Plan Investments

Our colleague Jason Levy recently published an article in The Actuary Magazine on the Department of Labor’s fiduciary conflict rule.  More than six years in the making, this rule represents perhaps the most significant regulation from the DOL during the Obama Administration.

The fiduciary conflict rule expands the definition of fiduciary to cover, with certain exceptions, all investment advice provided to a retirement plan (like a 401(k) plan, defined benefit pension plan, or an IRA), or to a participant or beneficiary in any of those retirement plans.  The rule imposes fiduciary status on a broad category of professionals, including many broker-dealers who previously had taken the position that they were not investment advice fiduciaries based on a DOL regulation that had been in place since 1975.

In contrast to the sweeping changes it imposes on investment advice professionals, the fiduciary conflict rule will have a far more modest effect on employers.  The rule is not intended to confer fiduciary status on sponsors of retirement plans.  Likewise, there had been concern under the proposed version of the rule that human resources and other employees who interact with participants might be considered fiduciaries when they discuss retirement plan investments with their co-workers.  However, the final version of the rule provides that, absent unusual circumstances, such employees would not be covered.

Nevertheless, the fiduciary conflict rule has important implications for employers that sponsor retirement plans.Continue Reading What Employers Need to Know About the Fiduciary Conflict Rule

Recent guidance from the IRS suggests that it will be helpful to segregate funding for retiree health benefits from funding for all other welfare benefits (such as retiree life insurance, disability benefits, and health benefits for active employees) in order to minimize tax liabilities.  A proposed regulation issued earlier this year indicates that segregating the retiree health assets in a separate trust might reduce the unrelated business income tax on the trust’s investment income.  (As we explain below, this tax issue is limited to benefits that are not collectively-bargained.)
Continue Reading Can You Reduce Your VEBA’s Taxable Income?

The Department of Labor’s Office of Inspector General recently issued a report detailing concerns with the valuation of alternative investments (such as private equity funds, hedge funds, and real estate) held by ERISA plans.  ERISA requires plan sponsors and fiduciaries to value investments for several purposes, including to determine funding obligations, select investments, monitor investment performance, and file accurate financial statements.  The report notes that many plan fiduciaries rely on valuations provided by managers of alternative investments without analyzing the basis for the valuation or seeking independent review.  The report suggests that this practice poses substantial risks to the retirement system and urges the Labor Department to require more rigorous valuation methodology.
Continue Reading ERISA Plans’ Valuation of Private Equity and Other Alternative Investments Draws Increased Scrutiny

Several changes to the definition of “commodity pool operator” could require fiduciaries of retirement plans to file for an exemption from treatment as a “commodity pool operator,” or be subject to comprehensive registration and compliance requirements.  A “commodity pool operator” is generally a manager of a pooled investment vehicle that invests in commodity interests.  The Dodd-Frank Act amended the Commodity Exchange Act to include swaps within the commodity interests that will establish a commodity pool.  Investment in futures and options on futures also will cause a pooled investment vehicle to be considered a commodity pool.  A plan fiduciary could therefore be treated as a “commodity pool operator” if the plan invests in swaps, futures or options on futures, or invests in a fund that, directly or indirectly, invests in those commodity interests.  Several exemptions may apply.  However, some exemptions require a filing with the National Futures Association, and recent guidance from the Commodity Futures Trading Commission (“CFTC”) requires the exemption filing in more circumstances than before.
Continue Reading Plan Fiduciaries Might Need to File a Notice to Avoid Registration Requirements as Commodity Pool Operators

The Department of Labor resolved key issues related to cleared swaps transactions in a recent advisory opinion.  The opinion concludes that margin posted by an employee benefit plan in connection with a cleared swap is not a “plan asset” for purposes of ERISA, and that a Clearing Member does not act as a fiduciary of the plan when the Clearing Member exercises discretionary account liquidation rights upon the plan’s default.  The opinion also provides guidance on prohibited transaction issues raised by the clearing process.
Continue Reading Labor Department Addresses Key Issues for Cleared Swaps

Yesterday, Verizon announced that it will transfer $7.5 billion of pension liabilities to Prudential.  As we previously discussed in this blog, many sponsors of defined benefit plans, especially frozen plans, are considering ways to “de-risk” by reducing or eliminating the volatility associated with their pension obligations for financial accounting…
Continue Reading Verizon Announces $7.5 Billion Pension Settlement