Critical Qualified Plan Fiduciary Issues For Employers To Consider In Light Of Covid-19
With the business disruptions and market turbulence being wrought by COVID-19, many employers sponsoring qualified retirement plans are facing key decisions about their 401(k), profit sharing, defined benefit, and cash balance plans. From considering potential cost-savings measures such as suspending safe harbor contributions to a 401(k) plan and/or discretionary contributions to a profit sharing plan, to addressing participant requests for distributions and investment education/advice, to considering pension “de-risking” strategies such as realigning trust investments to hedge against volatility and the risk of significant losses, to considering the freezing of participation in and/or benefit accruals under defined benefit and cash balance plans, to addressing stock repurchase liability for terminated employees exercising the “put option” in employee stock ownership plan (“ESOP”)-owned companies (part or full ownership), employers have their hands full these days.
Many of these issues implicate fiduciary considerations under the federal pension law, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Given that employers typically are the named fiduciaries of their qualified plans for ERISA purposes, it is imperative they make any cost-savings and market volatility-related decisions, given the fiduciary requirements of ERISA. These requirements require employers to act for the exclusive benefit of plan participants and their beneficiaries, make decisions prudently, diversify plan assets to protect against significant losses, and follow the plan documents (insofar as they do not violate ERISA). In addition, plan fiduciaries must not engage in acts of self-dealing and other prohibited transactions. Violations of ERISA’s fiduciary requirements can expose employers to liability under ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), and participant lawsuits.
Some of the most important fiduciary issues an employer may wish to consider in light of COVID-19, and depending on the type(s) of qualified plan(s) it sponsors, are:
Plan Document Issues. It can be very risky for an employer to make a cost-saving or market volatility-based decision without reviewing the applicable plan documents. For instance, the statement of investment policy or funding policy for a defined benefit pension plan may require a more aggressive ratio of equity to fixed income investments than an employer may desire in light of COVID-19. Changing the investment mix without changing the statement of investment policy or funding policy exposes an employer to liability for not operating the plan in accordance with the governing plan documents.
Target Date Fund “Expectation” Issues. During the 2008 financial crisis, many 401(k) and profit-sharing plan participants were stunned to learn that, at the target retirement date, the target date fund (“TDF”) still invested heavily in the generally higher investment risk equity market (for instance, 60% in equities and 40% in fixed income instruments). The TDF investment “glidepath,” and particularly, whether the TDF is a “to” fund (most conservative mix of underlying investments attained at the target retirement date) or a “through” fund (most conservative mix of underlying investments attained over a pre-determined number of years starting at the target retirement date), are key investment elements to communicate to plan participants.
Participant Education and Investment Advice Issues. With many 401(k) and profit-sharing plan participants clamoring for enhanced investment education and even investment advice, an employer needs to be careful that its service provider knows the difference: Whereas investment education implicates relatively few fiduciary issues, investment advice for a fee implicates numerous fiduciary issues. If an employer is considering providing investment advice for a fee to plan participants, it will need to address its oversight responsibilities regarding such advice, and whether an applicable exemption from ERISA’s prohibited transaction rules applies.
Soft and Hard Freeze Issues under Defined Benefit/Cash Balance Plans. The decision on whether to implement a participation freeze (“soft freeze”) and/or a benefit accrual freeze (“hard freeze”) is not a fiduciary act. Implementing such a decision is a fiduciary act. An employer considering such an action is well-advised to consult both legal counsel and its actuary.
Put Option Issues for ESOP-Owned Company. It may sound simple, but if a terminated participant has the right to “put” his or her shares of the company to the ESOP for cash within 60 days following termination of employment, what happens if the company does not have the cash to pay for the shares? Is it permissible to use a valuation date other than the last day of the immediately preceding plan year (e.g., December 31, 2019, for a calendar year plan), i.e., a more current date in 2020 that presumably reflects the recent COVID-19-related market contraction? These are thorny issues.
These five fiduciary issues require extreme care in their proper navigation. Often, plan documents and service provider agreements will need to be reviewed and/or amended. In all instances, a proper balancing of legal and business risk will be essential.