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ASPPA National

Conference

National Harbor, MD

October 23, 2016

Employee Benefits Publications & Seminars © 2016 Jeffery Mandell

ERISA/QUALIFIED PLAN:

Trends, Lessons, Future

Jeffery Mandell, Esq.

The ERISA Law Group, P.A.205 N. 10th Street, Suite 300 Boise, ID 83702

208.342.5522 866.ERISALAW

[email protected]

www.erisalawgroup.com

Attorney Speaker

Trainer Author


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ERISA Is:

•Behemoth, Messy, Labyrinthine

•Profoundly Effective

•Necessary

•Enormously Successful

•Always Evolving


JEFFERY MANDELL, ESQ.

• Founder and President of The ERISA Law Group, P.A.

• Founder and President of Employee Benefit Publications & Seminars

• Over 34 years concentrated practice in ERISA

• Fellow American College of Employee Benefits Counsel

• Co-editor and Architect of the 401(k) Advisor, a nationally distributed monthly publication by Wolters Kluwer (ftwilliam)

• Nationally recognized practitioner, speaker, and author on ERISA topics

• Best Lawyers in America since 1995

• Former Adjunct Professor at University of Wisconsin Law School and University of Idaho College of Law

• His Aspen/Panel Publisher textbook on ERISA plan administration and legal matters published in 1998

• Clients from coast to coast


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Regarding ERISA and Qualified Plans,

Attendees Will Learn:

• Brief pre-ERISA history

• Evolution of Title I & Internal Revenue Code

• Impact of changes on business & fiduciaries

• Lessons to empower you, enhancing your context

• The future?


U.S. First Formed Pension Plan

What Year? For What Company?

1875 American Express

1890 Baltimore & Ohio Railroad Company

1891 Grand Trunk railway of Canada

1903 American Great Again Trump, MCMLXXIV


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Why?

Employee

Retirement

Income

Security

Act of 1974, as amended


Why ERISA? ( one)

John F. Kennedy (Pres. ‘61-‘63)

Studebaker

“Sunlight being the best disinfectant”

NBC

“I will not be ignored, Dan”

All of above None of above


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Pre-ERISA


Why ERISA?

1954 Studebaker Champion (’39 ‘58)


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Several ERISA Themes

•History repeats itself

•The pendulum swings

•Lessons often not learned

•Things change, but always the

same

•Stakeholder conflicting objectives


ERISA has Four

“Titles”


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Title I – Protection of Employee

Benefit Rights

•Reporting

•Disclosure

•Participation

•Vesting

•Administration

•Funding

•Enforcement

•Fiduciary

responsibilities

& standards


Title II – Amendments to the Internal

Revenue Code relating to Retirement Plans

•Minimum participation, vesting,

funding standards

•Collectively bargained plans

•Deduction & contribution limits


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Title II (continued)

•Miscellaneous “qualification”

provisions

•Taxation, cutbacks


•Department of Labor has Title I

jurisdiction

• Internal Revenue Service has Title

II jurisdiction

•Title I = “ERISA”

•Title II (IRC) = “Code”


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Different Objectives of

Code/IRS & Title I/DOL

• Share Some Common Ground Yet

Radically Different


Code/IRS Objectives

•Establish and enforce federal tax law

for policy purposes

• To encourage employers to establish

plans, with equities to ensure

broader coverage and benefits

▫ Nondiscrimination rules, for example


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Title I/DOL Objectives

•Establish and enforce non-tax ERISA law

•Reporting to the government

•Disclosure to participants

•Establish fiduciary responsibilities and standards

•Private rights of actionEmployee Benefits Publications & Seminars © 2016 Jeffery Mandell


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Title IV – Termination Insurance

•Pension Benefit Guaranty

Corporation

•Multiemployer plans

•Liabilities

•Mergers, transfers between plans


Title III – Jurisdiction,

Administration, Enforcement

•What agencies are in charge of what?

•Explains oddity of a Form 5500 filing with twogovernment agencies (IRS & DOL)


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Internal Revenue

Code (Code)

Outcome Based

Objective

Mathematical

Title I (ERISA)

Fiduciary Matters

Process Based

Subjective

Meaning of Words

v.


Shift from

Defined Benefit (DB)

Defined Contribution (DC)

Especially 401(k)s (K)


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The DB K Migration is

Remarkable but Unremarkable

•No impact on savings

•6% savings rate as a % of wages

before and after shift

•Pre and post ERISA - no impact of

employee coverage in retirement

plans


Growing Failure Leading up to ERISA and

Still Now

• 10% of population covered by a plan

• Woeful coverage among small

business

• Many leaders in government and

retirement plan community cite lack of

coverage as the leading failure of

ERISA


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Most Remarkably

•The DB K shift materially

altered ERISA


Why 401(k)s?

Because of 1988 Treasury Regulations finally blessing salary reduction contributions

and

the resulting market revolution


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Why 401(k)s? (continued)

In the mid-late 1980s:

•Financial institutions stepped into

that space

•The IRS’ “regional prototype plan”


DB K Impact #1

Employer risk Employee risk

•Risk of Investments

•Risk of Retirement

•Costs


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DB K Impact #2

Materially more focus on and involvement of employee

Pre-401(k):

• Employees only received SPDs, SMMs, a benefit statement, distribution and beneficiary designation forms

• Employees were not investors

• No employee education


DB K Explosion of Participant

Notices• QDIA

• Mapping

• Safe Harbor

• 404(c)

• Prospectus or Summary

• Automatic (Enrollment) Contribution Arrangements

• 404a-5


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DB K Impact #3

ERISA, including DOL and IRS –

statutes, regulations and case law –

are always playing catch-up to

modernization of the industry … as

new battle lines are drawn


DB K Impact #4

Explosion of fiduciary regulations

Pre-401(k)

• ERISA §404(c) is one example. One sentence in ERISA ’74 – If a participant “exercises control” over her account, the participant is not a “fiduciary by reason of such exercise” and no (other) fiduciary “shall be liable for any loss or breach which results from . . . the participant's exercise of control.”


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Post-401(k) 404(c) 1993 Regulations

•Long

•Detailed

•Dense

•Complex

Were they necessary?Employee Benefits Publications & Seminars © 2016 Jeffery Mandell

1993-1994 Attorney-Client Initial Meeting

Attorney: So, I understand that when this mutual fund nose-dived your profit sharing account balance plummeted to next to nothing.

Client: That’s right.

Attorney: And that your full account balance was invested in this fund because of its great return.

Client: Uh-uh.

Attorney: And that the mutual fund crashed just two days before you retired, leaving you pretty much with zip.


Attorney: I also understand that under this plan you yourself chose to invest your plan amounts in this fund, that you could have chosen some other investments, and that several times a year you could have changed investments.



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1993-1994 Attorney-Client Initial Meeting

Attorney: So, I understand that when this mutual fund nose-dived your profit sharing account balance plummeted to next to nothing.

Attorney: I see. Well, did your employer, the plan trustee or plan committee encourage or tell you to invest in this fund?

Client: No.

Attorney: Did anyone give you materials that said that you could never lose your shirt with this investment?

Client: No. I just thought it was a really great investment. You see, this broker-friend of mine told me…

Attorney: Excuse me. I guess I am unclear as to why you believe you have a strong lawsuit

against your employer, the trustee and profit sharing plan committee.

Client: Well, you see, my neighbor, Mort Klevan…

Attorney: Excuse me again. So, is my understanding correct that you voluntarily decided to

put all of your eggs in one basket even though there were lots of other investment

opportunities available to you, and that, in hindsight, you think that was not a

prudent thing to do, but now you want your former employer to cough up your loss?

Client: You got it. I read in the Wall Street Journal that….


Attorney: Well, I’m sorry but I can’t help you. For one, no judge or jury is going to agree with you, for two, the last kind of case I want is an ERISA case, and for three, there is this ERISA provision, §404(c), which says it’s your fault.

Pre-1994 Meeting Conclusion


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Attorney: Excuse me, again. Yes I read that too, but let me ask you just a few more questions. The plan documentation you gave me does

not say that your plan is a “§404(c) plan,” nor that you will be solely responsible for your own decision.

Client: That’s right, and I gave you everything I have.

Attorney: Did you also say that you asked for some updated data regarding this mutual fund that it took the plan two full weeks to get it to

you?

Client: Exactly.

Attorney: I see. It is getting clearer to me. Finally, you told me you could switch out of this fund several times a year…

Client: That’s right, but it was four times a year, once a quarter.

Attorney: Well you know, I am familiar with this fund and its great recent returns. But I would say you’d really need to get in and out of it on

a daily basis to really protect yourself.

Client: Exactly my thoughts, the general volatility rule, you know, that my neighbor Mort…

Attorney: Wait a second. Did you say Mort Klevan? I think he would be the perfect expert witness.

Post-1993 Meeting Conclusion


Explosion of Fiduciary Law (Impact #4 cont.)

Older & wiser, the §404(c) regulations

were necessary

As were fiduciary level (408(b)(2)) &

participant level (404a-5) disclosures

As were fiduciary conflict of interest

regulations

• Expansion into rollover IRAs


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401(k) plans plus technology

engendered current fiduciary

interest


DB K Impact #5

Material maturation of fiduciary

responsibilities

Now we know more of the meaning

of broad Title I principals of conduct


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ERISA Sec. 404(a)(1)(B)

A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and…

with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims…


DB K Impact #5 (cont.)

Explosion of fiduciary litigation

The neglected amorphous stepchild

of ERISA Title I – fiduciary matters –

stands toe-to-toe with Title II (Code)


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Fiduciary Law

Fa

t

Fr

ee

LI

TE

Pa

LE

AL

e

IP

ASto

ut

Pre-1974 ERISA 1990’s 2000’s 2010’s


Freddie F. Fiduciary

Pre-1974 ERISA-

1990s

2000’s


2010’s

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DB K Impact #6

Radical changes in production and

management of qualified plans

and

in the business of retirement plans


DB K

Technological Advances

Plans became more complicated

More moving parts

Fund line-ups/mutual funds


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Pre-401(k) Plan Business Model

Investment

Broker/

Advisor

Tax

Lawyer

Documents &

Advise

• Form 5500

• Financials

• Benefit Statements

• Some testing

CPA Recordkeeper


Post-401(k) Plan Business Model

Tax

ERISA

Lawyer

Wall Street

CPA

TPA


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The Business of Plan Production,

Design, Management & Operation

Was: Plodding, deliberative, legally

correct

Is: Pretty, quick, not legally

compliant


The historical lines are blurred, unrecognizable, as to what is properly legal, recordkeeping and investment.

Plans are now a commodity, due in part to:

• Technology

• The market

• Internal Revenue Service policies, most notably increased complexities and regarding the IRS’ “qualification” of plans.


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Consequences of New Business Model

Changed roles of independent legal counsel

Steady deterioration of legal compliance

Increased value and utility of Employee Plans Compliance Resolution System


New Business Model

Automation has become primary in

the plan process

Increasingly exceedingly difficult for

lawyers and employers to move

financial institutions to change

documents and practices to comply

with the law


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Really, What Does an ERISA Lawyer Do?

What value, if any, do they have?


Independent Legal Counsel--

Protects plan sponsors from plan providers

Making it a fairer playing field

Provides counsel independent of providers

Provides checks and balances


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ERISA lawyers “fix” problems

arising from the providers,

including:

• Improper beneficiary designation

forms

• Incorrect top-heavy testing and

contributions


Common Provider Mistakes (cont.)

• Improper preparation of

restatements. Leaving things out,

changing things, etc. (for example,

not properly listing participating

employers or having them adopt,

or to frame as multiple employer

plan).


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• Amending plan document improperly (e.g., putting in special provisions that are not applicable or could be addressed more precisely in an existing section; inappropriate use/nonuse of defined terms).

• Failure to recognize/monitor controlled group status.

• Failure to recognize/address leased employee issues.

• Poor Form 5500 preparation resulting in incorrect information and completion in conflict with the instructions (and/or needlessly garnering attention of DOL/IRS).



• Imprecise legal advice regarding EPCRS corrections.

• Provision of legal advice despite written and oral statements to the contrary.

• Poor advice generally. For example, regarding compliance with fee disclosure last week a provider furnished 408(b)(2) disclosures and strongly implied no need to review, understand, or assess, but rather to just file them.

• Failure to conduct and document discrimination testing.


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• Failure to follow electronic delivery rules.

• Insufficient documentation/process relative to plan mergers.

• Improper exclusion of temporary/part time employees.

• Poor document retention practices.

• Failure to timely amend/restate.


ERISA, Primarily Code, Evolution

• Prior to 1982, TEFRA, a professional corporation could contribute hundreds of thousands of dollars to a plan, the owner could borrow it all the next day, the owner could repay it over an unlimited number of years, and he or she could take a deduction for the interest payments

• Prior to the Retirement Equity Act of 1984, there were virtually no protections for spouses in plans

• Nor were QDROs recognized


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ERISA, Primarily Code, Evolution (cont.)

• Prior to the Tax Reform Act of 1986, an employee would be treated as participating in a plan even though he or she received nothing

▫ using “integration” now called permitted disparity

• Doctors and lawyers could have their own extremely generous plans, and no plans for their staff

• Plans were invested in guaranteed annuity contracts, providing enormous returns for the annuity providers


“Qualified” Plan Tax

Benefits Are

Uniquely Generous


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“Disqualification” Has

Five Consequences

1) Employer loss of deductions

for contributions

2) Inclusion of plan benefits in

participants’ taxable income


Disqualification (cont.)

3) Taxation of gains in trust

4) Contributions treated as wages

for employment tax purposes

(FICA/Medicare)

5) Threat of litigation by

participants


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•Why we lawyers are what we are

•Monstrous tax losses

•Plans were being disqualified

leading up to APCRS



No (unique) statute of limitations


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Lessons, Themes, The Future

The Cycle

Law lite, technological advantages, more laws, greater burdens on employers and fiduciaries, more litigation, more financial opportunities for plan providers to help with those burdens, more noncompliance and abuses, more litigation and laws and on and on.


Humility, Recognizing ERISA’s

•Enormity

•Breadth

•Depth

•Complexity

•See a Cry for Revision Reform

(after the slides)


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ERISA Is Not For The Weak

Will always change, challenge and become more complex

Do you have the appetite and/or tolerance for it?

There will be more additions, not subtractions.


Small Business Will Continue to

Sometimes be Misunderstood

The government is getting better,

but will still think there are more

“bad players” than there are

There will always be bad players


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The shift away from determination

letters and independent ERISA

attorney involvement will create

greater noncompliance, and thus

greater risk.


The ying-yang of $$

and creativity

and litigators

and the IRS and DOL


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“Intent” still does not matter with

the IRS

Agents are people too

Dwindling government resources

affecting quality of agents


A failure of ERISA: Individuals will still have the hardest time to be protected

-Normal P. Stein, a law professor at Drexel University School of Law in Philadelphia, reflecting on 40 years of ERISA law, likened a participant’s quest for benefits to Dorothy’s attempt to return to Kansas in “The Wizard of Oz,” where she faced a long road sprinkled with complications that eventually led to a “blustery old gatekeeper” who lacked adequate remedies.


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Process, Process, Process, Did I Say

Process, Matters

Employers and fiduciaries must re-

examine their processes, their

documents, and their

documentation


Continued attempts to cover more

people in plans and to increase

savings

Continued resistance to change


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More litigation

Deeper understanding of the meaning of fiduciary

Increased need for fiduciaries to, really, simply be bright, attentive and honest.


If you pay attention, at least some of

the future is clear, allowing you to

be better, and if you have the

resources, to be successful.


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What IS the context?


JEFFERY MANDELL

205 North 10th Street, Suite 300

Boise, Idaho 83702

208.342.5522

[email protected]

www.erisalawgroup.comEmployee Benefits Publications & Seminars © 2016 Jeffery Mandell

mailto:[email protected]

http://www.erisalawgroup.com/

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Disclaimer

This presentation is intended to provide

general information only and does not

provide legal, tax, or investment advice

or create an attorney-client

relationship. This material may be

considered attorney advertising under

rules of certain jurisdictions.
