Category Archives: ERISA Compliance

Avoid ERISA Litigation

Avoid ERISA litigation with attention to common red flags

ERISAAny size retirement plan can run into serious trouble when sponsors aren’t careful. With some planning, though, your qualified retirement plan doesn’t have to be the target of ERISA litigation. Awareness of some of the most common red flags leading to litigation might be helpful.

Reasonable expenses
Of course, you can’t assure consistently strong investment performance. But plan sponsors can — and must — ensure that expenses are reasonable.

When your plan’s investment portfolios are performing well, it’s easy to pay less attention to the recordkeeping costs and investment management fees. But when performance is subpar, out-of-line expenses stick out like the proverbial sore thumb. Make sure you schedule regular, independent reviews of your plan expenses and fees every three to five years as part of your due diligence.

Opaque fee structures
In the past, complex and opaque fee structures such as revenue-sharing arrangements between asset managers and third-party administrators made it harder to get a handle on cost. But with the U.S. Department of Labor’s fee disclosure regulations now in their fourth year, pleading ignorance is no excuse. In fact, it never really was.

Mutual fund shares with built-in revenue sharing features still exist but, with required disclosure statements, it’s easier for you (and plan participants) to understand what they are. Although these built-in revenue sharing features aren’t inherently bad, they tend to be associated with funds that have higher expense charges.

In some plan fee litigation, courts have deemed fee-sharing arrangements a payoff to an administrator to recommend those funds, subordinating its assessment of the funds’ merits as sound investments.

Bundled services
Another expense-related red flag that could trigger litigation is exclusive use of a bundled plan provider’s investment funds. This also can raise questions about the effort that you put into investment performance evaluation.

So if you use only a bundled provider’s funds, you could give the appearance of not performing your fiduciary duty to seek out the most appropriate and competitively priced funds. And in fact, the odds are slim that one bundled provider has best-of-class funds in all of your desired investment strategy categories and asset classes. When retaining a bundled provider, question whether the recommendation of primarily proprietary funds could result in a conflict of interest if better performing and lower cost funds are available on their platform.

Share classes
Even when your plan’s investment lineup features funds from multiple asset management companies, you could be inadvertently flying a red flag if the funds in your investment menu are in an expensive share class. Individual investors, unless they have very deep pockets, generally have access to only retail-priced share classes. In contrast, retirement plans, even small ones, typically can use more competitively priced institutional share classes. The failure to use institutionally priced share classes has been at the heart of many class actions against plan sponsors.

Different share classes of the same mutual fund have different ticker symbols; that’s one easy way to determine what’s in the portfolio. Fund companies that offer shares with sales loads typically offer more variations, with “A,” “B” and “C” categories of retail shares, and an institutionally priced “I” share class without embedded sales charges.

Having some high-cost investments in your fund lineup isn’t in itself a reason that you’ll be deemed to have breached your fiduciary duties. There may indeed be good reasons to include them, notwithstanding the higher costs.

Investment policy statements
The concept of “procedural prudence” is embedded in ERISA and case law. This means plan sponsors must establish — and follow — policies and procedures to safeguard participants’ interests and set the criteria used to evaluate vendors, including asset managers.

Create an investment policy statement (IPS) to articulate your vision for plan investments overall, and the investment options you want to make available to participants. The IPS should clearly state:

  • What kind of assets you’ll include in investment options,
  • The degree of investment risk and volatility that’s acceptable,
  • How you’ll assess investment performance, and
  • When you’ll change managers.

Although having an IPS isn’t obligatory, doing so can show that you’re exercising procedural prudence — provided you can document your compliance with it. Merely signaling prudence won’t get you off the hook; following carefully crafted procedures and policies will go a long way toward preventing missteps that could lead to litigation in the first place. If you already have an IPS, be sure to follow it.

Next steps
Avoiding ERISA litigation is on every plan sponsor’s wish list. Reviewing expenses, fee structures and bundled services, and creating and following an IPS, can help you achieve this. Start by making periodic review of these areas the norm, in good times and bad.

Our advice is:  Don’t go it alone. Contact George Pickard, CPA, Ciuni & Panichi, Inc. Accounting and Audit Senior Manager, at 216-831-7171 or for help with your plan. His expertise includes performing your plan audit, advising you on compliance issues and helping to avoid litigation.

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Now’s the Time to make Changes to your Retirement Plan

Start the Process Now

By Jeffrey R. Spencer, CPA, Principal, Ciuni & Panichi, Inc.

Jeff SpencerMost defined contribution retirement plans, such as 401(k), profit sharing, and money purchase plans will need to be restated by April 30, 2016 to incorporate the provisions of the Pension Protection Act of 2006 (“PPA”) and various other changes that took effect between 2007 and 2011.  As a result, you may recently have been contacted by your retirement plan document provider informing you they will be restating your plan in the coming months.

Before you agree to this restatement, you should determine if you want to make any additional changes to the provisions of your retirement plan.  These can be simple changes such as adding an employer matching contribution, or major changes such as implementing a safe harbor plan in order to avoid annual nondiscrimination testing.

Now is the time to review the provisions of your retirement plan to ensure they are in line with the objectives of your organization.  One restatement covering both required and desired changes can avoid costly amendments in the future.

In addition, now is an ideal time to review the vendors servicing your retirement plan – especially those providing investment advice and plan administration.  The fees for these services are now more transparent.  Over the last several years with advances in technology, these services are now more competitively priced.  If you are considering a change in plan provider, you will want to know if the new provider can use your current plan document or if they require you to use their own plan document.  Consequently, you will want to make changes in plan vendors before you restate your plan.

Finally, now is the time to consider if your organization is a candidate for some of the more advanced types of retirement plans being used by employers to allocate larger benefits to key executives and owners.  Plans such as cross-tested profit sharing plans and cash balance plans may be used in conjunction with a 401(k) plan to provide maximum benefits to specific employees without violating many of the nondiscrimination rules conventional retirement plans must adhere to.

Although April of 2016 seems a long way off, now is the time to plan ahead for the April 30th PPA restatement deadline and review the key provisions of your current retirement plan and the vendors that service your plan.

Please contact Jeff Spencer at 216-831-7171 or for more information on this topic.

Jeff Spencer is a Tax Principal at Ciuni & Panichi, Inc., and he is the head of the employee benefits tax services group.

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Short-term ACA Relief Now Available for Midsize and Large Employers

AACA Health Care ReformRecently released IRS final regulations for the Affordable Care Act’s (ACA’s) employer shared-responsibility provision provide some short-term relief for midsize and large employers.

Under the ACA, the shared-responsibility provision (commonly referred to as “play-or-pay”) applies to “large” employers — those with the equivalent of 50 or more full-time employees. Play-or-pay had been scheduled to go into effect in 2014, but last year, the IRS pushed that out to 2015. Now, under the final regulations, eligible midsize employers that otherwise would be considered large employers under the ACA won’t be subject to the provision until 2016.

To Qualify for the Midsize-Employer Relief, an Employer Must:

      • Employ on average fewer than 100 full-time employees, or the equivalent, during 2014,
      • Maintain its workforce size and aggregate hours of service,
      • Maintain the health care coverage it offered as of Feb. 9, 2014, and
      • Certify that it meets these requirements.

Some Relief for Large Employers as Well

The final regulations also provide some relief for large employers that don’t qualify for the midsize-employer relief.  In 2015, they can avoid the penalty for not offering minimum essential coverage by offering such coverage to at least 70% of their full-time employees, rather than the 95% originally scheduled. The 95% requirement will apply in 2016 and beyond.

The final regulations also clarify certain aspects of the play-or-pay provision. Please contact Jim Komos at 216.831.7171 or for more information. You can also submit an inquiry on our contact us page.

To read more about Ciuni & Panichi’s Employee Benefit Plan Services, including employee benefit plan financial audits, preparation of annual Form 5500 filings, annual compliance tests required by ERISA and the IRS, and much more, visit our Employee Benefit Plan Services page.

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