You Run a Business -- Why Do You Choose to be in the Benefit Plan Business, Too?

You've been successful in the business world. You've made your way up through the ranks. Suddenly, because your title starts with the word "chief", you find yourself on the company's Benefits (or some other similar name) Committee.

You're an accidental fiduciary. You have no benefits training. You've never studied ERISA. In some cases, you've never heard of ERISA. What are you doing in this role and why?

Perhaps there is not a single person on your committee with a strong grounding in ERISA issues. But, you know that in order to compete for employees, you have to provide your employees with some benefits. It's likely that some or all of those benefit plans are covered by ERISA. And, ERISA coverage brings with it a myriad of rules and requirements.

Oh no, now I have you panicking. What should you do?

Let's consider one of the most common benefit plan offerings in 2015, the 401(k) plan. What is your committee responsible for? Do you know?

While one could argue that the list might be slightly different, here is a pretty decent summary:

• Plan design
• Selection of plan investment options
• Compliance (with laws, regulations, and other requirements)
• Plan administration
• Communication to participants and education of those participants

That's a lot to swallow. Look around your committee. Presumably, since the committee has responsibility for all of those elements, at the very least, you can find people in the room who, between them, have expertise in all of those areas,

You can't? 

Do you really want the responsibility that comes with being a member of that committee when you have just realized that the expertise to handle the committee's roles doesn't reside on the committee?

You have choices, or at least you might. You could resign from the committee. Frankly, that usually doesn't go over well.

You could engage an expert. Suppose you could find an individual who could function in the role that a committee Chair would play in a perfect world. We're likely talking about someone who doesn't work for your company. This person will bring you peace of mind and essentially serve as the quarterback for the committee. He or she won't have a vote, but will guide you through the processes so that 

• Your plan is well-designed for your population and budgets, 
• It has investment options for plan participants that are prudently chosen and monitored according to an Investment Policy Statement (sometimes called an IPS), 
• It gets and stays in compliance with applicable rules, 
• Is administered properly and the firm that administers it is well-monitored, and
• Is communicated to participants in a clear fashion that properly educates those participants as to the benefits of plan participation.

That sounds great, doesn't it?

If you don't currently have such a quarterback for your committee, perhaps you should. I can help you find one.

A Practical Response to the McCutchen Case

It's not often that an ERISA-founded lawsuit makes its way to the US Supreme Court. So, when it does, it's often big news. ERISA attorneys and litigators scramble to read the opinion and seemingly just as quickly work to analyze it and write on what the Justices said. Some do a very good job, others less so. I've read a lot of the legal analyses on US Airways, Inc. v. McCutchen and perhaps my favorite is this one from Morgan Lewis. If you are another attorney friend of mine who wrote on this case, your analysis was excellent as well.

All of my readers know, or at least I hope they know, that I am not an attorney. In fact, as of today, I've never even played one on TV. But, as a consulting actuary and sometimes expert witness, I deal with a lot of legal issues. I like to think though that my approach to them is practical and business-focused. In other words, I try to advise my clients to take actions that their attorneys would tell them are not in conflict with the law, but that are practical and facilitate them running their businesses rather than getting in the way. After all, administrivia is not our friend.

Before I get to the practical side, however, I find it incumbent upon me to tell you a little bit about the case. There may be some legal-sounding mumbo-jumbo (that's a term of art, by the way) in here, so be forewarned that stimulants could be called for.

James McCutchen was the unfortunate driver of a car whose vehicle was struck by what one might term an errant driver. As a participant in the US Airways health plan, a self-insured plan, Mr. McCutchen was reimbursed for $66,866 in medical expenses resulting from the crash. McCutchen also sued the driver of the other car for damages resulting from the crash. While McCutchen estimated said damages to exceed $1 million, he settled for $110,000. Of this amount, he paid his attorneys 40% or $44,000 leaving him with $66,000.

The terms of the health plan required McCutchen to reimburse US Airways for any amounts recovered from third parties. So, US Airways requested repayment of the entire $66,866. McCutchen argued that he had 1) recovered only a small portion of his actual damages and 2) that US Airways' share should be reduced proportionately to cover attorney's fees. After all, had he not engaged counsel, US Airways would not be entitled to any reimbursement.

The keys from a practical standpoint to the Supreme Court ruling were these:

• The plan document is the governing document.
• Where terms in the plan document are unambiguous, they absolutely control.

While not written, what may have been at least as important from where I sit were these less conclusive elements:

• Where plan documents are not unambiguous (I know, you don't like double negatives, but I have used this one to make a point), the plan document may or may not be able to control.
• In Firestone, Glenn, and Frommert, deference was given to the plan administrator's interpretation of the plan document, but what happens when the plan administrator either has not interpreted the provisions of the document or has not consistently interpreted them?

What should plan sponsors do? 

1. Make sure that your plan document is well written. The mere fact that a plan has a favorable determination letter in the case of a qualified plan, for example, does not mean that the document is clear.
2. Where the plan may not be crystal clear, the administrator should develop a set of administrative processes, procedures, and interpretations that are not inconsistent with the plan provisions and that are documented.
3. Follow the processes, procedures, and interpretations that have been documented 100% of the time. 
4. And, consider the advice that I am setting out below ...

For my final piece of advice on this case (for now), think about any plans that you sponsor that have any mathematical component to them. While I know many attorneys who are quite gifted mathematically, many others will admit that they are arithmetically challenged. Therefore, when they write the terms of a plan that have a computational element to them, those terms, to paraphrase Spock, may not compute. 

I offer you this. Do you have a plan with computational elements to it? [It can be a qualified retirement plan, a nonqualified plan, a welfare benefit plan, a compensation plan, or virtually any other type of plan related to your employees.] Are you not certain that the computational terms are unambiguous? Would you like another set of eyes -- a set of eyes that has experience with plan administration, plan document interpretation and that are not computationally challenged. Then go to my profile that you can find on this blog and contact me. I'll let you know if I can find ambiguity and if I do, I'll help you to fix it.

A Case for Not Offshoring

Why do companies move certain functions offshore? Well, that's a pretty easy question.

1. It saves money
2. Labor laws are weaker if they exist, so they can often get people to work long hours with no premium

Obviously, there are more reasons, but those two are certainly pretty key. 

Since this is a benefits and compensation blog (usually), I want to focus on offshoring benefits or compensation administration. I'm going to make a pretty strong leap of faith here. If you are reading this and if you are employed, your benefits and your compensation are pretty important to you (if you disagree, you can stop reading). And, since they are pretty important, you really feel like your employer or the third party administrator that they choose should get this right.

From personal experience, I have dealt with call centers in the US and call centers in other places on the globe. In fact, this morning, I got to deal with a call center that was not in the US (I asked). Whether this was an HR issue or just general customer service with some company that I do business with in my personal life, I'll keep to myself, but I can tell you that I have had similar experiences with HR call centers in the past.

Here are my complaints about this call:

• The rep that I spoke with had insufficient subject matter knowledge
• The rep that I spoke with did not speak clear enough English that I could understand her without significant difficulty on my part
• The rep that I spoke with could not answer my questions
• The rep that I spoke with could not find me a supervisor
• The rep that I spoke with promised me a call back within 5-7 business days

Now, let's suppose that this was a call about my healthcare benefits (I think that most of my readers would consider this to be an important benefit). How would I be at the end of this call?

• I would feel like my employer (I don't know whether or not this is outsourced if I am a random employee) doesn't understand the benefit programs it sponsors
• I would feel like my employer doesn't care about me
• I might tell my co-workers about my experience
• I would feel that 30 minutes of my time (thus far) had been wasted
• I would be less productive that day and probably for several thereafter because of this
• After I told my co-workers, some of them would be less productive

Perhaps this attitude change brought on by the call center would wind up showing itself to one of my clients or one of my co-worker's clients. Maybe that client is one that is already teetering on the edge of keeping us or firing us. Could this push them over the edge? Yes, it could.

Could this happen with a US call center? It could, but in my personal experience, it happens far more often with call center services that are offshored as compared to those that stay in the US. 

The perceptions of your employees matter. Happy employees are more productive. Happy employees treat their clients better. Offshoring HR administration doesn't do that.

Of Course It's Time for a Better QDIA

The Pension Protection Act of 2006 (PPA) brought us lots of new terms and concepts. One of the more controversial has been the qualified default investment alternative or QDIA. Essentially, what it did was to require participants who did not make affirmative elections otherwise in defined contribution (DC) plans to be defaulted into a QDIA. On an ongoing basis, and oversimplifying somewhat, the Department of Labor (DOL) regulations give plan sponsors three broad alternatives in selecting their QDIAs:

1. Age-based funds
2. Risk-based funds
3. Managed accounts

Our observations suggest that the most prevalent have been age-based funds, largely in the label of Target Date Funds or TDFs. In a nutshell, a participant picks a year in which they expect to retire, rounds to the nearest multiple of five, and voila, they have a fund. Or, in the situation where a participant is defaulted into a TDF, the plan document uses the same algorithm and without the active consent of the participant, his or her money is in a fund.

The companies that serve as both DC recordkeepers and asset managers love this. To my knowledge, they all have TDFs that they actively market as part of their recordkeeping bundles, and each of these families of TDFs are proprietary funds of funds. In other words, a Fidelity TDF is composed of Fidelity funds and a Vanguard TDF is composed of Vanguard funds. The same could be said about the other asset management firms who are also DC recordkeepers. Perhaps there are one or two out there that do not fit the mold, but I am not aware of them.

This is not to denigrate the current state of TDFs, but I think we can do better. And, so, in fact, do plan sponsors. In a November 2010 study commissioned by PlanSponsor and Janus Capital, only 34% of plan sponsors (down from 57% in November 2009) thought a TDF was the best QDIA available for their DC plan. Or, stated differently, nearly two-thirds of plans (clients) don't like the product that is being pushed upon them. If you were a car manufacturer and two-thirds of potential consumers didn't like your product, you would likely need a bailout. If you made computers and two-thirds of the users thought your machines had the wrong features, you would need to re-think what you were producing.

Well, the large players in the market don't appear to see the motivation to re-invent the TDF, so as I am wont to do, I am going to consider the re-invention for them.

Today, when a participant is defaulted into a TDF, the sponsor (and recordkeeper) uses one data item to make that decision -- age. You would think that was the only data point they had. Well, if Bill Gates and I were both in the same DC plan, we would probably both be defaulted into the 2020 Fund. And, trust me, Bill Gates and I are not in the same financial circumstances. I know you find this shocking, but it just isn't so. The fact is that we do not have the same net worth as each other (I'll leave it up to my readers to work out who is worth more).

But, assuming that we were active participants in the same plan, here is some other data that our plan sponsor would have on us:

• Compensation
• Years of service with the company
• Account balance
• Rollover balance
• Savings rate
• Gender
• Whether our jobs are white-collar or blue-collar
• Accrued benefit in a defined benefit (DB) plan, if our employer sponsors one
• Whether we are eligible for company-provided equity

Each of these is likely to have an effect on our readiness for retirement at any point in time. Let's go through them quickly to see how.

Compensation. That's an easy one, but in general, the more money that an individual makes, the more likely it is that they will be able to retire earlier as compared to later.

Years of service. Continuity with the same company tends to result in larger DC account balances and larger DB accrued benefits making it more likely that a participant will be able to retire at a younger age.

Account balance and rollover balance. The bigger your balance, the closer you are to your retirement goal.

Savings rate. The more you are saving, the less time it will take you to get from where you are to your retirement goal.

Gender. Without regard to other factors such as health and family history, women will, on average, outlive similarly situated men, and therefore need a larger account balance to fund their retirements.

White-collar or blue-collar jobs. Studies done by the Society of Actuaries have shown that white-collar workers outlive blue-collar workers. This suggests that white-collar workers need larger account balances at the same retirement ages.

And, the other two elements may do more to affect the appropriate asset mix for a participant.

Accrued benefit in a DB plan. Accrued benefits in a DB plan can be thought of as a fixed income investment. That is, their value grows (largely) at a discount rate. Having a large DB accrued benefit means that the remainder of a participant's account balance could, and perhaps should, be invested more aggressively.

Access to company provided equity. If a meaningful portion of your compensation is in the form of equity, then you tend to possess a significant undiversified asset. This would suggest that your TDF should have significant diversification.

Again, who has this data? Your employer, the plan sponsor does. Combined with age, this list of parameters could give your employer ten data points with which to appropriately place you in a TDF instead of one. In the coming world of TDFs, this is what should happen.

Perhaps the TDFs of the future will not have years attached to their names, but instead will have letters, numbers, or some combination of the two. And, perhaps, these ten data items (or others like them) can be used as part of an algorithm to place participants into their proper TDFs. 

Finally, while we are redesigning, do we really think that any one asset management firm has a monopoly on all the best funds? I don't think so. Without naming names, I have an opinion on some of the best fixed income funds available in the marketplace. Surprisingly enough (not really), none of the firms that manages those fixed income funds also has, in my opinion, the best large cap equity funds, international equity funds, and real estate funds. So, wouldn't our new age TDFs be better if composed of funds from a variety of providers? I think so. And, if we suddenly had reason to believe that the great-performing real estate fund that we were using in our TDFs might no longer be as great (the main portfolio manager decided to retire), wouldn't we like to have the ability to change real estate funds? I think so.

It's time. Who is going to start the trend?

Make a New Year's Resolution: Get Your 409A Documents Cleaned Up

About a month ago, I wrote about a court case in which an incompletely worded 409A (nonqualified deferred compensation) plan document caused the court to award an executive more money than his previous employer thought he was entitled to. You can read my original piece on Graphic Packaging v Humphrey here: http://johnhlowell.blogspot.com/2010/12/its-extremely-important-to-have.html .

I've read more of these sorts of documents than most of you would prefer. And, the good news for employers is that most executives don't read those documents as carefully as I do. The bad news is that most that I have read do not satisfy (in some situations) the concept of definitely determinable (stealing the term from the qualified plan world).

What does that mean? The words speak for themselves ... I think the lawyers would call that res ipse locutur, although literally that means the thing speaks for itself (I see now why I took Latin in school about 40 years ago).  For a benefit to be definitely determinable, a person should be able to read the plan document and know what the amount of that benefit will be.

Let's return to 409A documents. If you've made it this far, there is a good chance that you know that "specified employees" (generally the highest-paid executives (not more than 10% of the company) making at least $150,000 as indexed, but it's actually far more complicated than that) may have a 6-month delay before than can receive certain benefits under a 409A plan.

Let's consider a simple situation. Suppose Ebby Scrooge is the CEO of No Holiday Corporation. Ebby retired just the other day on December 31, 2010. He had earlier made a bona fide initial deferral election in his SERP to take his benefit in a lump sum at termination (or 6 months later if he was a specified employee). Ebby's lump sum on December 31 would have been $10 million, but he was a specified employee.

Poor Bobby Cratchit needs to process the payment to dear old Ebby. He has a quandary -- how big should Ebby's check be? Does the $10 million get interest at some rate from December 31 until mid-2011? The plan document doesn't say. Does it get calculated using 12/2010 interest rates or 6/2011 interest rates, or some other rates? The plan document doesn't say. Does the annuity factor get calculated using Ebby's age as of 12/2010 or as of some other date? The plan document doesn't say.

Get the picture? In Humphrey, the 11th Circuit Court of Appeals (based in Atlanta and covering Alabama, Florida and Georgia) found that where the plan document (written by or under the control of the employer) is not clear, uncertainty should be decided in favor of the participant. Oops!

What do your plan documents say? Do you know?

I am about to be perhaps a little bit critical of some attorneys who write these plan documents. I'm sorry, some of you are my friends (but of course, my friends couldn't be the ones who are doing less than perfect work). Very few attorneys have ever worked in plan administration. They don't consider whether the language that they write is easy to administer, difficult to administer, or anywhere else on the spectrum. For many, it's just not in their DNA. Surely, you will see in the document that where found in the document, the male is to be considered the female and the singular the plural, but that inconsequential stuff about how much to pay the executive -- nowhere!

What's my suggestion? Attorneys are best at the legal mumbo jumbo, but where a plan must be administered, a company may save itself a lot of money by paying a little bit (relatively speaking) to have some non-attorney such as this author review the document to see if it can be accurately administered. Looking back to Ebby Scrooge, if it's an issue of a 5% annual rate of interest, then the increase in payment amount for the 6-month period would be $250,000. Of course, in some cases, the employer may not have the right to unilaterally amend this document, but that's an issue for another article on another day.

In the meantime, I'd love to take a look.

It's Extremely Important to Have Complete and Accurate 409A Documents -- So Says the 11th Circuit Court of Appeals

On November 16, the 11th Circuit Court of Appeals rendered its decision in Graphic Packaging Holding Corporation v Humphrey. You can read the decision here: http://scholar.google.com/scholar_case?case=7196368006507516478&hl=en&as_sdt=2&as_vis=1&oi=scholarr

Despite their growing numbers, most of us are not attorneys (I'm not) and don't revel in the reading of court decisions, so I'm going to try to save your eyes (and your brain) some serious pain. Rather than going through all of the court's legal reasoning, we'll look at this one from the proverbial 30,000 feet. In other words, we'll hit the high points and give you a VERY key lesson to be learned.

Mr. Humphrey was the President and CEO of Graphic Packaging (GPC) (or one of its predecessors) from 1997 through 2006 and served as its Vice Chairman in 2007. He retired from GPC on December 31, 2007 as a   specified employee (a term of art under Code Section 409A that usually requires that the employee experience a 6-month delay in payments from a nonqualified deferred compensation (NQDC) plan). Mr. Humphrey was a participant in such a plan, the"2004 Stock and Incentive Compensation Plan" under which he received a number of restricted stock units (RSUs).

Because the GPC stock declined in price over the period from December 31, 2007 until June 30, 2008, Mr. Humphrey's RSUs were worth less at the end of the 6-month period. When GPC paid him out his RSUs, they paid him the smaller amount.

Mr. Humphrey sued and the 11th Circuit Court of Appeals ruled in his favor.

Without going through all of the legal mumbo-jumbo, the court reasoned the following:

• Code Section 409A does not specify how the amount of  a payment should be calculated at the end of the 6-month waiting period for specified employees. It does not mention a valuation method or valuation date and does not mention the accrual of interest.
• The plan document did not specify how the amount of the payment should be calculated either.
• The company (or their counsel/advisers) wrote the plan document and the onus was on them to get it right.

So, the lesson is that an NQDC plan should answer these questions and answer them clearly and unambiguously. Do your plans do that? Many that I have seen do not.

Suppose they don't. Notice 2010-6 as amended by Notice 2010-80 (you can read about it here: http://johnhlowell.blogspot.com/2010/12/your-eyes-are-not-failing-you-we-have.html ) generally allows plan sponsors to amend their 409A plans by the end of 2010 without penalty (this is a generality and you should not assume that you have no penalty without a specific understanding of your facts and circumstances). A complication might occur if this was a material modification to the plan document, but as it will not uniformly improve the benefit for employees, my non-legal take on this is that it will not be a material modification. In either case, get your plan amended to say what it should say. Make sure that it is reflective of past practices and that future practices will follow the plan.

If I were in an employer's shoes, I would look to an expert for assistance with this, and not necessarily the attorney who drafted the plan. Attorneys are experts in legal issues, but often are not in plan administration and this particular issue has implications for administration. I would look to a consultant with knowledge of the law, knowledge of the administrative issues, and the ability to understand the issues.

As always, this author does not provide legal, tax or accounting advice.