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Fiduciary Update | October 2015

Drew McCorkle
CAPTRUST Vice President | Financial Advisor

Topics Covered:

  • Not Honoring Participant Document Requests Can Be Costly
  • IRS Limits Plan Determination Letter Program
  • Delegated Investment Manager Liable for $15 Million and Plan Fiduciaries Sued
  • GAO Review of QDIAs: No Significant Issues
  • Following the Plan Document…Is Not Optional
  • Timing of QDRO Determination Is Critical
  • Tidbits

Not Honoring Participant Document Requests Can Be Costly

A court recently awarded more than $74,000 to a plan beneficiary who was not provided a life insurance policy and plan document covering death benefits on a timely basis. A deceased participant’s mother attempted to determine if life insurance benefits were available following her son’s death. She repeatedly requested the documents and warned the plan administrator she would seek penalties. Although the administrator eventually provided the documents, the court found that the time it took to provide them was unreasonable and assessed the penalty. Meagan Harris-Frye v. Omaha Life Insurance Company (E.D. Tenn. Sept. 21, 2015) 

ERISA includes a statutory penalty of $110 per day if required plan documents are not provided within 30 days of a participant or beneficiary’s request. Imposition of the penalty is left to the discretion of the judge and is exercised infrequently. Here, the court rejected arguments that the delay was not in bad faith and that it did not harm the beneficiary in any way, noting that the objectives of the penalty provision are to encourage timely compliance with document requests and punish noncompliance.

IRS Limits Plan Determination Letter Program

The Internal Revenue Service (IRS) announced it will limit review of individually designed retirement plans for the issuance of determination letters on whether they meet current legal requirements. Effective January 1, 2017, the IRS will issue determination letters for these plans only upon their establishment or termination. IRS Announcement 2015-19. This change does not affect prototype and volume submitter plans, which are based on plan document forms that are pre-approved by the IRS.

Plan sponsors and practitioners have routinely submitted plan documents to the IRS for periodic review and approval. This process often includes discussion with an IRS reviewer and adoption of any plan amendments found to be necessary. When review is complete and necessary amendments are agreed upon, the IRS issues a favorable determination letter. A benefit of having such a letter is that, in the event of an IRS audit, the plan document is presumed to be correct as of the date of the last favorable determination letter.

Limiting this program could encourage use of volume submitter and prototype plan documents, which the IRS will apparently continue to review. The absence of current favorable determination letters may impact corporate mergers and other transactions and discourage plan mergers. However, note that for plan rollover purposes, the IRS eliminated the need for plan administrators to secure favorable determination letters from plan participants to establish that their former plan was qualified. Revenue Ruling 2014-09 permits plan administrators to rely on a current Form 5500 filing in the U. S. Department of Labor (DOL) database to conclude that a plan is qualified—absent contrary information.

Delegated Investment Manager Liable for $15 Million and Plan Fiduciaries Sued

In a recent case, a retirement plan’s fiduciaries had retained an ERISA 3(38) investment manager to take responsibility for investing the plan’s assets according to its investment policy statement. These are sometimes referred to as delegated investment manager arrangements. During the period from November 2008 to March 2009, the bulk of the assets in the plan were invested in a single portfolio utilizing only 13 stocks, with 11 energy stocks making up 97 percent of the account’s assets. In March 2009, the stock holdings were liquidated and held in cash until July of 2009. In view of prevailing market volatility, the timing could hardly have been worse. 

Plan fiduciaries sued the 3(38) investment manager for losses resulting from his failure to prudently diversify plan assets. At trial, the investment manager was unable to provide a reasonable rationale for maintaining a non-diversified portfolio—either the concentrated energy stock portfolio or the concentrated cash position. The investment manager was held liable for more than $15 million in losses resulting from the failure to diversify. (Lost earnings were $9.7 million, and pre-judgment interest was $5.3 million.) As a result of what the court referred to as “near total dereliction of their duties,” the 3(38) investment manager and his firm were also required to disgorge $110,000 in investment management fees. Severstal Wheeling, Inc. Retirement Committee v. WPN Corporation (S.D. N.Y. Aug. 10, 2015)

Even though plan fiduciaries brought suit against the 3(38) investment manager and won a $15 million judgment, their journey did not end there. The DOL filed suit against the plan’s fiduciary committee and its members alleging that they:

  • Failed to properly monitor the 3(38) investment manager,
  • Failed to ensure that plan assets were prudently invested,
  • Through their inactions, enabled another fiduciary to commit a breach of fiduciary responsibility, and
  • Knew of another fiduciary’s breach and failed to take reasonable steps to cure the breach.

This case is currently being litigated. Perez v. WPN Corporation (E.D Penn.)

GAO Review of QDIAs: No Significant Issues

In August, the Government Accountability Office (GAO) issued the results of a study on the use of default investments in 401(k) plans. Qualified default investment alternatives (QDIAs) were established under the Pension Protection Act of 2006 and regulations issued by the DOL in 2007. Under these rules, if plan fiduciaries properly select a QDIA as a default investment, they will not be liable for imprudent selection of investments for participants in individual account plans, like 401(k) plans, who fail to provide investment direction. The following were approved as appropriate default investments:

  • Target date funds,
  • Balanced funds, and
  • Managed accounts.

Historically, plan fiduciaries have focused on capital preservation when selecting a default investment, with money market or stable value funds being common choices. Inertia is often the prevailing force acting on plan participants, meaning that once money is defaulted into an investment, it is unlikely to be reallocated. As many would expect, long-term investment in money market or stable value funds has produced lower returns than more diversified portfolios. Even so, plan fiduciaries fretted about the risk of selecting default investments that could experience a loss of principal. QDIAs solved this issue by providing fiduciary protection if these more diversified portfolio options are used when participants do not provide investment direction.

Key findings of the GAO study include:

  • Target date funds are by far the most popular QDIA choice. In fact, in most years surveyed, more plans continue to use non-QDIA eligible options (such as stable value funds and money market funds) for defaulted monies than balanced funds and managed accounts combined.
  • Automatic enrollment has increased significantly, likely due in part to the availability of fiduciary protection when using a QDIA.
  • Some plan fiduciaries expressed uncertainty about applying their specific employee demographics to the approved QDIA options and the relative levels of fiduciary protection offered by each QDIA alternative.

GAO-15-578, “401(k) Plans: Clearer Regulations Could Help Plan Sponsors Choose Investments for Participants,” August 2015. Available at 680/672140.pdf

Following the Plan Document…Is Not Optional

No matter how sympathetic the situation, plan fiduciaries must follow a plan document’s terms. Brian O’Shea worked for United Parcel Service for 37 years, and was a participant in the UPS pension plan during that time. After falling ill, he elected a period certain benefit that would pay benefits to his children for 10 years regardless of his health. As his illness progressed, he worked with the UPS human resources department to optimize his income before he retired, delaying the date of his retirement until he had used his accrued vacation time. 

O’Shea stopped actively working on January 8, 2010, and his retirement date was set at February 28 the same year. Unfortunately, his illness rapidly progressed and he died on February 21, 2010—seven days before he planned to retire. The plan document in effect required that a participant actually retire before retirement benefits can begin. Because O’Shea died before he retired, no benefits were payable under the plan to his children.

His family appealed to the plan’s administrative committee that confirmed the human resources department’s denial of benefits. The final committee decision was challenged in U. S. district court. Following analysis of the plan document and the facts, the court “reluctantly concluded” that—like the committee—it had no flexibility to deviate from the plan document’s terms. The denial of benefits was upheld. O’Shea v. UPS Retirement Plan (D. Mass 2015). The court noted that, at the time of its decision, UPS had amended the pension plan to ensure “that a tragedy of this nature will not occur again.”

Timing of QDRO Determination Is Critical

Timing is critical in many aspects of the administration of ERISA plans—including domestic relations situations. A couple divorced, and their final divorce decree incorporated the terms of their written settlement agreement. One of those terms provided that each spouse would receive a survivor pension benefit from the other’s pension. A dispute arose about who would receive the husband’s pension benefit upon his death: his former wife or his new wife. 

For a divorce decree to effectively divide the assets of an ERISA-covered retirement plan, the divorce court order must be submitted to the plan administrator for a determination whether the domestic relations order meets ERISA’s requirements and is a qualified domestic relations order (QDRO).

Here, the divorce occurred in August 2003, and the husband retired in July 2014. The former wife did not file a draft QDRO with the plan during the intervening 11 years, and the former husband remarried. A draft QDRO was submitted to the plan administrator in early October 2014—after the former husband retired. The QDRO was rejected because, upon the former husband’s retirement on July 31, 2014, a 50 percent survivor benefit vested in the former husband’s new wife. On appeal from the committee’s decision, a U.S. district court upheld denial of benefits to the former wife. Dahl v. Aerospace Employees Retirement Plan of the Aerospace Corp. (E.D. Va. Aug. 13, 2015)


  • IRS Issues Nonqualified Plan Audit Guidelines and a 401(k) Plan Caution—The IRS and DOL have developed a practice of publishing their internal audit guidelines—part of the instructions to their auditors. Such releases let plan sponsors and fiduciaries know some of the issues the agencies believe are important and does not require the regulatory formality of issuing official guidance like regulations. This type of guidance was recently issued for nonqualified deferred compensation plans, which is available at: This guide provides a brief overview of the types of nonqualified plans and the issues auditors should look for as they audit these plans. 

Crossing over to the qualified plan area, the guideline directs auditors to look for any provision in a nonqualified plan that would condition receipt of any other benefit on an employee’s participation (or non-participation) in the plan sponsor’s 401(k) plan. The guide alerts auditors to situations where nonqualified plan participation is limited to those who do not participate in the 401(k) plan or limits the total amount that may be deferred between the 401(k) and nonqualified plans.

  • Form 5500 Extension Deadline Lengthened Beginning with Filings in 2017—This summer’s Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 included a provision enlarging the automatic extension available for Form 5500 filings from two and one-half months to three and one-half months. For calendar year plans, the extended deadline would change from October 15 to November 15. This rule will take effect with filings for plan years beginning after December 31, 2015—2016 plan year filings, which will be due in 2017.