July 2009
Governance and Compliance Advisory Update: July 2009
In June, legislation introduced in the House focused on protecting participants in defined contribution plans by encouraging plans to offer (and participants to elect) lifetime annuity payments when they retire and by introducing a fee disclosure bill. In another matter regarding fee disclosures, the Seventh Circuit denied an appeal for rehearing in Hecker v. Deere (see March GCA Update). But in denying a rehearing, the court clarified the scope of its earlier decision.
An IRS official commented on when sample plan language waiving required minimum distributions and a sample 402(f) notice can be expected.
Also in the courts, the Third Circuit became the latest circuit to consider standards established by the Supreme Court in Met Life v. Glenn addressing conflicts of interest in ERISA benefit claims.
Lastly, continuing a nationwide trend, New Hampshire enacted legislation legalizing same-gender marriage, and Nevada approved a domestic partner law.
Legislative Developments
Life annuity payments proposed
Representative Pomeroy introduced the Retirement Security Needs Lifetime Pay Act of 2009, which includes incentives designed to encourage retirees to receive some of their retirement savings in the form of guaranteed lifetime income payments. These incentives include:
- excluding from tax 25% of lifetime income payments from qualified retirement savings plans (capped at $5,000 for an individual return and $10,000 for a joint return)
- excluding from tax, in the case of annuities that are not part of a tax-qualified retirement plan, 50% of lifetime income payments, subject to a maximum annual exclusion of $10,000 per tax return.
Insight: As a result of administrative burdens, relaxed IRS rules and participants' ability to roll over account balances to an IRA, many defined contribution plan sponsors offer only lump sum distributions. The push to encourage lifetime retirement income is a reversal of this trend. However, current economic conditions have spurred plan sponsors, Congress and advocacy groups to educate participants on the need for lifetime retirement income, and provide them with the tools to help maintain it. Plan sponsors who are considering adding an annuity option to their plans should first gauge employee interest in this initiative before taking on the added cost of implementing it. In addition, since there are numerous annuity products in the marketplace, plan sponsors should carefully review these options before determining which product to offer. Equally important, plan sponsors that decide to implement an annuity option should include their vendor and legal counsel/benefits consultant in related reviews and discussions.
A copy of the bill can be found here.
Fee disclosure bill introduced
Representative Neal introduced the Defined Contribution Plan Fee Transparency Act of 2009. The bill requires that defined contribution plan sponsors provide employees with detailed information regarding plan investments and fees, both at enrollment and quarterly. The bill also requires vendors to provide plan sponsors with detailed information about investment fees, service offerings and any revenue sharing. Unlike other recently introduced fee disclosure bills, this bill includes tax penalties for failure to comply.
Insight: This bill (and the other similar, previously introduced bills) demonstrates that, despite recent court rulings and the delayed release of Department of Labor fee disclosure regulations, Congress is still concerned about the lack of transparency in the 401(k) industry and is pursuing enhanced participant protection. The bill highlights the fact that plan fiduciaries must be mindful of the process they use to select plan funds and service providers.
A copy of the bill can be found here.
Regulatory Developments
Future IRS guidance in the pipeline
An IRS official recently stated that sample plan language for required minimum distribution waivers resulting from the provision included in the Worker, Retiree, and Employer Recovery Act of 2008 is in the final clearance pipeline. The IRS is also reportedly close to issuing an updated 402(f) model notice, which explains the tax consequences of distributions from qualified plans and a participant’s rollover rights.
Insight: This is welcome news for plan sponsors that hoped to adopt a plan amendment for the required minimum distribution waiver by year's end. Plan sponsors should also keep in mind that Pension Protection Act of 2006 (PPA) amendments must be adopted by December 31, 2009. The model 402(f) notice is being updated to include language about the consequences of electing an immediate distribution (as opposed to deferring distribution until a later time) and to address other changes affecting distributions enacted by the PPA. Once the notice is released, plan sponsors should have their current notice reviewed to ensure it includes this and other required information, or adopt the model notice instead.
Court Decisions
401(k) fee litigation rehearing is denied
The Seventh Circuit denied an appeal for rehearing Hecker v. Deere. In a short opinion, the court clarified that its earlier decision should not be read "as a sweeping statement that any Plan fiduciary can insulate itself from liability by the simple expedient of including a very large number of investment alternatives in its portfolio and then shifting to the participants the responsibility for choosing among them." The plaintiffs had claimed the sponsor breached its fiduciary duty by offering mutual funds that charged excessive and unreasonable fees (primarily due to the fact that Deere decided to accept "retail" fees and did not negotiate lower "wholesale" fees) (see March GCA Update).
Insight: This ruling, coupled with Congressional proposals requiring greater fee disclosure, emphasizes the need for plan sponsors to be aware of investment-related fees charged to the plan. Plan sponsors should take proactive measures now to prepare for compliance with required fee disclosures that will likely be passed by Congress in the future.
A copy of the decision can be found here.
Third Circuit applies new review standard for benefit claims
In Donachy v. Motion Control Industries, the Third Circuit applied a new standard of review for denied benefit claims where conflicts of interest exist. The new standard, first adopted by the U.S. Supreme Court last year, requires the court to consider a conflict of interest as one of several factors in determining whether a plan fiduciary has abused its discretion in denying a claim.
Insight: The new standard will apply if a participant claims that a conflict exists between the interests of plan participants, the plan administrator and/or the company. Virtually all the appellate courts have adopted the new Glenn standard to review benefit denial claims. However, the Sixth, Ninth and Tenth Circuits have not modified their standards of review because their current standards were already consistent with the standard adopted by the Supreme Court.
Plan sponsors should review current benefit claim procedures (in both retirement and health and welfare plans) and the delegation of authority contained therein for reviewing claims and appeals to ensure plan fiduciaries are well positioned to withstand participant challenges and avoid costly future litigation.
A copy of the case can be found here.
Other Developments
New Hampshire legalizes same-gender marriage
New Hampshire enacted legislation authorizing same-gender marriage, effective January 1, 2010. New Hampshire is the sixth state, joining Vermont, Iowa, Maine, Massachusetts and Connecticut, to permit same-gender marriage.
Insight: As noted in the May 2009 GCA Update (regarding Vermont, Iowa and Maine same-gender marriage), employers in New Hampshire will likely face an uptick in questions and requests related to same-gender spouse benefits. Because same-gender marriage is not recognized under federal law, sponsors of qualified retirement plans and self-insured welfare plans are generally not required to extend spousal rights (e.g., qualified joint and survivor annuity) and benefits to same-gender spouses (insured plans in New Hampshire do recognize such spouses).
However, plan sponsors may choose to treat a same-gender partner as a "spouse" for some limited retirement plan purposes and may extend health benefits to same-gender spouses. Whether or not a plan sponsor has decided to extend marital-related rights to same-gender spouses, employee communications should spell out how the change in state law affects (or does not affect) participants' benefits. If you need assistance preparing these communications, deciding whether to offer same-gender benefits or implementing such benefits contact your Towers Perrin consultant.
A copy of the legislation can be found here.
Nevada legislature approves domestic partner law
Nevada enacted legislation that gives domestic partners, with certain exceptions, the same rights, protections, benefits, responsibilities, obligations and duties afforded to married couples, effective October 1, 2009. However, the bill specifically states that public or private employers in the state are not required to provide health care benefits to or for the domestic partner of an employee.
Insight: The same-gender marriage issues noted above should also be considered for other same-gender civil arrangements.
A copy of the legislation can be found here.
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