RPA2 Module 10 Flashcards
List the three common objectives for employee benefits communications regardless of whether print or nonprint media are used.
(a) Adhere to statutory reporting and disclosure requirements.
(b) Support employee benefits cost-containment strategies.
(c) Support human resource recruitment and retention objectives.
Identify the key times when employers commonly communicate with their employees regarding employee benefits.
(a) As new hires at employment
(b) As part of the open enrollment communication process
(c) As part of the ongoing interaction when employees experience a life event or make routine changes to their benefit programs
(d) At the time that the employee terminates employment
(e) As a retiree if the employee continues to be eligible for certain benefits.
In addition to the times when employees routinely interact with their employers regarding employee benefits, why would an employer initiate contact with an employee about benefit programs?
One of the primary reasons for initiating contact may be to enhance employee understanding and appreciation of employee benefit programs.
Especially since employers have placed more responsibility on employees for managing risk with participant-directed defined contribution (DC) plans, the employer has a stake in ensuring that employees understand plan features and make the best use of these programs.
An employer may initiate contact to provide investment education. Efforts to improve knowledge, understanding and outcomes with these plans can actually be beneficial to the employer, in demonstrating that the employer as a plan sponsor, is fulfilling fiduciary responsibilities.
Who is considered a fiduciary under ERISA?
A person (or corporation) is considered a fiduciary under ERISA if that person exercises any discretionary authority or control over the management of the plan, exercises any authority or control over assets held under the plan or the disposition of plan assets, renders investment advice for direct or indirect compensation (or has any authority or responsibility to do so), or has any discretionary authority or responsibility in the administration of the plan.
Clearly, the trustee of a plan is a fiduciary. So also are officers and directors of a corporation who have responsibility for certain fiduciary functions—for example, the appointment and retention of trustees or investment managers or the appointment and monitoring of an investment advice provider. On the other hand, individuals whose duties are purely
ministerial (e.g., applying rules of eligibility and vesting) are not fiduciaries.
Under the law, what responsibilities does a fiduciary possess?
Under the law, a fiduciary possesses several responsibilities. A fiduciary is required to discharge all duties solely in the interest of participants and beneficiaries and for the exclusive purpose of providing plan benefits and defraying reasonable administrative expenses.
In addition, a fiduciary is charged with using the care, skill, prudence and diligence that a prudent person who is familiar with such matters would use under the circumstances then prevailing—a standard that has come to be
called the prudent expert rule. A fiduciary also is responsible for diversifying
investments so as to minimize the risk of large losses, unless it is clearly prudent not to diversify. Finally, the fiduciary must conform with the documents governing the plan and must invest only in assets subject to the jurisdiction of U.S. courts. This latter requirement does not preclude investing in international securities; it simply requires that the assets be held in a manner such that they are subject to the jurisdiction of U.S. courts.
For purposes of the law involving prohibited transactions, answer the following
questions:
(a) who are considered disqualified persons?
(b) What transactions between the plan and a party in interest or a disqualified person are prohibited?
(c) What penalties are assessed on a fiduciary for any breach or violations of his or her responsibilities?
(a) Both labor law (Title I of ERISA) and the Internal Revenue Code (IRC) prohibit certain transactions between the plan and disqualified persons. A disqualified person is broadly defined to include any plan fiduciary; a person providing service to the plan; any employer or employee organization whose employees or members are covered by the plan; a direct or indirect owner of 50% or more of the business interest of the employer; a relative of any of the above; an officer, director and certain highly compensated employees (HCEs); or a person having 10% or more of the ownership interest in any of the preceding.
Under ERISA, an employee also is considered to be a party in interest; an employee, however, is not considered to be a disqualified person.
(b) The following transactions between the plan and a party in interest or a
disqualified person are prohibited:
• The sale, exchange or leasing of property
• Lending money or extending credit (including funding the plan by
contributing debt securities)
• Furnishing goods, services or facilities
• A transfer or use of plan assets
• The acquisition of qualifying employer securities and real property in excess of allowable limits.
These prohibitions apply even to “arm’s length” transactions and even though the plan is fully protected.
(c) Under ERISA, a fiduciary will be personally liable for any breach or violation of responsibilities and will be liable to restore any profits made through the use of plan assets. Under IRC, an excise tax of a percentage of the amount involved in a prohibited transaction may be levied on the disqualified person who engages in the transaction.
For prohibited transactions occurring after August 5, 1997, the initial excise tax is 15% of the amount involved. If the situation is not corrected within the time allowed (90 days unless extended by the Internal Revenue Service (IRS)), a further excise tax of 100% of the amount involved may be imposed. However, engaging in a prohibited transaction will not cause the plan to be disqualified.
Explain the penalties, in addition to the excise taxes imposed because of a prohibited transaction under the tax law that are applicable to a fiduciary for breach of duties.
Apart from excise taxes that might be imposed because of a prohibited transaction under the tax law, a fiduciary will be personally liable for any breach or violation of responsibilities and will be liable to restore any profits made through the use of plan assets.
In addition, the Department of Labor (DOL) may impose a 20% penalty on
any fiduciary who is found liable for a breach of fiduciary rules. The penalty is applied to the recovery amount—that is, the amount recovered from the fiduciary on behalf of the plan or its participants pursuant to either an out-of-court settlement with DOL or a court order under a judicial proceeding instituted by DOL. DOL may waive or reduce the penalty in cases where the fiduciary acted reasonably and in good faith or where the fiduciary will not be able to restore all losses to the plan absent the waiver or reduction.
The penalty is automatically reduced for prohibited transactions by the 15% excise tax imposed in those cases
Explain the liability of a fiduciary should he or she knowingly participate in or assist a co-fiduciary in committing a violation of fiduciary rules.
A fiduciary may be liable for the violations of a co-fiduciary if the fiduciary knowingly participates in or conceals a violation or has knowledge of a violation or by the fiduciary’s own violation enables the co-fiduciary to commit a violation.
If a plan uses separate trusts, however, a trustee of one trust is not responsible for the actions of the other trustees.
Also, a fiduciary will not be responsible for the acts of a duly appointed investment manager (except to the extent that the fiduciary did not act prudently in selecting or continuing the use of the investment manager). A trustee also is not responsible for following the direction of named Fiduciaries in making investment decisions if the plan so provides.
What are earmarked investments, and what conditions must be satisfied by plan sponsors if they are to be exempted from fiduciary liability associated with these investments?
The law permits a DC plan to be established on a basis that allows earmarked investments—that is, employees are allowed to direct the investment of their own accounts. Under these plans, sponsors and other plan fiduciaries might be exempt from liability for investment returns that result from participant choices, provided that participants are given the opportunity to exercise control over the assets in their individual accounts and can choose from a broad range of categories.
DOL has issued regulations that provide statutory relief from fiduciary liability under these plans if certain requirements are met. Failure to comply with these requirements does not necessarily mean that the fiduciaries will be liable for investment performance; it simply means that this regulatory protection is not available.
To ensure that participants have both control over their assets and the opportunity to diversify their holdings, the regulations:
(a) Require the plan to provide participants with reasonable opportunities to give investment instructions to the plan fiduciary who is obligated to comply with these instructions
(b) Require that a plan offer at least three “diversified categories of investment”— with materially different risk-and-return characteristics—that collectively allow participants to construct a portfolio with risk-and-return characteristics within the full range normally appropriate for a plan participant
(c) Establish specific rules regarding participant transfer elections. Sponsors must allow at least quarterly elections for transfers in or out of the three diversified investment options that must, as a minimum, be offered under the plan, and more frequent transfers may be required if appropriate in light of the volatility of a particular investment.
In order to qualify for statutory relief
from fiduciary liability, what must a plan
sponsor supply to a plan participant
regarding investment alternatives?
(a) A general description of the investment objectives and risk-and-return characteristics of each investment alternative
(b) An explanation of how to give investment instructions and any limitations on such instructions
(c) An identification of investment managers
(d) An explanation of voting, tender and similar rights
(e) A description of transaction fees and expenses that could affect the participant’s account balance
(f) The name, address and phone number of the plan fiduciary
(g) Where appropriate for the investment alternative, any applicable prospectus
(h) A notice that the plan is intended to comply with ERISA Section 404(c) and that fiduciaries’ liability is thereby limited
(i) If a plan utilizes automatic enrollment and default investment alternatives,
Explain the rationale for plan sponsors’ reluctance to provide investment education and how certain provisions of the Pension Protection Act (PPA) are likely to result in increased provision of investment advice to retirement plan participants.
The majority of DC plans let participants direct how their account balances will be invested. While employers recognize the need to encourage employees to save, historically they had been reluctant to provide extensive education about investing these savings. This reluctance had been due, in part, to the fiduciary provisions of ERISA, which impose both responsibility and liability on those who provide investment advice for a fee or other compensation.
The concern for these employers had been to distinguish between investment education and investment advice, recognizing that some efforts to provide only education may end up being interpreted as advice. This situation has undergone some change. With PPA providing guidelines on a plan sponsor’s ability to appoint a fiduciary investment advisor, it is expected that more plans will make use of these services and be less concerned about prohibited transactions related to paying fees for investment advice.
Describe the four types of investment-related information that employers can provide to employees without fear of exposing themselves to fiduciary liability in the view of DOL.
These safe harbors are:
(1) General plan provisions. These include information about plan features and operations, the benefits of participating in the plan, and descriptions of the plan’s investment alternatives, including investment objectives, risk-and-return characteristics and historical information—as long as such information does not address the appropriateness of particular investment options for a given participant or beneficiary.
(2) General financial and investment information. Information about general
investment concepts may be provided—for example, risk and return, diversification, dollar-cost averaging and the advantages of tax-favored savings. It also is acceptable to provide information as to historical differences in rates of return among different asset classifications, investment time horizons and estimates of future retirement income needs.
(3) Asset allocation models. Participants and beneficiaries can be provided with asset allocation models illustrating the projected performance of hypothetical asset allocations using varying time horizons and risk profiles.
(4) Interactive investment material. Acceptable material includes items such as questionnaires, worksheets, computer software and other materials that
employees can use to estimate their retirement income needs and the potential impact of various investment strategies on their ability to meet those needs.
To qualify for safe harbor treatment, asset allocation models and interactive
materials must be based on generally accepted investment theories, and their underlying assumptions must be disclosed (or, in the case of interactive materials, selected by the participant). And, if allocation models or interactive materials identify a specific investment option under the plan, they should indicate that other investment alternatives having similar risk-and-return characteristics may be available under the plan and must identify where information on these alternatives may be obtained.
Further, models and interactive materials must be accompanied by a statement explaining that participants should consider all of their other income, assets and investments in applying the model or using the interactive tool.
How has PPA encouraged plan sponsors to provide investment advice to plan participants, and what responsibilities does a plan sponsor have related to the selection of an investment advice provider?
Since passage of PPA, retirement plans’ fiduciaries can provide investment advice to participants and be paid an additional fee for providing this advice.
Before PPA, providing investment advice for an additional advisory fee by a plan fiduciary would result in a prohibited transaction under ERISA and IRC. Now that PPA allows plan sponsors to offer investment advice services, it is important to note the fiduciary responsibilities that apply to these services. Plan sponsors are not required to offer investment advice services.
However, if plan sponsors offer such services to their participants, there are certain fiduciary responsibilities. Plan sponsors must prudently select the advice provider. Subsequently, the plan sponsor also must monitor the investment advice provider
Within what time period must plan sponsors remit participant contributions after withholding these monies from employee paychecks? .
DOL has taken the position that participant contributions become plan assets as of the date they can be segregated from the employer’s general assets but no later than 90 days after withholding.
However, DOL issued final regulations in August 1996 that shorten this outside deadline to the 15th business day following the month in which the employee contribution is received or withheld. A procedure is set forth under which an employer can obtain an additional ten business days if certain conditions are met.
Apart from the plan-specific elements in the complaint of Sulyma v. Intel, why could this case, or one similar to it, have general precedential principles that could be very important for plan sponsors of DC plans offering customized target-date funds (TDFs) or other plan structures comprised of alternative investments?
The case raised interesting issues that could have general applicability to many plan sponsors. The assertion was made that the investment committee dramatically altered the asset allocation model within the company 401(k) plans’ custom target-date portfolios (TDPs) by increasing exposure to hedge funds and private equity investments.
The general question raised for all plan fiduciaries is: Are innovative investments automatically imprudent if they differ from more standardized investments offered in most 401(k) plans? The suit claimed that the investment committee implemented an imprudent asset allocation model. Instead of implementing an asset allocation model consistent with prevailing standards adopted by investment professionals, it was alleged that the investment committee implemented an asset allocation strategy
for the company TDPs that grossly over-weighted allocations to hedge funds, commodities and international equities as compared to TDFs available in the marketplace. The lawsuit claimed modern portfolio theory (MPT) argues that low-cost, passive fund management with strictly disciplined asset allocation methodologies at the core of the investment process are the most effective and prudent approach to managing long-term, retirement-oriented assets such as TDPs, and that deviation from core
investment strategies is imprudent.
