Help your Clients Comply with ERISA Pension and 401k Plan Regulations

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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