Help your Clients Comply with ERISA Pension and 401k Plan Regulations
Learn more about Investment Programs for Law Firms
Massachusetts Lawyers Journal
By: Bruce Fenton
Many attorneys who, although they do not focus their efforts in the areas of
pension plan law, have clients who are subject to various pension plan
regulations. Many of these clients, particularly small and mid sized companies,
do not retain any other counsel. Such corporate clients and their pension plans
may be subject to various provisions of the Employee Retirement Income Security
Act of 1974 (ERISA) and Department of Labor regulations. Most attorneys do not
focus on or have the expertise to advise these clients on complicated pension
plan matters. Often companies do not feel that they need to consult an ERISA
specialist because their company is too small. Others feel that they are already
in compliance with all necessary regulations because their attorney drafted
documents for the plan or the administration is handled by a third party
administrator. As a result, many plans are out of compliance with the
regulations. Although sometimes overstated, the problem is real, according to
the September 17, 1991, issue of Financial World, some estimates indicate that
60% of today's plans are not in compliance. While there is no substitute for
having a plan reviewed by a qualified ERISA specialist, there are some simple
ways which attorneys can help clients. One area in which many plans need help is
the actual management of the assets within the plan, an area which auditors
closely review.
There are a number of plan sponsors who have the misconception that if all their
investments are guaranteed such as CDs or Treasury bills, the plan will be
definitely safe from violations. In truth, a plan invested 100% in guaranteed
investments may run into suitability problems and problems with diversification.
Alden Bianchi, an attorney with Mirick, O'Connell, DeMallie and Lougee in
Worcester MA works in the area of employee benefits and executive compensation.
Mr. Bianchi pointed out that, "A plan investing in only one asset is probably in
violation of Title One of ERISA." Mr. Bianchi also pointed out that the
violation would be due to the diversification requirement that is put in place
to help plans avoid substantial loss. James Benages, Regional Director of the
Pension Welfare Benefits Administration noted, "There are potential problems for
plans that have been advised to invest all of their assets in CDs or Government
Paper, since this is clearly not prudent." Diversification and prudence are two
of the most major requirements for ERISA plan investments.
One alternative is for attorneys to recommend that their clients work with
mutual funds or independent money management companies. This provides immediate
diversification, avoidance of prohibited transactions, and places the day to day
asset management decisions on the shoulders of a prudent expert, the fund
manager. Attorneys registered with the NASD can have an active role in selecting
management companies and receive a fee or commission for such services. If
receiving a commission or fee, a registered attorney must disclose that they are
doing so and should not also charge hourly legal fees. It is not recommended
that attorneys, especially if not NASD registered, actually make the day to day
investment decisions of what securities to buy or sell. In a mutual fund or
managed account these decisions are left to qualified fiduciaries who meet the
prudent expert definition.
Mr. Benages stated, "Attorneys should not have involvement with actual asset
management, law school curriculum does not prepare attorneys to make investments
for clients." Instead, Mr. Benages recommends the use of professional money
management companies and mutual funds. Mutual fund managers and professional
money management companies are perhaps the best qualified to make day to day
investment decisions, certainly more so than attorneys, clients, or even full
time stock brokers. One of the best ways for attorneys to help their clients
with qualified plan investing is to help them develop a deliberative procedure
for selecting mutual funds or money management companies. A good first step is
to make use of independent rating services such as Lipper and Morningstar.
During a pension plan audit, Mr. Benages team will most often look for the
investment philosophy of a plan, who makes the investment decisions, and
consistency with investments. The importance of compliance with the regulations
is serious Mr. Benages noted; "The liability for plan violations is a personal
liability for fiduciaries under section 405 of ERISA." The amount of effort
spent in enforcing these regulations also should not be ignored. Mr. Benages
explained that he has a large force of highly trained MBAs, attorneys CPAs, and
other experts who are very sophisticated in finding violations. It should be
noted that a substantial amount of DOL and PWBA revenue is derived from fines.
William Schmidt, a Senior Partner and ERISA specialist at Hale and Dorr in
Boston, pointed out that not only are the investment vehicles important, but the
process used in selecting them is of great importance. "The decision process [of
selecting a money management company, mutual fund, or other investment vehicle]
is evaluated more than the performance results. The deliberative procedure of
how a manager or fund is picked is very important." Mr. Schmidt explained that
investments such as CDs offer safety but expose plan investors to more than one
type of risk most notably economic risk, inflation risk, and market risk in
addition to principal risk. Mr. Schmidt added, "I have seen many plans with huge
problems but feel that most sponsors try to do the right thing." Mr. Schmidt
recommends that fiduciaries have a defined process for selecting investments and
monitoring them on an ongoing basis. He also encouraged the use of independent
rating services when selecting and monitoring investments. Once the investment
side of their compliance concerns is addressed, plans still, of course, have to
comply with form 5500 filing requirements, summary reports and other concerns.
Mr. Benages pointed out that vehicles such as mutual funds and money management
companies contain built in diversity and are run by prudent experts. Mr. Benages
also stressed the importance of arm's length reporting and monitoring. Another
quality of mutual funds and money management companies is that their use can
save plan fiduciaries a great deal of time. Many plan sponsors do not have the
time to actually manage assets. However, with proper guidance it does not take a
long time to select top quality money management companies and mutual funds.
Matthew R. McArthur is an accomplished ERISA attorney at M.R. McArthur &
Associates Ltd. in Hinsdale Illinois. Mr. McArthur stated that, although it is
not a requirement by statute, an Investment Policy Statement is of great
importance. Mr. McArthur recommends that the Policy Statement include goals for
the plan and clearly describe realistic goals for the money manager. The
statement should detail a standard for the performance to be measured which is
both understandable and acceptable to the client.
The plan's Investment Policy Statement should clearly detail the investment
goals of a plan and its participants. The choice of money management vehicles
should reflect these objectives. It is important that the investment choices and
the Investment Policy Statement goals fit with each other logically because it
becomes the yardstick by which investment performance will ultimately be tested.
Attorneys who advise clients on money management choices should also write out a
process by which they will select a management vehicle. This process might
include the use of independent rating services such as Morningstar. It should
also include a statement of what the fiduciary considered in choosing investment
vehicles such as performance, independent ratings, assets under management,
number of years in business, etc. This record of the procedure used is important
because it will help demonstrate the fiduciary prudence of the ultimate
selection.
In summary, attorneys who do not perform reviews of the clients' qualified plan
and its investments should make these clients aware that the plan may have
issues that need resolution. If necessary, the attorney can refer the client to
a pension plan specialist. Attorneys can help clients a great deal by performing
a basic review of the plan. The review should include a look at the Investment
Policy Statement, investments within the plan and the procedure used to select
them as well as the non investment issues such as filing requirements. For plans
that need help, attorneys can assist clients by helping them implement a process
for selecting investment management vehicles. Attorneys can charge their normal
billing rate for these services or, if registered with the NASD, they can
receive a fee or commission for the assistance provided in selecting investment
management choices.
Copyright 1996 Bruce Fenton