Monthly Archives: August 2014
Friday, August 29, 2014

Tatum v. RJR Nabisco Investment Committee, decided by the Fourth Circuit on August 4, involved the divestiture of the Nabisco stock funds following spin off of Nabisco.  Some 14 years after Nabisco and RJ Reynolds merged to form RJR Nabisco, the merged company decided to separate the food and tobacco businesses by spinning off the tobacco  business.  Following the spinoff, the RJR 401(k) plan, which was formed after the spinoff, provided for the Nabisco stock funds as frozen funds, which permitted participants to sell, but not purchase, Nabisco stock.

Although the Plan document provided for the Nabisco stock funds, RJR decided to eliminate the funds approximately 6 months following the spinoff.  The decision was made by a “working group” of several corporate employees and not by either of the fiduciary committees appointed to administer the Plan and review its investments.

During the 6 months following the spinoff, the price of the Nabisco stock declined significantly.  However, the stock was rated positively during this period by analysts who recommended a “hold” or a “buy” for the stock during 1999 and 2000.

After the Nabisco stock funds were divested in January 2000, the price for the Nabisco stock began to rebound.  In December 2000, following a bidding war, Nabisco was sold for a price well in excess of the price that the stock was sold by the Plan in January.  In 2002, this litigation commenced.

District Court Decision.  The District Court found that RJR had breached its fiduciary duty because the “working group” that recommended the divestiture of the Nabisco stock funds did no investigation of the merits of maintaining or divesting the stock funds.  Although the District Court found a fiduciary breach, it dismissed the case because the decision to divest the Nabisco stock fund was objectively prudent:  a reasonable and prudent fiduciary could have made the same decision after a proper investigation.

Appellate Court Decision.  On appeal, the Fourth Circuit, in a two to one decision, agreed that RJR had breached its duty of procedural prudence.  Two judges concluded that the proper standard for determining objective prudence is whether a prudent fiduciary would have, not could have, made the same decision. The majority concluded that the “could have” standard adopted by the District Court sets too low a bar for a breaching fiduciary.  According to the majority a “could have” standard describes what is “merely possible while a “would have” standard describes what is “probable.”

The dissent agreed that RJR had not been procedurally prudent but sharply disagreed with the majority’s standard for objective prudence.  The dissenting opinion stated that objective prudence does not “dictate one and only one investment decision.”  ERISA allows for more than one prudent decision when all of the facts existing at time the decision is made are considered.  The dissent implied that the majority may have applied hindsight in reaching its conclusion.   It characterized the takeover attempt and bidding

war in late 2000 as unexpected.

The majority vacated the District Court’s decision and remanded with instructions to review the evidence and determine whether RJR met its burden of proving that a prudent fiduciary would have made the same decision:  to divest the Nabisco stock funds in January 2000.


Lessons Learned.  The majority and dissent’s sharply conflicting views regarding the standard for whether a fiduciary decision is objectively prudent provide great material for theoretical discussion among lawyers.  Plan fiduciaries should assure, however, that they never become part of the debate.  Had the RJR fiduciaries simply (i) performed a thorough investigation of the alternatives, (ii) made a reasoned decision based on their investigation, and (iii) documented the basis for their decision, no breach of duty would have occurred in the first place even though, with hindsight, the decision may have been different.

Thursday, August 28, 2014

Retire at 65This recent Reuters article paints a rosy picture of the phased retirement offering that the federal government is extending to its employees.  It sounds like a great win-win.  The government saves money; employees get to continue to save for retirement, but also get to cut back on hours.

However, the article goes on to lament the “slow” employer response:

Worker interest in a flexible glide path to retirement is strong, and it’s not limited to the federal payroll. A survey this year by the Transamerica Center for Retirement Studies found that 64 percent of workers – of all ages – envision a phased retirement involving continued work with reduced hours….

The Society for Human Resource Management reports that 11 percent of employers provide some version of phased retirement, with only 4 percent having formal programs.

What the article fails to discuss is that tax code nondiscrimination rules make phased retirement a hard sell for many employers.  Under those rules, if employers want to use their existing tax-qualified pension plans for this purpose, they can impose some eligibility conditions, but they generally have to be careful to make the program available to a significant section of non-highly compensated employees.

In some cases, where “brain drain” is the concern, employers would like to offer a program to keep employees with certain skill sets around (especially if the alternative is losing them), but they also may not want a mass partial-exodus of their non-highly compensated workforce.  Often, the rules make drawing a workable line practically difficult.  For federal government employees who have been “frozen” in place without promotion, there is hope that many senior people will phase out in order to open up their positions for advancement by others.

Phased retirement may not be attractive to many employees, too.  Employees need to consider the value of phased retirement to them personally.  It makes sense for many people to enjoy phasing out of a job over time instead of going “cold turkey” into retirement.  However, if the employee is covered by a final pay average defined benefit plan, there may be a consequential reduction in the employee’s retirement benefit resulting from part-time pay during the phase out period.  Lower pay during the phase out years for those participating in defined contribution plans often means smaller employer and employee contributions for people who have not yet saved enough for retirement.

The federal government, of course, sets the rules and therefore does not have to play by the ones they choose to avoid.  Which is why, as the article notes, “Each federal agency will write its own eligibility rules, and phased retirement won’t be a guaranteed right for all workers.”  There is no analog for this type of slicing and dicing in the private sector.  And, of course, there is no way yet to gauge the popularity of the new rules that go into effect on November 6, 2014.

This is not to be critical of the federal program or even the nondiscrimination rules.  Those rules serve a very good purpose in ensuring that retirement benefits go to a broad group of employees.  But if the government wants phased retirement to take off in the private sector, it will need to liberalize the existing rules as they relate to phased retirement to provide employers with the flexibility they need to implement these programs.

Wednesday, August 27, 2014

The so-called “contraceptive mandate” saga continues.  Since the passage of the ACA in Spring 2010, its preventive care requirement mandating coverage of all FDA-approved contraceptive drugs, devices, and related services – and at no cost to women – has been a point of controversy for non-profit religious organizations and closely held businesses, as we have discussed previously.

Although the government attempted to settle the matter for religious institutions by creating an  “accommodation” in final regulations issued in July of 2013, certain entities – both non-profit and for-profit – continued their challenges.  The final regulations provided non-profit group health plan sponsors that hold themselves out as religious organizations and that have religious objections to contraceptive coverage (called an “eligible organizations”) an alternative to offering the contraceptives to which it objects.

However, the alternative required completing and mailing a “self-certification” to the sponsor’s insurer that acts as a claims administrator in an insured plan or third party administrator (TPA) of a self-insured plan, as applicable.  The submission of the self-certification to the insurer/TPA then “triggered” the requirement that the insurer/TPA carve out the objectionable drugs/devices/services from the plan offered to the sponsor and to separately provide for that coverage to the plan’s participants at no cost to the eligible organization (or the covered women).

Proposal to Expand Final Regulation “Accommodation” to For-Profits

We’re all well-aware of the lawsuit filed by Hobby Lobby that made its way up to the Supreme Court and, as discussed in our prior post, the high Court held that  the contraceptive mandate violates the statute designed to protect religious freedoms – RFRA – as applied to closely-held corporations.  While the Court did not go so far as to expressly approve of use of the accommodation for for-profit objectors, it did recite that it did not find any legitimate reason to distinguish between non-profits and for-profits for this purpose under RFRA.

Many observers expected HHS to expand the “accommodation” to closely-held for-profit organizations like Hobby Lobby, which it did in proposed regulations released on Friday.    They purport to expand the definition of eligible organization to include a qualifying closely held for-profit entity that has a religious objection to providing coverage for some or all of the contraceptive services otherwise required to be covered.

To use the accommodation, a for-profit organization must be “closely-held” and the objections to the provision of certain contraceptive coverage must stem from its “owners’ sincerely held religious beliefs is made in accordance with the organization’s applicable rules of governance, consistent with state law.”  The government declined to define the term “closely-held” at this juncture and instead asked for comments and suggestions.  Two alternative definitions being vetted by the government include:

  1. An entity in which none of the ownership interests in the entity is publicly traded and where the entity has fewer than a specified number of shareholders or owners; and
  2. An entity in which the ownership interests are not publicly traded, and in which a specified fraction of the ownership interest is concentrated in a limited and specified number of owners.

It is unclear how either definition would apply for a company that was owned wholly or partially by an employee stock ownership plan.

“Alternative” Means to Coverage under the “Accommodation” for Non-Profits

BC PillsAlso on Friday, the government issued interim final rules modifying the mechanism by which an organization can be exempted from the contraceptive mandate.

This change stems from the Supreme Court’s interim order in connection with an application for an injunction brought by Wheaton College (see 134 S. Ct. 2806 (2014)).  In short, Wheaton College objected that filing the form (EBSA Form 700) which was required by the accommodation made the organization complicit in the provision of the contraceptives to which it objected. The Court upheld an injunction in Wheaton’s favor, holding that the College need only file a letter with the federal government stating its objections.

The interim final regulations create an alternative process to filing Form 700, consistent with the Wheaton order.  Instead of filing a notice with the insurer/TPA, an eligible organization could notify the Secretary of HHS that it will not act as the plan administrator or claims administrator with respect to, or contribute to the funding of, coverage of all or a subset of contraceptive services. The notification must include certain specific information, including: identification of the plan, plan type and the identity and mailing addresses of any third party administrators.

The government can then turn around and tell the insurer/TPA to provide the coverage for the contraceptives.  Once it does so, the government says that notice will designate the insurer/TPA as the plan administrator for purposes of these benefits.  This means the insurer/TPA an ERISA fiduciary, at least with respect to the applicable contraceptives.

This creates many potential questions.  For example, who is responsible for monitoring this “plan administrator?”  If the “plan administrator” breaches a fiduciary duty, is the eligible organization potentially responsible for co-fiduciary liability (certainly, the government would not be)?  Do insurers/TPAs need to make sure that they have fidelity bonds since the plan benefits are not paid from the general assets of the employer?  Do they need to establish trusts for these benefits?  It’s likely that the DOL will come out with FAQs that answers the last three questions in the negative.  However, the ERISA fiduciary implications of such an appointment are unclear.

Public reaction to these changes is still developing.  At a minimum future changes will still be needed to address the definition of privately-held.  Time will tell whether additional changes will be forthcoming to address continuing concerns/objections. Stay tuned….

Friday, August 22, 2014

Floating DollarAccording to the Investment Company Institute, approximately 18%% of all mutual fund assets are invested in money market mutual funds.  An even higher percentage reflects the investment in money market mutual funds held by participant-directed defined contribution plans.  Many of these plan participants believe that their retirement money is “safe” in a money market mutual fund since these funds are thought to be “guaranteed” to maintain a fixed target value of $1.00 per share.  Plan participants do not, as a rule, appreciate the risks inherent in money market mutual funds that in certain market conditions might “break the buck.”

On July 23, 2014, the SEC promulgated a rule (the “MMF Rule”) addressing what it believes could be heavy redemptions of money market mutual funds in the event of economic stress.  The MMF Rule intends to make information about money market mutual funds, particularly inherent risk factors, more transparent.

Money market mutual funds offer a return of principal, liquidity and a rate of return based on the market.  The net asset value (NAV) per share of a money market mutual fund changes daily in response to market factors, but the funds are designed to retain a stable share price that is typically $1.00 per share.

Federal rules require money market mutual funds to invest in short-term investments with minimal credit risk and high quality.  But even investments that carry these characteristics are subject to the vagaries of the market place, and significant changes in market factors can cause money market mutual funds to deviate from their target value.

The MMF rule requires institutional prime money market mutual funds to use a floating NAV, to impose default liquidity fees on non-governmental money market mutual funds when certain conditions of economic stress exist, and to give money market mutual funds the flexibility to institute liquidity fees and/or “redemption gates” under certain conditions of economic stress.

The floating NAV applies to non-government, non-retail money market mutual funds.  It prevents institutional funds such as those held by large 401(k) plans from maintaining a stable $1.00 share price.

Government money market mutual funds are invested in cash, government securities and/or repurchase agreements collateralized with cash or government securities.  Retail money market mutual funds are those that are reasonably designed to limit all beneficial owners of the fund to natural persons.  Both government and retail money market mutual funds are exempt from the liquidity fee and redemption gates provisions, but they can apply them if they disclose that they do so in their prospectus.

It will take up to 18 months for these rules to become fully implemented.  During that time, it would behoove plan administrators and their investment advisors to reassess the type of money market mutual fund held by the retirement plan and determine if it continues to be a proper investment for the plan.  Additional information regarding the fund and how it works might be required to be distributed to participants.  And, it may be that institutional funds, irrespective of their lower cost structures, should be replaced by government money market mutual funds in order to meet the participants’ expectation of safety.  The plan fiduciaries will have to review new prospectuses to determine if their plan’s government or retail fund might impose liquidity fees or redemption gates.  Of course, procedural prudence will, as always, be required in evaluating the propriety of the money market mutual fund available in a participant-directed defined contribution plan.

Thursday, August 21, 2014

Institutional Shareholder Services, or ISS, invites U.S. companies to verify the data it uses to evaluate proxy statement equity plan proposals.  ISS previously announced a move to a “balanced scorecard” approach for its evaluation of equity plan proposals.  Data verification is included as a key feature of this approach.

Data verification allows companies to preview, and if necessary update, the data used by ISS in its vote recommendation.  Some companies have been frustrated when reviewing ISS vote recommendations that include inaccurate or misconstrued data.  This program is designed to improve the quality of information used by ISS.  See “FAQs:  Equity Plan Data Verification” for details about the program.  Below is a summary of some key features:

How to Participate

  • The data verification program is optional.
  • It is open to U.S. companies who have filed definitive proxy materials after September 8th, 2014 with an equity plan proposal (new or amendment) on the ballot.
  • The data verification program does not apply to other compensation plan proposals such as cash and bonus plan proposals.
  • To participate in the program, the company’s proxy materials must be filed at least 30 days in advance of the meeting date.
  • Data verification is only available to company contacts who register in advance to participate in the data verification program with ISS.


  • Companies will have only a short period to verify their equity plan data – approximately two business days to review and respond.
  • The window period is expected to open within 12 business days following the filing of the company’s definitive proxy materials.

What Data

  • ISS reviews definitive proxy filings, 10-Ks, 10-Qs, and 8-Ks, “among other documents” to gather data for its vote recommendation.
  • Data submitted for the program must be consistent with relevant publicly-disclosed filings.
  • ISS includes a list of data verification questions for companies to use in advance.  The questions are helpful insight into the ISS “balanced scorecard” approach.  The questions cover four areas:

1.      Equity Plan Provisions – includes definitions and provisions covering stock option repricing, cash buyouts of underwater stock options, share recycling, limits on full value awards, fungible share counting provisions, evergreen share reserves, dividend/dividend equivalent rights, change in control definitions, triggers and effect on time-based and performance-based awards, and tax gross-ups.

2.      Outstanding Stock and Convertibles – includes data covering the number of common shares outstanding, shares issuable upon exercise of outstanding warrants, conversion of debt, and outstanding weighted average common shares in the past 3 fiscal years in the computation of basic EPS.

3.      Equity Grant Activity – includes data regarding time-vesting options, stock appreciation rights, full value and performance-based awards granted or earned in the past 3 fiscal years.

4.      Shares Reserved and Outstanding Under Equity Compensation Program – includes number of shares reserved under the proposal, shares remaining available under all equity compensation plans, and shares subject to outstanding awards.


460326385If your company is a publicly-traded U.S. company, or a company covered under ISS’ U.S. policy, with an upcoming equity plan proposal, consider participating in the ISS equity plan data verification program.  Remember that contacts at your company will need to register in advance (multiple contacts are permitted) and be prepared to act quickly to verify, and make any necessary corrections, to your company data.

In advance of filing your definitive proxy statement, consider reviewing the ISS verification questions and include the data, where appropriate, in clear and concise proxy statement disclosures.

Monday, August 18, 2014

Missing PersonsLast week, the DOL released Field Assistance Bulletin 2014-01 which updated its 10-year-old guidance on how to deal with the accounts of missing or unresponsive participants and beneficiaries in a terminating defined contribution plan that does not have annuity options.  The 10-year-old guidance was largely rendered moot because of the discontinuance of the Social Security Administration and IRS letter forwarding programs, which were prominent features of that guidance.

The DOL takes this seriously.  As the FAB notes:

Some search steps involve so little cost and such high potential for success that a fiduciary should always take them before abandoning efforts to find a missing participant, regardless of the size of the participant’s account balance. The failure to take such steps would violate the fiduciary obligations of prudence and loyalty, as set forth in section 404(a) of ERISA.

However, other more expensive approaches may be required when the account balance is large enough to justify an additional plan expense and other efforts have failed. (emphasis and hyperlink supplied)

Search Free or Cheap. The required search steps in all cases (as described more fully in the FAB) are:

  1. Use certified mail (the DOL has a model notice available for this).
  2. Check related plan and employer records (such as the group health plan records – although query whether this works under HIPAA).  The DOL does note that if there are “privacy concerns” (like the small matter of other federal laws) the fiduciary of the terminating plan can ask the other plan or the employer to forward a letter on the fiduciary’s behalf.
  3. Check with the designated beneficiary.  This includes beneficiary designations in the employer’s other plans, such as life insurance plans.  Again, letter forwarding is allowed. (The DOL does not note this, but the beneficiary could always claim the participant is dead and to send the money to them.  Obtaining proof of death would be prudent in that circumstance.)
  4. Google the participant!  The DOL says the fiduciary should use free Internet search tools, which may include search engines, public records, obituaries, and social media.  So if you have an unresponsive participant, you can also tweet them or send a Facebook friend request to try and get their most current information. The DOL did not suggest a dedicated hashtag, but we recommend something like: #IHaveMoneyForYou

Going More Upscale.  If the free or cheap options don’t work, fiduciaries can’t stop there.  They need to consider how prudent it would be to utilize other tools, such as commercial locator services, credit reporting agencies, information brokers, investigation databases, and analogous services that charge.  The fiduciary’s analysis should take into account the size of the participant’s account and the cost of those steps.  Many of those services can be quite cost effective, so it’s important to research them thoroughly before dismissing them out of hand.  The DOL notes that the exact steps will depend on the facts and circumstances.

What to Do for Those “Off the Grid.” Of course, there are those rare people who are still unable to be located (perhaps because they work for the CIA).  In that case, the DOL notes that the fiduciaries “have no choice” but to distribute the money.  In that case, they can:

  1. Roll the money over to an IRA directly.  In doing so, fiduciaries should comply with the guidance on selecting IRAs for automatic rollovers to satisfy their ERISA fiduciary duties.
  2. If no IRA provider will take the money, or the fiduciary has “other compelling” reasons for not rolling the money over, the fiduciary can open an interest-bearing federally insured bank account in the name of the missing participant or beneficiary or transfer it to a state unclaimed property fund.  Either such distribution is taxable to the recipient, unlike the rollover, as is any future interest earned.  The fiduciary needs to take this and other factors the DOL mentions in the FAB into account.

The DOL views this as the option of last resort as it notes:

A prudent and loyal fiduciary would not voluntarily subject a missing participant’s funds to such negative consequences in the absence of compelling offsetting considerations. In fact, in most cases, a fiduciary would violate ERISA section 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution.

Translation: expect to get fined or sued if you do this without proper justification.  Of course, there are other reasons to avoid state unclaimed property funds, as we have noted previously.

The DOL also notes that “know your customer” laws that apply to banks have been interpreted by other agencies to allow IRAs or federally-insured bank accounts to be set up by plans.

What You Must Never, Ever Do. Doing a distribution where there is 100% income tax withholding “Is Not An Option.”

Other Considerations. The DOL notes the plan administrator can charge missing participants’ accounts for the reasonable expenses associated with finding them.  The method for allocating those expenses has to be consistent with the terms of the plan and the administrator’s ERISA duties (as detailed in other DOL guidance).  Plan fiduciaries also need to be able to show how they complied with ERISA’s fiduciary obligations for decisions made to locate missing participants.

The DOL notes that these rules do not apply to defined contribution plans that have annuity options. Additionally, if the employer has another defined contribution plan that will take a transfer of the benefit, the DOL assumes it will be transferred to that plan

Finally, the DOL also mentions that the PBGC is supposed to be setting up rules for it to take on the accounts of missing participants in terminated defined contribution plans.  Expect further guidance once that program is implemented.

Thursday, August 14, 2014

Last Friday, the President signed the highway trust funding bill.  One part of the debate over the bill was how it would be funded.  Ultimately, the bill was paid for using  so-called “pension smoothing” that some decried as a “gimmick.” But what is it and might it be beneficial?

Pensioners Driving on the HighwayTo understand smoothing, we have to first understand how pension plans are funded.  Pensions are typically funded with company contributions.  Put simply, the amount of these contributions are determined by an actuary based on the expected future benefits to be paid (i.e., the future liability) relative to the amount of assets already in the plan.

Because actuaries don’t have crystal balls, they have to make certain assumptions in making these calculations. The assumptions center around the anticipated mortality of the participants (i.e., how long the plan will have to pay benefits) and the rate at which the plan’s assets are expected to grow (i.e., an interest assumption).  The law establishes what these mortality and interest assumptions are for funding purposes.

The problem that pension smoothing seeks to address is with the interest assumption.  Absent pension smoothing, the law mandates that the assumption be based on relatively current interest rates. As you can imagine, with interest rates at historic lows, the assumed rate of the plan’s return is relatively small.  This means that larger contributions are required now to fund benefits in the future than there would be if interest rates were higher.

One could argue that such an assumption is unreasonable.  For a plan designed to pay benefits over decades, does it really make sense to assume such a low rate? Couldn’t that result in significantly overfunding the plan (potentially to the detriment of the company since it can’t really get that money back) when interest rates rise? Conversely, when interest rates rise, does it make sense to potentially underfund the plan at those higher rates since interest rates may go down?

Simply described, what smoothing does is even out the interest assumption by looking at an average rate over several years.  This helps even out historically low (or high) rates.  Consequently, it reduces the contributions companies can or are required to make.  It leaves that money in the company where it can be used by the company for other purposes (and, Congress hopes, be subject to tax). Congress likes it because it raises revenue without looking like a tax hike.  Companies like it because it reduces their potential pension contribution obligations.

Some argue that this has the potential to underfund pension plans and put the PBGC in further jeopardy.  However, the effect of that is unclear.  By reducing contribution obligations, it may make a company less likely to terminate a pension plan since it is less of an immediate financial burden, thus allowing the plan to continue and not be handed over to the PBGC.

The bottom line is that the benefits and drawback of pension smoothing are complex; it’s not as simple as saying its universally good or bad for pension plans or the companies that sponsor them.  There are benefits that are perhaps less tangible than those that simply allow us to keep our highways freshly paved.