Ok. Well. Probably not, but this might be a useful (maybe even fun) way to review the factors for determining what is and what is not a “plan” under ERISA.
So, let’s give it a shot.
First, the law:
According to this article from Pensions & Investments, half of employers could not accurate indentify the fees charged to participants in their 401(k) plans.
As we’ve discussed in earlier posts, such as this one about 401(k) plans for small businesses, ERISA’s fiduciary provisions are expansive. It is hard to imagine a responsible fiduciary who has satisfied his duties of prudence and loyalty, but cannot identify the fees charged to participants in the 401(k) he administers.
We’ll talk more about fiduciary duties in later posts, but the headline is clear for this post: 401(k) fees are opaque and you aren’t the only one who is confused. The people in charge don’t understand either.
When you look over the investment options in your retirement plan, you probably see a 2020 fund, a 2030 fund, a 2040 fund, and on up the line. Those are “target date funds.” They can be mutual funds, exchange traded funds, or pooled separate accounts. But what are they and what are they designed to do?*
A target date fund is an investment vehicle that invests in equites, bonds, and other funds. What’s different about a target date fund is its stated goal. It does not claim to simply maximize your investment return.
A target date fund’s goal is to gradually transition your retirement savings – from riskier investments when you are young to safer investments when you near retirement. A 2040 fund will be highly invested in stocks with very few of its assets devoted to safe investment vehicles like bonds. For example, this John Hancock mutual fund, the Retirement Living through 2040 Portfolio, has only 4.6% of its assets devoted to bonds and nearly 35.7% of its assets devoted to aggressive growth stocks.**
The California State Teachers’ Retirement System (“CalSTRS”), America’s second largest pension fund, announced that it would vote its nearly six million shares against the retention of Wal-Mart’s board of directors. This decision comes in the wake of Wal-Mart’s ongoing Mexican bribery scandal.
This is an important story for pension governance and fiduciary responsibility. Entirely too often, the discussion about pension investment is focused on inaction.
CalSTRS has not fallen into this trap. It has pursued legal action over alleged failures in corporate governance and now it will vote its against the board. These are proactive steps made to protect the fund’s investment and its investors, the teachers of the State of California.
Are the losses in your 401(k) plan due to poor investment performance or high administrative fees? Or both? Could either have been avoided? And whose responsibility was it to oversee those issues?
Retirement plans are governed by obscure law, are complex in nature, and include complicated investment products. Participants rarely understand their 401(k) plans or the investment options presented to them. The Employee Retirement Income Security Act (“ERISA”) provides participants with the right to take action against irresponsible plan fiduciaries, but what good is that when it is nearly impossible to know if a plan is being run well?
In short, employees simply do not know if they are getting a good deal or a bad one with their 401(k).
Check out this entry by Suzanne Wynn at The Pension Protection Act Blog on the 6th Circuits recent discussion on whether ERISA’s 6 year statute of limitations on fraud requires actual concealment by fiduciaries. It’s a good read and we’ll address this issue on the Erlich Law Blog at a later date.
The Family and Medical Leave Act of 1993 (FMLA) is a federal law requiring employers to grant paid leave in certain situations for employees. It was written in order to help American employees take care of their families, loved ones, and themselves in the case of medical necessity. Not all employees are covered and requirements for coverage vary state-by-state.
Are you covered by the FMLA?
The federal FMLA only applies to employers with 50 or more employees within 75 miles of the employee’s jobsite. If you work at a company with less than 50 employees, you generally are not covered. The employee must also have worked for their employer for over a year and worked at least 1,250 hours in the last 12 months. Some states, however, have lessened the threshold for coverage in their state’s version of the FMLA.
Should Your Small Business Have a 401(k)?
Small business owners often feel that offering a retirement savings plan legitimizes their business and makes them more competitive in the hiring market. Whether or not these perceptions are true, very few small businesses understand the legal implications of offering a 401(k). Before you decide to offer a retirement plan, you should understand the potential liability and how to avoid it.
First, the bad news. The law that governs employee benefit plans is the Employee Retirement Income Security Act of 1974 (“ERISA”). By offering a 401(k), the named fiduciary, generally the business owner in a small business, takes on a full set of fiduciary responsibilities, including the duties of prudence and loyalty. The fiduciary responsibilities under ERISA are considered “the highest known to the law.” Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996). The liability associated with being a fiduciary is not limited by your corporate structure. It attaches to the fiduciary in his or her personal capacity. As a result, the decision to operate a 401(k) plan without proper planning and advice can create substantial risk and liability to a business owner. These problems have solutions, including fiduciary insurance, the advice of an experienced attorney, and proper planning.
On to the good news. A 401(k) plan can be a great asset to a business and the requirements of ERISA are not problematic for small businesses that follow the necessary steps to avoid unnecessary risk. One important point to remember is that ERISA’s fiduciary duties are more about process than substance. This can be a problem for businesses that do not know how to properly document their decision-making processes. If you keep minutes of your meetings and record the documents you review while choosing a retirement plan, those records can go a long way toward proving you used a responsible, prudent process to make your decision. Obtaining competitive bids is also considered a fiduciary best practice. It is difficult to prove that your decision making process was prudent if you only consider one offer.
Virginia Employment Law Blog