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Now that we have all read the articles can someone explain what the take away is from this parable?

 

Secondly what is the extent of fiduciary liability for an employer who operates a 401k plan in reliance on 404c of ERISA.

 

Third can the plan eliminate potential liability if the employee can hire a fiduciary to provide advice and select plan investments for the participant?

 

Fourth: what are the standards for determining liability of a fiduciary under ERISA and who makes the determination of a breach of fiduciary liability under ERISA?

 

Fifth what is the applicability of these articles for 403b plan sponsors that are exempt from ERISA?

 

Hi--

 

OK, for Intruder:

 

First-I dunno. I work with ERISA and non-ERISA plans, but I just don't share the author's anxieties. Absent employer securities, ERISA retirement plans don't get sued much (disability plans. yes-retirement plans, no), and when they do they win. The recent rash of fee-related suits seems to be dying off, and is doing so faster than even I expected; none of them seems to me to be properly framed, given that plans have costs and ERISA says the employer doesn't have to pay them.

 

Second-They have to work with an investment professional to develop the options and the default investment has to be one a plan without investment direction might use. Better yet, use the QDIA rules, once we figure them out. Then they're good. And substantial compliance on the 404© procedural stuff is probably good enough.

 

Third-Yes, if the array is reasonably chosen and the fiduciary's compensation (from the employer or anybody else) isn't affected by the recommendations. That's equally true if the fiduciary is an adviser. But that only applies to selection of the investment array. You still have to evaluate full or substantial 404© compliance and the risks and costs of each.

 

Fourth-The standards are less substantive than procedural. Go through an acceptable process, and you can be wrong about the decisions. Here, it is very much the "Streetcar Named Desire Defense" that the plan has always relied on the kindness of strangers.

 

Fifth-NONE. That includes "open marketplace" plans that fit within the exemption for salary reduction, multiple investment options 403(b) plans, what I used to sloppily and erroneously call the "non-plan plan" 403(b) (Anybody got any ideas? I'm thinking octopus because they're invertebrates and they look about right. Squid sounds too icky, unless you like Greek or Italian seafood.). Any fiduciary duties would have to come from state securities laws or insurance laws (that do not have trust concepts) unless the 403(b) sponsor is church-related and has a retirement income account in a trust format. But you can never stop worrying about fraud-looking things like back-room money flows, incentives for different behaviors by the plan or employer and cross-subsidies, even if there is no fraud in fact.

 

For Ellen TSA:

 

My basic position is that the articles are not relevant, so I have been ignoring their content. By way of showing that I have some understanding of the issues in the article, and therefore can actually assess relevance, here are two of the items that popped up pretty quickly.

 

The 404© regulations are bizarre and ridiculous, and almost impossible to fully comply with. I would enjoy contesting their validity, but nobody has ever wanted to pay for that or annoy the DOL that much. Pretty much everyone, even those who try really hard, ends up in substantial compliance. Now, can you give a legal opinion that's enough? No. But are employers or plans being successfully sued where they substantially comply and actually get some advice on options? No. Why? Because the 404© regulations are a safe harbor, not an exclusive rule. The 404© regulations themselves say: "Such standards, therefore, are not intended to be applied in determining whether, or to what extent, a plan which does not meet the requirements for an ERISA section 404© plan or a fiduciary with respect to such a plan satisfies the fiduciary responsibility or other provisions of title I of the Act." One can argue about what that sentence means, but one can also cite it in the brief in a substantial compliance situation, to good effect. Gosh, call me silly, but I would have mentioned it as a limitation on how worried you should be.

 

Second, his comments about protecting the fiduciary or the employer do not properly reflect the distinction between settlor/sponsor functions and operational functions. In particular, the employer in the design phase is nowhere required to make design decisions that will minimize costs to the plan or maximize its investment returns. The implementation of that design, however expensive, is an operational cost. The fiduciaries (not the employer as such) are responsible for getting the functions performed under the terms of the plan, and only then for reducing costs, and then only where the reduction does not compromise plan operations. Again, I'd have mentioned that, even if it disrupted my flow. At least I'd have been using phrases like "as a general rule" or "in theory" or "one concern here is."

 

I have other comments, but I don't think they're relevant or important here, as I don't think those are. And maybe I missed some content reflecting my concerns because I hate Q&A formats. In any event, I'd rather side-step further comments. I'm certainly not inclined to do a line-by-line thing.

 

Tom Geer

 

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Now that we have all read the articles can someone explain what the take away is from this parable?

 

Secondly what is the extent of fiduciary liability for an employer who operates a 401k plan in reliance on 404c of ERISA.

 

Third can the plan eliminate potential liability if the employee can hire a fiduciary to provide advice and select plan investments for the participant?

 

Fourth: what are the standards for determining liability of a fiduciary under ERISA and who makes the determination of a breach of fiduciary liability under ERISA?

 

Fifth what is the applicability of these articles for 403b plan sponsors that are exempt from ERISA?

 

Hi--

 

OK, for Intruder:

 

First-I dunno. I work with ERISA and non-ERISA plans, but I just don't share the author's anxieties. Absent employer securities, ERISA retirement plans don't get sued much (disability plans. yes-retirement plans, no), and when they do they win. The recent rash of fee-related suits seems to be dying off, and is doing so faster than even I expected; none of them seems to me to be properly framed, given that plans have costs and ERISA says the employer doesn't have to pay them.

 

Second-They have to work with an investment professional to develop the options and the default investment has to be one a plan without investment direction might use. Better yet, use the QDIA rules, once we figure them out. Then they're good. And substantial compliance on the 404© procedural stuff is probably good enough.

 

Third-Yes, if the array is reasonably chosen and the fiduciary's compensation (from the employer or anybody else) isn't affected by the recommendations. That's equally true if the fiduciary is an adviser. But that only applies to selection of the investment array. You still have to evaluate full or substantial 404© compliance and the risks and costs of each.

 

Fourth-The standards are less substantive than procedural. Go through an acceptable process, and you can be wrong about the decisions. Here, it is very much the "Streetcar Named Desire Defense" that the plan has always relied on the kindness of strangers.

 

Fifth-NONE. That includes "open marketplace" plans that fit within the exemption for salary reduction, multiple investment options 403(b) plans, what I used to sloppily and erroneously call the "non-plan plan" 403(b) (Anybody got any ideas? I'm thinking octopus because they're invertebrates and they look about right. Squid sounds too icky, unless you like Greek or Italian seafood.). Any fiduciary duties would have to come from state securities laws or insurance laws (that do not have trust concepts) unless the 403(b) sponsor is church-related and has a retirement income account in a trust format. But you can never stop worrying about fraud-looking things like back-room money flows, incentives for different behaviors by the plan or employer and cross-subsidies, even if there is no fraud in fact.

 

For Ellen TSA:

 

My basic position is that the articles are not relevant, so I have been ignoring their content. By way of showing that I have some understanding of the issues in the article, and therefore can actually assess relevance, here are two of the items that popped up pretty quickly.

 

The 404© regulations are bizarre and ridiculous, and almost impossible to fully comply with. I would enjoy contesting their validity, but nobody has ever wanted to pay for that or annoy the DOL that much. Pretty much everyone, even those who try really hard, ends up in substantial compliance. Now, can you give a legal opinion that's enough? No. But are employers or plans being successfully sued where they substantially comply and actually get some advice on options? No. Why? Because the 404© regulations are a safe harbor, not an exclusive rule. The 404© regulations themselves say: "Such standards, therefore, are not intended to be applied in determining whether, or to what extent, a plan which does not meet the requirements for an ERISA section 404© plan or a fiduciary with respect to such a plan satisfies the fiduciary responsibility or other provisions of title I of the Act." One can argue about what that sentence means, but one can also cite it in the brief in a substantial compliance situation, to good effect. Gosh, call me silly, but I would have mentioned it as a limitation on how worried you should be.

 

Second, his comments about protecting the fiduciary or the employer do not properly reflect the distinction between settlor/sponsor functions and operational functions. In particular, the employer in the design phase is nowhere required to make design decisions that will minimize costs to the plan or maximize its investment returns. The implementation of that design, however expensive, is an operational cost. The fiduciaries (not the employer as such) are responsible for getting the functions performed under the terms of the plan, and only then for reducing costs, and then only where the reduction does not compromise plan operations. Again, I'd have mentioned that, even if it disrupted my flow. At least I'd have been using phrases like "as a general rule" or "in theory" or "one concern here is."

 

I have other comments, but I don't think they're relevant or important here, as I don't think those are. And maybe I missed some content reflecting my concerns because I hate Q&A formats. In any event, I'd rather side-step further comments. I'm certainly not inclined to do a line-by-line thing.

 

Tom Geer

 

 

While I agree with Tom's points there are other misstatements about the applicable laws that classify the articles as fiduciary "junk science".

 

1. As ERISA is a law of equity, there are no jury trials since employees are only entitled to receive benefits, i.e. specific property held by the plan, that belongs to the participant. All claims of fiduciary violations are tried before a judge in Federal Court who decides both the facts and the law. There is no jury to award damages.

 

2. A fiduciary is liable only if he acts impudently under ERISA and the imprudence causes a loss to the plan. A loss means an out of pocket loss. A loss does not include the failure to take action which would result in greater profts for a participant because the recovery of lost profits on an investment would be considered money damages which is not permitted under ERISA. Punative, compensatory and consequential damages are not permitted under ERISA.

 

3. There is no prohibited transaction risk for offering investment education because the DOL reg 2509.96-1 expressly permits 401k plans to offer investment education as part of the procedures to provide investment information to participants to fulfill the requirements for compliance with the 404© regs. Under the coordinatiion of responsibility rules for enforcing ERISA, the IRS collects the PT tax under IRC 4975 in accordance with rules issued by the DOL. Does anyone think that the IRS is going to levy the PT tax under IRC 4975 on a 401k plan that is providing investment education permitted under Reg 2509.96-1?

 

4. ERISA 404© is an express exemption to the general rule of fiduciary liability for plan investment decisions. The ERISA Conference Committee report on 404© (House Report 93-1280) states " ... a special rule is provided for individual account plans where the participant is permitted to, and does in fact exercise independent control over the assets in his individual account. In this case the individual is not to be regarded as a fiduciary and other persons who are fiduciaries with respect to the plan are not liable for any loss that results from the exercise and control by the participant or beneficiary." I do not know of any case where a court has invalidated the 404c regs . Second there was a case earlier this year where a Fed ct held that an plan fiduciary was not liable for investment decisions made by employees under a DC plan that did not comply with the 404c regs.

 

5. While 404c has no applicability to non ERISA 403b plans, the practical result is that for a plan sponsor 404© is the ERISA equivalent of a 403b hold harmless agreement for a SD because it reduces employer liabilty for investment decisions made by a participant.

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Hi everyone -

 

Forgive me for chiming in. I prefer to be a silent observer & learner, and I know this topic has been hashed to death.

 

Intruder...you're a tad rusty on your understanding of how things work in ERISA. Like Ellen, Hutcheson's views are cutting edge. You say they are junk science, but you err. Quadrino and Schwartz states it billiantly:

 

"When the U.S. Court of Appeals for the Second Circuit initially determined, in Sullivan v. LTV Aerospace and Defense Co., that jury trials were not available to plan participants and beneficiaries in Employee Retirement Income Security Act (ERISA) benefit litigations, it specifically based its rationale upon its "sister circuits" opinions that the trust-like nature of ERISA made all benefit claims equitable, rather than legal, in nature.

 

In the less than 10 years since Sullivan was handed down, the foundation for the court's decision in Sullivan has crumbled. Thus, the Second Circuit appears poised to finally return disappointed plan beneficiaries the jury trial rights it divested from them by mistaken statutory interpretation."

 

In other words, it USED TO BE generally thought that Jury trials were unavailable to beneficiaries of ERISA Plans. That is definitely NOT the case now.

 

Next, what defines a prohibited transaction is not whether it is expressly stated in code or regulation. There are many explicit exemptions to prohibited transactions, and other allowances. The most common is the participant loan. There are also PT's that are less obvious. You and Geer have failed to discern the finer point of Hutcheson's message. It is when a participant pays for something they do not benefit from - such as a service financed through obscure costs built into the macro economics of the plan (i.e. which everyone pays but which everyone might not benefit) - that presents a fundamental problem. This is a matter of fine discernment of fiduciary principle - one that is being considered by the Supreme Court next year. Also, the Supreme Court has held that ERISA is not exempt from a distinction between law and equity, the Great-West Insurance Company v. Knudson being one interesting example. In other words, both Equity and Law can be adjudicated in ERISA cases.

 

404© is not automatically of full effect just because someone claims their plan falls under that provision. It's only an exemption that fiduciaries can try to comply. Contrary to common belief, it's technically not even a safe harbor. It is full of provisos and requirements that are virtually impossible to comply with, and everyone who is familiar with 404© knows that. The Department of Labor has stated more than once that even if a plan document requires a plan administrator to operate the plan in accordance with 404©, the named fiduciaries must refuse if it would otherwise be imprudent to comply. Hutcheson observed that 404© is the breeding ground for sub-possible returns. Didn't you catch that? When near market returns are possible, yet viritually no one is getting close to earning them; to me that is imprudent. I think Hutcheson really nailed that point in the first article. And more than one Court has found that a fiduciary can breach their duty by simply doing nothing, let alone spending participant funds on protecting themselves. Accusations of junk science are hardly fair unless you accuse those Courts of making statements based upon "junk law." Finally, 404© can't even be remotely compared to a hold harmless agreement. Exculpatory clauses are against public policy, and 404© has not, nor ever will be contemplated as such clause. It was never intended to offer rubber stamp protections to fiduciaries.

 

Finally, the case you mention where a fiduciary wasn't held liable was the Deere case. Compliance with 404© wasn't even tested in that instance, contrary to DOL requirements. Seven other courts within just a few months of the Deere decision disagreed and have held that 404© must be complied with prior to granting protections to fiduciaries. Thus, the Deere case is an outlier.

 

I do appreciate many of the comments and thoughts on this website. But I get the sense you guys emit more heat than light.

 

In any event, it seems like this discussion has run its course.

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Hi everyone -

 

Forgive me for chiming in. I prefer to be a silent observer & learner, and I know this topic has been hashed to death.

 

Intruder...you're a tad rusty on your understanding of how things work in ERISA. Like Ellen, Hutcheson's views are cutting edge. You say they are junk science, but you err. Quadrino and Schwartz states it billiantly:

 

"When the U.S. Court of Appeals for the Second Circuit initially determined, in Sullivan v. LTV Aerospace and Defense Co., that jury trials were not available to plan participants and beneficiaries in Employee Retirement Income Security Act (ERISA) benefit litigations, it specifically based its rationale upon its "sister circuits" opinions that the trust-like nature of ERISA made all benefit claims equitable, rather than legal, in nature.

 

In the less than 10 years since Sullivan was handed down, the foundation for the court's decision in Sullivan has crumbled. Thus, the Second Circuit appears poised to finally return disappointed plan beneficiaries the jury trial rights it divested from them by mistaken statutory interpretation."

 

In other words, it USED TO BE generally thought that Jury trials were unavailable to beneficiaries of ERISA Plans. That is definitely NOT the case now.

 

 

INTRUDER REPSONSE: Before you copy articles that you have googled can you tell the audience whether the section under which the Supreme Ct purports to allow jury trials by participants under ERISA is the same section of ERISA which provides for lawsuits by participants for a breach of fiduciary duty under ERISA 409? A participant's claim for benefits under ERISA 502(a)(1)(B) which is the subject of the case you cite is different from the participant's rights under a law suit for a breach on fiduciary duty under ERISA 502(a)(2). Also the issue of jury trials for benefit claims under ERISA 502(a)(1)(B) is very narrow and involves the question of whether claims for welfare benefits covered under insurance contract plans such medical or disability benefits are guaranteed a jury trial under the 7th amendment.

 

Next, what defines a prohibited transaction is not whether it is expressly stated in code or regulation.

 

INTRUDER REPONSE: IRC 4975/ERISA 406 EXPRESSLY STATE WHAT THE PT VIOLATONS ARE. If PT violations are not in IRC 4975 or parallel provisions of ERISA where are they?

 

 

There are many explicit exemptions to prohibited transactions, and other allowances. The most common is the participant loan. There are also PT's that are less obvious. You and Geer have failed to discern the finer point of Hutcheson's message. It is when a participant pays for something they do not benefit from - such as a service financed through obscure costs built into the macro economics of the plan (i.e. which everyone pays but which everyone might not benefit) - that presents a fundamental problem. This is a matter of fine discernment of fiduciary principle - one that is being considered by the Supreme Court next year. Also, the Supreme Court has held that ERISA is not exempt from a distinction between law and equity, the Great-West Insurance Company v. Knudson being one interesting example. In other words, both Equity and Law can be adjudicated in ERISA cases.

 

INRUDER RESPONSE: WHAT SECTION OF OF ERISA WAS GREAT WEST PREDICATED ON?

 

404© is not automatically of full effect just because someone claims their plan falls under that provision. It's only an exemption that fiduciaries can try to comply. Contrary to common belief, it's technically not even a safe harbor. It is full of provisos and requirements that are virtually impossible to comply with, and everyone who is familiar with 404© knows that. The Department of Labor has stated more than once that even if a plan document requires a plan administrator to operate the plan in accordance with 404©, the named fiduciaries must refuse if it would otherwise be imprudent to comply. Hutcheson observed that 404© is the breeding ground for sub-possible returns. Didn't you catch that? When near market returns are possible, yet viritually no one is getting close to earning them; to me that is imprudent. I think Hutcheson really nailed that point in the first article.

 

INTRUDER RESPONSE: In Helfrich v. PNC Bank, 267 F3d 477 (2001) the 6th Federal Circuit appellete court held that restitution is the only remedy by a participant against a fiduciary in a benefit claim because money damages are not available. In Helfrich the plaintiffs alleged that the fiduciary did not follow their instructions to invest their account balances in mutual funds but instead invested the accounts in a money market fund causing a significant economic loss. See Helfrich at 267 F3d 481: " Although they often dance around the word, what petitioners seek is none other than compensatory damages -monetary loss for all losses their plan sustained as a result of the alleged breach of fiduciary duties. Monetary damages are of course the classic form of legal relief" (Citing Mertens v. Hewitt Associates, 508 US at 255.) Economic loss is not recoverable for a breach of fiduciary duty under ERISA.

 

And more than one Court has found that a fiduciary can breach their duty by simply doing nothing, let alone spending participant funds on protecting themselves. Accusations of junk science are hardly fair unless you accuse those Courts of making statements based upon "junk law." Finally, 404© can't event be remotely compared to a hold harmless agreement. Exculpatory clauses are against public policy, and 404© has not, nor ever will be contemplated as such clause. It was never intended to offer rubber stamp protections to fiduciaries.

 

INTRUDER RESPONSE:Please provide a cite for you claim that a fiduciary breaches ERISA by spending plan aseets on protecting themselves. In Spink v. Lockheed, 116 US 1783 (1996), the US Supreme Court ruled that it was not a violation of the PT rules of ERISA 406(a)(1)(D) for the employer to pay plan assets to an employee in return for signing a waiver of all claims against the employer and the plan under ERISA.

 

Finally, the case you mention where a fiduciary wasn't held liable was the Deere case. Compliance with 404© wasn't even tested in that instance, contrary to DOL requirements. Seven other courts within just a few months of the Deere decision disagreed and have held that 404© must be complied with prior to granting protections to fiduciaries. Thus, the Deere case is an outlier.

 

INTRUDER RESPONSE: You really need to read the cases you cite. The Court held that the Deere 401k plan complied with the 404c regs and that it did not violate 404c by not providing the disclosure on plan fees requested by the plantiffs becuase it was not requried under ERISA. In Jenkins v. Yaeger & Mid American Motorworks, Inc., 4/14/2007, the 7th Circuit Court of Appeals held that 404c is only a safe harbor and not the exclusive authorization under ERISA for permitting participant directed accounts. Among its other findings the court held that investment loss was not a breach of fiduicary duty and and it was not imprudent to select conservative funds with long term growth potential and stay with those funds even during years of lower performance.

 

I do appreciate many of the comments and thoughts on this website. But I get the sense you guys emit more heat than light.

 

INTRUDER RESPONSE: I get the sense that you dont know anything about what you are talking about because you have never reserached the laws that you are relying upon. You need to improve your research skills and provide cites to support your positions. You need to do more than repeat statements from articles that you found by goolging keywords.

 

INTRUDER QUESTION-BLAKE: Do you agree with my comment on the lack of application of the PT penalities to employers who use plan funds to comply with 404c?

 

In any event, it seems like this discussion has run its course.

 

INTRUDER RESPONSE: IT HAS If YOU DO NOT RESPOND TO MY COMMENTS.

 

 

 

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Intruder:

 

No need to get defensive.

 

I'll convey my message more succinctly so you can follow.

 

1. Beneficiaries are not limited to equitable relief alone under ERISA. A point made in one of the articles.

 

2. Again, you are not discerning the point. Prohibited transactions can occur by spending participant funds on parties in interests - i.e. fiduciaries. That's exactly what happens in most 404c scenarios. Another stimulating point made in the articles.

 

3. Uh, it was the 2nd Circuit Court who confused whether jury's were available to ERISA beneficiaries. The Supreme Court has never ruled, to my knowledge, that Jury's were not available in ERISA cases. But what if they did - SO WHAT? The point is a Jury trial under ERISA is available to ERISA Beneficiaries - again a point made in the articles.

 

4. You think sub-possible returns are not "damages" when ERISA it is a Fiduciary's duty to prudently manage assets for the exclusive benefit of participants and beneficiaries? Come on. Damages are not limited to a careless mistake. They can also result from omissions resulting from a fiduciary's "pure heart and empty head."

 

5. I'm not familiar with the context or background of Spink v Lockheed. That doesn't change the fact that exculpatory clauses are against public policy. And what does the Spink case have to do with your comment comparing 404c to an exculpatory clause?

 

6. I, like you, and eager to learn and understand. I think Google is a fine research tool.

 

7. Finally - I don't think there is anything wrong with 404c per se, as long as the employer pays for those services themselves. I agree that 404c is permitted, but I think Hutcheson is correct when he pointed out the elephant in the living room. What benefit does the participant get from paying for 404c? None. Only the plan sponsor and/named fiduciaries supposedly benefit. That to me is difficult to accept and I think is the whole point.

 

If money is spent out of participant accounts for services that are not related to delivering future benefits, that is wrong. From your message, I'm not sure you disagree with me on that particular point.

 

I like your energy, Intruder. Great post.

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Intruder:

 

No need to get defensive.

 

I'll convey my message more succinctly so you can follow.

 

INTRUDER:

 

See my RESPONSES to each of your statements below.

 

1. Beneficiaries are not limited to equitable relief alone under ERISA. A point made in one of the articles.

 

INTRUDER RESPONSE:

 

As noted in more detail in my response to #4, equitable relief is the only relief available for beneficaries and participants because the remedies permitted under ERISA 502 for violations of ERISA limit relief to equitable remedies. The article does not cite any section of ERISA for its claim that money damages are permitted.

 

2. Again, you are not discerning the point. Prohibited transactions can occur by spending participant funds on parties in interests - i.e. fiduciaries. That's exactly what happens in most 404c scenarios. Another stimulating point made in the articles.

 

INTRUDER RESPONSE:

 

That argument has no basis under law. Under ERISA Plan fiduciaries are required to administer the plan in accordance with it's terms and investigate plan investments to determine it they are permitted for the plan and employ outside advisors such as attorneys and investment advisors to determine of the proposed investments would violate applicable laws such as the PT rules. Every plan I have seen expressly permits a fiduciary to perform due diligence and allows payment from plan assets for administration costs because the purpose is to operate the plan in accordance with applicable law.

 

 

3. Uh, it was the 2nd Circuit Court who confused whether jury's were available to ERISA beneficiaries. The Supreme Court has never ruled, to my knowledge, that Jury's were not available in ERISA cases. But what if they did - SO WHAT? The point is a Jury trial under ERISA is available to ERISA Beneficiaries - again a point made in the articles.

 

INTRUDER RESPONSE:

 

You are ignoring my previous response that the only issue for the courts of whether jury trials are allowed under ERISA is in the narrow question of whether the 7th Amendment to the Constitution allows a jury trial for participant claims under insured welfare plans. The reason why jury trials are not allowed for other claims under ERISA is that if Congress wanted to permit jury trials for benefit claims it would have written such a provision into ERISA as authorized in legislation allowing lawsuits for violations of other federal laws protecting worker rights, e.g., age discrimination which specifically permits jury trials. Absent specific language in ERISA the conclusion of the courts is that Congress did not intend to permit jury trials under ERISA.

 

4. You think sub-possible returns are not "damages" when ERISA it is a Fiduciary's duty to prudently manage assets for the exclusive benefit of participants and beneficiaries? Come on. Damages are not limited to a careless mistake. They can also result from omissions resulting from a fiduciary's "pure heart and empty head."

 

INTRUDER RESPONSE:

 

Below market returns are a claim for lost profits which is form of money damages. Your insistance that low returns are a form of "damages" which can be recoverd under ERISA indicates that you don't know the difference between equitable remedies and remedies in an action at law which every lawyer learns in law school. In an action at law the remedy is money damages which includes compensatory, consequential and punitative damages because the purpose is to make the injured party whole. The remedy to a wronged party in equity is restitution, e.g., a return of the specific property possessed by the wrongdoer and any gains that were earned from the property by the wrongdoer. For example, if a plan fiduciary mistakenly invests a participant's account in a MM fund instead of a stock fund the participant's recovery under ERISA is limited to the earnings on the MM fund not the lost gains which are considered money damages allowed only in an action at law because ERISA does not permit recovery of money damages.

 

5. I'm not familiar with the context or background of Spink v Lockheed. That doesn't change the fact that exculpatory clauses are against public policy. And what does the Spink case have to do with your comment comparing 404c to an exculpatory clause?

 

INTRUDER RESPONSE:

 

Exculpatory clauses are not against public policy when permitted by law. As noted by the Supremes in the Spink case, Congress specificaly allows employees to sign waviers of liability in favor of employers under the age discrimination law. Therefore it is permissible to use plan assets to obain a waiver of claims under ERISA. 404c is an exculpatory clause which is expressly permitted under ERISA because it states that neither the employer nor any other person who is a fiduciary under ERISA is a fiduciary for losses which occur in a participant's account which results from the exercise of investment direction by the participant. Therefore 404c is not against public policy.

 

6. I, like you, and eager to learn and understand. I think Google is a fine research tool.

 

INTRUDER RESPONSE Google is a fine tool but its only as good as the Q asked.

 

7. Finally - I don't think there is anything wrong with 404c per se, as long as the employer pays for those services themselves. I agree that 404c is permitted, but I think Hutcheson is correct when he pointed out the elephant in the living room. What benefit does the participant get from paying for 404c? None. Only the plan sponsor and/named fiduciaries supposedly benefit. That to me is difficult to accept and I think is the whole point.

 

If money is spent out of participant accounts for services that are not related to delivering future benefits, that is wrong. From your message, I'm not sure you disagree with me on that particular point.

 

INTRUDER RESPONSE:

 

ERISA permits a fiduciary to use plan assets in the course of performing duties required to administer the plan under ERISA and in carrying out responsibilities authorized under ERISA such as 404c regardless of who benefits. Employer are free to pay such costs outside of the plan.

 

ERISA does not prevent the use of plan assets for purpose other than delivering future benefits, e.g. preparing a 5500 does not relate to future benefits. Settlor expenses which relate to delivering future benefits such as the costs incurred in adopting a plan are not permitted to be paid from plan assets.

 

I like your energy, Intruder. Great post.

 

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Intruder:

 

No need to get defensive.

 

I'll convey my message more succinctly so you can follow.

 

INTRUDER:

 

See my RESPONSES to each of your statements below.

 

1. Beneficiaries are not limited to equitable relief alone under ERISA. A point made in one of the articles.

 

INTRUDER RESPONSE:

 

As noted in more detail in my response to #4, equitable relief is the only relief available for beneficaries and participants because the remedies permitted under ERISA 502 for violations of ERISA limit relief to equitable remedies. The article does not cite any section of ERISA for its claim that money damages are permitted.

 

2. Again, you are not discerning the point. Prohibited transactions can occur by spending participant funds on parties in interests - i.e. fiduciaries. That's exactly what happens in most 404c scenarios. Another stimulating point made in the articles.

 

INTRUDER RESPONSE:

 

That argument has no basis under law. Under ERISA Plan fiduciaries are required to administer the plan in accordance with it's terms and investigate plan investments to determine it they are permitted for the plan and employ outside advisors such as attorneys and investment advisors to determine of the proposed investments would violate applicable laws such as the PT rules. Every plan I have seen expressly permits a fiduciary to perform due diligence and allows payment from plan assets for administration costs because the purpose is to operate the plan in accordance with applicable law.

 

 

3. Uh, it was the 2nd Circuit Court who confused whether jury's were available to ERISA beneficiaries. The Supreme Court has never ruled, to my knowledge, that Jury's were not available in ERISA cases. But what if they did - SO WHAT? The point is a Jury trial under ERISA is available to ERISA Beneficiaries - again a point made in the articles.

 

INTRUDER RESPONSE:

 

You are ignoring my previous response that the only issue for the courts of whether jury trials are allowed under ERISA is in the narrow question of whether the 7th Amendment to the Constitution allows a jury trial for participant claims under insured welfare plans. The reason why jury trials are not allowed for other claims under ERISA is that if Congress wanted to permit jury trials for benefit claims it would have written such a provision into ERISA as authorized in legislation allowing lawsuits for violations of other federal laws protecting worker rights, e.g., age discrimination which specifically permits jury trials. Absent specific language in ERISA the conclusion of the courts is that Congress did not intend to permit jury trials under ERISA.

 

4. You think sub-possible returns are not "damages" when ERISA it is a Fiduciary's duty to prudently manage assets for the exclusive benefit of participants and beneficiaries? Come on. Damages are not limited to a careless mistake. They can also result from omissions resulting from a fiduciary's "pure heart and empty head."

 

INTRUDER RESPONSE:

 

Below market returns are a claim for lost profits which is form of money damages. Your insistance that low returns are a form of "damages" which can be recoverd under ERISA indicates that you don't know the difference between equitable remedies and remedies in an action at law which every lawyer learns in law school. In an action at law the remedy is money damages which includes compensatory, consequential and punitative damages because the purpose is to make the injured party whole. The remedy to a wronged party in equity is restitution, e.g., a return of the specific property possessed by the wrongdoer and any gains that were earned from the property by the wrongdoer. For example, if a plan fiduciary mistakenly invests a participant's account in a MM fund instead of a stock fund the participant's recovery under ERISA is limited to the earnings on the MM fund not the lost gains which are considered money damages allowed only in an action at law because ERISA does not permit recovery of money damages.

 

5. I'm not familiar with the context or background of Spink v Lockheed. That doesn't change the fact that exculpatory clauses are against public policy. And what does the Spink case have to do with your comment comparing 404c to an exculpatory clause?

 

INTRUDER RESPONSE:

 

Exculpatory clauses are not against public policy when permitted by law. As noted by the Supremes in the Spink case, Congress specificaly allows employees to sign waviers of liability in favor of employers under the age discrimination law. Therefore it is permissible to use plan assets to obain a waiver of claims under ERISA. 404c is an exculpatory clause which is expressly permitted under ERISA because it states that neither the employer nor any other person who is a fiduciary under ERISA is a fiduciary for losses which occur in a participant's account which results from the exercise of investment direction by the participant. Therefore 404c is not against public policy.

 

6. I, like you, and eager to learn and understand. I think Google is a fine research tool.

 

INTRUDER RESPONSE Google is a fine tool but its only as good as the Q asked.

 

7. Finally - I don't think there is anything wrong with 404c per se, as long as the employer pays for those services themselves. I agree that 404c is permitted, but I think Hutcheson is correct when he pointed out the elephant in the living room. What benefit does the participant get from paying for 404c? None. Only the plan sponsor and/named fiduciaries supposedly benefit. That to me is difficult to accept and I think is the whole point.

 

If money is spent out of participant accounts for services that are not related to delivering future benefits, that is wrong. From your message, I'm not sure you disagree with me on that particular point.

 

INTRUDER RESPONSE:

 

ERISA permits a fiduciary to use plan assets in the course of performing duties required to administer the plan under ERISA and in carrying out responsibilities authorized under ERISA such as 404c regardless of who benefits. Employer are free to pay such costs outside of the plan.

 

ERISA does not prevent the use of plan assets for purpose other than delivering future benefits, e.g. preparing a 5500 does not relate to future benefits. Settlor expenses which relate to delivering future benefits such as the costs incurred in adopting a plan are not permitted to be paid from plan assets.

 

I like your energy, Intruder. Great post.

 

 

I concur with Intruder. BlakeSmith does not seem to understand that the employer designing the plan is not a fiduciary. Or that the costs of administration of the resulting plan are perfectly permissible plan expenses. Or that, on the second point, why the employer selected a specific plan design or design component is irrelevant. This reflects a lack of understanding of the classical settlor function/administration function distinction.

 

I do agree that full 404© compliance does not actually benefit participants. Could you please explain that to the DOL, which appears to disagree.

 

Last, heaven help us all if the measure of damages is maximum possible yield.

 

Tom Geer

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Hi all,

Read through this discussion and I did not read any comments about the author's support of Rep. Miller's new bill that would require explanation and transparency of all fees to participants. One thing that I know about first hand in two situations that support what the author wrote is the industry response is that the participants will be "confused."

 

Question: The author implies that 404c is the best thing that has ever happened to the benefit of participants. How in the world did 404c ever get through the legislative process or was it a regulation written and implemented by the IRS?

 

As a member of my employers 457 committee, the articles were a good way to explain the concept of a fiduciary to a lay person. We will be trained on the responsibilities as a fiduciary in the near future and the articles provided an excellent starting point for me.

 

Thanks Judy for posting them,

Steve

 

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Hi all,

Read through this discussion and I did not read any comments about the author's support of Rep. Miller's new bill that would require explanation and transparency of all fees to participants. One thing that I know about first hand in two situations that support what the author wrote is the industry response is that the participants will be "confused."

 

Question: The author implies that 404c is the best thing that has ever happened to the benefit of participants. How in the world did 404c ever get through the legislative process or was it a regulation written and implemented by the IRS?

 

As a member of my employers 457 committee, the articles were a good way to explain the concept of a fiduciary to a lay person. We will be trained on the responsibilities as a fiduciary in the near future and the articles provided an excellent starting point for me.

 

Thanks Judy for posting them,

Steve

 

 

 

Rep. Millers proposal is dead because of the opposition of Rep. Rangel, chariman of the ways and means committee who appears to be disposed toward allowing the DOL to draw up new fee rules before intoducing any disclosure legislation.

 

404c was enacted as part of ERISA and as noted it is only a safe harbor. DOL issued the 404c regs, not IRS. Why do you feel the need to blame someone for its existance?

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Intruder,

Not trying to accuse. Having experienced the opposition by the insurance industry over this very same issue of transparency of fees, it is surprising the 404c claims to be so good for the individual investor, according to the author, and is the regulation of the land for 401K plans.

Steve

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Intruder,

Not trying to accuse. Having experienced the opposition by the insurance industry over this very same issue of transparency of fees, it is surprising the 404c claims to be so good for the individual investor, according to the author, and is the regulation of the land for 401K plans.

Steve

 

 

In your view what is wrong with 404c? I am having difficulty identifying your problem with the statute.

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