in effect for several years, but have so far largely gone unnoticed. Now that employees can get financial assistance through the Health Insurance Marketplace, employers should revisit these provisions and carefully structure their actions to limit potential exposure. In addition, a recent lawsuit brought by employees under ERISA suggests employers should use care when taking employment action that might impact health benefits. As a result, employers and insurers should consider implementing and/or updating and revising their employment policies and procedures now.

IRS Clarifies Prior Guidance on Premium Reimbursement Arrangements; Provides Limited Relief

Originally posted February 24, 2015 by Daimon Myers, Proskauer - ERISA Practice Center on

Continuing its focus on so-called “premium reimbursement” or “employer payment plans”, the Internal Revenue Service (IRS) released IRS Notice 2015-17 on February 18, 2015. In this Notice, which was previewed and approved by both the Department of Labor (DOL) and Department of Health and Human Services (collectively with the IRS, the “Agencies”) clarifies the Agencies’ perspective on the limits of certain employer payment plans and offers some limited relief for small employers.

Prior guidance, released as DOL FAQs Part XXII and described in our November 7, 2014 Practice Center Blog entry, established that premium reimbursement arrangements are group health plans subject to the Affordable Care Act’s (ACA’s) market reforms. Because these premium reimbursement arrangements are unlikely to satisfy the market reform requirements, particularly with respect to preventive services and annual dollar limits, employers using these arrangements would be required to self-report their use and then be subject to ACA penalties, including an excise tax of $100 per employee per day.

Since DOL FAQs Part XXII was released, the Agencies’ stance has been the subject of frequent commentary and requests for clarification. With Notice 2015-17, it appears that the Agencies have elected to expand on the prior guidance on a piecemeal basis, with IRS Notice 2015-17 being the first in what may be a series of guidance. The following are the key aspects of Notice 2015-17:

  • Wage Increases In Lieu of Health Coverage. The IRS confirmed the widely-held understanding that providing increased wages in lieu of employer-sponsored health benefits does not create a group health plan subject to market reforms, provided that receipt of the additional wages is not conditioned on the purchase of health coverage. Quelling concerns that any communication regarding individual insurance options could create a group health plan, the IRS stated that merely providing employees with information regarding the health exchange marketplaces and availability of premium credits is not an endorsement of a particular insurance policy. Although this practice may be attractive for a small employer, an employer with more than 50 full-time employees (i.e., an “applicable large employer” or “ALE”) should be mindful of the ACA’s employer shared responsibility requirements if it adopts this approach.  ALEs are required to offer group health coverage meeting certain requirements to at least 95% (70% in 2015) of its full-time employees or potentially pay penalties under the ACA. Increasing wages in lieu of benefits will not shield ALEs from those penalties.
  • Treatment of Employer Payment Plans as Taxable Compensation. Some employers and commentators have tried to argue that “after-tax” premium reimbursement arrangements should not be treated as group health plans.  In Notice 2015-17, the IRS confirmed its disagreement. In the Notice, the IRS acknowledges that its long-standing guidance excluded from an employee’s gross income premium payment reimbursements for non-employer provided medical coverage, regardless of whether an employer treated the premium reimbursements as taxable wage payments. However, in Notice 2015-17, the IRS provides a reminder that the ACA, in the Agencies’ view, has significantly changed the law, including, among other things, by implementing substantial market reforms that were not in place when prior guidance had been released. The result:  the Agencies have reiterated and clarified their view that premium reimbursement arrangements tied directly to the purchase of individual insurance policies are employer group health plans that are subject to, and fail to meet, the ACA’s market reforms (such as the preventive services and annual limits requirements). This is the case whether or not the reimbursements or payments are treated by an employer as pre-tax or after-tax to employees. (This is in contrast to simply providing employees with additional taxable compensation not tied to the purchase of insurance coverage, as described above.)
  • Integration of Medicare and TRICARE Premium Reimbursement Arrangements. On the other hand, although the Notice confirms that arrangements that reimburse employees for Medicare or TRICARE premiums may be group health plans subject to market place reforms, the Agencies also provide for a bit of a safe harbor relief from that result. As long as those employees enrolled in Medicare Part B or Part D or TRICARE coverage are offered coverage that is minimum value and not solely excepted benefits, they can also be offered a premium reimbursement arrangement to assist them with the payment of the Medicare or TRICARE premiums. (The IRS appropriately cautions employers to consider restrictions on financial incentives for employees to obtain Medicare or TRICARE coverage.)
  • Transition Relief for Small Employers and S Corporations. Although many comments on the prior guidance concerning employer payment plans requested an exclusion for small employers (those with fewer than 50 full-time equivalent employees), the IRS refused to provide blanket relief. The IRS notes that the SHOP Marketplace should address the small employers’ concerns. However, because the SHOP Marketplace has not been fully implemented, no excise tax will be incurred by a small employer offering an employer payment plan for 2014 or for the first half of 2015 (i.e., until June 30, 2015). (This relief does not cover stand-alone health reimbursement arrangements or other arrangements to reimburse employees for expenses other than insurance premiums.) This is welcome relief to small employers who adopted these arrangements notwithstanding the Agencies’ prior guidance that they violated certain ACA marketplace provisions.
  • In addition to granting temporary relief to small employers, the IRS also provided relief through 2015 for S corporations with premium reimbursement arrangements benefiting 2% shareholders. In general, reimbursements paid to 2% shareholders must be included in income, but the underlying premiums are deductible by the 2% shareholder. The IRS indicated that additional guidance for S corporations is likely forthcoming.

The circumstances under which premium reimbursement arrangements are permitted appears to be rapidly dwindling, and the IRS indicated that more guidance will be released in the near future. Employers offering these arrangements should consult with qualified counsel to ensure continuing compliance with applicable laws.

United States: You've Acquired A New Qualified Retirement Plan? Time For A Compliance Check

Originally posted October 20, 2014 by Nancy Gerrie and Jeffrey M. Holdvogt of Mondaq Business Briefing, on

In connection with a merger or acquisition, an acquiring company may end up assuming sponsorship of a tax-qualified retirement plan that covers employees of the acquired company. Basic due diligence on the plan likely was done during the acquisition. But if the plan will continue to be maintained following the acquisition, this is the perfect time to establish procedures to ensure that the numerous administrative and fiduciary requirements involved in maintaining a qualified retirement plan will continue to be met on an ongoing basis. Following is a brief summary of some key issues that a company should focus on after it assumes a new qualified retirement plan.

Review Compliance with Coverage and Nondiscrimination Testing

In order for the plan to retain its tax-qualified status, the Internal Revenue Code requires that a qualified retirement plan be tested periodically to ensure that it does not discriminate in favor of highly compensated employees. Two of the most important tests to be monitored are: (i) the coverage test, to ensure that the plan covers a stated minimum number of non-highly compensated employees on a controlled group (employer-wide) basis, and (ii) the nondiscrimination test, to ensure that the formula for determining the amount of contributions and benefits a particular participant receives does not discriminate in favor of highly compensated employees. Advance planning should be done to determine the impact of the acquisition on these tests, both for the new plan and any existing plans within the controlled group. Different rules may apply for determining which employees are highly compensated, depending on the type of transaction.

Become Familiar with the Plan's Investments and Investment Policy

The acquiring company, or more typically a committee appointed by the acquiring company, will have fiduciary responsibility for selecting the plan's investments, including the investment funds offered under a 401(k) or other individual account retirement plan. Plan fiduciaries, who likely will be newly appointed following the acquisition, must familiarize themselves with the fund lineup, obtain information to evaluate the funds and document how they monitor and select funds to ensure compliance with U.S. Department of Labor requirements. Plan fiduciaries also should familiarize themselves with the plan's written investment policy or guidelines, refer to the investment policy or guidelines when meeting to discuss changes to plan investments and update the policy or guidelines, as needed.

Understand Plan Fees and Revenue Sharing

New plan fiduciaries should carefully review any revenue-sharing arrangements related to the plan and understand the plan's use of so-called "12b-1 fees" and other revenue-sharing payments. Plan fiduciaries must understand the formula, methodology and assumptions used to determine the respective share of any revenue generated from plan investments by the plan's service provider. Plan fiduciaries also must monitor the arrangement and the service provider's performance to ensure that the revenue owed to the plan is calculated correctly and that the amounts are applied properly (for example, for payment of proper plan expenses or for reallocation to participants' plan accounts).

Review Consultant, Investment Manager and Service Provider Agreements

Qualified retirement plan fiduciaries typically have agreements with various consultants, investment managers and service providers that carry over following an acquisition. This is a good time to review these agreements, both to understand the service providers (and whether they are still needed) and to make sure plan fiduciaries are set up to properly monitor and select new service providers, as needed. In particular, plan fiduciaries should understand whether the consultant or advisor represents itself to be a fiduciary or co-fiduciary of the plan, whether the consultant or advisor maintains adequate insurance coverage, whether fees are reasonable and whether any conflicts of interest exist.

Ensure the Plan's Eligibility Provisions Reflect the New Controlled Group

The plan document will specify precise rules for employee eligibility. Following an acquisition, the acquiring company often must update the plan's eligibility provisions to reflect the new controlled group. In addition, with new administrators and new human resources personnel likely to be looking at the plan, this is an ideal time to make sure the plan is following the eligibility and enrollment rules set forth in the plan document, including: (1) eligibility for or exclusion of part-time employees; (2) proper classification of independent contractors; (3) adherence to hours-of-service counting rules or the elapsed-time alternative; (4) re-enrollment of rehired participants; and (5) for automatic enrollment plans, proper automatic enrollment for eligible employees on a timely basis.

Check the Plan's Definition(s) of Compensation

A plan's definition of compensation is used for a variety of important purposes, including the calculation of an employee's allocation in a defined contribution plan or benefit accruals in a defined benefit plan, adherence to limitations on allowable compensation and performing nondiscrimination testing. The plan document must specify precise definitions for applicable compensation for each purpose. Problems frequently arise following an acquisition because the payroll provider may change or key personnel who understood how compensation was applied under the plan may be gone. Also, the transaction agreement may require the continuation of certain benefit levels for a period of time, which in practice may require that the plan continue to apply the same definition of eligible compensation as before the transaction. Plan administrators should review payroll codes against the plan's definition of compensation and make adjustments to either the plan or the payroll codes, as needed.

Review the Distribution Paperwork

The acquiring company will usually update the plan's summary plan description and employee communications to reflect the new employer. However, distribution paperwork, including benefit election and rollover forms that the employee must complete, as well as descriptions of optional forms of benefits and other required disclosures, is often overlooked in the due diligence and transition process. If election forms are not periodically reviewed and updated, the plan may fail to provide all the correct options (for example, installments, annuities and lump sums, where available) or fail to require spousal consent for distributions, where it is required under plan rules.

Update ERISA Fidelity Bonds and Fiduciary Insurance Coverage

One of the most common failures noted by the Department of Labor during audits is a plan's maintenance of an Employee Retirement Income Security Act (ERISA) fidelity bond. ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan be bonded (for at least 10 percent of the amount of funds he or she handles, subject to a $500,000 maximum per plan for plans that do not hold employer securities) to protect from risk of loss due to fraud or dishonesty on the part of persons who "handle" plan funds or other property. The period after an acquisition is an excellent time to make sure the plan maintains appropriate bonds, as well as to make sure the company is adequately protected with fiduciary insurance coverage, which may be with the same insurer as the fidelity bond.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Follow this Record Retention Checklist

Originally posted April 23, 2014 by Paula Aven Gladych on

Qualified retirement plans are required to report and disclose certain obligations as part of the Employee Retirement Income Security Act of 1974, but what isn’t well known is that ERISA also spells out how long a plan sponsor must retain plan documents and records that support those obligations, according to Kravitz.

Kravitz, which represents Kravitz, Inc. and Kravitz Investment Services, Inc., points out that all records that support the plan’s annual reporting and disclosure requirements should be retained. All plan-related materials and records must be kept for at least six years after the date of filing an ERISA-related return or report. Records should be preserved in a manner and format that permits ready retrieval, the company said.

It is the plan administrator’s responsibility to retain these records, even if they’ve contracted with an outside service provider to produce their Form 5500 filing, Kravitz said.

The Department of Labor also requires employers to retain records that show how much benefits have been accrued by each plan participant. Here’s it’s list:

1.     Plan documents: ERISA requires that plan administrators retain the original signed and dated plan document and all original signed and dated plan amendments; a copy of the plan’s most recent IRS approval letter; and copies of Form 5500. Plan documents should be retained until the plan is terminated, Kravitz said.

2.     Supporting documents: Reports that support the plan documents also should be kept, according to Kravitz, including financial reports, Trustees’ reports, journals, ledgers, certified audits, investment analyses, balance sheets, income and expense statements, corporate/partnership income-tax returns, documentation supporting the trust’s ownership of the plan’s assets, evidence of the plan’s fidelity bond, and copies of nondiscrimination and coverage test results.

3.     Census and other data: Payroll records that determine participant eligibility and contributions should be retained, according to Kravitz. Records that establish hours of service data also must be kept to demonstrate the determination of allocations and vesting.

4.     Communications: Employers should keep copies of all communications that are provided to participants and beneficiaries

5.     Participation forms and tax reporting: Companies need to keep documents that show they have followed plan documents with participant transactions, for plan audit purposes.

6.     Duration of storage: Records should be kept for at least six years after a government filing. Kravitz recommends that employers keep these records for the life of their retirement plan. The DOL does allow electronic copies of these documents as long as they meet certain specifications.