White-papers authored by Michael J. Olah:
The white-paper discusses ERISA fiduciary standards for the committee and its members, who should be on the committee, what decisions should be within the province of the committee, and how much documentation the committee should maintain.
Impact of Merger and Acquisition on Retirement Plans
Retirement plans (and all benefits plans) often are considered at the "eleventh hour" when two companies are engaged in a transaction. failing to consider the retirement security of soon to be acquired employees can seriously limit the options available to acquiring employer. This white-paper explores a structured approach to deciding whether to "acquire" a retirement plan along with other assets and employees, and the best way to do so.
Q: Can you shed some light on the 401(k) questionnaire that the IRS has been sending to plans. Is it for certain plan sizes? What is the questionnaire all about?
A: The IRS' recently commenced survey of plan sponsors is soliciting "trends" in compliance issues that may require further regulatory and enforcement action. The DOL has not participated in this, or similar efforts. The IRS previously conducted a similar survey in 2008, targeting 400 tax-exempt educational institutions that sponsor 403(b) plans. The results of that survey was a refocused regulatory effort, and enforcement actions against 30 respondents that had plans with compliance issues or questionable data integrity. The IRS' program is designed to ascertain the "health" of a cross section of 401(k) plans and to determine if various tools on the IRS' website are relevant, useful, and indeed even used. Specifically, the IRS has said in it's "Winter 2010 Employee Plans New" (a copy of which is available here) that it is specifically looking at the usefulness and usage of their "401(k) Checklist" and "401(k) Fix-it Guide (both available as one document here). This survey is being sent to 1200 "randomly selected" plan sponsors, and we have no information yet to determine if any specific "market segment" or industry has been targeted or over-represented in the sample. The The IRS has published a copy of the questionnaire on their website. The questionnaire can be found here, and the IRS' website with instructions is here. When responses are received by the IRS, they will be compiled and the results reported on the IRS' website.
While responding to the questionnaire is "technically" voluntary, the IRS has indicated that it wants to receive answers from all selected respondents, and may follow-up with those who do not return the completed questionnaire within 90 days of receiving it. Failure to respond to the questionnaire may cause the IRS to believe the plan sponsor has something to hide and make further inquiries, including opening a formal audit of the plan. While the compiled responses will be anonymous to the public, individual respondents may be targeted for enforcement action if their completed questionnaire indicates plan compliance failures or other issues.
Plan sponsors that receive a questionnaire should take care in crafting their responses, consulting with their advisors and service providers as appropriate, use it (and the 401(k) Fix-it Guide) to identify any problem areas with their plan(s), implement corrective actions, and in appropriate cases, seek the IRS' approval of the corrective action through its VCP/EPCRS programs before submitting their response.
Q: We've been asked about our stance on being a 3(38) fiduciary. In a summarized version, what would be the advantages/disadvantages of an advisor acknowledging status as a 3(38) fiduciary?
A: From the prospect/client's perspective the advantage is simple - properly engaging a 3(38) investment manager can relieve the plan sponsor and other plan fiduciaries from liability associated with investment management responsibilities. ERISA provides an exemption from the normal co-fiduciary liability rules (making fiduciaries liable for breaches of other fiduciaries if they participate in, have knowledge of and/or fail to correct those breaches) where a plan fiduciary properly delegates responsibility for investment decisions to an investment manager under Section 3(38) who acknowledges in writing their status as a fiduciary under ERISA. In order to obtain relief from investment management liability, the plan sponsor and other fiduciaries must completely delegate all discretionary control over the management of the assets to the 3(38) fiduciary – not something many plan sponsors are willing to do. This relief from liability also is somewhat limited, however. First, the plan sponsor or other fiduciaries must initially, as fiduciaries, prudently select the 3(38) investment manager, and would continue to have liability for the improper selection of the manager. On-going monitoring of the investment manager is also implied – at least with respect to ensuring that the manager has adopted a prudent processes or methodology for fulfilling it’s obligations under the plan and ERISA. The plan sponsor need not verify the outcomes of that process, but needs to be satisfied that the 3(38) manager has an appropriate process and diligently follows that process. Second, any active participation in investment decision making, other than the on-going monitoring mentioned above, would cause the plan sponsor to re-assume the responsibilities (and liability) of investment manager to the plan (and causing the 3(38) manager to be “co-fiduciarily” liable for the actions of the plan sponsor in the assumed responsibilities – a potentially dangerous scenario.)
The disadvantages are also simple – the plan sponsor must divest all control over management of plan assets lest they re-assume responsibility, and they have continued liability for the prudent selection and monitoring of the 3(38) manager. This latter disadvantage is essentially trading reasonably well defined responsibilities of participating in investment activities for rather ill-defined responsibilities to select and monitor – without interfering with – the activities of the 3(38) manager.
From my perspective, I don’t see the relief from fiduciary liability, especially considering the on-going monitoring requirements to be worth it - except in specific circumstances. If the plan sponsor understands their role as a fiduciary, has implemented an appropriate decision making paradigm (with an IPS, engaged committee, etc.) and has appropriate advisors (whether 3(21) fiduciaries or even non-fiduciary advisors), then the risks are generally known and manageable. Using a 3(38) manager implies dissociation from the decision making process while still maintaining responsibility for ensuring the 3(38) manager has, and is following an appropriate process. In that case, the risks become more nebulous (how do you ensure that the manager is following a prudent process without reviewing the outcomes, and potentially testing them – thereby potentially impermissibly interfering in the process). The specific situations where I think a 3(38) manager would be appropriate generally involve the management (and possible liquidation) of potentially imprudent investments - most notably company stock or other company related assets (which, invariably are liquidated as soon as practicable) where the plan sponsor has a potential conflict of interest in continuing to direct their management or disposal.
Q: Our client had a percentage (less than 50%) of his company acquired by a investment concern. The new party is trying to force his plan into a Multiple Employer Plan that the other companies they own all use and he does not want to. Can you please lay out exactly what a control group is, would this qualify, and if they have to consolidate plans, what is the required time frame.
A: While the specific rules concerning controlled groups, affiliated service groups, and multiple employer plans are complex, and require examination of each client's specific circumstances, I believe there are really two "threshold" questions that need to be answered - is the client required to participate in the investor's multiple employer plan, and may the client do so? The answer to the latter question is yes, regardless of whether the two entities are a controlled group or affiliated service group, and the subsequent question, "should they do so" is dependant, of course, on specific facts and circumstances involved. The answer to the former question is a bit more complex. Nothing in ERISA or the Code requires separate plans to be combined - even if a controlled group or affiliated service group exists - but rather, in the event a controlled group (or affiliated service group) exists, the individual employers will be treated as a single employer (and the employees will be treated as being employed by a single employer) requiring that coverage tests under 410(b), or non-discrimination tests under 401(a)(4), 401(k), and 401(m) be conducted on the entire (combined) employee population. Essentially, if a controlled group (or affiliated service group) exists, and if each plan can pass the Section 410(b) coverage test or all of the applicable non-discrimination tests independently considering all employees of the controlled group as the "denominator" in those tests, the plans may remain independent. Even if the plans do not pass the appropriate tests independently, they may be aggregated for testing purposes, in which case a comparison of the benefits, rights and features of each plan will have to be made to determine if benefits are provided on a impermissibly discriminatory basis. In summary, suffice it to say, with appropriate plan designs, even employers in a controlled group may have separate plans, provided each plan covers the right numbers of the right people with the right levels of benefits
The most flexibility results, however, if the employers are not part of a controlled group (or affiliated service group) in which case each employer (and their employees) are considered independently for purpose of both coverage and non-discrimination tests. That said, a controlled group is defined as one of two types of business structures - a parent subsidiary relationship, or a brother-sister relationship. a parent-subsidiary controlled group exists where one business entity has either 80% voting control over a subsidiary, or controls 80% of the value of the subsidiary organization. A brother-sister controlled group exists where five or fewer owners own in the aggregate 80% or more of two (or more) organization and the same five or fewer shareholders have "effective control" over the organizations. In order to have "effective control" over multiple organizations, the owners "identical interest" in each of the organizations (the amount of ownership an owner has in common between the organizations) must exceed 50%. An example should make the concept clear.
Assume the following Alice, Bret, Charlie and Diane own the following amounts of 3 corporations:
Corp A Corp B Corp C
Alice 100% 45% 40%
Bret 0% 40% 40%
Charlie 0% 15% 0%
Diane 0% 0% 20%
TOTAL 100% 100% 100%
In this case, clearly five or fewer owners own more than 80% or more of each of the organizations (in fact, four owners own 100% of the companies), but "effective control" only exists with respect to Corps B & C. For the effective control determination, you look at the "identical ownership" of each of the owners with respect to organizations (essentially take the "least" amount each person owns in each of the organizations - so that Alice's identical ownership number between Corp B & C is 40% (the lesser of the amounts she owns in each); for Bret it is 40%, for Charlie and Diane, it is 0%). Because the identical ownership of the five or fewer owners exceeds 50% (40%+40%+0%+0%>50%), a controlled group exists. No controlled group between Corp A and either of the other two Corps because no "effective control" exists (Alice's "identical interest would be either 40% or 45% and each of the others would be 0% - hence either 40% or 45% plus 0% does not exceed 50%, and no effective control exists, and no controlled group exists).
For purposes of conducting a controlled group analysis, certain the ownership of certain relatives (spouse, children and parents,and in some case corporations) may have to also be taken into account in determining the ownership of one of the five or fewer owners. in other words, an individual may be deemed to own the stock actually owned by their spouse or in some circumstance children or parents in determining their ownership in various entities for controlled group analysis. in addition, if there is a certain amount of cross ownership between entities or their owners, and their is common management or cross management, an "affiliated service group" may exists, which for all practical purposes results in the same treatment of plans as under a "controlled group." Rules describing the existence of an affiliated service group are very complex, and beyond the scope of this answer.
If a controlled group comes into being as the result of a merger, or investment by one entity or individuals into another, generally each employer and the plans they sponsor may be treated independently (as if no controlled group existed) until the end of the plan year following the plan year in which the controlled group came into existence. So if a controlled group came into being during 2010, a calendar year plan would be considered unaffected by the controlled group until the end of 2011 (and would have to be merged into the other plan, or be in compliance with the testing requirements as of January 1, 2012). Each plan has its own deadline for compliance, so a combination of two entities, one with a calendar year plan and the other with a fiscal year plan would have different deadlines (the end of each plan's plan year beginning after the combination occurred).
These rules can be complex, and their application to any particular situation daunting, requiring a complete analysis of each of the owners interests in each of the entities involved (including certain relatives' interests), but I hope this provides you with a general understanding of the concepts. It appears as though no parent-subsidiary relationship exists (as the investor doesn't control 80% or more of your client's entity). However, without knowing how much ownership the investment concern has in each of the companies it has invested in, including knowing who owns interests in the investment concern, what interest if any your client has in the investment concern, or any of the other companies the investment concern has invested in, and the nature of the management structure (and if their is any "shared" management) it is impossible to determine if a brother-sister controlled group (or affiliated service group) exists, requiring a further analysis of if the plans can "stand on their own" or must (or should) be merged.