Category Archives: Fiduciary and Fee Issues

VP of HR Sued Over 401(k) Operational Error

A proposed class action lawsuit in the Northern District of Illinois involving a failure to follow the terms of a 401(k) plan personally names the Vice President of Human Resources for Conagra Brands, Inc. Karlson v. Conagra Brands, Case No. 1:18-cv-8323 (N.D. Ill., Dec. 19, 2018) as a defendant, and, as it happens, the lead plaintiff is the former senior director of global benefits at the company. Other named defendants included the benefits administrative and appeals committee of the Conagra board, both of which committees included the named VP of Human Resources among its members.

Generally, class action litigation over 401(k) plans has alleged fiduciary breaches over plan investments, such as unnecessarily expensive share classes, undisclosed revenue sharing, and the like. However a failure to follow the written terms of a plan document is also a fiduciary breach under ERISA § 404(a)(1)(D), which requires fiduciaries to act “in accordance with the documents and instruments governing the plan” insofar as they are consistent with ERISA.

In the Conagra case, the plan document defined compensation that was subject to salary deferrals and employer matching contributions to include bonus compensation that was paid after separation from employment provided that it would have been paid to the participant, had employment continued, and further provided that the amounts were paid by the later of the date that is 2 ½ months after the end of employment, or end of the year in which employment terminated. Post-severance compensation was included in final regulations under Code § 415 released in April 2007 and is generally an option for employers to elect in their plan adoption agreements.  Note that, when included under a plan, post-severance compensation never includes actual severance pay, only items paid within the applicable time period that would have been paid in the course of employment had employment not terminated.

Karlson was terminated April 1, 2016 and received a bonus check 3 ½ months later, on July 15, 2016, and noted that the Company did not apply his 15% deferral rate to the bonus check and did not make a matching contribution. Because the bonus check fell squarely within the definition of “compensation” subject to contributions under the plan, Karlson filed an ERISA claim and exhausted his administrative remedies under the plan before filing suit.

The complaint alleges that the failure to apply deferral elections and make matching contributions on the bonus check was not a mere oversight on Conagra’s part. Instead, until 2016 Conagra had allowed deferrals to be made from all post-termination bonus checks (provided they were paid by the end of the year in which termination occurred), but in 2016 it limited it to instances where the bonus check was paid within 2 ½ months of termination.  In claim correspondence with Karlson, Conagra referred to this as an “administrative interpretation” of the terms of the Plan that was within its scope of discretion as Plan Administrator, and did not require a plan amendment.

Karlson maintained that the “administrative interpretation” contradicted the written terms of the plan and pursued his claim through the appeals stage. Karlson alleged, in relevant part, that Conagra’s narrowed administrative interpretation coincided with a layoff of 30% of its workforce and was motivated by a desire to reduce its expenses and improve its financial performance.  This, Karlson alleged, was a breach of the fiduciary duty of loyalty to plan participants and of the exclusive benefit rule and hence violated ERISA.  In addition to the fiduciary breach claim under ERISA § 502(a)(2), Karlson also alleged a claim to recover benefits under ERISA § 502(a)(1)(B).

As of this writing, per the public court docket the parties are slated for a status hearing to discuss, among other things, potential settlement of Karlson’s claims.

Although the timing of the layoff certainly adds factual topspin to Karlson’s fiduciary breach claim, the troubling takeaway from this case is that Conagra’s simple failure to follow the written terms of the plan is sufficient for a court to find that it violated its fiduciary duty. The other concern is that operational errors relating to the definition of compensation are among the IRS “top ten” failures corrected in the Voluntary Compliance Program and are also among the most frequent errors that the author is called upon to correct in her practice.

To limit the occurrence of operational failures related to the definition of compensation, plan sponsors should do a “table read” of the definition of compensation in their adoption agreement and summary plan description, together with all personnel whose jobs include plan administration functions (e.g., human resources, payroll, benefits, etc.) Reference to the basic plan document may also be required.  Most important, outside payroll vendor representatives should attend the table read meeting either in person, or by conference call.  All attendees should review, and be on the same page, as to the items that are included in compensation for plan contribution purposes, and on procedures relating to post-termination compensation.

If questions ever arise in this regard, benefit counsel can help.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2019 Christine P. Roberts, all rights reserved.

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Filed under 401(k) Plans, Benefit Plan Design, ERISA, Fiduciary and Fee Issues, Fiduciary Issues, Profit Sharing Plan

Webinar: Dept. of Labor 401(k) Audits – How Not to Get Selected (and How to Survive if You Do) UPDATED

 Y01VDYAX63Please join Christine Roberts and former DOL investigator David Kahn for a free, one-hour webinar on Wednesday, Aug 24, 2016 at 10:00 AM PDT which will provide tips on how to reduce the risk of audit, and how to survive an audit if one occurs. We will cover investigation triggers and issues that the DOL targets once an audit is underway. This no-charge webinar qualifies for continuing education credits for California CPAs and ASPPA. Join us for a webinar. Register now!

For those of you who missed the event, the PowerPoint and audio file are found here.

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Filed under 401(k) Plans, DOL Audit, Fiduciary and Fee Issues, Fiduciary Issues, Plan Reporting and Disclosure Duties, Profit Sharing Plan

Benefits Compliance: Where You Get It; What You Need (Poll)

Y01VDYAX63Changes in the law and continued advances in technology have made benefits compliance a constantly shifting landscape.  As one of many potential sources for your own path towards benefits compliance, E for ERISA would very much appreciate your participation in the following poll, which asks a few simple questions about where you currently get your benefits compliance services and what you may still need in that regard.  Thank you in advance for (anonymously) sharing your thoughts and experiences.


















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Filed under 401(k) Plans, 403(b) Plans, Affordable Care Act, Applicable Large Employer Reporting, Benefit Plan Design, Employer Shared Responsibility, ERISA, Federally Facilitated Exchange, Fiduciary and Fee Issues, Fiduciary Issues, Fringe Benefits, Health Care Reform, HIPAA and HITECH, Payroll Issues, Plan Reporting and Disclosure Duties, PPACA, Profit Sharing Plan, Uncategorized

A Conversation About the DOL Fiduciary Rule (Audio File)

The Department of Labor recently published a final regulation defining a “fiduciary” for purposes of investment advice rendered for a fee with regard to “retirement accounts.” The final regulation marks the first change in the regulatory definition of this type of fiduciary since the regulation originally was published in 1975. Retirement accounts under the new rule include those held under qualified plans (e.g., 401(k), pension plans), which have always been subject to ERISA, and now for the first time with regard to IRAs, which formerly were subject only to Internal Revenue Code rules governing self-dealing and other forms of prohibited transactions that the Internal Revenue Service enforced through audits.  The new rule – together with new and amended prohibited transaction exemptions related to the rule – becomes applicable on April 10, 2017, with full implementation required on and after January 1, 2018.

Recently I was interviewed about the new definition of an investment advice fiduciary for an episode of Money Talk that KZSB (1290 AM) will broadcast a 2:00 p.m. PDT on June 20, 2016.  The interview provides a broad overview of the rule and how it will likely impact IRA investors, employers, and the investment industry.  Joining me were program hosts Dianne Duva, Partner at Arlington Financial Advisors, and Neil Kriesel, who worked in finance for many years, has taught at SBCC as an adjunct faculty member and serves on the SBCC Foundation Board and various other non-profit organizations.  Click below to listen.

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Filed under 401(k) Plans, Fiduciary and Fee Issues, Fiduciary Issues, IRA Issues, Uncategorized

401(k) Fee Disclosure Deadlines Extended Three Months; Other Changes Made in Final Regulations Under ERISA 408(b)(2)

On February 2, 2012 the Department of Labor issued a final rule under ERISA Section 408(b)(2), governing disclosures that plan service providers must make to plan fiduciaries to allow them to confirm that the providers receive only “reasonable” amounts of compensation from plan assets in exchange for their services. The types of providers affected include Registered Investment Advisors, certain broker-dealers, third party administrators, and other service providers receiving $1,000 or more in direct or indirect compensation from plan assets. The rule extends the deadline for the initial disclosure three months, from April 1, 2012 to July 1, 2012.

The plan-level fee disclosure rules originally issued in July 2010 with a one-year deadline for implementation deadline, but that deadline was extended to April 1, 2012 last July. This is probably the last such extension (though anything is possible in an election year).

There is no prescribed manner of providing the required disclosures other than that it is in writing. Because compensation information may be conveyed through multiple or complex documents, the final rule includes a placeholder for rules on a “guide or similar tool” that would help fiduciaries locate information in disparate sources. An appendix to the final rule also includes a Sample Guide to get service providers working towards a disclosure roadmap.

Another significant change in the final rule is that it carves out, from plans that are covered by the disclosure rule, “pre-2009” 403(b) annuity contracts or custodial accounts that meet all the requirements set forth in DOL Field Assistance Bulletins 2009-02 and 2010-1 providing limited relief from Form 5500 reporting duties. More information on how to identify a pre-2009 contract or account is found in the FABs.

Failure to comply with the fee disclosure requirements constitutes a prohibited transaction (PT) for the responsible fiduciary, whereas compliance qualifies the fiduciary for a PT exemption. The final rule changes one of the conditions for the PT exemption when a service provider has failed to provide compensation information and also has not responded to the fiduciary’s written request for the information within 90 days. If the information relates to futures services and is not disclosed promptly after the 90-day period, the final rule requires the fiduciary to terminate the service arrangement “as expeditiously as possible.”

The final rule cuts service providers some slack, however, allowing them to provide “reasonable and good faith estimates” of compensation or cost amounts that are difficult to itemize, so long as the service provider explains the methods and assumptions it used to arrive at the estimate.

Additionally, disclosures of indirect compensation paid by third parties to the service provider must be accompanied by a description of the arrangement between the service provider and the third party pursuant to whom the payments are made.

The three-month extension of the plan-level fee disclosure rule triggers an equal extension of the participant-level fee disclosure rules under ERISA Section 404(a)(2). Technically plan sponsors (employers) must make these disclosures to plan participants, but for practical purposes institutional investment providers will provide most of the content. The deadline to distribute the initial written disclosure has moved from May 31, 2012 to August 30, 2012, and the deadline to distribute the first quarterly statement under the rule has moved from August 14, 2012 to November 14, 2012.


Filed under 401(k) Plans, Fiduciary and Fee Issues

Your 401(k) Plan’s Online Report Card — and What to do About It

Since 2009, a company called Brightscope has been compiling data on plan assets from retirement plan tax returns (Form 5500s) and providing on-line “scores” on plan investment performance, as measured against industry peers. I am surprised how often clients and even colleagues in the benefits world are unaware that this data is publicly available, and not just for larger ($10 million + in assets) retirement plans.

That is because, in addition to “scoring” retirement plan investment performance (including the impact of administrative and investment expenses), Brightscope translates poor investment performance into what it “costs” a hypothetical plan participant, in real dollar terms.

So, for instance, the Brightscope rating for a plan with a performance score of “60” as measured against its top-rated industry peer’s score of 84 will also state that this 24-point lag in scoring will “cost the average 401(k) plan participant” an additional 10 years of work, and up to $67,000 in lost retirement savings. Brightscope separately explains its statistical methodology, which assumes an “average participant” who is a 44-year-old, gender-neutral individual, earning an income of $44,000 a year, with a starting account balance of $40,000. However readers have to dig a bit for this information, and in the mean time the initial negative impact the numbers could make on a plan participant is considerable.

Brightscope also invites those “average 401(k) plan participants” who are not happy about their plan’s performance to “Help Improve this Plan” (by contacting the employer and other participants) and “Track this Plan” (by receiving updated plan performance data). It also provides a summary of participants’ legal rights under ERISA.

Needless to say, Brightscope is packaging information in a way that invites employees to challenge employers about plan investment performance, fees, and plan design. This is a timely development given the Department of Labor’s current (long-overdue) focus on fee disclosure regulations at both the plan- and participant-level. In fact some of the information Brightscope shares has always been required to be communicated to employees annually under existing Department of Labor regulations, in the form of a Summary Annual Report (SAR). Obviously, Brightscope is a boon to employers whose plans are at or near the top score for their respective industry. But what does it mean for employers whose plans are at the other end of the spectrum? If handled properly, a low Brightscope rating does not have to be an employee-relations disaster.

First, I recommend that clients periodically check their plan’s information on Brightscope. Originally only larger plans with $10 million in assets or more were rated, but Brightscope is adding ratings on smaller plans every day. (And for smaller plans without a rating, Brightscope conveniently summarizes information from the plan’s latest Form 5500 data, including beginning- and end-of-year plan asset totals, and responses to questions about fiduciary breaches.)

Second, employers can challenge the methods by which Brightscope derives its ratings (by following prcedures described in the FAQ) and this is appropriate to correct an obvious error in plan data. Absent that, however, I don’t think it is helpful for an employer with a low rating to go on the defensive this way. It is better for the employer to confront the low score head-on, share their Brightscope rating with their investment advisor, and take steps to address the source problem, which may be higher than average costs/fees, low-performing mutual funds, or both. It won’t be possible to immediately close a 20-point gap in scoring, but it is possible to answer complaints on the current score by saying that the company is aware of it and is taking steps to improve the situation.

For more information about how Brightscope came about, other ventures its founders are working on, and its perception in the retirement plan industry, I recommend this New York Times article.


Filed under 401(k) Plans, Fiduciary and Fee Issues

DOL Sanctions Plan Sponsor Purchase of Real Property from Plan

Last February, noted fiduciary guidance counsel Peter Gulia alerted me to a prohibited transaction exemption application involving a 401(k) plan sponsor’s purchase of troubled real property from the plan. At the time Peter observed that the application, if granted, would allow the sale on the opinion of an appraiser without requiring any supervision by an independent fiduciary.

The exemption was granted, and is published in the Federal Register on May 11, 2011. The property was an antique home used as a bed & breakfast. The B&B represented 93% of the value of the assets of a 401(k) plan maintained by a professional medical corporation, the sole participants of which plan were the doctor, his wife (another doctor), and their three children. Despite the significant investment of Plan assets, the property yielded only small amounts of net income to the Plan. The family was not able to afford the third party management fees and tried to manage the property themselves. Due to poor cash flow, significant maintenance and safety issues went unaddressed. Ultimately, the Plan’s aggregate net income from the property between 2004 and 2010 (purchase price, less aggregate net acquisition and holding costs) was determined to be only $141,648.

In order to get the Plan out from under the burden of running the property at a loss, the doctor and his wife sought to purchase the property from the plan and obtained the lender’s approval to assume the loan from the bank. The stated rationale for the exemption was that the sale would allow the plan fiduciaries to “divest the Plan of an asset that has been difficult to manage within the Plan as a result of adverse economic conditions.” The conditions of the sale included all of the following:

1) All terms and conditions of the sale were at least as favorable as the Plan could obtain in an arm’s length transaction with a third party. (This was almost assured under the circumstances due to the depressed real estate market and drop in tourism.)
2) The applicants either personally assume the loan on the property, which represented less than half of its value, or paid the loan off from the sale proceeds. (The applicants had obtained the lender’s consent to their assuming the loan, or obtaining another loan.)
3) The Plan receive the greater of (a) the property’s fair market value as determined by a qualified independent appraiser, less the loan principal assumed by the applicants, or (b) the property’s net acquisition and holding costs, less the loan principal. (In this case the FMV was higher.)
4) The FMV be updated by the appraiser on the date the sale is consummated.
5) The sale be a one-time transaction for cash.
6) The Plan pay no real estate commissions or fees in connection with the sale.
7) The Plan fiduciaries, who were also the applicants, do all of the following:
a. Determine whether the sale was in the interest of the Plan;
b. Review and approve the appraisal methodology; and
c. Ensure that the appraiser uses the methodology to determine the FMV.

Several factual points, although not expressly cited by the Department of Labor as grounds for their ultimate approval of the exemption, no doubt contributed to the application’s favorable outcome:
➢ The parties used a highly qualified appraiser. He had state and national appraisal credentials and had spent 20 of his 25 years of professional experience appraising commercial properties. The appraiser’s valuation methods (combination of sales comparison and income approach) were logical and clearly explained. It no doubt helped that in there were comparable sales transactions in the community as well as numerous B&B businesses from which to draw income figures.
➢ The Plan covered only five members of the same immediate family. Were there non-family member participants in the Plan, it is likely that the initial fiduciary decision to invest over 90% of Plan assets in a single property would not have passed muster.
➢ The Plan would fare much better in a sale to interested parties than it would if the property were sold on an open market; depressed real estate values would have meant a lower-than-FMV sale price as well as a hefty sales commission and other transaction expenses. By contrast the terms of the exemption required a FMV sale (with an appraisal update on the transaction date) with no fees or commissions paid by the Plan. In addition, if the applicants assumed the loan from the plan they would indemnify the Plan and hold it harmless from any future liability for payments.

I want to thank Peter Gulia first for alerting me to the exemption application and also for sharing his opinion – which I share – that lack of non-family member participants likely contributed to the Department not insisting on more stringent conditions, such as supervision by an independent fiduciary.

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