BNA Pension and Benefits Blog

Fee Disclosure

ERISA fiduciary litigation isn't calming down, it is just switching subjects.  As the stock drop cases  wind down, they will be replaced (in fact, are already being replaced) by hidden or excessive fee cases.  This should really come as no surprise to anyone.  Most of us in the industry have known about these hidden payments (commissions, shelf space fees, etc.) for years, but never mentioned them in polite society. 

It took Elliott Spitzer to shine a light on these arrangements and, once he did, virtually everybody agreed that they were indefensible (not that service providers shouldn't get paid, but that their fees should be known to the payor, who would then be in a position to comparison shop).  Now everybody is getting into the act.   Both the SEC and DOL are acting as though they just found out that these arrangements exist and are telling plan fiduciaries to ask questions.  DOL is going to require greater disclosure on Forms 5500 and is considering amending the section 408(b)(2) regs. to require knowledge of fees as a pre-condition to a determination of reasonableness. 

If only it were that easy.  No matter how much disclosure the government may require, people will figure out new ways to be paid.  In fact, there are so many ways now, that full disclosure would probably create something as difficult to prepare and read as a prospectus.  Great for the service providers who prepare them, but of little practical use to plan fiduciaries, let alone participants. 

In my view, for greater disclosure to become effective, it must be accompanied by greater simplicity.  I don't think either DOL or the SEC currently has the authority to dictate how fees will be paid (as long as prohibited transactions are avoided), and the chances of Congress passing an ERISA equivalent of a truth-in-lending disclosure statement appear nil.  This doesn't mean that the problem won't be solved.  It just means that the problem will be solved by class action litigation--a boon to the lawyers, but to no one else.

What I don't understand is why the industry groups, such as ICI or ACLI don't come forward to take the lead.  This can easily be accomplished by standardized disclosure statements coupled with a commitment to receive or pay no fees not covered by those statements.  This would probably be a net plus to the members of those associations, since, I assume, mutual funds and insurance companies pay more secret fees and commissions than they receive. 

It seems to me the end result is both inevitable and desirable--full disclosure (in an understandable form) of all fees paid or received by a service provider in connection with a plan's business.  There are four ways to get there; legislation, litigation, regulation (to the extent possible) and industy initiative.  The latter, I think, is most desirable, but least likely to occur.  The least desirable is litigation, and that is how I think it will happen. 

Any thoughts or comments?

Pension Protection Act Redux?

With the dust clearing on the recent mid-term elections, we thought it might be beneficial to speculate on what, if any, effects the Democratic takeover of Congress might have on the recently enacted Pension Protection Act.  When the Act passed earlier this year, a number of key House Democrats voted against the Act, including Rep. George Miller (D), the likely chair of the 110th Congress’ House Committee on Education and the Workforce and Rep. Robert Andrews, the likely next chair of the House’s Subcommittee on Employer-Employee Relations.  With their rejection of the bill, the committee and subcommittee with jurisdiction over the Act may move to re-address the issues that troubled them when the Act was passed.  Such issues may include the Act’s provisions related to amendments to ERISA’s prohibited transaction provisions regarding the furnishing of investment advice to plan participants and beneficiaries, which when voting on the initial House version of the Act (H.R. 2830), Rep. Miller stated on behalf of the Democrats that several of the Act’s amendments did not provide enough protection for the private pension system.  See Minority Views, H.R. 2830, “Pension Protection Act of 2005” (Sept. 21, 2005), http://edworkforce.house.gov/democrats/hr2830views.html.  Although the Democrats have expressed a number of priority issues for the new Congress (like increasing the minimum wage and reforming No Child Left Behind), those Pension Protection Act issues that concerned the Democrats earlier this year may raise their heads yet again.

New Proxy Pension Benefits Table

Many public companies are now drafting their proxies and dealing with the new proxy disclosure rules.  One of the tables for many companies is the Pension Benefits Table.  For each named executive officer, this table needs to list on a separate line each qualified defined benefit plan as well as each nonqualified defined benefit plan such as a SERP that the officer participates in.  With respect to each plan for each named executive officer, the actuarial present value of the officer's accumulated benefit must be set forth. The actuarial present value of the accumulated benefit is computed as of the same pension plan measurement date used for financial statement reporting purposes.  The assumptions used to determine the actuarial present value of the accumulated benefit are generally the same assumptions used for financial statement reporting purposes other than the retirement age assumption is the plan's normal retirement age.

Fiancial statement valuations of benefits are likely to be different than the amount an officer would actually receive if the officer terminated employment.  Proxy drafters - are you providing the additional information regarding the actual benefit that the officer would receive if the officer terminated employment?  Material factors necessary to an understanding of each plan must be disclosed - when does this difference between financial statement valuation and termination value become a material factor?  The rules specifically list as an example of a material factor, the eligibility of an officer for early retirement and they suggest describing the early retirement payment and the benefit formula and eligibility standard for such early retirement.

Many plans are using a September 30th pension plan measurement date for financial statement purposes but will be moving to a December 31st measurement date.  This movement of measurement dates will generally mean a 15 month (rather than 12 month) difference in the benefit calculation from the prior year for the year in which the measurement date is switched.

To the extent executives negotiated additional years of service for purposes of their SERP benefit calculation, such fact must be noted and the impact of the additional years of service credit must be quantified.

Interested in exploring issues in preparing the proxy Pension Benefits Table, please share your experience.

Oh yes, oversight ...

How could I overlook the possible impact of the shift in power in the Congress on Congressional oversight mission, and, in turn, the possible impact of Congressional oversight on the world of employee benefits?  If nothing else, we're less likely to see a resurrection of the Department of Energy's announcement that it would not reimburse contractors for defined benefit plan costs, or for the cost of more than a minimal health coverage package.

Where else do you think Congressional oversight might affect agencies' approach to benefit regulation?

Election Impact?

I'm still yawning from staying up late (for a school night) to see what happened, how The American People made their views known to the governing class.

There are any number of levels to the question, what will be the impact "on us" of the transfer of power. 

"Us" includes, of course, all of us as citizens -- will the election outcome hasten the day that we stop precipitating and experiencing deaths and mutilations in Iraq?  Maybe there's a qualified sorta yes in there, given the swift resolution of Secretary Rumsfeld's DOD career prospects.  Will it lead to more generous policies for the lower economic rungs in our society?  A less qualified yes, at least in terms of an increase in the federal minimum wage.  Note that not only was this on the Democrats' agenda, it was on the ballot in six states and passed in every one -- by contrast, measures to ban same-sex marriage were on the ballot in seven states, but only passed in six (Arizona seems to have defeated it).

[EVEN MORE THAN USUAL, THE IMMEDIATELY PRECEDING TEXT GIVES MY OWN PERSONAL VIEWS, NOT THOSE OF EMPLOYER OR CLIENTS.]

What about as a community especially concerned with general issues of retirement security and access to health care?  The main impact I see at this point is a slowing down (if that's possible) of a drift toward the Ownership Society.  Beyond that, it's hard to envision substantive changes in Social Security or Medicare.  Even if they could agree on a reform program, the Democrats don't exactly have veto-proof majorities in both Houses.  Besides, the next election is only 2 years down the road -- not enough time to tackle the major entitlements.

So what about the rules governing employee benefits?  My guess is that everyone is too exhausted from this year's battles to be willing to reopen the PPA.  However, there may be a little more give around the edges, perhaps in defining what exactly is meant by "technical corrections."  If next year's Congress had been sitting this year, there are some parts of PPA that would probably have come out quite differently: maybe hybrid plans, investment advice, treatment of credit balances in single employer plans, for example.  But undoing what's now in there is a great deal harder than putting it in in the first place (3d rule of lobbying). 

What do you think?