DOL Delays Plan Fee Disclosure Rules

The DOL has recently announced that it will extend both the fiduciary and participant fee disclosure rules. The regulations under ERISA section 408(b)(2) are extended until April 1, 2012. Participant disclosure regulations are extended to no later than 60 days after a first day of the first plan year beginning on or after November 1, 2011, or 60 days after the effective date of the fiduciary-level fee disclosure rule (i.e., 60 days after April, 1, 2012, which is May 31, 2012).

408(b)(2) will require plan service providers (such as record keepers and broker-dealers) to fully describe their services, disclose sources of compensation and to identify its fiduciary status to their plan sponsor clients. DOL is also providing more time to comply with the plan fee disclosures to employees.

The DOL’s Phyllis C. Borzi said, “We want employers and workers to benefit from the increased transparency provided by these rules as soon as possible.” Additionally, she stated, “We also appreciate that service providers may need more time for compliance efforts…”

Supreme Court Rules on Misleading ERISA Plan Communications

In CIGNA Corporation v. Amara, an ERISA case affecting participant communications, the US Supreme Court ruled that a plan sponsor will not be held liable for misrepresentations in its plan’s summary plan description (SPD) when it conflicts with the terms of its plan document.


In 1998, CIGNA converted its traditional defined benefit plan into a cash balance plan.  A case was filed in 2001 by current and    former employees of CIGNA alleging their employer provided incomplete and misleading information (including the SPD) concerning the benefits of the new plan.

The district court ruled in favor of the plaintiffs, concluding that CIGNA’s communications were inaccurate, intentionally misleading and violated ERISA. The district court then invoked ERISA §502(a)(1)(B)* to reform the plan and pay benefits to the affected parties. An appeals court confirmed the district court’s ruling.

  • ERISA §502(a)(1)(B) states that a participant or beneficiary in a plan may bring a civil action “to recover benefits due to him under the terms of the plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.”

The Court’s Decision

The Supreme Court’s opinion overturned that of the lower courts. It ruled §502(a)(1)(B) did not authorize the lower courts to provide relief to the plaintiffs for the inaccurate information in this case. However, the Court’s opinion did discuss that these violations may give rise to claims for other relief under a related statute – ERISA §502(a)(3).

In addition, the Court found the following:

  • The plan sponsor creates the plan’s terms and establishes a written plan document in its settlor capacity – not as fiduciary subject to ERISA. The plan is administered in accordance with these written terms and communicated to the participants and beneficiaries through plan communications such as the SPD. The plan administrators are fiduciaries and are subject to ERISA.
  • Summary documents provide communications to participants about the plan, but their statements do not constitute the terms of the plan. They cannot be enforced as plan terms under ERISA.
  • ERISA Section 502(a)(1)(B) does not authorize a court to rewrite the terms of a plan.

The case was remanded to the district court to provide equitable relief [under§502(a)(3)], where appropriate.

The verdict appears to overturn the standard imposed by many lower courts in that, if a SPD contained more favorable language to participants over the plan document, then the SPD would automatically prevail.  This ruling is the first time the Supreme Court has identified that compensatory relief is available under ERISA §502(a)(3). As a result, many practitioners believe that this will lead to a significant increase in claims of this nature.

The CIGNA case is advantageous to employers because it found that plan participants cannot bring suit under ERISA §502(a)(1)(B) for misleading or inaccurate plan communications.  The language in a SPD cannot be treated as the terms of the official written plan document. However, due to the Supreme Court’s acknowledgement that other relief may be available in the case of ERISA violations such as these, plan administrators should carefully review their SPDs and other participant communications to ensure that the plan’s terms are described accurately.

Legislative Outlook for the Public and Private Retirement System

Congress BuildingAs the 112th Congress convened in January, it was clear that a substantial part of the legislative agenda for the next few years will be to address our nation’s long-term fiscal challenges which arose from our mounting Federal debt. Although dramatic reforms are not expected this year, it is likely that the current economic conditions will result in significant changes to the tax code. These revisions could diminish many of the tax incentives in retirement plans that we have long taken for granted. If so, this will likely hinder workers and their ability to adequately save for retirement.

Tax Reform and Simplification of Private Retirement System

A familiar approach to addressing the federal deficit is tax reform. In a recent speech, President Obama called on Congress “to undertake comprehensive tax reform that produces a system which is fairer, has fewer loopholes…”  While much of Washington differs on whether to lower tax rates or raise additional income without increasing rates, most seem to agree that to “broaden the base” (restrict or eliminate current income exclusions so that additional income may be subject to taxes) would greatly increase federal tax receipts.

Broadening the income subject to federal taxes would result in activities that have preferential tax treatment to no longer enjoy a favored position in the Internal Revenue Code (IRC). One area where a significant impact might be felt is on tax deductible contributions of qualified retirement plans (by both employers and employees). The private retirement system is a large target to those that support this approach as it is projected to be the largest “tax expenditure” in the IRC by 2013.

There have already been several recommendations put forward by multiple organizations including the National Commission on Fiscal Responsibility and Reform and the President’s Economic Recovery Advisory Board to address reform of the private retirement system. Among the proposals is the consolidation of the multiple types of retirement plan coupled with a reduction and targeted approach to the tax incentives inherent to them. This recommendation included the fusion of different retirement account types into a single plan design with an annual additions limit of 20% of compensation or $20,000. This limit would represent a significant reduction from the current Section 415 limit of $49,000 for defined contribution plans. The proposal further suggested simplifying qualified plan non-discrimination testing.

Social Security

Congress, the Administration and the opposing political parties may wrestle over the many peripheral issues in the budget, but the 800 pound gorilla in the room is entitlement programs such as Social Security. If, once and for all, Social Security’s issues could be addressed in a meaningful way, it would have a sizable impact on the reduction of long-term deficits and to improve the future security of America’s retirees. In 2010, Social Security paid out more in benefits than it took in through payroll taxes. This disparity and the risk of insolvency create concern for workers over what will be available for them in the future. Addressing these public retirement system challenges would go a long way to restoring the public’s confidence in our nation’s finances.

Over the years, dozens of proposals have claimed to provide a solution to Social Security’s financial ills. Some of the more substantial recommendations gaining attention include:

  • Indexing the full retirement age beyond 67 years old to improvements in longevity
  • Switching to an inflation adjustment that rises more slowly than the current rate (CPI) used to calculate the annual cost-of-living adjustment
  • Increasing the taxable wage base that exposes the amount of earnings subject to payroll tax (and the basis for benefits) to about $180,000 from the current $106,800
  • Subjecting both employer and employee premiums for group health insurance to payroll and income taxes


Given the new balance of power in Washington, there may be uncertainty as to how any future efforts to address our fiscal challenges will affect our public and private retirement system. Many believe the private retirement system could come under attack as a means to alleviate the mounting federal budget deficit. Those that wish to effect changes to the private retirement system often neglect to reveal the many facts and successes of the current system, namely:

  • The exclusion of retirement savings is a deferral not a permanent write-off like other deductions and exclusions. Further, deductible employee and employer dollars contributed to a plan are taxed in the future when withdrawn.
  • Tax savings resulting from plan contributions is critical to encouraging small employers to establish and maintain a qualified plan.
According to the National Retirement Risk Index, about “51% of households are at risk of not being able to maintain their pre-retirement living standards after retirement.” Qualified retirement plans have been very successful at encouraging workers of all income levels to set aside current income for the future. North Pier emphatically believes that the availability of employer-sponsored plans should be expanded, not curtailed.

Defined Contribution Trends Indentified in Callan’s Survey

Callan Associates’ 2011 DC Trends Survey, Defined Contribution Trends Survey: Positioning the DC Plan for the Future, was published in January 2011. Approximately 90 US companies, comprised of mostly large plan sponsors (80% had over $100 million in assets) were surveyed. The following findings were among the most relevant:

  • The outlook for employer contributions to defined contribution plans is looking brighter. 58% of plan sponsors that had reduced or eliminated company contributions over the last two years plan to reinstate them over the next year. 75% of those have already reinstated their contributions to the same level prior to the reductions. Additionally, not one of the sponsors surveyed said they planned on reducing or eliminating the company match in the future.
  • Plan sponsors continue to adopt plan automation features. Utilization of automatic enrollment and automatic escalation of contributions increased to about 51.3% and 46% in 2010 from approximately 44% and 34% respectively.
  • Unbundled plans (where the recordkeeper and trustee are independent from one another) appear to be gaining in popularity. The use of fully unbundled plan arrangements increased from approximately 30% in 2009 to nearly 35% in 2010.
  • A key area of focus for defined contribution plan sponsors continues to be fees. About 85% of the respondents claim they have calculated their plan fees within the past year and about 84% of those that performed the calculation went on to benchmark their plan fees as a result of their findings
  • Inflation ranked as a high concern for plan sponsors. Real return and TIPS mutual funds were the most frequently added plan investment choices in 2010.
  • Plan sponsors were still not comfortable with the fiduciary issues surrounding guaranteed income products. Despite sponsors’ desire to help their employees manage income in retirement, utilization of guaranteed income products has gained little traction.
  • The use of investment consultants is becoming more prevalent with nearly 72% of the respondents using them versus the approximated 65% last year.
  • Nearly 50% of plans maintain Roth contribution options (up from 28% in 2008).
  • The growth in target date funds appears to be stagnating. While roughly 70% of the plans offer target date funds as its default investment choice, growth appears to have stalled.

Appellate Court Approves Class Status for Defined Contribution Participants

A Federal appellate court ruled that it may be appropriate for a class of defined contribution plan participants to file a suit for relief under ERISA. In January 2011, Circuit Judge Diane Wood released the opinion from a three judge panel of the 7th US Circuit Court of Appeals calling for the courts to re-examine relief provisions available under ERISA.

In 2008, the US Supreme Court decided that individual plan participants can seek relief under ERISA, although it was unclear if a class of participants can do the same. Judge Wood concluded that there are cases where the plan as a whole is injured at the same time as an individual employee. For example, this can happen when the entity responsible for investing the plan’s assets charges unreasonably high fees or when there had been reckless selection of investment options for participants.

Decision on New Fiduciary Rules Delayed

Securities Exchange CommissionThe SEC has delayed establishing new rules that would level the playing field for broker dealers and other investment advice providers. A decision had been expected to mandate both types of entities to operate under a common fiduciary standard. The SEC stated that a decision on the final regulation will not be available until later this year, instead of the projected timeline of spring to early summer.

The Dodd-Frank financial regulatory reform law called for SEC commissioners to extend a fiduciary duty requirement to broker dealers to protect investors confused by the different standards advisers and brokers are currently subject to. Studies found that the average investor has no understanding of the distinction between advice providers or that only registered investment advisers have a legal obligation to act in the client’s best interest.

IRS 401(k) Plan Questionnaire: Non-Responders Will Be Subject to Full-Scope Audit

Internal Revenue ServiceAs reported in a previous Fiduciary Commentary, in May 2010, the IRS delivered questionnaires to some 1,200 401(k) plan sponsors to determine the general level of compliance of 401(k) plans. The questionnaire required the plan sponsors to provide information on the plan’s demographics, participation, contributions, top-heavy and nondiscrimination compliance, distributions and plan loans, and other plan information.

In the February 23, 2011 issue of the Retirement News for Employers, the IRS announced that the data-gathering phase was complete and that they will be evaluating the feedback provided by the respondents. The IRS intends to furnish a report that will highlight the areas where additional education is needed in its enforcement efforts. The IRS also announced that it will be carrying out a full-scope examination of those plan sponsors who did not give their response to the questionnaire., The IRS encourages all plan sponsors to use the 401(k) Questionnaire as an internal control tool to review plan compliance.