HRM best practices responding to impact of market crisis on retirement saving plan ⁱ

“In the long run stock prices will be higher. But in the long run we are all dead.”
John Maynard Keynes

Over 7 million employees and beneficiaries have account balances totaling more than $500 billion invested in Retirement Savings Plans iii. For the overwhelming majority of participants, their account balances represent the largest or second largest assets they will ever own. The major dollar amounts involved underscore the importance of human resource management responsibilities and fiduciary duties associated with these plans.

At the same time participants have experienced the steepest drops in the equity portions of their account balances, Plan Sponsors are coincidentally reducing or eliminating annual contributions to such plans, and initiating layoffs. ^iv

Human resource management (“HRM”) can – and should - play a key role in making sure that these actions are successfully implemented. The first step is to help organizations recognize potential problems relating to retirement savings plans that have arisen because of the unprecedented economic downturn.

Purpose

The purpose of this article is to first identify potential problems relating to retirement savings plans that frequently arise during times like the current economic downturn, and then to examine best practices for avoiding or solving these problems.

I . Potential Problems

Identifying the problems that are likely to occur is the first step toward preventing them.

1. Cutbacks and suspensions of employer match contributions

Many employers are reducing or suspending matching contributions to their retirement savings plans as a means of surviving the recession. Most affected participants will view these changes as a cut in pay, potentially causing poor morale and loss of productivity. Morale and productivity problems may be compounded when the participants are automatically enrolled in the plans, and they continued participation with the expectation of company match contributions.

Special testing may be required after cutbacks and suspensions to guard against violations of the antidiscrimination rules v Plan amendments and certain related disclosures to employees are required prior to the effective date of these changes, particularly in order to avoid violation of the “anti-cutback” rules. ^vi

2. High Risk Terminations

Serious potential problems, e.g. wrongful termination complaints and lawsuits, are associated with participants who are about to be laid off, offered buyouts or special early retirement incentives, or are involuntarily terminated for other reasons.

Numerous federal and California statutes may prevent employers from relying exclusively on at-will employment relationships as justification for involuntary terminations. Other statutes require certain disclosures to employees and beneficiaries regarding employee benefits.

3. Investment Advice

There are reporting and disclosure requirements, as well as risks, associated with giving guidance and information to employees regarding their retirement savings plans, notably during periods of poor investment performances.

Employers have a sense of obligation to help employees make informed decisions relating to their employee benefits, especially regarding important investment options under retirement savings plans. For various reasons, however, employers are properly cautious before providing advice and information. The main reasons are fear of being sued for violating Securities and Exchange Commission licensing rules, causing investment losses, or breaches of fiduciary duty. Employers have even been held liable when participants incur losses due to the Plan Administrator’s negligence vii.

II. Avoiding & Solving the Problems: HRM Best Practices

Insure Legal Compliance

The old adage “An ounce of prevention is worth a pound of cure” is most apropos with regard to legal compliance issues. The challenge here is to recognize when situations require legal counsel. Certainly legal counsel would be deemed appropriate for the foregoing potential problem areas, particularly with regard to high risk terminations.

Making sure the Summary Plan Description material contains a formal claims procedure is also a very valuable – and required - tool to prevent most lawsuits against retirement savings plans.

Changes to Retirement Savings Plan

If employer match contributions are to be discontinued or reduced, make sure that proper advance notice of the change is given to employees as part of a well planned communication strategy.ix The intent is to preserve employee morale, avoid complaints and misunderstandings, and comply with statutory requirements.

Also, plan amendments need to be made with prospective effective dates.x For example, a 401(k) plan that specifically states the level of employer match and commits the employer to make that match has to be amended on a perspective basis for any modification to the plan commitment. Watch out for an unintended violation of anti-cutback rules when taking steps to discontinue or reduce employer matches on employee contributions to qualified retirement plans.^xi

High Risk Terminations

HRM best practices in this area include consideration of alternatives to layoffs and other involuntary terminations, such as suspension or reduction of contributions to retirement savings plans, hiring freezes, suspension of wage increases, and unpaid vacations. If layoffs are still deemed necessary, a thorough review of applicable federal and California statutes needs to be conducted by legal counsel before implementation.^xii

Be a Strategic Partner

With the goals of preserving trust in management, and keeping valued employees motivated and productive, HRM should partner with senior management in developing plans to effectively implement changes.

These plans should include development of coordinated communication strategies. For example, the predictable negative impact of cutbacks and suspensions of employer match contributions to retirement savings plans may be minimized with sincerely worded messages that explain the compelling financial reasons for the “last resort decision” for making the changes. These employee communications also present opportunities to review the commonly accepted tenets for retirement savings plan investments, along with current required financial disclosures, e.g. summary annual reports (“SARs”).

Help Employees Make Informed Investment Decisions

The Pension Protection Act enables employers through third party investment consultants to give appropriate investment advice to retirement savings plan participants.xiii  This type of assistance is crucial during the current economic downturn, but is also an ethical in light of the fact that participants assume investment risk in these plans.

Some of the more commonly accepted tenets offered by personal financial planners and investment consultants for participants include:

1. Avoid risky speculation or trying to time the market.
2. Invest for the long term, and ride out the markets’ inevitable ups and downs, rather than chasing the hottest trend; Diversify and consider age-based asset allocations;
3. Avoid panic and emotional decision-making; Don’t sell into a declining market, thereby making “paper losses” real.
4. Keep saving for retirement, and investing according to your own risk tolerance; Risk-averse participants should invest in conservative but low yielding investments.

Review Investment Manager Performance

Plan Sponsors should arrange regular (at least quarterly) meetings with Plan Investment Managers to evaluate fund performances under retirement savings plans against appropriate market indices, and to review strategies for future investment of plan assets. HRM should learn as much as possible from investment professionals about the types and nature of alternative investments that are appropriate for retirement savings plans, i.e. stable value funds, target date funds, indexed funds.

III. Conclusion – Risks and Opportunities

The current extraordinary economic downturn, and the steep decline of equity market assets held in retirement savings plans, present unique challenges for HRM.

Best practices to meet these challenges include

• Careful reexamination of legal compliance issues relating to a) suspension or reduction of employer contributions to retirement savings plans and b) high risk terminations to avoid wrong termination complaints and costly lawsuits;
• Strategic partnering with senior management to develop plans for preserving employee trust and to address their heightened concerns over job security and their savings for retirement.
• Offering appropriate guidance and providing financial disclosures (including straightforward reports on plan annual administrative and investment fees.) to help employees make informed decisions regarding investments in their retirement savings plans; and,
• Closely monitor performance of retirement plan investments against appropriate indexes, and review future investment strategies.

i       For purposes of this article, “retirement savings plans” refers to defined contribution plans, qualified under the Employee Retirement Income Security Act, §402(a), et al, e.g. 401(k) plans, profit sharing plans and related savings plans.

ii      Dan Van Bogaert, J.D. has extensive experience working for major corporations, including Nestle USA and Blue Cross, designing and implementing employee benefit and retirement plans, and handling legal compliance issues. He is also an adjunct professor who regularly teaches for UCLA Extension and Paralegal programs, as well as graduate and undergraduate courses at Chapman University and Loyola Marymount University/LA.
   
       (Footnotes with supporting citations and a helpful comprehensive “pre-termination checklist” are available upon request. Mr. Van Bogaert may be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

iii        Estimates vary depending upon the source of survey data. For example, PSCA 51st Annual Survey (2007) reports $730 billion in plan assets and 7.4 million participants. The typical plan has approximately 65 percent of assets invested in equities, most frequently invested in actively managed domestic equity funds (29.1 percent of assets), indexed domestic equity funds (10.0 percent), stable value funds (8.6 percent), and balanced stock/bond funds (8.0 percent); Plans offer an average of 18 funds for participant contributions. The funds most commonly offered for participant contributions are actively managed domestic equity funds (76.8 percent of plans), actively managed international equity funds (73.4 percent of plans), indexed domestic equity funds (70.4 percent of plans), and actively managed domestic bond funds (63.8 percent of plans).

iv        Since late 2007 the “average” drop in the value of equity investments has been estimated to be in excess over 30%, depending upon the nature of the risk associated with the stock fund, e.g. www.marketwatch.com ; www.lipperweb.com; https://401k.fidelity.com (For list of employers suspending or reducing contributions visit: http://www.worldatwork.org/waw/adimComment?id=30394 )

v          Average Deferral Percentage, Actual Contribution Percentage, for Highly-Compensated vs. Non-Highly Compensated employees; IRC §§ 410(b), 402(g) and 415 (For general information on anti-discrimination testing visit http://www.ahola.com/media/guides/compliance_testing.pdf )

vi        See footnote 7 below for applicable citations.

Note #1: a series of plan amendments may, when taken together, have the effect of reducing or eliminating an accrued benefit in violation of the anti-cutback rule.

Note #2: When employees are automatically enrolled in a contributory retirement savings plan pursuant to the Pension Protection Act, but the employer shortly thereafter discontinues or reduces matching contributions, participants may be able to claim detrimental reliance to prevent the discontinuance or reduction. Based on the reasonable expectation of an employer matching contribution, the employees accepted the default enrollment and allowed deductions to be taken from their compensation as a contribution to the retirement savings plan. On this basis the employer could be estopped from suspending or reducing matching contributions.

vii    La Rue vs. DeWolff, No. 06-856; 522 U.S.__ (2008)

viii   ERISA §503 requires qualified plans to have an administrative claims procedure, and generally requires participants and beneficiaries to exhaust administrative remedies before bringing a lawsuit against the plan.

ix     Internal Revenue Code (“IRC”), §408F(e), and ERISA §204(h), generally require notice of an amendment to a retirement savings plan that either provides a significant reduction in the rate of future benefit accrual or that eliminates such benefits. Further, ERISA §§102 and 104 may require disclosures in Summary Plan Descriptions and summaries of material modifications.

x          Sect. Economic Growth and Tax Relief Reconciliation Act); 411(d) (6) anti-cut back rule; 2005 IRC §411; ERISA §204 (minimum vesting); (§204(h) notice”).

xi          IRC §411(d)(6) generally protects participants’ accrued benefits by providing that they may not be decreased by plan amendment. The Retirement Equity Act of 1984 (REA) added anti-cutback rules to the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA). A plan will not be treated as satisfying the minimum vesting standards of Code §411 and ERISA §204(g), 29 U.S.C. § 1054(g), if a participant’s accrued benefit is decreased by a plan amendment or by a transaction, such as a plan merger or a direct transfer of assets and liabilities, having the same effect as a plan amendment. Such amendments are, however, permissible if they apply to benefits accruing after the amendment. (See also Central Laborers’ Pension Fund V. Heinz et al., 541 U.S. 739 (2004))
xii      E.g. Worker Adjustment and Retraining Notification Act, Public Law 100-379 (29 U.S.C. 210l, et seq.); Cal-WARNA, California Labor Code Section 1400 (a) and (h); Older Workers Benefit Protection Act, amendment to Age Discrimination in Employment Act of 1967 (29 U.S.C. 621 et seq.); Exceptions to At-Will Employment relationships (e.g. Cal. Labor Code § 2922), particularly employers who are parties to collective bargaining agreements; Consolidated Omnibus Budget Reconciliation Act, Public.Law 99-272, 100 Stat. 82.

xiii    Visit http://www.sec.gov/investor/pubs/invadvisers.htm general information about selecting reliable third party investment advisors. Note that advisory fees must not be linked to specific investments; http://www.dol.gov/EBSA/pensionreform.html provides detailed information regarding the law.

xiv   (For more details on fee disclosures, visit: AARP, Insight on the Issues 8, September 2008; www.aarp.org/ppi)