Compliance November 22, 2004

Suit: Union Funds 'Diverted' to CA Resort

November 22, 2004 (PLANSPONSOR.com) - The Department of Labor (DoL) filed a lawsuit against a Pipefitters union local, alleging officials diverted more than $36 million to the Konocti Harbor Resort and Spa facilities on Clear Lake in Kelseyville, California.
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A DoL news release said the federal court suit against current and former trustees, the plan administrator, and Local 38 of the United Association of Plumbers, Pipefitters and Journeymen alleged that the assets came from five employee benefit plans. By doing so, the defendants violated the Employee Retirement Income Security (ERISA), the DoL charged.

>According to the suit, Local 38 controls a non-ERISA “convalescent trust fund” that owns and operates the Konocti resort. DoL alleged that several of the defendants diverted approximately one-third of all pension assets – more than $36 million – to the convalescent fund.  

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>The trustees asserted they were unaware of the diversion even though it was reported on financial statements as a “receivable.”   Some or all of the diverted assets were used to build and improve Konocti’s 5000-seat outdoor amphitheatre, 1000-seat concert hall, and other infrastructure, the suit charged. The retirement, health, scholarship, apprenticeship, and vacation and holiday funds cover more than 2,000 participants employed throughout northern California.  

>Further, the Labor Department suit alleged that the current and former trustees and the administrator maintained inadequate financial controls, violated plan documents, and imprudently spent millions to build and maintain facilities at Konocti despite the resort’s continuing financial losses.   According to the suit, the trustees did not require loan agreements or obtain a security interest in the resort.   Local 38 also profited from a $6 million loan it made to the convalescent fund to prevent a bank foreclosure that would have forced the sale of the Konocti property in 2000, the suit charged.

>In addition to an accounting of all plan assets, the suit asks for a restoration of all losses to the plans, to correct transactions prohibited by law, give the plans a security interest in the convalescent fund and Konocti and to return any illegal profits paid to the defendants.   The suit also asks the court to remove the plan officials as fiduciaries and to permanently bar them from service to ERISA plans in the future.

>The lawsuit named as defendants trustees Lawrence Mazzola, business manager and financial secretary-treasurer of Local 38, Lawrence Mazzola, Jr., William Fazande, Larry Lee, James Shugrue, Vohon Kazarian, Tom Irvine, Robert Buckley, Robert Buckley Jr., Art Rud, Ron Fahy, and Robert Nurisso; plan administrator Frank Sullivan; and Local 38).   The suit was filed in federal district court in San Francisco.

Benefits November 19, 2004

E&Y Survey: Employee Education No Longer 'If' but 'How'

November 18, 2004 (PLANSPONSOR.com) - Eighty-three percent of employers provide some form of financial education for employees, making it clear that it is no longer if but how to provide employees with investment education.
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align=”justify”>According to an Ernst & Young and ExecuNet survey, 80% of employers feel that their education service is in place in order to retain employees, while 84% think that education is also necessary in order to make sure employees have enough money for retirement. Ninety percent claim that they put such programs in place in order to also increase employee satisfaction.

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align=”justify”> For those 17% of employers who do not offer basic education, 40% cite concerns over liability for such programs as the major reason for not instituting them, according to Ernst & Young spokesperson Donna Cox-Davies. An additional 13% cite cost.

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align=”justify”>Education programs that offer a more personalized approach through phone calls and other direct methods of communication seem to bring in higher levels of involvement, according to the survey. Results from employers with such personalized employee counseling services show:

  • up to a 16% increase in participation rates in excess of 5%
  • up to a 17% increase in contribution rates as a percentage of pay inexcess of 5%
  • up to an 11% increase in the change in allocations in excess of 5%
  • up to a 15% decrease in loan activity in excess of 5%
  • up to a 16% increase in rollover activity in excess of 5%.

“A small percentage increase in any aspect of investment behavior, such asa change in contribution as a percentage of pay, can yield positive results for plan participants and can leave them more financially secure in their retirement,” said Bill Arnone of Ernst & Young’s Human Capital practice in a press release. “By providing one-to-one counseling, employees understand the importance of saving for retirement and can also determine the course of action that best meets their needs.”

The inclusion of personalize assistance into programs can have a greater affect on employee behavior, however. Almost half (47%) of employers who provided telephone counseling as part of their programs increased participation rates by over 5%.

Of the 83% of employers who offer some level of employee financial education, modes of delivery differ vastly, with many forms of delivery often being offered at the same company. Brochures, newsletters or print publications are used by 91.9%, while online information is used by 90.3%, personalized statements by 80.6%, and online calculators by 82.3%. Workshops (66.1%), phone counseling (33.9%), and in-person counseling (24.2%) are also popular.

Delivery frequency is also looked at in the survey, with continuous (upon request) information by far the most popular delivery frequency, with 44.9% of employers offering this. Other delivery frequencies are annually (7.2%), quarterly (18.8%), monthly (5.8%), and only at enrollment (1.4%).

Ernst & Young LLP, with the assistance of ExecuNet, a firm that specializes in executive career strategies, recruiting and employment market trends, conducted a survey of large employers nationwide to determine whether they are measuring the success of their employee financial education programs. The findings were based on responses from human resources and employee benefits professionals from a cross section of some of the largest employers in the country in a variety of industry sectors.

The survey was designed to cover basic education programs and not formal advice, which can carry a much higher level of potential plan sponsor liability.

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