The Rosenbaum Law Firm P.C. Blog

My latest article on JDSupra.com can be found here.

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My latest article on JDSupra.com can be found here.

It seems that with Voluntary Compliance Issues, it seems that at the top of the list are issues regarding plan compensation and conflict between practice and what the plan document says.

The issue exists when the plan sponsor administers a definition of compensation that is inconsistent with what the plan document says. That usually happens with bonuses where the intent is for the plan sponsor to exclude it and the plan document forgets to exclude it. That could be an issue as there is corrective contributions that may have to be made for missed deferral opportunities, as well as employer contributions.

It’s important that you check your practice in plan administration when it comes to the definition of compensation and whether it’s inconsistent with what the plan document says.

People of my generation and older remember the old E.F. Hutton commercials. As a kid, I had no idea that it was a brokerage firm, but I knew that when an E.F. Hutton talked, people listened. When it comes to the Department of Labor (DOL) talking about retirement plans, my recommendation is the same.

One concentration on the DOL these days on audits is asking plan sponsors about their written cybersecurity policies and procedure, and asking about cybersecurity attacks, and the response(s) to them. So my recommendation is pretty clear: get a cybersecurity policy.

When you look at the problems of retirement plans, one that gets short shrift is coverage and that is one of the pillars of qualified plans needed to be fulfilled in order to be a qualified plan. It’s a forgotten rule of compliance that can always end up leading to plan disqualification if the employer fails to properly cover enough of their employees in order to satisfy minimum coverage tests.

I don’t want to get into a complex discussion on coverage, but you need to know that every plan sponsor must annually meet coverage to ensure that the minimum amount of people that need to be covered are. One big problem with coverage is that there are third-party administrators (TPAs) that may forget to actually perform the test or tests and if a plan would have failed, then the corrective methods aren’t made and it becomes a bigger headache many years later especially when caught on a government audit.

The other problem with coverage is understanding that a group of corporations that have some common ownership and/or some affiliation may be counted as one company under the controlled group or affiliated service group rules which means that employees of these other companies may have to be covered under the one company who sponsors a retirement plan. How does an error like that happen? A TPA not getting the rules analyzed correctly based on the corporate fact pattern or the plan sponsor failing to tell the A that there are these affiliated companies with common ownership that needs to be reviewed.

In terms of errors, failing to provide benefits to employees who needed to be covered under a retirement plan for coverage is one of the deadliest errors made by a plan sponsor and a candidate for plan disqualification.

When I was at that semi-prestigious law firm many moons ago, I developed this plan review called the Retirement Plan Tune-Up. I’d look at the plan document, plan design, costs, the Fiduciary process, basically anything that the plan sponsor can grow at me and I’d do it for $750.

When I started my own law firm, I kept that program and even had brochures about it. I gave speeches at some great 401(k) Rekon events to tout them as well and I’ll be honest, maybe I’ve done about 10 of them in 12 years. The fact is that most plan sponsors tune out the need to take care of their plan and usually only take care of it when it needs to. Plan sponsors for the most part are reactive rather than pro-active. They don’t understand the threats to liability as a plan sponsor until it happens to them.

I’m not trying to mean or to denigrate Plan sponsors. The fact is they’re busy with running their business and they don’t understand the nature of fiduciary responsibility and the continued need for vigilance. Some plan sponsors, but most don’t and that is always going to be an uphill battle.

For any presidential campaign, there usually is an ad about which candidate would you trust to handle the phone call in the wee hours of the morning. You want someone to answer the call instead of it just going to voice mail.

When dealing with an organization, one of the problems I’ve seen is a leadership vacuum where there might not be a decisive decision maker at the top or the top person maybe out for extended periods of time and there is no one to pick up the slack. Armies need generals and any organization needs leadership that they can answer to and will be responsible if something does go wrong. Any organization that I ever was involved with that wasn’t efficient in its work was because there was a lack of leadership either at the top or in the middle. Employees and workers need direction and when there is a lack of leadership, they are not going to get it.

A leadership vacuum means that work isn’t going to be efficiently done, mistakes are going to be made, and clients are going to be lost. Worst of all, the inmates are going to run the asylum and that always reminds me of the first place I ever worked at full time: it was four years of summer camp and that place has been out of business for 18 years.

The Plan Sponsor Council of America’s Annual Survey shows that 2019 was a great year for retirement plan savings by participants.

The survey showed record contribution and participation rates. Plan sponsors contributed an average of 5.3% of compensation to participants, which was the highest recorded to date. In addition, plan participants contributed an average of 7.6% of pay in 2019.

More than 90% of eligible employees in plans had an account balance.

What is surprising to me is that only 70% of plans use an investment advisor for the plan, so that means 30% had no help.

Retirement plan fiduciaries will be barred from casting corporate-shareholder proxy votes in favor of social or political positions that don’t advance the financial interests of retirement plan participants, under a new Department of Labor (DOL) final rule.

These matters are often referred to as economic, social and governance (ESG) issues.

The final proxy voting rule makes clear that fiduciaries are not required to vote every proxy and outlines six points a fiduciary must undertake when making decisions on exercising shareholder rights, like proxy voting:

• Act solely in the economic interest of the plan and its participants and beneficiaries.
• Consider any costs involved.
• Not subordinate the interests of the participants and beneficiaries to any non-pecuniary objective.
• Evaluate material facts that form the basis for any particular proxy vote.
• Maintain plan records on proxy voting activities and other exercises of shareholder rights.
• Exercise prudence and diligence in the selection and monitoring of proxy advisory firms.