By Susan Erickson, Manager, Employee Benefits Compliance

 

Class action lawsuits, “Qualified Default Investment Arrangements,” participant investment advice, and the pending wave of retiring Baby Boomers. Those are just some of the challenges facing retirement plan fiduciaries. Managing your credit union’s employee retirement plan has never been easy, but certain social factors are converging that will tax even the best-prepared fiduciary officers. CUNA Mutual wants you to be prepared for the coming challenges.

            • When the Department of Labor issued final regulations under ERISA Section 404(c) in 1992, most plan fiduciaries were eager to comply. Section 404(c) protects fiduciaries from liability for participant account losses if participants are offered diversified investment choices, have ample opportunities to change investment allocations, and are given sufficient information to choose among available funds.

            With choice and education, fiduciaries thought, plan participants could master their own retirement destiny. However, participants proved to be poor investment managers, often making bad choices or none at all, and the results of their inactions showed. At year-end 2005, the average 401(k) account balance among plan participants was just $58,328, with a median balance of an even more modest $19,398, according to a survey by the Employee Benefit Research Institute[1].

            Such alarming trends could indicate a new dimension in fiduciary responsibility, saddling fiduciaries with additional requirements based on real, rather than assumed behavior. Leading your employees to greater investment expertise doesn’t necessarily guarantee they’ll learn, but federal regulators may not care.

            • Along those same lines, the pendulum of the Pension Protection Act of 2006 (“PPA”), designed to help employees do a better job building their retirement funds, is swinging away from participant independence and back toward greater fiduciary responsibility and plan sponsor involvement. PPA’s automatic enrollment provisions are creating the biggest stir, requiring the Department of Labor to provide greater guidance on default funds and propose regulations governing “Qualified Default Investment Arrangements (QDIAs).” The final version of those regulations is due this spring.

            The regulations protect fiduciaries under ERISA Section 404(c) if they choose one of three specified QDIAs: a “lifecycle fund” targeted to a participant’s retirement age; a “balanced fund” that takes into account participant demographics; or a managed option tailored to individual participants. PPA even has provisions allowing registered investment advisors and other financial professionals to provide participants with investment advice for a fee if stringent criteria are met.

            Despite providing a safe harbor for default funds, fiduciaries’ increased responsibilities are clear. More than ever, plan managers must know their workforce and exercise due diligence in selecting QDIAs.

            • One of the greatest concerns has to do with management and service fees charged by mutual funds and third-party providers. Multiple private suits have alleged that employers have breached their fiduciary duties under ERISA by failing to understand and disclose investment fees charged by fund managers, abusing revenue-sharing arrangements, and choosing expensive retail mutual funds rather than cheaper institutional funds.

            Private suits may come to naught, but the issue has caused the Government Accountability Office to recommend that Congress amend ERISA to require greater fee disclosure and that the Secretary of Labor require plan sponsors to provide fee summaries for participants. Regulations are expected sometime in 2007.

            Making an already challenging job even more so, the new trends indicate that plan fiduciaries at your credit union must be well-educated in their duties, review and perhaps simplify their plans, and remain abreast of the laws affecting such plans. CUNA Mutual has comprehensive resources to help you manage your plan, maximizing your employees’ return while protecting your credit union from danger. Talk to your CUNA Mutual Sales Executive at 1-800-356-2644 for more information.

 

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© CUNA Mutual Group 2007.  Used with permission.

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