Dale R. Vlasek
McDonald Hopkins LLC
P: (216) 348-5452
E: dvlasek@mcdonaldhopkins

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From a Retirement Plan point of view, the legal and legislation front was “relatively quiet.” As anyone familiar with the retirement plan areas can attest, there are always changes but the past year or so has not brought changes of the magnitude of the Economic Growth and Tax Relief and Reconciliation Act of 2001 (“EGTRRA”) or the Pension Protection Act (“PPA”). Having said that there are some items of note:

The Internal Revenue Service 2009 Plan Limits

• 401(k) Salary Reduction - $16,500
• 401(k) Catch up - $5,500
• Simple Deferred Amount - $11,500
• Simple Catch Up - $2,500
• Defined Contribution Section 415 Maximum - -$49,000
• Compensation Maximum - $245,000

Pension Funding and Technical Correction

At the very end of 2008 in response to the credit crisis and economic downturn, Congress passed the Worker Retiree and Employer Recovery Act of 2008 (“WRERA”). Among other things, it permitted Employer sponsors of defined benefit plans to delay the implementation of certain of the increased funding rules of the PPA. It also permitted pension plans to “smooth” unexpected assets gains or losses over 24 months. This should help mitigate the negative effect 2008’s severe decline in asset values would otherwise have on the funding obligation of employer-sponsored defined benefit plans.

WRERA also eased the restrictions on employers who might otherwise have had to freeze benefit accruals under the PPA funding restrictions because their plan’s funding ratio dropped too low.

WRERA also clarified that plans are required to permit non-spouse death benefit beneficiaries to rollover their benefits to Individual Retirement Accounts (“IRAs”) in the plan year beginning in 2010. The concern was that the PPA, which clarified this provision, could have been interpreted to have this rollover only optional for plan sponsors.

Required Minimum Distributions (“RMD”) for 2009

WRERA also provided that participants in qualified defined contribution plans or IRAs who would otherwise be required to take an RMD for 2009 may opt not to have an RMD for 2009. This revision is effective only for the 2009 RMD and no others.

This revision does not affect a participant who had his or her first RMD in 2008 and which the participant has chosen to delay until early 2009. The participant must still take the 2008 RMD but can waive the 2009 RMD.

Employers and IRA Sponsors are required to notify participants of their ability to waive the 2009 RMD. The notice must also explain the consequences of not taking the 2009 RMD, including the fact that the 2010 RMD may be larger due to the fact that the unpaid 2009 RMD will still be in the participant’s account when the 2010 RMD is calculated. This, of course, presumes the account increases in value or at least does not decline too significantly.

Department of Labor Fee Disclosure Regulations

The Department of Labor had issued proposed regulations regarding the disclosure of fees in retirement plans. These regulations were scheduled to become effective January 1, 2009. The rules would have required any persons or entities serving as plan fiduciaries (such as trustees or investment advisors) or service providers to a plan (such as third party administrators, actuaries, or record keepers) to disclose the fees charged to the plan. The disclosure was to be made to the plan fiduciaries and to plan participants. The retirement plan community was struggling to come up with a way to make these disclosures accurate and comprehensible.

At this time, the Department of Labor has delayed the implementation of these new regulations. It is anticipated regulations in a modified form will ultimately become effective.

Cases of Note

There are two court decisions that are relevant to retirement plan operations. The first is Kennedy v. Plan Administration to DuPont Savings and Investment Plan, U.S. Supreme Court (January 26, 2009). This case is important because in it, the United States Supreme Court conclusively determined that the administration of a retirement plan must be operated in compliance with the documents of the plan, including the plan’s beneficiary designation forms, and not by reference to documents outside of the documents maintained by the plan.

In this particular case the plan participant was divorced. His divorce decree specifically stated that his ex-wife was divested of any of her rights in his retirement plan. After the divorce, the plan participant apparently did not change his beneficiary designation which designated his ex-wife by name as his beneficiary. Subsequently, the participant died. His estate argued that the divorcee decree should negate the participant’s specific designation of the ex-wife. However, the language in the divorce decree did not meet the standards to be treated as a Qualified Domestic Relations Order (QDRO).

The U.S. Supreme Court ultimately affirmed the decision of the lower court and effectively indicated that a plan administrator is obligated under the Employee Retirement Income Security Act of 1974 (“ERISA”) to follow the documents of the plan and not documents (like the divorce decree) extrinsic to the plan.

The second case, Hecker v. Deere & Co. (7th Cir., February 12, 2009) involved the allegations that fiduciaries had breached their duty to the Deere 401(k) plan by providing investment options that required excessive fees and costs and then failed to disclose that fee structure to plan participants. The Seventh Circuit Court of Appeals upheld the dismissal of the case against Deere & Co. as well as Fidelity Management and Research Company (the investment advisor) and Fidelity Management Trust Company (the directed Trustee and record keeper). Among other reasons given for upholding the dismissal was the fact that participants had over 20 different Fidelity funds and a portal with over 2000 additional funds to choose. The participant under the ERISA Section 404(c) rules had the ability to select funds and monitor their costs. The fees and costs were also disclosed in the Summary Plan Description and the funds’ prospectuses and, in addition, there was no evidence of misleading statements made to participants. The upside of this case should be to ease concerns over fees and fee disclosure until the Department of Labor finalizes its fee disclosure regulations.

Conclusion

The year 2009 may bring additional changes to the retirement plan world. President Obama’s budget will include proposals for mandatory automatic enrollment IRAs for employers which do not sponsor retirement plans for their employees. If that proposal is enacted, 2009 could be significantly more interesting than 2008.

 

©McDonald Hopkins LLC (2009) Dale Vlasek