Jules Smith, a partner with Blitman & King, has been awarded the 2012-13 RPO Board Volunteer of the Year by the Rochester Philharmonic Orchestra. Jules currently serves as a Board of Director and the Secretary for the RPO.
DOL Finalizes Rule Authorizing the Provision of Personalized Investment Advice to Participants and Beneficiaries in Individual Account Plans
On October 24, 2011, the DOL issued a final rule permitting investment advisers to provide investment advice to participants and beneficiaries in self-directed individual account plans. The final rule implements an exemption to ERISA’s prohibited transactions rules added by the Pension Protection Act of 2006. Without this exemption, investment advisers could not provide investment advice to participants and beneficiaries in these types of plans without running afoul of ERISA’s prohibited transactions rules. The final rule, which is effective for transactions occurring on or after December 27, 2011, allows investment advisers to receive compensation from the investment products that they recommend, provided either: (1) the investment advice they provide is based on a computer model certified as unbiased and as applying generally accepted investment theories; or (2) the adviser is compensated on a “level-fee” basis (i.e., fees do not vary based on investments selected by the participant). According to the DOL, the final rule will make fiduciary investment advice more accessible for the millions of Americans that participate in self-directed individual account plans.
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B&K Benefits Update – Fall 2012
BK Benefits Update Newsletter-Fall 2012-FINAL
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Whistleblower Case Study: Defending a State Employee Doing the Right Thing
An employee discovers practices that appear to be improper if not unlawful. A state employee of the Office of Vocation Rehabilitation (“State Office”) turned to us in connection with their discovery of several practices of their employer that appeared to be improper if not unlawful. The discovery occurred in connection with their review of the use of monies granted by the federal government to the State Office. These monies were granted to the State Office for the purpose of paying rehabilitation facilities for services handicap persons referred to the rehabilitation facility from the State Office.
What were the practices that appeared improper if not unlawful? To the employee, it appeared that there were overcharges and duplicative billing and that an effort had been made by the State Office to code the billings in a way that would mask the improprieties. For example, there appeared to be three voucher payments for the placement of one individual; the amount of the voucher payments were higher that what the State Office would usually pay; and the voucher payments were coded as requests for reimbursement for training when the recipient organization was not a training facility but rather an employment agency. The employee reported the findings to their supervisor but corrective action was taken.
Oh no, what did I discover? The Hornets’ Nest. The employee was fearful of being personally implicated in a cover-up of the apparent improprieties due the conviction of past employees in kick-back type schemes and was concerned that their supervisor might be involved in the wrongdoing because of the supervisor’s relationship with the private facilities involved. In fact, the employee commented to us that they knew they had “walked into a hornets’ nest and that [they] were going to get stung.”
Doing the right thing. After weighing the advice of employment counsel on various available options, and despite the employee’s fear of being in trouble for reporting a problem of monies that involved the bosses’ friends within a politically powerful rehabilitation facility, the employee decided that they “wanted to do the right thing” and take action by reporting the wrongdoing to the Federal Bureau of Investigation (FBI). The FBI, in connection with the U.S. Attorney’s office, opened an investigation and advised the employee to inform their supervisor of the disclosure made to the FBI.
Wrongful retaliation against an employee that exercised integrity. Within six months of the employee informing their supervisor of the reporting to the FBI, the employee was stripped of their duties and the State Office extended the probationary period of the position that the employee had recently been promoted to. In addition, the employee was issued a probationary evaluation report that the characterized the employee’s performance as “average” or “satisfactory” despite many prior years of performance reports that characterized the employee as “exception,” “consistently exceed[ing] the requirements for all…tasks,” and making “exceptional contributions.”
The FBI and the U.S. Attorney’s office ultimately concluded their investigation and issued a written letter determining that there was no prosecutable case. Nine days following this determination, and after the employee devoted their entire professional career of 20-odd years to improving employment opportunities for handicapped persons, the State Office terminated the employee from their current position and demoted them. The termination notice stated that the employee did not satisfactorily complete the probationary period (which was not scheduled to end for several months) and the employee would be returned to their prior position with a decreased salary.
As a result, the employee suffered trauma caused by the events leading to the demotion and after the demotion the employee suffered years of pain and sleepless nights. The employee was essentially ostracized by former colleagues and the employee felt that their reputation had been destroyed.
We took action on behalf of this employee. We sued the State Office on behalf of the employee alleging that a violation of civil right for retaliation against the employee for exercising First Amendment rights in reporting suspicious of unlawful activity practices to the FBI. The complaint alleged the retaliation took the form of giving the employee a false and damaging performance review, systematically stripping the employee of their responsibilities, and finally demoting the employee from their employment position.
At trial, we were able to establish these allegations through evidence and pierce through the general principal that state officials cannot be sued on the exception that the actions of the State Office violate clearly established statutory or constitutional rights. Part of our evidence included the FBI agent’s testimony that the FBI’s determination did not mean that no wrongdoing occurred just that the prosecutor’s assessment was that they did not believe a successful prosecution could be obtained.
The jury found in our favor on all measures and awarded the employee with a substantial amount of damages including back pay, emotional distress, punitive damages and attorneys’ fees.
For more information on whistleblower laws or to contact an employment attorney, you may visit the Employee’s Briefcase.
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Federal District Court Holds Plan Fiduciaries Liable for Excessive Investment Fees and Imprudent Investments
In one of the first 401(k) fee class action cases to be decided on the merits, the U.S. District Court for the Western District of Missouri recently ruled in Tussey v. ABB, Inc., that 401(k) plan fiduciaries breached their ERISA fiduciary duties by failing to monitor recordkeeping costs and revenue-sharing payments, selecting more expensive share classes when less expensive options were available, replacing an investment fund in violation of the plan’s Investment Policy Statement, and paying an amount to the recordkeeper in excess of the value of its services in order to subsidize the cost of other services provided by the recordkeeper to the company. In considering the claims that ABB breached its fiduciary duty to monitor by not calculating the dollar amount of the recordkeeping fees paid to the recordkeeper (Fidelity) through revenue sharing agreements, and not considering how the plans could use their size to reduce recordkeeping costs even though the Investment Policy Statement specifically required them to do so, the court noted that the plan fiduciaries were not able to prudently analyze the arrangement. Although issued by a lower court, this decision underscores the importance of plan fiduciaries fully understanding the fee arrangements entered into with service providers. To this end, a thorough analysis of the service provider fee disclosures that are required to be provided to plan administrators under Section 408(b)(2) of the Internal Revenue Code by July 1, 2012, will be of utmost importance.
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DOL Issues Guidance on Apprenticeship Plans Graduation Ceremonies and Program Marketing
On April 2, 2012, the Department of Labor (“DOL”) issued Field Assistance Bulletin No. 2012-01, which provides guidance on the use of Apprenticeship and Training Plan assets for program graduation ceremonies and marketing. Under the guidance, the DOL will not consider a plan’s payment of expenses associated with a “modest graduation ceremony” attended by graduating apprentices, family, plan officials, and other persons connected with the program, including “light refreshments,” and “token awards/gifts” for non-apprentices an impermissible use of plan assets provided: (a) the amount of the expense is modest in relation to the plan’s assets; (b) the expenses are approved in accordance with internal accounting, recordkeeping, and administrative controls designed to prevent inappropriate, excessive, or abusive expenditures of plan assets; and (c) the expenses are costs for the ceremony. Similarly, the DOL will consider outreach expenses for “marketing or promotion of the apprenticeship program” a permissible use of plan assets so long as the expenses are consistent with the fiduciaries’ obligation to be prudent and economical in the use of the plan assets. For example, the purchase of t-shirts bearing the program’s logo (purchased at a reasonable price from a non-party in interest) would be considered an acceptable plan expense, while the purchase of tickets to sporting events for apprentices, trustees, or plan officials would not.
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DOL Issues FAQ on Individual Account Plan Participant-Level Fee Disclosures
On May 7, 2012, the DOL issued Field Assistance Bulletin 2012-02 (“FAB 2012-02”), to assist plan administrators and service providers in complying with the requirements of the DOL’s final participant-level fee disclosure regulation. The guidance contains several notable clarifications, including: (1) confirmation that if a plan provides investment and plan-related information in a single document, designated investment alternatives need only be listed once; (2) an explanation that if all of a plan’s administrative expenses are paid from revenue sharing received by the plan from one or more of the plan’s designated investment alternatives that participants’ quarterly statements must nevertheless include a statement that “some of the plan’s administrative expenses for the preceding quarter were paid from the annual operating expenses of one or more of the plan’s designated investment alternatives;” and (3) affirmation that the plan administrator is under no obligation to provide the comparative chart of investment information and expenses more often than annually even if there is a change to the information contained therein. The guidance also confirms that because plan administrators and service providers may have already furnished or prepared the initial disclosures before the date of publication of FAB 2012-02, the DOL will only take into account whether covered service providers and plan administrators have acted in good faith based on a reasonable interpretation of the regulations for purposes of determining whether initial disclosures comply with the requirements of the final rule.
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DOL’s Recent LM-30 Regulations Return to Historical Position Regarding Employee Benefit Plan Reporting
On October 26, 2011, the Office of Labor-Management Standards (“OLMS”) issued final regulations concerning reports made by labor organization officers and employees (“Form LM-30”). The regulations, which are effective November 25, 2011, return to the Department’s historical position of not requiring officials to report on payments that they receive from trusts, or as a general rule, from unions. The return to the historical interpretation for Form LM-30 reports means that employee benefit plans no longer need to file LMRDA reports for expenses reimbursed to union trustees, except with respect to payments that would create an actual or potential conflict of interest between the union official’s financial interest and the interests of the labor organization.
Although this regulatory development is welcome news for union officials that serve as trustees for multiemployer plans, the 2011 regulations retained one detail of which trustees and plans should be aware. “While payments from a trust are not reportable by a union official on the revised Form LM-30, payments from and interests in any business that deals with the trust are reportable.” Consequently, trustees should still be cautious about reporting obligations related to gifts from investment managers, accountants, or other businesses that provide services to the plans.
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