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2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
2010 Hrm Stimulus   Retire Savings Plans
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2010 Hrm Stimulus Retire Savings Plans

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7 Best Practices for Your Retirement Savings Plan in a Tough Economy

7 Best Practices for Your Retirement Savings Plan in a Tough Economy

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  • 1. 2010 HRM “Stimulus Package” 7 Best Practices for Your Retirement Savings Plan1 in a Tough Economy By: Dan Van Bogaert, J.D.2 “To acquire knowledge, one must study, but to acquire wisdom, one must observe.” Anonymous Today’s tough economy has caused many employers to react in a survival mode with their retirement savings plans, sometimes without considering potential unintended consequences. Awareness of latent long term problems that could emerge is crucial for employers who seek immediate ways to reduce employee benefit costs. HR professionals must reexamine best practices to control costs; particularly costs related to retirement savings plans, to avoid potential long term problems. HRM can play a key role in helping their organizations ensure that retirement savings plans incentivize employees, especially in the current period of slow economic recovery. Employer sponsored retirement savings plans can and should still be an incentive to motivate employees and inspire loyalty. Special attention should be paid to these plans because they are largest or second largest assets employees will ever own. It is, therefore, important for HR professionals to understand best practices when responding to the impact on retirement savings plans from a down market and volatile worldwide equities market. 1 The term “Retirement Savings Plan” for purposes of this article means primarily Defined Contribution Plans, e.g. 401(k), Profit Sharing plans, and Defined Benefit Plans, e.g. Pension and Annuity plans, as defined under the Employee Retirement Income Security Act (ERISA) of 1974, as amended, and the Internal Revenue Code, e.g. §§ 401(a), 410(b), et al. Although 403(b) plans (aka “401 (k) plans for non-profits”), and certain other retirement plans in the public sector, are not subject to ERISA, the best practices reviewed in this paper generally may also be useful to such plans, e.g. California Public Employees Retirement System (http://www.calpers.ca.gov/index.jsp?bc=/investments/home.xml), Pension Savings Plan of Los Angeles County (https://countyla.gwrs.com/static/CountyOfLA/html/menus/guest_psp.html). (For background information regarding non-profit retirement plans visit: http://www.ftwilliam.com/articles/403BNonProfit20081209.html and http://www.amper.com/publications/section-403-b-plan-compliance2.asp) 2 Dan Van Bogaert, J.D. is an adjunct professor of business and employment law, as well as the northern California representative for MMC, Inc, a national HR outsourcing firm headquartered in Los Angeles (mmchr.com). Dan also has extensive experience in the design and implementation of qualified Employee Benefit Plans and ERISA compliance duties within multiple industries, including major corporations, e.g. Carnation/Nestle′ USA and Blue Cross. (profdan@ssctv.net) 2 Employee Pension Benefit Plan" is a generic term used to describe most retirement plans under ERISA, § 3(2); DOL Reg. § 2530.3-2 1|Page
  • 2. Overview and Brief Historical Perspective Retirement plan benefits are primarily intended to provide workers with a degree of lifetime financial security. They also give employers a vehicle with which to motivate workers to be productive. Retirement plans have been around in the U.S. since the late 1800s, starting with the railroad industry. The first pension plans guaranteed annuity payments to retired or disabled employees, and beneficiaries. However, employer sponsored retirement plans did not become prevalent until after the enactment of the Social Security Act in 1935. In 1974 the comprehensive and complex Employee Retirement Income Security Act (ERISA) was enacted to protect interests of participants and their beneficiaries in most employee benefit plans, among other things.3 It established minimum national standards for financial reporting and disclosures, guidelines on how employers were to operate their plans, as well as uniform standards for vesting, participation, funding, and fiduciary conduct. Currently, retirement plans come in many shapes and sizes, although there are two general categories: defined benefit (“DB”) plans or defined contribution (“DC”) plans. DB plans (pensions and annuities) provide periodic benefit payments, usually monthly, based on a formula using age, years of service, pay and/or other factors.4 In DC plans the contribution, not the benefit, is defined under terms of the plan. 5 The employer and employee may make the contributions to individual participant accounts for investment purposes. The trend for the past couple of decades has been an almost complete shift away from DB plans, e.g. pensions and annuities, toward DC retirement savings plans, e.g. 401(k), 403(b) and similar plans with individual accounts.6 As a result about two-thirds of all workers participate in DC plans. * * * Here are 7 suggested best practice areas for retirement savings plans that HRM may want to consider for 2010:  Hold Investment Managers accountable  Encourage maximum employee participation  Equip employees to make informed investment decisions  Evaluate (or resume) employer match contributions  Beware of “furlough fallout”  Plan ahead with pre-retirement planning programs  Learn Compliance Issues Re: Plan Changes 3 Employee Pension Benefit Plan" is a generic term used to describe most retirement plans under ERISA, § 3(2); DOL Reg. § 2530.3-2 4 Many retirements plans permit participants to choose between a lump sum payment and fixed monthly payments. (For an informative video presentation on this issue, visit http://www.answers.com/topic/pension. 5 “Qualified” plans receive favorable tax treatment and are regulated by ERISA. The technical definition of qualified does not agree with the commonly used distinction. For example, 403(b) plans are not considered qualified plans, but are treated and taxed almost identically. 6 The Shift From Defined Benefit Plans To Defined Contribution Plans by Samuel Estreicher & Laurence Gold, 11 Lewis & Clark L. Rev. 331 (2007); Also, EBRI Issue Brief #249, September 2002 2|Page
  • 3. 1. Hold Investment Manager Accountable Who’s Minding the Store? Employers/Plan Sponsors need to hold Investment Managers accountable.7 After all they are responsible for managing the investment of Plan contributions. One of the best ways to hold them accountable is to evaluate their performance, as well as their proposed strategy and objectives for 2010. One Plan – Several Fiduciaries Investment Managers are one of several Plan fiduciaries.8 As such they have both the legal authority and a duty to make decisions regarding financial matters on behalf of the employee/participants. Other fiduciaries with assigned duties under retirement savings plans include those who 1) exercise discretionary authority or control over management of the Plan or management or disposition of its assets, 2) render investment advice for a fee, and/or 3) have discretionary authority or responsibility in Plan administration. Role of HRM: Strategic Partner & Use of Investment Manager Checklists9 In light of the fact that there is so much involved in the management of the investment of Plan assets, and the required high level of specialized expertise, what role should HRM play in this area? One suggestion is to use comprehensive checklists for a step by step review of key areas, including (but not limited to):  compliance with applicable laws, trust documents and written investment policy statement  acceptable level of risk and appropriateness of portfolio diversification  definitions of each fiduciary’s duties and responsibilities  investment expenses and fees  application of Safe Harbor provisions10  financial reporting of investment performance In light of extraordinary recent changes that have taken place in the global economy, there is a need to re- examine each Plan’s investment policies and procedures. HRM should partner with their organization’s CFO or other responsible finance officer in this effort. Strategic partnering is needed in order to insure a basic understanding of the Plan’s investments to effectively communicate principle features of the Plan to employee/participants and beneficiaries, particularly general investment options. 7 DOL regulation §2550.404(a)-1(b)(2). Investment performance is required to be periodically monitored for compliance with investment guidelines. Investment considerations include diversification of risk, new volatility of portfolio, liquidity relative to plan’s funding objectives, projected return of portfolio relative to plan’s funding objectives, fees, and particularly prevailing and projected economic conditions of investments. 8 Fiduciaries may also include Plan Sponsors, officers, principal shareholders, owners, Board of Directors, Retirement Committee Members, money managers and investment advisors, Directed Trustees, Plan Administrators, and human resources managers. 9 For samples of comprehensive checklists, examine Arnold T. Beck’s “Investment Fiduciary Checklist” and “Setting Up a Due Diligence File” (www.fmacentral.com) 10 Employee and employer Safe Harbor matching or non-elective contributions are 100% vested immediately. (For explanation of safe harbor rules visit: http://www.statefarm.com/learning/planning/smbus_retire/safe_harbor.asp ) 3|Page
  • 4. The investment policy has strategic importance. This policy sets objectives and goals, and assigns responsibilities, risk tolerance, asset allocation, objective performance measurements, and criteria for selecting and monitoring service providers. Other Investment Management Issues Plan fiduciaries must exercise due diligence to control investment expenses and to avoid prohibited transactions.11 The performance of other Plan service providers, e.g. trustees, record-keepers, also needs to be monitored. ERISA requires Plan fiduciaries to be identified in a written plan document. This legal plan document must also include funding policy, procedures for allocation of responsibility for operating and administering the plan, amendment procedure and authority, and the basis on which contributions are made and benefits paid. 12 Plan assets must be held in trust by one or more trustees13, and the Trustee(s) must be named in plan document, trust instrument, or appointed by a named fiduciary. The Trustee typically has exclusive authority and discretion to manage and control plan assets, unless a designated as “directed trustee.” Retirement plans should not be over invested in illiquid assets, such as real estate and commodities. Retirement plan investments in real estate are restricted because real estate is an illiquid asset that generally cannot readily be sold for cash when needed for distribution to participants. 14 2. Encourage Maximum Employee Participation Save for (more than) a rainy day. As a best practice, HRM should encourage employees to increase (or at least maintain) Plan contributions. One of the biggest challenges in tough economic times for employees - and HRM - is to maintain participation in retirement savings plans. In response to the down economy, many organizations made unpleasant choices to eliminate positions, freeze pay increases, reduce pay, and have layoffs. In such as belt tightening environment, employees predictably decide to cut back or discontinue contributions to their retirement savings plans, perhaps with unintended 11 ERISA § 406(a) and IRC § 4975. Prohibited Transactions involve the sale, exchange or lease of property, lending of money or other extension of credit, or furnishing goods, services or facilities, or transfer or use of plan asset between the Plan and Party in Interest 12 ERISA §§402(a)(1), 402 (b)(1)-(4). Note that the Trustee is not necessarily the Investment Manager. 13 ERISA § 403(a); Exceptions: insurance contracts, ERISA § 403(b) 14 For example, most IRA custodians limit available investments to traditional brokerage accounts such as stocks, bonds, and mutual funds, and do not permit real estate in an IRA, unless it is held indirectly via a security, e.g. real estate investment trust (REIT). Problems that can occur with real estate investments in retirement plan portfolios was recently demonstrated by public sector retirement plans, CalPERS (California Public Employees' Retirement System) and CalSTRS (California State Teachers' Retirement System). The 2 systems may have lost more than ½ $billion due to cyclical real estate losses and related bankruptcies. CalPERS also lost nearly $1 billion on a single large housing investment known as LandSource. (Sacramento Bee, Oct. 15, 2009, page 2 “Our Region”) 4|Page
  • 5. consequences. In many instances, HRM should be stepping up to encourage workers to contribute regularly and significantly to their retirement accounts. Furthermore, HRM should be implementing communication strategies that highlight the advantages of participation, despite the down economy. This best practice lessens “leakage” of savings and discourages withdrawals, except as a last resort. When the economy starts to recover turnover will tend to pick up. HRM needs to develop a strategy in anticipation of such recovery. There will be a general reversal of turnover rates from the current low 7-8% average annual rate to about 17% (median turnover in 2007 ) when the economy turns around.15 This strategy is particularly important for employers who have stopped ER match contributions and who are thereby perceived as not loyal to their employees. Post recession, workers will “pay close attention to how organizations treated employees when times were tough,” warns Jennifer Schramm, manager of Workplace Trends and Forecasting program at SHRM. A new push in early 2010 should be made to encourage increased participation in retirement savings plans. Although a growing number of workers in the over age 30 category are starting to increase participation anyway, averaging 7.7% of pay.16 HRM needs to take steps to insure that younger participants are on board too. Organizations should not miss out on the healthy increasing participation trend. The main advantage of riding out the tough years is the avoidance of missed opportunities to purchase stocks at a relatively low price. When the market turns the corner equities may be priced too high, possibly resulting in widespread inadequate savings for retirement, and greater reliance on Social Security. Special ERISA fiduciary protection Employer/Plan Sponsors may also utilize the Qualified Default Investment Alternative (“QDIA”) option to encourage participation. Generally, QDIA provides safe harbor relief from liability for a retirement savings plan’s default investment when there are automatic enrollments.17 3. Equip participants to make informed investment decisions Give a man a fish and you feed him for a day; teach a man to fish and he can charge a consultant’s fee The best investment decisions are unemotional informed decisions. Yet, many participants frequently make investment decisions based on their feelings, and solely in reaction to the latest swings in the marketplace. 15 SRHM Capital Benchmarking Database, page 96, HR Magazine, October 2009 16 Fidelity Investments 2009 2Q report shows that the trend of employees reducing contributions to retirement savings plans started to reverse at the end of 2008; 5% of all participants actually increased their deferral rate while 3% reduced contributions; those that maintained contributions during the period 2004-2008 netted on average netted a 35% increase in account values. The report, however, also shows that “only 44% of workers in their 20s contribute to retirement savings plans.” (http://blog.taragana.com/n/fidelity-investments-workers-again-putting-more-into-401ks-reversing-recent-trend-137501/) 17 The Pension Protection Act of 2006(PPA) includes the rules governing automatic enrollment in 401(k) plans and the availability of investment advice. In addition, the PPA made permanent the retirement savings incentives and contribution limits of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). 5|Page
  • 6. As a best practice, HRM can help employees make appropriate (informed) choices with their investment options by offering a valuable employee benefit: a financial planning and advisor program. In the process of providing assistance HRM must, however, keep in mind the important distinction between investment advice and investment education in participant-directed retirement plans. Employer/Plan Sponsors and third party agents are permitted to educate employees about investment options. Generally, only a licensed professional, e.g. SEC-registered Investment Advisor is legally permitted to give investment advice. Investment education, as opposed to advice, is defined by the Department of Labor as the furnishing of the following general categories of information and materials to participants or beneficiaries in retirement savings plan participant-directed individual accounts: 1) Plan information; 2) general financial and investment information, e.g. historic differences in rates of return between different asset classes (e.g., equities, bonds, or cash) based on standard market indices, 3) asset allocation models, and 4) interactive investment materials. Rendering investment advice to a participant or beneficiary, however, is determined based on facts and circumstances, but generally involves 1) “furnishing information relating to the value of securities or other property, or recommendations regarding investing in, purchasing, or selling securities or other property, and 2) the person, either directly or indirectly, (A) has discretionary authority or control with respect to purchasing or selling securities or other property for the participant or beneficiary, or (B) renders the advice on a regular basis to the participant or beneficiary, pursuant to a mutual agreement, arrangement or understanding (written or otherwise) with the participant or beneficiary that the advice will serve as a primary basis for the participant's or beneficiary's investment decisions with respect to plan assets and that such person will render individualized advice based on the particular needs of the participant or beneficiary.” Education: What, How, Who A fiduciary named under a Plan, including HRM, may be exempt from liability for investment decisions under DC plans when complying with proper instructions of participants.18 However, a fiduciary is protected only to the degree that a participant actually exercises decision-making control. It is important for fiduciaries to provide sufficient information to participants to make an informed investment decision in order to be exempt from liability. 18 ERISA § 404(c), et al; Employer/Plan Sponsors must still comply with the nondiscrimination and prohibited transaction rules under ERISA. Specifically, if an investment advice offered to participants imposes charges or requires minimum account balances that result in a disproportionate number of highly compensated participants – as compared to non-highly compensated participants - taking advantage of such advice, then there may be violation of the nondiscrimination requirements of 401(a)(4) of the Internal Revenue Code and Treas. Reg. §1.401(a)(4). For straightforward explanation of top-heavy and anti-discrimination rules under ERISA by the Profit Sharing Council of America, go to: http://www.psca.org/DCIMagazineMembers/tabid/133/ctl/Detail/mid/490/Id/931/Archive/Default.aspx or: http://www.401khelpcenter.com/mpower/feature_030702.html 6|Page
  • 7. Essentially, participants must have an opportunity to choose between a broad range of investment alternatives. A broad range of asset classes and styles, generally at least 3 diverse core investment alternatives, e.g. equities, bonds or debt, and cash or Guaranteed Investment Contracts (GICs), are required to be made available from which participants or beneficiaries may choose to invest in based on appropriate risk tolerance.19 Participants must also be able to give investment directions at least once every three months. There are certain duties that may not be delegated to employee/participants that may cause a Plan fiduciary to be liable for investment activities. For example, participants must receive information materials regarding available investment choices, as well as prospectuses of investment funds in which assets are held. Additionally, participants and beneficiaries must be given information about investment managers and fees or expenses charged. Someone once said that education is what you have left after you have lost all your notes. The question then becomes how good our note-taking is. As the baby boomer generation gets older and closer to retirement, this group in particular needs to figuratively “take good notes” in order to make important investment decisions. There is a legitimate national concern about whether older workers are saving enough for retirement. We as a society in the U.S. have not been adequately saving for our "golden years.”20. Employer/Plan Sponsor Duty of Care HRM is in an ideal position to influence employees to properly save for retirement, primarily by helping them to make informed decisions regarding how their retirement savings plan contributions are invested. Employer/Plan Sponsors have a fiduciary duty to educate participants. Conversely, a breach of this duty may occur when employees are not given enough information or choices to prepare them for retirement. Employees are hesitant to admit that they do not know the meaning of various investment terms and may never ask for clarification. Employers need to take the time to define the terms within a variety of communication approaches, e.g. newsletters, employee handbooks, bulletin boards, payroll stuffers, intranet. A diverse workforce means that employees have different financial goals and objectives. Therefore, offering training sessions or hold meetings on retirement options need to be targeted to various age groups or knowledge levels. In summary, an HRM best practice is to provide the valuable employee benefit of a financial planning and advisor program. These programs primarily bestow advice regarding retirement savings plan investments to insure that employees in participant-directed investment accounts make informed decisions. After careful selection of a 19 Ibid. For more information on requirements for broad range of investments visit: http://www.reish.com/publications/article_detail.cfm?articleid=231 20 For example, reliable studies at http://www.bea.gov/BRIEFRM/SAVING.HTM and http://dinomite.net/2009/united-states-personal- savings-rate / show that while personal savings rate (as a percentage of personal income) has recently risen to almost 5% - perhaps temporary due to national feelings of financial insecurity from the down economy – the rate for the past decade averaged only about 2%. 7|Page
  • 8. licensed financial planner with a proven track record, HRM would need to develop a comprehensive strategy to effectively communicate the program to all employees.21 4. Evaluate (or resume) employer match contributions Time To “Mix & Match” Nearly 1/3 of all U.S. employers with contributory retirement savings plans have recently reduced or suspended matching contributions. “In tough economic times, many employers are seeking to cut compensation-related costs; employer contributions to 401(k) plans are an obvious target. While reducing employer contributions can hurt employee morale, it is sometimes a better option for reducing labor costs than furloughs and layoffs, for example.” 22 The Internal Revenue Code requires qualified DC Plans meet special non-discrimination tests to insure lower paid workers join such plans. Therefore, Employer/Plan Sponsor must be cautious when adjusting employer match contributions, particularly with regard to compliance with notice requirements and non-discrimination standards. Most 401(k) plans, for example, are written to give the employer the discretion to set the amount of employer match at any time. Reducing or suspending employer match contributions that are intended as safe harbor contribution must provide:  Eligible employees are provided with timely notice and explanation;  An effective date of reduction or suspension no earlier than the later of 30 days after eligible employees are provided the notice and the date amendment is adopted23;  Eligible employees with a reasonable opportunity to change their elective contributions;  A Plan amendment for satisfying ADP/ACP tests the entire Plan Year; and, Lastly, the requirements for the safe harbor must have been satisfied for the period through the effective date of the amendment. Conversely, stopping employer match contributions may be impermissible if 1) it would result in discrimination in favor of highly compensated employees (generally employees who earned in excess of $110,000 in 2009), or 2) it would violate a safe harbor commitment. Automatic Contribution Arrangements Alternative (“ACA”) Another way to increase employee participation in DC plans, albeit more expensive, is to utilize a special safe- harbor ACA alternative. The primary purpose would also be to insure compliance with non-discrimination 21 For examples of a successful personal financial planning & advisor programs (includes user-friendly video) visit: https://pwceadvisor.pwc.com/portal/images/Demo/Demo.swf and http://www.ayco.com/ 22 Spectrem Group, 2008-2009 report; Details at http://www.spectrem.com/ 23 IRC §4980F(e) and ERISA § 204(h); “Anti-cut back” rules require advance notice of change to participants and Alternate Payees; DC plans that specifically states the level of employer match and commits the employer to make that match must amend plan on a prospective basis for any modification. (For related infomrative article visit: http://www.shrm.org/hrdisciplines/benefits/Articles/Pages/MidyearReduction.aspx) 8|Page
  • 9. provisions of ERISA by increasing Plan participation.24 A particular retirement savings plan may thereby satisfy employer contribution requirements through safe-harbor employer non-elective contributions to non-highly compensated employees, rather than through safe-harbor matching contributions to all eligible participants. In summary, an HRM best practice is to resume or increase employer match contributions as soon as possible because when the economy fully turns around, the cost of recruitment will quite possibly increase to a point greater than the savings from not making the match. 5. Beware of “Furlough Fallout” Public sector employers in 28 states, including California25, have used furloughs to stretch 2009 budgets. Furloughs have also frequently been used in the private sector. The best practice for handling necessary furloughs is to minimize the adverse impact, particularly as related to retirement savings plans. Since a furlough is an unpaid leave (typically about 1 to 2 weeks), contributions to retirement savings plans would be reduced. The negative impact of furloughs may be minimized by:  offering retroactive “make up” contribution, subject to specific condition applied on a uniform non-discriminatory basis  meeting one-on-one with affected employees;  being flexible regarding when leave without pay is taken, but subject to supervisor approval, e.g. around child care and vacations;  spreading pay losses over several future pay periods. Give as much advance notice as possible to allow employees time to budget  Encouraging employees to share ideas on how to they may constructively use time off;  Giving full and transparent disclosure to the extent possible, and include information about unemployment benefits; Explain how retirement savings plan benefits and other employee benefit are affected;  Addressing post-furlough morale issues; Make an announcement of the organization’s sincere appreciation of employees’ sacrifices to help organization survive during difficult times. 6. Plan ahead with pre-retirement planning programs I started out with nothing and I still have most of it left. As Baby Boomers approach retirement age, they face a series of profoundly important decisions that will determine their economic wellbeing during their remaining lifetime. They must decide when to retire, when to start Social Security income payments and employer pensions, and how DC plan balances should be distributes. Lack of knowledge in these areas may lead to poor decision making.26 24 §401(k)(13), 414(w) of the Internal Revenue Code; For more detailed information on “ACA”, including notice requirements and sample employee communications, visit: http://ftp.irs.gov/pub/irs-tege/sample_notice.pdf 25 For background: http://www.shrm.org/Publications/hrmagazine/EditorialContent/Pages/0909fox.aspx 26 For an informative example of a comprehensive retirement planning software made by Society of Actuaries, visit http://www.soa.org/files/pdf/Retirement%20Planning%20Software.pdf 9|Page
  • 10. You are only young once, but you can be immature forever. The economic meltdown has caused employees to postpone their plan for retirement. One of the many causes for postponement is the fact that those invested primarily in equities have seen their retirement assets shrink by as much as 30% to 40%. Many employers are implementing win-win “phased retirements” as a form of change in response to the current economic crisis. As part of pre-retirement planning programs, employers may offer older workers the option of continuing to contribute their talent and experience on scaled-back basis. Employers save on salary expense, while employees who cannot currently afford to retire are able to continue working but at fewer and more flexible hours with less responsibility. Phased retirements may require changes to organizational policies, amendments to plans, and/or the development and implementation of “bridge” plans or bonuses. One study shows that nearly 24 percent of workers over age 50 participate in some type of phased retirement arrangement.27 It is also important to advise any employees eligible for the program to determine any impact continued working would have on Social Security benefits and overall financial planning. * * * It’s not the pace of life that bothers me; it’s the sudden stop at the end HRM may learn about pre-retirement planning program by first surveying services offered by professional consultants.28 However, beware of firms merely marketing their insurance and investment products. The complexity of decision that have to be made, coupled with the postponement and phased retirement trends have resulted in increased need for pre-retirement planning. Older workers who have been forced to leave their jobs must also make decisions on how and when retirement benefits are to be distributed, e.g. cash out, IRA rollovers, deferral, immediate annuity, or conversion to deferred annuity. 7. Learn Compliance Issues Re: Plan Changes Look Before You Leap The following are highlights of some key court cases that relate to retirement savings plans. Monitoring landmark court rulings and new laws enables HRM to interface with legal counsel, and to build a basic understanding of legal issues that may impact retirement savings plans. 27 Retrieved October 15, 2009 at: http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=13054&Component=The+Insider 28 For information on retirement planning consultants, access: http://www.mercer.com/home.htm; http://www.retirement-planning- software-guide.com/retirement-planning-consultants.html ; http://www.laterlife.com/laterlife-learning-services.htm ] 10 | P a g e
  • 11. Highlights – Recent Court Cases Pegram v. Herdrich, 530 U.S. 211, 226 (2000) – Breach of ERISA fiduciary duty The threshold question is whether [the defendant] was acting as a fiduciary, i.e. was performing a fiduciary function, when taking the action subject to complaint. (ERISA § 502(a)(2): codified at 29 U.S.C. § 1132(a)(2) and authorizes a suit by a plan participant “for appropriate relief” against a plan fiduciary for breach of fiduciary duty, i.e. harmful errors in Plan administration.) Vaughn v. Bay Environmental Management, Inc., 544 F.3d 1008 (9th Cir. 2008) – Former participants have standing to sue A former employee who has voluntarily withdrawn account balance from a defined contribution ERISA plan has statutory standing as a “participant” of that plan, and may hereby assert claims for breach of fiduciary duty under section502(a)(2) of ERISA even if claims under Section § 502(a)(1)(B) are also available; Participants who voluntarily cash out their defined contributions plans have statutory and constitutional standing to assert breach of fiduciary duty claims under ERISA section 502(a)(2) even if relief is available under 502(a)(1)(B). Paulsen v. CNF Inc., 559 F.3d 1061, 1073 (9th Cir. 2009) The Supreme Court has held that recovery for a violation of 29 U.S.C. § 1109 for breach of fiduciary duty inures to the benefit of the plan as a whole, and not to an individual beneficiary.” LaRue v. DeWolff, Boberg & Assocs., Inc., 128 S. Ct. 1020 (2008) Supreme Court held that an ERISA plan participant may recover monetary losses to individual (DC)plan account due to an alleged fiduciary breach (failure to implement investment election in a timely manner to avoid drop in stock market). Steve Harris, et al. v. Amgen, Inc. et al., 2009 U.S. App. LEXIS 15499; Ninth Circuit, No. 08-55389 Employees who cash out of a defined contribution ERISA plan are still “participants” in that plan, as defined by 29 U.S.C. § 1002(7), regardless of whether they withdrew their assets voluntarily; Background: Harris and Ramos filed a class action complaint alleging that during a 22-month class period the defendants breached their fiduciary duties by allowing the Plans to purchase and hold Amgen stock while knowing that the stock price was artificially inflated because of improper off-label drug marketing and sales. Braden v. Wal-Mart - 8th Cir. November, 2008 - $10B 401(k) plan – Excessive fees issue Class action lawsuit filed alleges that Wal-Mart violated mutual fund ERISA statutes and cost its 401(k) employee plan holders and investors $60 million in unnecessary expenditures by purchasing expensive mutual funds, when cheaper alternatives were available. 11 | P a g e
  • 12. Wal-Mart 401(k) plan is one of the largest plans in the U.S., with over 1 million participants and almost $10 billion in assets under the plan. The Eighth Circuit will hear appeal on the issue of excessive fees and alleged kickbacks, and will focus on the plans size in reviewing its ability to have negotiated the fees to the participants. (Wal-Mart 401(k) plan offers 10 mutual funds, a common/collective trust, Wal-Mart common stock, and a stable value fund. ) In re Tyco International Ltd. Multidistrict Litigation, D.N.H., No. 02-1335-PB Tyco Fiduciaries not shielded by ERISA section 404(c); The U.S. District Court of the District of New Hampshire appears to be in line with DOL’s position on the extent of protection offered by ERISA section 404(c). Tyco offered company stock as an Plan investment option; Court held that Tyco could not use 404(c) as a defense for choosing poor investment options for the plan. Note #1: If losses occur as a result of participants’ direct control in investment choices, as opposed to fiduciary’s direct control, then Plan fiduciary should not be held liable. Note #2: The Seventh Circuit held that participants had "control" over the investments and, therefore, ERISA section 404(c) shielded the fiduciaries from liability. The participants alleged that the fiduciaries breached their duties by failing to inform the participants of the fees associated with the investments in their accounts. The DOL stated that it is the employer not the participant who "controls" the investment menu, since it is the employer choosing the investment line up within the plan. ERISA section 404(c) cannot shield the employer from choosing investments that have excessive fees. The Seventh Circuit did not agree. (More details are shown at: http://www.planadviser.com/NewsCompliance.aspx?id=2918; http://www.bostonerisalaw.com/uploads/file/Tyco%20404c%20opinion.pdf ) Register v. PNC Fin. Servs. Group, Inc., 477 F.3d 56, 61-62 (3d Cir. 2007) Employee bears the investment risks and the employer does not guarantee a retirement benefit (defined contribution plan") to the employee; AK Steel Corporation Retirement Accumulation Pension Plan, Et Al v West, No. 07-663 – Cash Balance plan issue; ERISA's anti-forfeiture and actuarial-equivalence provisions Participant took early retirement and elected to receive pension benefits in a lump-sum distribution. If the rate used to calculate interest credits is greater than statutory discount rate, then the lump-sum benefit would be greater than the participant's hypothetical account balance on the date of distribution. 12 | P a g e
  • 13. Alternative form must be the “actuarial equivalent” of an annuity commencing at normal retirement age; Ambiguity in Plan formula calculation must be resolved in participant’s favor to avoid violation of ERISA's anti- forfeiture and actuarial-equivalence provisions. * * * Various compliance issues must be carefully considered before making retirement savings plan changes. Other compliance issues may inadvertently arise in relation to cost-cutting measures. As employers look for ways to cut costs to stay competitive, alternatives outside of Plan changes should be considered, e.g. suspension of pay increases, furloughs, unpaid vacations, and hiring freezes. “There is no denying the need to cut costs as revenues decline. But we will be better off as a whole if employers temporarily cut pay more steeply, or perhaps shed a few more jobs, rather than create a new norm whereby retirement plans are funded only during economically healthy years.” (J. Nittoli, AVP, Rockefellers Foundation, May 20, 2009) The foregoing highlights are not intended as an exhaustive listing of court cases and regulations relating to retirement savings plans. Plan Administrators still have to meet annual reporting and disclosure requirements, anti-discrimination testing, and occasional plan amendments necessitated by new statutes. HRMs should regularly keep abreast of these types of compliance issues by attending seminars, workshops, and watching for reliable professional “legal updates”.29 29 An excellent source for keeping abreast of landmark court cases, rulings, and related statutes and informative seminars, visit http://www.boardmanlawfirm.com/attorneys/VANBOGA.html 13 | P a g e

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