Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 23, 1993 TAG: 9305210066
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
The law, which took effect Oct. 13, is the Employee Retirement Income Security Act. Plans that comply with the law are named for its federal code section as 404(c) plans.
The new rules control handling of popular 401(k)-type plans in the workplace. These are plans that allow workers to put pretax dollars into savings, generally intended for retirement, with employers often matching a portion of the money set aside.
Companies may choose whether they want to come under its provisions. They have the option of keeping their present 401(k) arrangements.
But if they do choose the new option, they may comply the second fiscal year after the effective date. Typically, that would be Jan. 1.
Companies that adopt the program, perhaps because they believe their employees want it, must give their workers three things:
A broad range of investment alternatives for their pension plans.
Some employers already do this, but many may offer only company stock and a Guaranteed Investment Contract with a private insurance company - the latter is the overwhelming choice among workers, probably because they get a guaranteed interest rate even though it is often a low return.
If employers opt for this plan, they also must offer investments such as stock, bond and money funds.
An opportunity for workers to change their choices with a frequency that is appropriate in light of market volatility.
Sufficient information to make informed investment decisions.
In return, employers and the trustees they hire for their plans would be relieved from liability for investment losses resulting from worker control over assets in their accounts.
This generally has been seen as a good deal for employers.
The warnings that have dominated the media and investment materials have centered on the burden facing workers. Under the new law they become totally responsible for growing their own money into a fund large enough to finance their own retirements.
But now there is a caveat for employers as well. It comes from Donald J. Potter Jr., president of Financial Strategies, a Roanoke firm of pension and investment consultants.
"This may be a great opportunity for employees to finally be able to effectively manage their own retirement planning," Potter said.
"But, for the employer, we see a minefield full of liability. Our advice: Employers proceed with caution and get professional advice."
That's because, Potter said, he believes companies open themselves to charges of violating fiduciary - or good faith - duties to workers. The workers would allege that the employer failed to select options properly or to disclose the risks.
And it is small companies, lacking teams of pension experts and lawyers, that are most in danger.
Potter warned that the U.S. Labor Department has hired an additional 120 pension auditors and invested $40 million in a new computer system to monitor every pension plan in the country.
"As a pension and investment consultant, I believe no employer should even think of flirting with this liability unless they are prepared to address every aspect of this regulation - to the letter of the law," Potter said.
"One missing piece places the employer in a worse situation than if he tried to retain his fiduciary liability by not giving investment discretion to employees. Because now he has to defend himself against the inadequacies of his employees' investment choices."
Potter said his firm accepts co-fiduciary liability for advising on those plans only "if our clients follow our advice completely.
"Absent full compliance," he said, "there is no price I would accept to take on this fiduciary liability."
But he called full compliance time consuming and expensive because the employer must show he acted as a "prudent expert."
The boss must demonstrate prudence in selection of the investment choices offered workers, in volatility of the products and in selection of plan managers.
Potter said companies must allow employees to redirect their choices at least once a calendar quarter. Large employers do this now, but many small businesses allow workers to adjust their plans only once or twice a year.
If any of the options displays volatility outside of the norm, Potter noted, monthly - or even daily - valuations could be necessary.
An even greater burden to companies, Potter said, are the disclosure requirements.
"The employer must make each and every employee an educated consumer of the investment choices available," he said. This will certainly demand that investment choices be limited rather than increased.
Disclosure is an ongoing requirement, he added, not something that is required only initially. This will require time and expense, he said.
Assuming the employer already provides account statements and an option to redirect investments on a quarterly basis, Potter said, compliance costs would stem only from the new program.
His firm then reviews the plan's investment options, performance and other factors. Assuming they are "prudent" and offer the required "broad range of choice," his firm concentrates on disclosure and education.
His experience, however, is that small and midsized employers need some overhauling of their plans to comply. This requires new options, policies, procedures, educational seminars and disclosure materials. The employer will need quarterly performance reviews.
For a small plan, Potter estimated, the annual cost can be as much as three-quarters of a percent to 1 percent of the plan's asset.
For a plan with assets in the $5 million to $100 million range, the cost could be a quarter- to a half-percent a year.
In the industry, he said, the rule of thumb for a large plan is as much as $150,000 a year.
"Employers must also walk a fine line between educating their employees and giving investment advice," Potter said. "Employers must avoid blatant conflicts of interest by letting the product vendor take on the role of the educator."
The largest employers can handle all of these procedures for full compliance, according to Potter.
What about the small sponsors of employee pension plans?
"Our advice is to steer clear unless you have to offer investment options," Potter said.
Mag Poff covers banking, personal finance, insurance and advertising for the Roanoke Times & World-News.
by CNB