ICI Requests Guidance from the DOL

With all of the recent mutual fund scandals and investigations, the legal and benefits community have been very focused on the ERISA fiduciary implications for plan sponsors and plan fiduciaries, with law firms and benefits consulting firms getting into the act by writing article after article on the subject. (Many of the articles are listed in the links section over in the right-hand column, including one here at Benefitsblog: “Plan Fiduciaries: Navigating the Rough Waters of the Mutual Fund Investigations.”) That being said, I have often wondered from time to time why we have not heard from one government agency that would seem to have a great deal to say about all of this–that is, the Department of Labor. And yes, we do have the remarks of Assistant Secretary Ann L. Combs Before the Annual Conference of The National Defined Contribution Council, which many of those who have written on the subject have referred to. However, I was glad to see that last week the Investment Company Institute issued a letter to the Department of Labor requesting “guidance from the Department of Labor that will help retirement plan sponsors and fiduciaries protect plan participants from any negative impacts of market timing activity.” The letter highlights some of the legal issues under ERISA which plan sponsors and plan fiduciaries are struggling with and asks the DOL to issue guidance with respect to these issues:

  • that nothing in ERISA prohibits plan fiduciaries from restricting the activities of participants who engage in market timing of plan investment alternatives;
  • that a plan sponsor should take into account and, under ordinary circumstances, be entitled to rely upon a determination made by an investment vehicle (or its manager) that certain trading activity is harmful to the interests of other shareholders (and, therefore, other plan participants);
  • that it is consistent with ERISA’s fiduciary rules for a plan sponsor to take reasonable steps to facilitate the application of any restrictions imposed at the fund level to plan participants; and
  • that section 404(c) relief will continue to be available for plan fiduciaries who select an investment option that imposes measures to restrict market timing and apply such restrictions to individual participants.

It is interesting to note this portion of the letter:

“[W]e understand that some plan sponsors confronted with concerns about the trading activity of one or more plan participants have suggested that ERISA prevents them from restricting market timing. This position is inconsistent with a recent federal district court ruling (dismissing an ERISA claim by participants challenging a plan’s terms and practice that restricted excessive trading in plan accounts) and, we submit, the clear dictates of ERISA to act solely in the interest of plan participants. To eliminate any confusion regarding ERISA’s dictate, we urge a strong statement by the Department affirming that ERISA contains no prohibition on restrictions imposed by plan fiduciaries to deter market timing in their retirement plans.

The ICI is likely referring to this case, Straus v. Prudential Employee Savings Plan, 253 F. Supp 438 (E.D.N.Y. 2003), which was highlighted here in a previous post: “An Unsuccessful ERISA Legal Challenge to Market-Timing Restrictions.”

The ICI asks that any guidance issued by the DOL be “prospective in scope, and that plan fiduciaries be given a reasonable period of time to implement.”

ICI Requests Guidance from the DOL

With all of the recent mutual fund scandals and investigations, the legal and benefits community have been very focused on the ERISA fiduciary implications for plan sponsors and plan fiduciaries, with law firms and benefits consulting firms getting into the act by writing article after article on the subject. (Many of these articles are listed in the links section over in the right-hand column which includes one at Benefitsblog: “Plan Fiduciaries: Navigating the Rough Waters of the Mutual Fund Investigations.”) That being said, I have often wondered from time to time why we have not heard from one government agency that would seem to have a great deal to say about all of this–that is, the Department of Labor. And yes, we do have the remarks of Assistant Secretary Ann L. Combs Before the Annual Conference of The National Defined Contribution Council, which many of those who have written on the subject have referred to. However, I was glad to see that last week the Investment Company Institute issued a letter to the Department of Labor requesting “guidance from the Department of Labor that will help retirement plan sponsors and fiduciaries protect plan participants from any negative impacts of market timing activity.” The letter highlights some of the legal issues under ERISA which plan sponsors and plan fiduciaries are struggling with and asks the DOL to issue guidance with respect to these issues:

  • that nothing in ERISA prohibits plan fiduciaries from restricting the activities of participants who engage in market timing of plan investment alternatives;
  • that a plan sponsor should take into account and, under ordinary circumstances, be entitled to rely upon a determination made by an investment vehicle (or its manager) that certain trading activity is harmful to the interests of other shareholders (and, therefore, other plan participants);
  • that it is consistent with ERISA’s fiduciary rules for a plan sponsor to take reasonable steps to facilitate the application of any restrictions imposed at the fund level to plan participants; and
  • that section 404(c) relief will continue to be available for plan fiduciaries who select an investment option that imposes measures to restrict market timing and apply such restrictions to individual participants.

It is interesting to note this portion of the letter:

“[W]e understand that some plan sponsors confronted with concerns about the trading activity of one or more plan participants have suggested that ERISA prevents them from restricting market timing. This position is inconsistent with a recent federal district court ruling (dismissing an ERISA claim by participants challenging a plan’s terms and practice that restricted excessive trading in plan accounts) and, we submit, the clear dictates of ERISA to act solely in the interest of plan participants. To eliminate any confusion regarding ERISA’s dictate, we urge a strong statement by the Department affirming that ERISA contains no prohibition on restrictions imposed by plan fiduciaries to deter market timing in their retirement plans.

The ICI is likely referring to this case, Straus v. Prudential Employee Savings Plan, 253 F. Supp 438 (E.D.N.Y. 2003), which was highlighted here in a previous post at Benefitsblog: “An Unsuccessful ERISA Legal Challenge to Market-Timing Restrictions.”

The ICI asks that any guidance issued by the DOL be “prospective in scope, and that plan fiduciaries be given a reasonable period of time to implement.”

Pension Funding Equity Act Passed by the Senate

The Pension Funding Equity Act passed the Senate in a vote of 86-9, in what is being called a “rare election-year concord.” The bill provides additional pension funding relief for the airline and steel industries.

Articles discussing the legislation:

Read more about the bill in a previous post here.

<![CDATA[From the MutualFundBlog: Congressional Hearing Yesterday]]>

The U.S. Senate Committee on Governmental Affairs, Subcommittee on Financial Management, the Budget, and International Security, held a hearing yesterday entitled “Oversight Hearing on Mutual Funds: Hidden Fees, Misgovernance and Other Practices that Harm Investors.” You can access all of the testimony at the hearing at this link. From Senator Fitzgerald‘s opening remarks at the hearing:

The mutual fund industry is indeed the world’s largest skimming operation – a $7 trillion trough from which fund managers, brokers and others insiders are steadily siphoning off an excessive slice of the nation’s household, college and retirement savings.

Isn’t it special that Congressmen and Senators have set up a separate mutual fund deal for themselves where no skimming is allowed? Sad to say, retirement investing appears to be yet another instance in which federal employees get a great deal, but everyone else gets the shaft. A Senator or Congressman or a member of the SEC staff who participates in the TSP [i.e. Thrift Savings Plan] will have more money at retirement than a member of the general public who invests the same amount for the same number of years in a comparable private sector index fund. That isn’t right. In fact, it’s outrageous.

This committee and this Senate should not rest until Congress has given every American the same retirement savings opportunity that it’s given itself.

As we commence this oversight hearing, I would like to note that the Senate Committee on Banking, Housing and Urban Affairs, the authorizing committee which will ultimately decide questions of mutual fund industry reform, has scheduled a series of legislative hearings to examine the mutual fund scandal and the merits of various reform proposals. I commend the leadership of Chairman Shelby and Ranking Member Sarbanes, and look forward to continuing to work with them on this issue in the coming months.

According to Fitzgerald, the special mutual fund system available to federal employees through the TSP charges only 11 cents per $100 invested compared to 63 cents per $100 for the average private sector S&P 500 index fund.

Eliot Spitzer’s comments at the hearing are highlighted in the news this morning:

From the Dow Jones Newswire via the Wall Street Journal (no link available): “Republican Senators At Odds On Mutual Fund Fee Regulation.” According to the article, Senator Fitzgerald plans to introduce sweeping legislation in a few days aimed at reducing fees. Senate Banking Committee Chairman Richard Shelby, R-Ala., is not sure new laws are needed and does not want Congress setting fund fees.

Quote of Note from the article: “Fitzgerald, who chairs a Senate Governmental Affairs subcommittee, said investors should have access to low-cost mutual funds, similar to what is available to members of Congress and their staff through the federal Thrift Savings Plan. “Hopefully, we can give the rest of America as good a mutual fund deal as we give ourselves,” Fitzgerald said at a subcommittee hearing Tuesday on mutual funds. He said his approach could save Americans billions each year in fund fees. Shelby welcomed Fitzgerald’s involvement, but said any legislation on mutual funds will be driven by the Banking Committee and would focus on fee disclosure, not setting fees.”

Also, Paul F. Roye, Director for the Division of Investment Management for the SEC, spoke at a PLI conference yesterday entitled “Understanding Securities Products of Insurance Companies – 2004.” You can read his comments here in which he discusses the SEC’s enforcement initiatives pertaining to the mutual fund industry.

UPDATE: The Philadelphia Inquirer has a good article today discussing the hearing: “The fight over mutual-fund fees.

Also, from the hearing yesterday: “Mutual Fund Whistleblower Tells of Beating.” (From the Washington Post. Thanks to Benefitslink.com for the pointer.)

Senate Action Expected on the Pension Funding Equity Act

Reuters is reporting: “Senate Presses Forward on Pension Relief.” According to the article, the Senate “pressed forward on Tuesday with a bill granting U.S. companies billions of dollars in pension funding relief, despite Bush administration protests over proposed extra breaks for the airlines and steelmakers” and that a final vote on the bill is scheduled for Wednesday. Differences between bills passed by the House and Senate must be reconciled before a final version can be sent to President Bush.

You can access information about the Pension Funding Equity Act of 2003, H.R. 3108, here. You can access some of the very interesting debate going on from the Senate floor here.

As many of you probably already know, three Cabinet secretaries said they would urge President Bush to veto the bill if it contains provisions giving special relief to airlines and other companies that have fallen behind in their pension payments, as reported at CNN.com: “Administration threatens veto of pensions relief bill.” You can read the letter written to Senate majority leader, Bill Frist, here.

Continue reading for one Senator’s remarks, likening pension funding deficits to credit card debt. This same Senator Fitzgerald spearheaded a hearing held yesterday on the mutual fund industry, which you can read about in a separate post.

“I know pension funding is something that perhaps makes the eyes of the press glaze over. Not many members of the public understand the importance of this. This is a very roundabout way of transferring liabilities to taxpayers. It is not easy for people to understand. But if I were to make an analogy that the average American could understand about what we are doing here, imagine that you have someone who is behind in their credit card payments. Imagine that you said to that person, you are behind in making your payments on the credit card. You are only making the minimum payment. You are trying to make a minimum payment due each month. You have this huge balance. It is going to take years and years to pay off this deficit of what you owe the credit card company or the bank. Imagine if this person were to have their minimum payments lowered. Imagine that when they are already just barely making the minimum payments, you say: OK, we will even lower your minimum payment.

We are doing that here. But in addition, we are going beyond that. We are telling the credit card holder while you are lowering your minimum payments and digging the hole deeper so that you are likely never to get out of debt, we are going to go out and allow you to continue spending and add more to your credit card. Can you imagine a credit card company telling anybody that? That wouldn’t be a way to advise a distressed consumer to try to get out of debt.

We are doing that and more here today in the Senate. We are not only allowing these companies to quit making their required payments into their pension plans, but we are allowing them to continue spending. We are allowing them, specifically if they are 60-percent funded, to keep sweetening the pension benefits for their employees and digging the hole deeper. That would be not only allowing the credit card holder to keep spending but encouraging the credit card holder to go out while they are behind in the payments on this one credit card and get some more credit cards and run up balances on those credit cards.

Obviously, if we pass this legislation we are going to make it hopeless for some companies ever to recover and to fulfill the promises they have made to their pension participants.”

Cash Balance Plan Litigation Developments

Some of you may have read a recent article in a newsletter from a major benefits consulting firm which discussed developments in the cash balance plan litigation arena. The article states that “[t]he first appellate court to consider whether the plan design violates federal age discrimination laws has ruled in favor of the plans.” The article later describes how in an unpublished opinion, the “Ninth Circuit Court of Appeals ruled on CBS’ adoption of a cash balance plan and the conversion method it used” and “held that the plan and conversion method do not violate ERISA’s fiduciary standards, do not result in an impermissible cutback of benefits and do not violate federal age discrimination laws.”

Here is what the unpublished opinion in Godinez et al. v. CBS Corporation et al., 81 Fed.Appx. 949, 2003 WL 22803700 (9th Cir. 2003), actually said:

1. “Appellants’ ERISA fiduciary claim fails because ERISA’s fiduciary duty provisions are not implicated where the employer, acting as the Retirement Plan’s settlor, changes the form or structure of the Plan.”

2. “Appellants’ claim under 29 U.S.C. section 1054(g) fails because Appellants did not put forth any substantive evidence to show a decrease in their benefit accruals. As CBS carried its burden of production on summary judgment, Appellants were required to present specific evidence in response. . . .The closest Appellants came to offering evidence of a decline in their accrual rate was their experts’ promise that future study and analysis of the Cash Balance Plan would establish that the Appellants’ pensions would have been larger had CBS continued the Traditional Pension Plan. However, no calculations were provided to the court, and Appellants’ conclusory assertions are insufficient to defeat summary judgment. Therefore, the district court did not err in granting summary judgment in favor of CBS on Appellants’ claim for decrease of accrued benefits under ERISA.”

3. “Appellants’ ADEA claim fails because they failed to produce any evidence that conversion to the Cash Balance Plan disproportionately impacted older employees.”

When I first read the article, I became intrigued that there might now be a Court of Appeals decision supportive of cash balance plans. However, after reading the unpublished opinion, I do not think the case comes out quite as strongly in favor of cash balance plans as the article seems to imply, ruling instead that there was not any substantive evidence presented in favor of appellants’ claims.

For more on the cash balance plan controversy, there are links pertaining to cash balance plan litigation in the right-hand column. You can also access previous posts on the subject here or here.

Cash Balance Plan Litigation Developments

Some of you may have read a recent article in a newsletter from a major benefits consulting firm which discussed developments in the cash balance plan litigation arena. The article states that “[t]he first appellate court to consider whether the plan design violates federal age discrimination laws has ruled in favor of the plans.” The article later describes how in an unpublished opinion, the “Ninth Circuit Court of Appeals ruled on CBS’ adoption of a cash balance plan and the conversion method it used” and “held that the plan and conversion method do not violate ERISA’s fiduciary standards, do not result in an impermissible cutback of benefits and do not violate federal age discrimination laws.”

Here is what the unpublished opinion in Godinez et al. v. CBS Corporation et al., 81 Fed.Appx. 949, 2003 WL 22803700 (9th Cir. 2003), actually said:

1. “Appellants’ ERISA fiduciary claim fails because ERISA’s fiduciary duty provisions are not implicated where the employer, acting as the Retirement Plan’s settlor, changes the form or structure of the Plan.”

2. “Appellants’ claim under 29 U.S.C. section 1054(g) fails because Appellants did not put forth any substantive evidence to show a decrease in their benefit accruals. As CBS carried its burden of production on summary judgment, Appellants were required to present specific evidence in response. . . .The closest Appellants came to offering evidence of a decline in their accrual rate was their experts’ promise that future study and analysis of the Cash Balance Plan would establish that the Appellants’ pensions would have been larger had CBS continued the Traditional Pension Plan. However, no calculations were provided to the court, and Appellants’ conclusory assertions are insufficient to defeat summary judgment. Therefore, the district court did not err in granting summary judgment in favor of CBS on Appellants’ claim for decrease of accrued benefits under ERISA.”

3. “Appellants’ ADEA claim fails because they failed to produce any evidence that conversion to the Cash Balance Plan disproportionately impacted older employees.”

When I first read the article, I became intrigued that there might now be a Court of Appeals decision supportive of cash balance plans. However, after reading the unpublished opinion, I do not think the case comes out quite as strongly in favor of cash balance plans as the article seems to imply, ruling instead that there was not any substantive evidence presented in favor of appellants’ claims.

For more on the cash balance plan controversy, there are links pertaining to cash balance plan litigation in the right-hand column. You can also access previous posts on the subject here or here.

Another Tax Blog on the Scene

Thanks to Joe Kristan at the RothCPA.com for pointing me to a new tax blog by Tax Analysts called “Tax Analysts Alive.” One might be inclined to ask, as Joe does, “Where, oh where, are the links?” The blog is off to a good start, though, and is a welcome comrade in the tax blog brigade.

Mutual Funds Make The, uh, Top Ten List . . .

The North American Securities Administrators Association (“NASAA”) has released its “top 10 list”–that is, its top 10 Scams, Schemes & Scandals investors are likely to see in 2004. Included in this list along with Ponzi schemes and internet fraud, are “Mutual Fund Business Practices” and “Variable Annuities.” You can read the press release here. Also, you can visit the NASAA Fraud Center which contains additional information for investors.

More IRS Audit Humor . . .

This really gave me a chuckle. (From the Tax Guru.)