Some pension attorneys are raising a ruckus because a Labor Department official said plan sponsors would lose their safe harbor protection under Section 404(c) of ERISA if their defined contribution plan participants are not directly managing their own investments.
The uproar followed a story in the Jan. 21 issue of Pensions & Investments, in which Louis J. Campagna Jr. commented on an advisory opinion given to SunAmerica Retirement Markets Inc. by the Labor Department. Mr. Campagna is chief of the division of fiduciary interpretations in the Labor Department's Pension and Welfare Benefits Administration.
Some attorneys think Mr. Campagna's interpretation is dead wrong. They believe a defined contribution plan with professionally managed accounts would not take a plan out of 404(c) protection because the account would be treated like any other investment option.
If a plan is already a 404(c)-protected plan, a managed account is just another option and would not cause the plan to lose its 404(c) status, said Richard L. Menson, head of the Chicago office of McGuire Woods Battle & Boothe, a Chicago law firm.
Linda Shore, partner with Washington-based Buchanan & Ingersoll, said that if a managed account were the default option, a plan could run afoul of 404(c) protection. However, where a participant can choose the managed account or invest account assets on his or her own, "it could not be clearer" that 404(c) protection would be intact, said Ms. Shore.
Others agree with Mr. Campagna but say it might not matter, because a plan with a managed account option would show an exercise of prudence, and a court would not have to get to the 404(c) question in that case.
Disagreement on loss
"I don't disagree with what Louis Campagna said; I disagree that losing 404 (c) status is a reason a plan sponsor should feel less secure if it is dealing with a service provider that offers managed accounts," said Roberta Casper Watson, partner and head of the ERISA practice group at the Tampa, Fla., law firm Trenam Kemker.
"I don't think falling outside of 404(c) is bad because an investment manager is making all the decisions," she said. "If a plan sponsor is prudently selecting an investment manager, the investment manager should be the only one liable if the investment manager screws up."
Mr. Campagna, meanwhile, was unavailable to comment by press time.
In the Jan. 21 article, Mr. Campagna was commenting on an advisory opinion that was issued by the PWBA in December. That opinion, which Mr. Campagna wrote, said SunAmerica and other firms could offer managed accounts as part of a bundle of services for defined contribution plan sponsors.
"While the situation would probably require a factual analysis, the basic idea behind 404(c) is that a participant retains independent control of their investment decisions and, in my opinion, it would be difficult to imagine that in a managed account situation," Mr. Campagna told P&I.
Backing down
Brian Tarbox, a consultant who advised SunAmerica on its application to the Labor Department for a prohibited transaction exemption, said the Labor Department is trying to back down from the opinion because it eliminates the need for investment advice legislation sponsored by John Boehner, R-Ohio, which is supported by the administration.
But James Delaplane Jr., vice president of retirement policy for the American Benefits Council, Washington, said the DOL made plain its view that the SunAmerica advisory opinion does not eliminate the need for the Boehner bill. "They made sure from the get-go that SunAmerica is no substitute for the Boehner bill," he said.
This has not stopped Boehner bill opponents from saying the SunAmerica opinion makes the Boehner bill unnecessary, he said.
"My sense of it is the SunAmerica opinion, for the most part, does not negate the need for the Boehner bill. The Boehner bill goes after different issues," said Mr. Delaplane, who is also a benefits attorney.
David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America, said the SunAmerica opinion "probably does not address the same issues as the Boehner bill, which is person-to-person advice."
The SunAmerica opinion allows a service provider to offer an investment advice product tailored to its bundled defined contribution plan services rather than the generic advice offerings available from online advice providers, Mr. Wray said.
While he agrees with Mr. Campagna that a managed account probably would be outside of 404(c), Mr. Wray said plan sponsors would be concerned whether it would take the entire plan outside of 404(c) or just that participant's account. A sponsor probably would be comfortable with taking on fiduciary liability for a participant whose account is being professionally managed, but would not like to take on fiduciary liability for participants who might be investing their assets in a brokerage account as part of the bargain, he said.
"I don't think the DOL would go so far as to pursue 404(c) for the entire plan," said Carl Londe, chairman of the board and chief executive officer of ProManage Inc., a Chicago company that professionally manages defined contribution participants' accounts.
ProManage takes on co-fiduciary responsibility as an investment adviser for those participants who choose to invest all of their account balances with ProManage. Plan sponsors then must satisfy all 404(c) requirements for those participants who do their own investing.
Another opinion
Other ERISA lawyers, like C. Frederick Reish of Reish & Luftman, Los Angeles, say a plan with a managed account could fall outside of 404(c).
But even if a court did agree with Mr. Campagna, it might not make much of a difference to the fiduciary liability of a plan sponsor.
For one thing, while some 70% of plan sponsors think their plans are 404(c) compliant, most may not be, Mr. Reish said.
Bundled providers generally take care of most requirements, although they are not responsible for meeting all of the more than 20 or so requirements, he said.
This leaves several that are not in compliance because the plan sponsor has not designated anyone to comply with the balance of 404(c) requirements, Mr. Reish said.
