Compliance August 12, 2014

Court Says RBC Executive Compensation Plan Is ERISA Plan

August 12, 2014 (PLANSPONSOR.com) – A federal court has found a wealth accumulation plan (WAP) offered to executives of RBC Capital Markets Corporation is a “pension plan” under the Employee Retirement Income Security Act (ERISA).
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The 5th U.S. Circuit Court of Appeals noted that a “pension plan” as defined by ERISA is “any plan, fund, or program . . . maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan…” The appellate court disagreed with RBC’s argument that the two conditions must be taken together and said they are two separate conditions for determining whether a plan is a “pension plan” under ERISA.

The court agreed that the express purpose of the plan was not to provide retirement income, but found in the beginning of the WAP document, the statement of purpose refers to the WAP as a “deferred compensation plan” and explains that, by design, employees have the option “to defer receipt of a portion of their compensation to be earned with respect to the upcoming Plan Year.” In addition, later sections of the WAP contain provisions for both Voluntary Deferred Compensation and Mandatory Deferred Compensation. “A deferral of income therefore ‘ensues from’ (or, ‘arises as an effect of’) the express terms of the WAP,” the court concluded in its opinion.

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The court also found the express terms of the WAP contemplate employees deferring income “to the termination of covered employment or beyond.” The vesting sections explain that, upon separation, unvested amounts vest immediately. Also, the distribution sections mention available forms of distributions if a distribution is made due to separation.

For these reasons, the court determined the plan fell into the second condition for a plan to be a “pension plan” under ERISA. The court refused to consider RBC’s citing of a previous court case that applied a conditional clause found in another section of ERISA about pay being systematically deferred, noting that the plan in that case was a bonus plan and the WAP was clearly not a bonus plan.

The case was brought by former plan participants who had portions of their WAP accounts forfeited when they left their jobs at RBC. The plaintiffs alleged the forfeitures were violations of ERISA. But, a federal district court ruled that the plan was not an ERISA plan because its purpose was not to provide retirement income.

RBC had argued that, regardless of whether the WAP is a “pension plan” under ERISA, it is a “top hat” plan—a plan that is (1) unfunded and (2) maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees”—thereby making it exempt from the fiduciary duties imposed by ERISA. The district court did not address this argument.

However, the 5th Circuit found the resolution of the dispute over the “top hat” exemption—now that it determined the plan is a “pension plan” under ERISA—may require factual determinations regarding, for example, selectivity and high compensation. The appellate court remanded the case back to the district court to decide this issue.

The 5th Circuit’s opinion in Tolbert v. RBC Capital Markets Corporation is here.

Benefits August 12, 2014

Breaking Up (with a Recordkeeper) Isn't Hard to Do

August 12, 2014 (PLANSPONSOR.com) – Changing retirement plan providers (recordkeepers) doesn't have to be a bad experience.
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Churn rates, or the percentage of plan sponsor switching recordkeepers, have actually slipped, says Bill Harmon; senior vice president of 401(k) markets at Great-West Financial in Greenwood Village, Colorado. In the smaller market, plans might change every five to seven years, he says. Larger plans have a lower turnover rate, but conversions are simply a fact of plan life. Sooner or later, someone is simply going to want a change.

One reason for the decrease in conversions might be that small-plan sponsors have a lot on their plates, Harmon says, given the Affordable Care Act and looking after their core business. The market is up; participants are relatively happy. In short, Harmon says, a certain amount of pain is necessary to galvanize a plan sponsor into deciding to go through the complexity of a plan conversion.

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Reasons for a change are simple, Harmon feels. “It comes down to systems and people,” he tells PLANSPONSOR. “It sounds so simple, but most of the time, investments are pretty similar, and with fee disclosure a lot of costs structures have come to the middle.” The plan sponsor that wants to change recordkeepers generally is not having a good systems experience, which can stem from the way the plan was set up initially, or an actual relationship with a the account manager or the field relationship manager.

It’s likely the recordkeeper has already had several chances, Harmon says, and mistakes on the systems or the human side are usually the culprit. It could be a mistake on a loan for the fifth time, or the plan has just outgrown the product. “Some recordkeepers focus on certain markets and don’t have certain features,” he says. A recordkeeper might offer only group annuities, and the plan has increased in size and wants different share classes, wider investment classes or more flexibility on the net asset value. Plan sponsors may feel that their plan is set up incorrectly, Harmon says, and they may be experiencing a lot of systems problems.

But when plan sponsors do think about changing recordkeepers, fear of the conversion process can get in the way of making a decision. Harmon says he’d like to dispel the myth that says changing recordkeepers—a plan conversion—is a bad experience.

Conversion is neither horrible nor scary, Harmon says. Some firms convert thousands of plans a year and have this process down to almost a science—but there is also an art to knowing the plan sponsor and the plan, having predictable processes and good, clear communication. Advisers are the main influencers in the decision, Harmon says, even more than third-party administrators (TPAs), since they talk to the plan sponsor and are very involved in the conversion process.

Common fears include lost files or dropped participants, Harmon says, but the reality is that the process is quite free of errors. “Today’s technology makes converting records a lot easier,” Harmon says. “There’s very little data input”–leaving little room for human error.

Plan sponsors should ask prospective recordkeepers to describe the conversion process. What is the communication like? Do they provide timelines? How predictable and consistent is the process? A key question to ask is how many of these conversions the recordkeeper does that are similar to the plan sponsor’s. “No one wants to be the beta test,” Harmon says.

Look for signs that a salesperson seems to be nodding automatically in response to requests. A plan sponsor might feel that certain plan features are important—multiple code sections or multiple plan designs—which might require manual workarounds by the recordkeeper. Harmon recommends asking for references from plans that do something similar.

Great-West has a consistent, easy-to-follow process , Harmon says. And, the firm consistently reviews each conversion after it is complete to find out about the plan sponsor’s experience. The firm's implementation team even has a competition component based on the outcome, he adds.

Harmon believes a recordkeeper’s implementation strategy is a powerful part of its initial relationship with a plan sponsor and with the intermediary. 

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