ERISA Articles

Upping the Ante for Fiduciaries

In March, 1995, DOL issued interpretive bulletin 95-1 charging that the selection of an insurance company to provide distribution annuities is a fiduciary act, and that plan fiduciaries have a duty in most cases to select the safest available annuity provider. In addition, the fiduciary obligation of prudence requires, at a minimum, that plan fiduciaries conduct an objective, thorough and analytical search for the purpose of selecting the safest provider. DOL makes clear that reliance solely on ratings from insurance rating services would not be sufficient to meet this requirement. The search must evaluate a number of factors relating to the provider's claim paying ability and creditworthiness, including the quality and diversification of the provider's investment portfolio, the size of the provider relative to the proposed contract, the level of the provider's capital and surplus, lines of business and other indications of the provider's exposure to liability, terms of the contract, such as guarantees, use of separate accounts, and possible outside protection such as state guaranty associations.

Unless they possess the necessary expertise to evaluate such factors, DOL expects fiduciaries to hire qualified, independent experts to advise them.

Derivatives been around for several years, but in 1994 they burst into the headlines with unwelcome frequency. Spectacular investment losses by Proctor and Gamble Co. and Orange County have got Congress and the press thinking about another S&L Crisis and a looming financial meltdown, and the SEC, GAO, FASB, and others are struggling to keep up with the complex and fast-growing market. By all accounts, the market is huge: the "notional amount" of all contracts is at least $17 trillion, according to the GAO.

Definitions are easy: a derivative is a financial instrument that is not a security, but rather a contract, whose value is derived from an underlying security, reference rate, or index. Examples include repurchase agreements, interest rate swaps, puts, calls, coupon strips, options, forward contracts," swaptions", caps, floors, collars, and most of the "alphabet-soup" investments of recent days (CATS, STRIPS, etc). Their complexity can be overwhelming, because more than 600 types of derivatives exist so far.

The issue:

New York City Code (§13-3417) provides for the payment of accidental death benefits to certain specified beneficiaries of a member of the the New York Fire Department Subchapter Two Pension Fund, if the member’s death was the natural and proximate result of an accident sustained while in the performance of duty. Section (a) provides for the payment to the decedent’s estate, or to such person designated by the decedent, of the decedent’s accumulated contributions to the pension fund. Section (b) provides for the payment of an annuity equal to one-half of the member’s salary to the decedent’s surviving spouse for life, or to cetain other specified beneficiaries.

In addition to the benefits provided by New York City, under applicable New York State law, a special death benefit is payable to the decedent’s surviving spouse for life, or if no surviving spouse to the decedent’s children under the age of 18 (age 23 if the child is a student). This special death benefit is payable if the decedent was a member of a pension or retirement system of a police department or paid fire department of a city, town, or village and the decedent died as a result of injuries sustained in the performance of duty. The benefit is a pension equal to the decedent’s salary, reduced by any death benefit payable by the city, town, or village in the form of a pension and any social security and worker’s compensation benefits. These benefits are payable with funds appropriated from the New York State’s general fund.

How are these benefits treated for estate tax purposes?

03/28/02

The Delinquent Filer Voluntary Compliance Program ("DFVC"), which was adopted in 1995, has been made much more affordable. Under the new and improved DFVC, late filing penalties are reduced from $50 per day to $10 per day, capped at $2,000 per year per plan (but only $750 for small plans). Even better, there's a new maximum penalty on a per plan basis, so multiple year submissions are capped at $4,000 per plan, or $1,500 for small plans. If you're submitting 5 years of reports under DFVC, make sure you put them all in the same envelope so they're considered one submission. Apprenticeship programs and "top-hat" plans facing potentially massive penalties because they did not file the one-time filing under the regs., can now file under DFVC and face a reduced penalty of only $750. The IRS has announced that it will not impose penalties under the Code for plans filing under the DOL's DFVC. (Under the 1995 DFVC Program, DOL sort-of hinted, but couldn't promise, that IRS might not impose penalties.)

TRUE CONFESSIONS PROGRAM FOR FIDUCIARIES?

ERISA provides that a fiduciary who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by Part 4 of Title I of ERISA shall be personally liable to make good to a plan any losses to the plan resulting from such breach, and to restore to the plan any profits made through the use of plan assets by the fiduciary. Where more than one fiduciary is liable for a breach, liability is joint and several.

ERISA requires the assessment of a civil penalty equal to 20 percent of the amount recovered under any settlement agreement with the Secretary or ordered by a court in an action initiated by the Secretary under with respect to a breach of fiduciary responsibility. This civil penalty may also be assessed against other knowing participants in a breach.

DOL believes that some individuals, facing the possibility of investigation, civil action, and civil penalty, may be reluctant to identify themselves to DOL and to correct the breach fully and make the plan whole. To encourage the full correction of certain breaches of fiduciary responsibility, DOL has decided to implement the VFC Program