Investing October 20, 2015

Is Retirement Industry's Focus on Costs Too Much?

“Cost is not dispositive of prudence,” says Eugene Maloney with Federated Investors.
Reported by

Retirement plan fee litigation over the past decade, in addition to fee disclosure rules, has some plan sponsors placing too much importance on cost when deciding what investment decisions are prudent, asserted Eugene F. Maloney, executive vice president at Federated Investors, Inc. in Pittsburgh, Pennsylvania.

One of the things plan sponsors fear most is a notice from the Department of Labor (DOL) about a plan investigation, but process and documentation should protect them. “Committee minutes are very important,” Maloney told attendees of the American Retirement Association’s 2016 ASPPA Annual Conference.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

He pointed out that in its decision in Tibble v. Edison International, the U.S. Supreme Court noted that the Employee Retirement Income Security Act (ERISA) was based on then decades-old trust law. “Cost is the sixth factor to consider in determining whether something is prudent, based on trust law,” Maloney said. “Cost is not dispositive of prudence.”

Yet, many of the excessive fee lawsuits that have been filed have been lost or settled. Maloney believes this is because ERISA attorneys are only ERISA attorneys and may not be as familiar with trust law. “And they don’t bother to ask their trust law counterparts about the definition of prudent, or reasonableness or best interest,” he added.

While the industry is focused on lowering fees for retirement plan participants, Maloney contended that focusing too much on low fees could lead to overlooking better performing funds for participants.

On another note about prudence with retirement plan investing, Maloney pointed out that there is no absolute duty to divest underperforming funds in retirement plans. “If you have a prudent process in place dealing with the treatment of underperforming investments, you are covered; the law will protect you,” he said.

Ask the Experts October 20, 2015

(b)lines Ask the Experts – When Hardship Suspensions Start

“I realized that, per our retirement plan safe harbor provisions for hardship distributions, elective deferrals from all of our retirement plans are to be suspended for six months following the hardship withdrawal.
Reported by

“But what is the specific date that the 6-month suspension period should begin? When the vendor received the hardship distribution paperwork from the employee? When the vendor issues the hardship distribution check? When the employee receives the hardship distribution check?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:        

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

As with many questions posed to the Experts, the best way to seek an answer to your question is to take a look at the applicable regulations. The applicable regulation in this case is Treas. Reg. §1.401(k)-1(d)(3)(iv)(E)(2), which states the following:

“(2) The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.” (boldface our emphasis)

Thus, it appears to the Experts that the regulation is clear; the 6-month suspension period begins on the date the participant receives the hardship distribution. However, the Experts also realize that the plan sponsor and/or recordkeeper will likely will not know the precise date that the participant receives the distribution check in the mail (although if funds are distributed electronically, the recordkeeper will know the date of receipt by the participant in that case).

Thus, the plan sponsor and recordkeeper should work together to ensure that an operating procedure is in place so that the suspension of elective deferrals commences as close to the actual receipt date of the distribution by the participant as possible. Since that date is unknown for paper check disbursements, the date of disbursement can be substituted for the date of receipt. As long as such an operating procedure is in place and is followed, the plan should be able to fully comply with this particular provision of the hardship safe harbor.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

«