BNA Pension and Benefits Blog

Not being a Washington type, I am not privy to who is lobbying for what provision in proposed legislation. After wading through the new prohibited transaction exemption which was added by the Pension Protection Act, now found in ERISA section 408(b)(14) and limited by the terms of section 408(g), I wondered who lobbied for this and how useful will it be?

The newly added section 408(b)(14) provides an exemption from the prohibited transaction provisions of section 406 for the receipt of fees or other compensation (which compensation must be reasonable) by a “fiduciary advisor” for the provision of advice or in connection with an acquisition, holding or sale of a security or other property available as an investment under the plan pursuant to the investment advice from the "fidiciary advisor".

A “fiduciary advisor” is defined as a registered investment advisor; a bank or similar financial institution referred to in section 408(b)(4) or a savings and loan association (but only if the advice is provided through a trust department of the bank or similar financial institution or savings association); an insurance company; a registered broker dealer; or an agent, employer, registered representative of any of the above. The advice must be given to a participant or beneficiary of an individual account plan who is self directing the investment.

Further, the advice must take place in the context of an “eligible investment advice arrangement”. An “eligible investment advice arrangement” requires either that any fees or other compensation received by the fiduciary advisor do not vary depending on the basis of any investment option selected or the arrangement uses a computer model under an investment advice program which meets the elements set forth in section 408(g)(3).

With respect to the computer model, in addition meeting the elements of section 408(g)(3), the computer advice program must be certified in accordance with rules established by the Secretary of Labor; the computer program must be recertified if there are material modifications; the only advice provided under the program must be the advice provided by the computer model and the transaction must occur solely at the direction of the participant or beneficiary.

The "eligible investement advice" arrangement must be expressly authorized a separate plan fiduciary other than the person offering the investment advice program; an independent auditor who has appropriate technical training or experience or proficency must audit the program annually and issue a report to the fiduciary who authorized the use of the arrangement presenting specific findings regarding compliance of the arrangement with the exemption; there are extensive disclosure rules including a model disclosure form to be provided by the Secretary of Labor for fees and other compensation; and the fiduciary advisor must acknowledge in writing its fiduciary status with respect to the plan.

While my limited intellectual capabilities cannot possibly fathom every possible prohibited transaction this exemption covers, it obviously is designed to provide some protection to plan sponsors who formally appoint fiduciary advisors to provide investment advice to participants in their 401(k) plans, where the advisor gives investment advice and takes a commission or other fee based on the investments recommended without running afoul of some of those tricky 406(b) violations lurking in a lot of 401(k) arrangements.

Will this new exemption provide a great marketing tool for the 40l(k) financial service providers?

Will it create a new niche for experts in 401(b)(14) arrangments?

Will this become the new standard for 401(k) arrangements or is it just too complex to be workable?

Every week it seems the courts find some new way to cabin participant rights and remedies.  In Langbecker v. Electronic Data Systems, 39 EBCases 2352, 2007 U.S. App. LEXIS 1125 (January 18, 2007) the Fifth Circuit, in a split decision found a doozy.  Since the DOL issued its 404(c) regulation in 1992, it has been generally understood that section 404(c) did not relieve fiduciaries from liability for limiting or designating investment options in a 404(c) plan.  This view was contained in the preeamble to the regulation as a gloss on regulatory language limiting 404(c)s relief to losses which are "the direct and necessary result of that participant's or beneficiary's exercise of control."  29 C.F.R. sec. 2550.404c-1(d)(2)(1).  In fairness, this view also informs examples included in the regulation itself. See examples 8 and 9 of the regulation.

The debate over whether the DOL had the authority to adopt the position in the preamble turns on whether the language in the statute and the regulation itself are sufficiently ambiguous to permit the DOL's interpretation.  The DOL is entitled to Chevron or Auer deference if there is ambiguity.  Ambiguity is in the eye of the beholder, it seems--and this opinion itself cannot seem to make up its mind about the statute, saying in one place that the statutory language leaves the question open, and in another that neither the regulation nor the statute are ambiguous. 

But what about common sense.  Should plans be able to offer just 3 options or four with employer stock, one or more of which are imprudent, and then argue that 404(c) means there is no liability simply because the participant chose that imprudent option, even without knowledge of its imprudence. 

I think the reasoning of EDS is deeply flawed, and consequently the petition for rehearing en banc supported by AARP, NELA, the Pension Rights Center, and the DOL itself has a good chance of being granted.  But it is the court's lack of sensitivity to the consequences of its decision that troubles me the most.  Assuming the majority felt that it had no choice but to issue the decision that it did, it could have acknowledged rather than denied the extraordinarily harsh results its decision could produce.  Instead, the reader is left wondering whether the court is actually pleased by its vision of an Act that provides participants with no protection against the selection of unacceptable investment alternatives.   If  Congress really meant  to have ERISA work this way, Congress should be asked to think again.  I prefer to think that Congress was not so foolish, but that's hardly a surprise coming from someone who helped write the 404(c) regulation.

In January the Fourth Circuit decided RILA v. Fielder, 39 EBCases 2217, 2007 U.S. App. LEXIS 920 (4th Cir. 2007) holding, in a split decision, that Maryland's law requiring certain large employers (most notably Wal-Mart) to spend 8% of payroll on healthcare for their employees or pay the difference to the state to defray the cost of Medicaid.  According to the court, such a law is preempted because it "effectively requires employers in Maryland covered by the Act to restructure their employee health plans."   

The preemption test is fair enough, but the law does no such thing.  It gives employers a choice between increasing health care spending to a certain level or paying the state--a real choice as far as the dissent was concerned--hardly a "requirement."  In any event, contrary to what the court thought there are ways to spend money on health care for employees without establishing a plan--all that's required is that employers avoid promising a particular level of benefits, i.e. decide what to pay for as an act of genuine discretion.  Oddly, this concept horrifies every defender of free enterprise I meet.  But the law is pretty clear; absent a specifically identified benefit--i.e. something definite enough that you know a promise has been broken when it doesn't get paid, there is no employee benefit plan.  A discretionary bonus payment is not an ERISA plan.

But I don't want to belabor the point.  The law shouldn't have been held preempted, but the Maryland Fair Share Health Care Fund Act was hardly comprehensive health care reform.

I write to suggest that there are other ways to skin this cat (and irritate fellow Advisory Board member Frank Cummings).  The outlines of one approach can be found in a proposal that was before the Wisconsin Legislature last year.   See www.wisaflcio.org which contains a summary and text of the bill. 

I'll omit details, but the basic approach is simple.  Employers pay a per capita assessment to the state which some state agency decides is about equal to the cost of coverage.  The state provides coverage.  Employees in the state get the coverage whether the employer actually pays or not--so the employer payments are in the nature of a tax, not the payment of a premium without which no coverage is provided.  The employer doesn't establish or maintain the plan--the state does.   No employee benefit plan, no preemption. It's a miracle.  ERISA doesn't preempt everything.

If the employer wants to provide more (e.g. a smaller co-pay for his employees), he's free to do so or not, so everyone is not reduced to the least common denominator; employers who want to use richer coverage to attract employees are free to do so.

The success of this scheme is based on the notion that the state, with all employee in the system, can provide health care more cheaply than the hodge podge of employer and individual arrangements that we now have, and cover at least all employees and their families to boot.  Large employers with older workforces stop paying more than their fair share--there's a real risk pool-no opting out for the young and the healthy, and no skimming the cream by hiring and providing coverage to just the kids in their twenties. 

I'm a lawyer, not a health care economist. The plan makes sense to me, but maybe it won't work.  But suppose it does.  Wouldn't that be grand (for everyone but health care insurers)?  Shouldn't at least one state give it shot so we'll finally know the answer?  Must we try this only on the national level, or not at all? The states should be laboratories to try out new ideas.  It's time to set them free.  End the tyranny of ERISA preemption.  If it works, the federal government can incentivize other states to do the same thing, and our long national health care nightmare will be over.