Compliance March 18, 2015

DOL Adds Flexibility to Investment Disclosure Requirements

The DOL says a new direct final rule provides a grace period for plan sponsors to furnish plan-related information to participants.
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The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) announced a direct final rule that provides a two-month grace period for participant-directed individual account plans, such as 401(k)s, to provide annual investment and plan-related information to participants.

According to EBSA, the rule changes the requirement that annual disclosures be made at least once in any 12-month period to at least once in any 14-month period.

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“The additional two months provided by the rule are in response to comments received by the department that plan administrators need more flexibility for these annual disclosures to avoid potentially unnecessary costs and burdens,” EBSA explains. “The information that is currently required to be disclosed, which helps workers make informed plan and investment decisions about their retirement savings, remains unchanged.”

The direct final rule is accompanied by a notice of proposed rulemaking. If EBSA receives significant adverse comment during the public comment period, it says it will withdraw the direct final rule and then address the comments in a subsequent final rule. The direct final rule is otherwise effective on June 17, 2015.

The DOL also announced a temporary enforcement policy that is “effective immediately and generally will apply until the direct final rule takes effect.”

“EBSA, as an enforcement matter, will treat a plan administrator as satisfying the current 12-month rule if annual disclosures are made within the new 14-month deadline, provided that the plan administrator reasonably determines that doing so benefits the plan’s participants and beneficiaries,” EBSA says.

The proposed rule will be published in the March 19, 2015, edition of the Federal Register. EBSA is soliciting comments on the rule which are due 30 days from the date of publication.

The direct final rule can be viewed here. The accompanying proposal can be viewed here. 

Compliance March 18, 2015

DOL Alleges Company’s ESOP Creation Was Flawed

Accurate company valuations are critical when it comes to establishing an ESOP, the DOL says in an enforcement action announcement.
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The Department of Labor (DOL) contends that, when establishing an employee stock ownership plan (ESOP), a company’s owner sought to inflate the company’s stock price to benefit himself.

The DOL filed a lawsuit in federal court against Dr. Roy Geronemus, owner of the Manhattan-based Laser and Skin Surgery Center of New York, and plan trustee Samuel Ginsberg, alleging the stock valuation process when setting up the Laser Skin and Surgery Center ESOP in 2009 was flawed, and the ESOP’s subsequent $24 million purchase of the stock violated the Employee Retirement Income Security Act (ERISA).

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The department’s complaint, filed with the U.S. District Court for the Southern District of New York, seeks to have the defendants restore all losses to the ESOP; have Geronemus disgorge any and all ESOP assets and profits earned by him as a result; require the defendants to undo the prohibited transactions; and bar the defendants from serving as fiduciaries or service providers to any ERISA-covered plans.

The lawsuit says Geronemus appointed Ginsberg, his personal accountant, as the ESOP’s trustee for the sale of Dr. Geronemus’ stock to the ESOP. Ginsberg retained Trenwith Valuation LLC, which valued the company at $48 million, including $24 million for the 400,480 shares sold to the employees. This valuation had several obvious errors, the DOL contends.

First, the company’s valuation was flawed because it relied on data that inflated its value, namely a projection that Geronemus would earn only $663,439 in compensation annually when, in fact, he had and would continue to receive $1 million to $3 million annually. This made the company’s operating costs seem lower than they were. Ginsberg and Geronemus knew, the lawsuit alleges, that Geronemus would make significantly more than $663,439 each year.

Trenwith also valued the company by comparing it to allegedly similar companies. However, five of the 12 companies that Trenwith used for the comparison were based in Europe and listed on European stock exchanges exclusively. They were not appropriate examples to use and were likely chosen to inflate the value of the company.

“As a result of the defendants’ actions, the ESOP significantly overpaid for the stock. These were open and obvious flaws that the defendants knew or should have known, which resulted in a financial loss for the plan and its participants,” says Jonathan Kay, the DOL’s Employee Benefit Security Adminstration regional director in New York. “In addition, the defendants breached their fiduciary duties under ERISA by allowing the ESOP to engage in the prohibited transaction. They must now make restitution of millions of dollars to the plan and its participants.”

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