BNA Pension and Benefits Blog

As expected, the 401(k) fee disclosure case against Deere & Company was the first to be decided, since the District Court for the Western District of Wisconsin has a reputation as a "rocket docket."  Many people, myself included, had thought the complaints in these 401(k) fee cases contained sufficient fact allegations that courts would wait until after discovery to decide them. Unexexpectedly, the court dismissed the case based on the complaint and the plan documents. Hecker v. Deere & Co., Case No. 06-C-719-S (W.D. Wisc. June 21, 2007). The facts of the Deere plan may, however, distinguish it from most other plans and make it less significant as a precedent in the other pending 401(k) fee cases, at least at the motion to dismiss stage.

The SPD provided that:

The costs of administering the Plan are paid by the Company. Participants incur no transaction fees or sales loads on funds purchased and sold through the Plan’s standard plan options.... All fund investors indirectly pay any fund-level expenses, such as management fees, asset-based sales charges (12b-1 fees), and other fund expenses, as detailed in the fund’s prospectus....

Of the 26 funds specifically offered by the plan, 23 were Fidelity Funds. However, the plan also offered a mutual fund brokerage account through which participants could select from among 2500 other mutual funds unaffiliated with Fidelity. Fidelity received direct payment for its trust services from Deere; the plan paid no additional fees to Fidelity.

The court concluded that:

The disclosure in the reports and prospectuses accurately reflect the expenses actually paid to the fund manager for fund management as evidenced by the allegations that the same fees are charged to all retail fund customers. To the extent that the charge includes profit, it is unlikely that the fund sponsor would know or be in a position to control its redistribution among related corporations, corporations, a fact conceded in defendants’ brief. There is no evidence of intent in the statute or regulations to reach this type of detail.

The court found that the recent proposals to expand disclosure of indirect fees and provide additional disclosure supported the conclusion that such expanded disclosure is not required under current law.

There appears to have been no dispute that the Deere plan satisfied the ERISA section 404(c) requirements other than requirements related to fee disclosure. The court concluded that the existing regulations do not require disclosure of revenue sharing, only the amount of the fees which were adequately disclosed. Nor did the court feel that disclosing the revenue sharing arrangements would have enhanced the participants' investment decisions:

In assessing the likely return on an investment the fees netted against the return are certainly relevant, but knowing the subsequent distribution of those fees has
no impact on the investment’s value.

The court concluded that the participants had adequate opportunity to choose funds other than the designated Fidelity Funds because of the mutual fund brokerage window and therefore their investment in the designated funds and therefore they exercised the requesite control over the investments in selecting the Fidelity Funds to insulate the Deere fiduciaries from any liability under section 404(c)'s safe harbor even if the plaintiffs could prove that the fees in the Fidelity Funds were excessive.

Most plans don't offer a brokerage window, so the Deere case is clearly distinguishable. However, the court's conclusions about the extent of disclosure required under current law, both under the general ERISA provisions and section 404(c), would protect most plan fiduciaries if followed by other courts. Stay tuned for the rest of the story, since there are still a number of these cases pending.

Litigation brings home how fragile our common understanding of ERISA can be. Until the 9th Circuit decided Beck v. PACE International Union, 427 F. 3d 668, 673 (2005), practitioners understood that the only ways to distribute participants' benefits under a terminating defined benefit plan were annuities or lump sums. Unfortunately, the 9th Circuit didn't find it so clear. Yesterday's unanimous Supreme Court decision ultimately confirmed practitioners' understanding. However, Justice Scalia's analysis made it clear that it wasn't as clear as we had all thought.

While holding that a merger was the continuation of a plan rather than an acceptable way to terminate a plan, Justice Scalia pointed out in footnote 3 that:

We would not have to decide that question of statutory interpretation if Crown's pension plans disallowed merger. Any method of termination permitted by §[4041](b)(3)(A)(ii) must also be one that is "in accordance with the provisions of the plan." Crown thus could have drafted its plan documents to limit the available methods of termination, so that merger was not permitted.

Who would have ever thought to put such a provision in a plan? Instead of looking at the provisions of the plan that set forth the distribution methods, all of which would have been annuities or lump sums, Justice Scalia seems to be requiring defensive drafting to make it clear that the means of distribution permitted by the plan are the only means of distribution permitted on termination.

Who knows what other things might be read into a plan. Can we anticipate all of them? Hopefully, Justice Scalia's footnote, which is clearly dicta, won't turn into precedent or our plans will grow ever longer and less understandable. Defensive drafting, like defensive medicine, has a cost.

[Editor's note: More information on the Supreme Court's decision in Beck v. PACE International Union may be found in the June 12 edition of BNA's Pension & Benefits Daily.]

Much has been made of the fact that employers are increasingly turning to 401(k) plans rather than defined benefit plans. Employers are implementing a number of strategies to help employees achieve retirement security in this brave new world. Most of these strategies, such as automatic enrollment and automatic increases in participant deferrals, focus on the asset accumulation phase. At the BNA conference earlier this year on Redesigning Pension Plans and Executive Compensation, Henry Eickelberg of General Dynamics talked about an innovative program that a number of large employers negotiated to help their employees buy annuities at reasonable prices.

The employer group isn't offering the annuities in their qualified plans but instead is making them available to employees for both plan rollovers and direct investment. The annuities include both fixed annuities, with and without inflation protection, and variable annuities. The group negotiated low commissions (.5% on the fixed annuity product). The good news is that these annuities are not limited to the employer group but are available to the public so other employers can bring them to the attention of their employees and financial planners can consider them for their clients. You can check them out at on the website for the Elm Income Group.

Years ago, before the Department of Labor issued its guidance on purchasing the safest available annuity for participants in terminating plans, Interpretive Bulletin 95-1, I advised a client that the standard was "Would you purchase an annity for your mother (not your mother-in-law) from this carrier." So I was intrigued years later by an article that Ron Gebhardstbauer wrote for the Women's Institute on a Secure Retirement (WISER) on the advice he gave his mother at age 77. She began receiving the required minimum required distributions at age 70 1/2 and he determined  that she would do better with an annuity than with the annual payouts, with the added advantage that she wouldn't see her annual payouts decrease as she got older. (Ron is the Senior Pension Fellow for the American Academy of Actuaries and the former Chief Actuary for the PBGC, so he can readiy figure these things out, unlike the rest of us.) I recently checked with Ron and his mother is still enjoying her annuity in her mid-80s.

You may be able to find a better deal through your own plan. I compared the payout on a single-life annuity for a male age 70 from Elm for someone who has $100,000 to invest to the same annuity offered by the federal Thrift Savings Plan (TSP), the 401(k) plan for federal employees. The annual payout under the Elm annuity was slightly less ($814 compared with $834 from TSP). Similar results for a female beginning payouts at age 60 ($605 from TSP versus $664 from Elm). However, most employers don't offer annuities to their DC plan participants and, even if they do, they may not have rates as competitive as TSP. The Elm annuities are definitely worth checking out. And kudos to the employer group that made an effort to bargain these good rates for their employees.

I'd be interested in hearing about any other sources for annuities that offer better rates. With the increasing elimination and freezing of defined benefit plans, employees will need to engage in self-help on the payout side of the 401(k) ledger just as they have to do on the investment side.

Massachusetts enacted its health reform requiring individuals to purchase health insurance or benefits under a plan that meets certain minimum standards in order for the individual to avoid a tax on the uninsured.  Massachusetts also imposes a tax or penalty of sorts on employers of individuals who incur more than a minimum amount of uncompensated care to fund the state's cost of health care that is not reimbursed or paid elsewhere. 

There is a collision between the federal initiatives to move employers toward offering high deductible health plans and health savings accounts and the Massachusetts initiative toward requiring the individuals to purchase minimum levels of health insurance coverage and to indirectly pressure employers to conform their benefit plans to satisfy the minimum level of coverage.  The Massachusetts rules do not accommodate a high deductible health plan as defined in federal tax law. 

There is a collision for employers operating in Massachusetts with high deductible health plans. If the employer's employees covered by the high deductible health plan do not pay for their care that is subject to the high deductible, then that care is uncompensated care for Massachusetts law purposes.  Such care which is not paid for by the employee can fall in the very broad definition of uncompensated care in Massachusetts resulting in a surcharge on the employer if the limits on uncompensated care for either the individual employee or their employees as a whole in Massachusetts are exceeded. 

Employers have a deadline to file their cafeteria plan documents with the "Connector" in Massachusetts by July 1, 2007; however, the form which must be filed with the cafeteria plan document and how all this is to occur has yet to be disclosed. 

There are many questions related to the Massachusetts legislation and its impact on employers and their plans that are still unanswered, including the most important one ...ERISA preemption.

Greta E. Cowart

Patenting employee benefits strategies or computer systems has been occurring since 1988 when an improved system for enrolling employees into pension benefits was granted a patent.  A number of the earlier patents in the employee benefits area appear to be computer system related and not merely compliance or tax strategies.  A computer system or data base that provides a service or fulfills a plan's administrative requirements is different than a strategy that merely works toward compliance with the law whether it be tax or ERISA.

A couple of professional organizations have raised concerns regarding whether tax strategies or employee benefits strategies should be patentable.  Calling a strategy "patented" carries with it an air of government approval of the strategy which is not accurate since the patent and trademark office reviews patent applications to determine if the idea is novel, useful and not obvious.  The strategies are not reviewed by the Patent and Trademark Office to determine whether they are valid under the tax law or if they comply with ERISA.  Patented strategies are not reviewed by the Internal Revenue Service or the U.S. Department of Labor before the patent is issued, thus while patented and approved by one agency, the strategies may lack the approval of the most relevant agencies for employee benefits plan issues.

Many practitioners have long maintained compliance programs and other strategies and discussed these with clients, but not placed them in the public domain thus to someone outside the field the strategy may appear new, but in reality it is not new to those operating in the field. 

A bill is currently pending in the U.S. House of Representatives to limit the damages and remedies for infringing on patents on tax planning methods which will assist tax advisers and their clients and may decrease the financial incentive to seek patents on such strategies.  The Joint Committee on Taxation prepared a report, "Background and Issues Relating to the Patenting of Tax Advice" on July 12, 2006. The report discusses some of the background for patent granting and issues related to patenting tax strategies. 

The AICPA website also contains many useful links to information on patents.  Practitioners need to be aware of this development and how it may impact their practice. 

Greta E. Cowart

[Editor's Note: A special report on these patents, which includes a chart of employee benefits-related patents and patent applications, can be found in the June 4, 2007, issue of BNA's Pension & Benefits Daily, and the June 5, 2007, issue of BNA's Pension & Benefits Reporter.]

On Patenting Tax Advice - A Lesson From Pythagoras

    The flap over patenting tax advice reminds me of something I learned long ago about the lessons of Pythagoras and Pythagoreans ages ago - some 500 years B.C. to be precise (and Pythagoreans were supposed to be, if anything, precise). 

    Aside from inventing the Pythagorean theorem, Pythagoras and his cult were said to have established a small society on the Italian coast, governed by laws that were mathematically-based.  The “catch” was that everyone in town was required to obey the laws, but only the Pythagoreans were permitted to know what the laws were. One of the reasons we know so little about the Pythagoreans is that the other residents finally rose up, burned Pythagoras’s house down, and wiped out the society. 

    There’s surely a moral to that story, and those who, by patenting compliance strategies would seek to prevent others from complying with the law, should, I suspect, consider what happened to Pythagoras.

Frank Cummings

[Editor's Note: A special report on these patents, which includes a chart of employee benefits-related patents and patent applications, can be found in the June 4, 2007, issue of BNA's Pension & Benefits Daily, and the June 5, 2007, issue of BNA's Pension & Benefits Reporter.]

"I'd help you find the best retirement plan, but then I'd have to kill you."  -- Tony Soprano.

It has been suggested that tax advice and retirement planning ideas are patentable.  Just like the patent on my recipe for potato latkas (pat. pending).  But I don't think it's a good idea.  Now I understand that a lot of time and effort goes into making these plans and I understand the resentment when someone else prances in and copies the result, without having invested that time and effort.  But justifiable resentment is not a test for a patent. 

Where's the line to be drawn?  If I read a particular court decision to mean a particular thing, is my reading patentable?  If I write a brief that finally explains the Rule Against Perpetuities and its 88 permutations and combinations, so that even a layperson can understand it, is my explanation patentable?  The suggestion that this kind of advice should be patented only tarnishes the image of lawyers and gives "holders of the public trust" an entirely new meaning.

I'm the first to say I really don't understand the argument in favor of patentability and would appreciate it if someone would explain it to me.