Benefits May 19, 2011

Adding Roth to 457 Plans Requires Participant Communications Change

May 19, 2011 (PLANSPONSOR.com) – The National Association of Government Defined Contribution Administrators has published an Issue Brochure explaining rules regarding newly-allowed Roth contributions to 457 plans.
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In the report, NAGDCA notes that participant communications and education about Roth contributions will be different than for pre-tax contributions. Previously, plan communications have focused on the value of a tax deduction received today and paying it back at lower rates in the future. The Roth feature’s selling points are more about coordinated retirement planning and avoidance of future taxes.   

The report says 401(k) and 403(b) plans offering Roth contributions have seen gradually increasing participation especially among new employees and younger employees with low to middle incomes. These employees are best approached using multiple communications channels and are more likely to use Web-based modeling tools, NAGDCA advises.  

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Interested employers will need to amend all plan documents and make changes to administrative and payroll processes prior to accepting Roth contributions. Employee communications and forms will require extensive re-design since Roth contributions and In-Plan Rollovers have new income tax and planning implications for participants.  

If the employer wishes to enable In-Plan Roth Rollovers, the plan document must also include provisions allowing Roth contributions effective no later than when they wish to allow In-Plan Rollovers. The 402(f) notice will also need to include language that explains In-Plan Rollovers. Model language is available in IRS Notice 2010-84 that could be used for this purpose.  

NAGDCA suggests that employers should start discussions early with administrative service providers to ensure that they can handle all the intricacies of these new accounts since vendors have had little opportunity to plan for the required changes to recordkeeping processes.  

The NAGDCA Issue Brochure is at http://www.nagdca.org/documents/NAGDCA_IssueBrief_Roth_457.pdf.
Compliance May 19, 2011

Groups Urge Court to Review Kraft Fee Case Ruling

May 19, 2011 (PLANSPONSOR.com) - The ERISA Industry Committee (ERIC) and other groups are urging a federal appellate court to rehear a case for which it held that fiduciaries at Kraft Foods may have breached their duties by, among other things, failing to make a decision about the unitized structure of the 401(k) plan’s stock fund.
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In a friend of the court brief, ERIC, along with The Profit Sharing/401k Council, the American Benefits Council, and the U.S. Chamber of Commerce, argue that the 7th U.S. Circuit Court of Appeals unitization and recordkeeping fee rulings conflict with decisions of the Supreme Court and the 7th Circuit, and subvert basic objectives of the fiduciary duty provisions under the Employee Retirement Income Security Act (ERISA).    

“Instead of applying these provisions in a way that gives fiduciaries the discretion that Congress intended, the rulings subject fiduciaries to costly ‘make-work’ requirements and the threat of litigation that Congress sought to avoid,” the brief argues.  The brief also contends that the rulings’ potential impact is widespread: most employer stock funds are unitized funds, and both rulings threaten to complicate the management of funded employee-benefit plans of all kinds.   

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The groups argue that the panel’s ruling attaches unwarranted significance to the absence of specific evidence that the defendants decided to continue to maintain unitized funds.  ERISA requires fiduciaries to follow lawful plan terms and requires participants to be informed of material changes in the plan.  “ERISA does not require that a decision not to change the plan be put in writing or communicated to plan participants.  Thus, when a decision is made not to change the way a plan is administered, plan fiduciaries do not typically affirm the decision in writing,” the brief contends.   

As to recordkeeping fees, the brief says that the panel’s ruling conflicts with the 7th Circuit’s decisions regarding the duty of prudence, arguing that the ruling is based on the view that if a prudent fiduciary would have solicited competitive bids, a fiduciary that does not solicit competitive bids is imprudent.  This conflicts with this Court’s ruling in Hecker v. Deere that the duty of prudence does not require a fiduciary to “scour the market” to find the lowest-cost service provider and with its ruling in DeBruyne v. Equitable Life Assurance Society that the duty of prudence does not require all fiduciaries to act the same way, the groups said.   

In this case, “. . . no expert’s opinion could support the view that the only prudent course of action was to solicit competitive bids or that . . . fees were unreasonable merely because some other recordkeepers charged less for smaller, less complex plans, which are less likely to be affected by business acquisitions and dispositions and the needs of a diverse workforce,” the brief argued.   

In a separate statement, ERIC President Mark Ugoretz said: “If the Seventh Circuit panel ruling is allowed to stand, you will continue to see an influx of litigation from participants merely second guessing their plan administrator’s discretionary authority.”   

In its prior ruling, the 7th Circuit determined that it was unclear whether fiduciaries had made a formal decision to continue the fund as a unitized fund, in which participants hold “units” in the fund instead of shares, and sent the case back for the trial court to determine evidence of a formal decision.   

It also found that Kraft’s reliance on an expert opinion with regard to the reasonableness of fees, rather than relying on competitive bids, may not have been sufficient.  The panel therefore sent the issue back for trial on the question of whether retaining the record keeper was prudent (see Appellate Court Sends Back Kraft Fee Case).   

The brief is here.

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