LSG Benefit Insider

inside this issue:

Supreme Court rules on age discrimination and conflict of interest in benefit plans

SHRM's 2008 Benefit Survey: Employers adjust benefits in a slow economy

DOL regs most likely route to PPA fine-tuning

June 30, 2008

Supreme Court rules on age discrimination and conflict of interest in benefit plans

On June 19, the Supreme Court handed down two decisions that go to the heart of benefit plan design. One deals with the potential conflict that exists when a claims fiduciary has a financial interest in claims decisions, and the other with age discrimination in pension plans.

In the case of Metropolitan Life Insurance Co. vs. Glenn, the high court justices were asked to decide whether a conflict of interest exists when the company that determines the validity of claims under a benefits plan also is responsible for paying benefits under the plan. "Yes," they said, and other courts should take this into account when adjudicating ERISA cases involving claims disputes.

Steven D. Spencer, an attorney with Morgan Lewis and Bockius, LLP, said that this decision has broad implications.

"In Glenn, the court concluded that such a [plan administration] structure creates an inherent conflict of interest that should be considered by courts in assessing whether the plan administrator abused its discretion in denying plan benefits. Employers must take note of this decision and consider whether a similar conflict in the administration and payment of claims under their benefit plans could diminish the protection usually afforded by the deferential standard of judicial review."

Of course, having a single administrator is not necessarily improper, and many insurers have procedures in place aimed at avoiding a conflict of interest, Spencer noted.

If after reviewing the plan structure, a sponsor decides to continue with it, Spencer recommended several steps to reduce potential bias and promote accuracy.

"Wall off the fiduciary from the financial," he suggested. This might include establishing an independent claims fiduciary whose decisions are subject to an independent auditor or including wording in a claim fiduciary committee's charter that makes it clear that the committee is free to make independent decisions without any repercussions from the plan sponsor.

This advice extends to self-insured employers as well, he added.

State pension plan does not discriminate

In Kentucky Retirement Systems v. Equal Employment Opportunity Commission, the high court ruled 5-4 that the state's pension plan for disabled workers, which treats employees differently based on pension status, does not violate the Age Discrimination in Employment Act.

Kentucky's retirement plan permits "hazardous position" workers, such as policemen, to receive normal retirement benefits after working either 20 years or five years and attaining age 55 and pays "disability retirement" benefits to workers meeting specified requirements. The plan calculates normal retirement benefits based on actual years of service. Disability benefits are calculated by adding to an employee's actual years of service the number of years that the employee would have had to continue working in order to become eligible for normal retirement benefits, adding no more than the number of years the employee had previously worked.

The employee in this case, Charles Lickteig, continued working after becoming eligible for retirement at age 55, became disabled and retired at age 61. He filed an age discrimination complaint with the Equal Employment Opportunity Commission after the plan based his pension on his actual years of service without imputing any additional years. The EEOC filed suit against Kentucky, arguing that the plan failed to impute years solely because Lickteig became disabled after age 55.

The justices sided – narrowly – with the employer. Harking back to the court's 1993 decision in Hazen Paper Co. v. Biggins, they said that a plaintiff must show that the differential treatment was actually motivated by age and not pension status to bring a disparate treatment claim under the ADEA.

"The court ruled that age and pension status are distinct concepts, and that decisions made under the plan are based on pension status rather than age," Spencer said. However, employers should be cautious about reading too much into this decision, he added.

"The court emphasized that this [decision] was a special case of differential treatment based on pension status, which lawfully turns, in part, on age, and that its decision 'in no way unsettles the rule that a statute or policy that facially discriminates based on age suffices to show disparate treatment under the ADEA."

[top]

SHRM's 2008 Benefits Survey: Employers adjust benefits in a slow economy

Employee benefits remain stable in 2008, even as the economy slowed down, reveals new data released by the Society for Human Resource Management at its 60^th Annual Conference in Chicago.

"Rising health care costs, combined with the state of the economy, are causing more employers to adjust health care and financial benefits," said Susan Meisinger, president and CEO of SHRM. "But in return, employers are offering other valuable but less costly benefits, such as telecommuting, cross-training for non-job-related skills development, and allowing employees to bring children to the office in emergencies," she added.

In the survey, which reflects the responses of 996 randomly selected employers, the HR association found that employers are scaling back on benefits tied to health screening programs; stock options; paid family, adoption, paternity leave and legal assistance.

While at the same time, they are beefing up on benefits that allow personal use of company-provided cell phones and communication devices; on-site vaccinations; fitness center membership reimbursement or subsidy; and Roth 401(k) saving plans.

SHRM also notes that HR professionals indicate that benefits costs to employers average 39% of payroll. Of those costs, 21% are attributed to mandatory benefits, and 18% to employee-selected benefits.

Key findings in the 2008 Benefits Survey include:

Thirty-six percent of respondents offer health care coverage for both same-sex partners and for dependent grandchildren. In addition, 30% provide health care benefits for foster children, and 15% give paid adoption leave.
Approximately 62% of companies pay for long-distance calls home during business travel; 37% offer a compressed work week; 24% offer such benefits as postal services, legal assistance, and food services or a subsidized cafeteria; and 5% offer concierge service.
Also, 72% of employers provide wellness resources and information; 40% offer smoking cessation programs; 31% offer weight-loss programs; and 21% offer bariatric procedure coverage.

[top]

DOL regs most likely route to PPA fine-tuning

Despite high marks for hitting major policy objectives, the Pension Protection Act of 2006 needs refinements that will more likely be delivered through Department of Labor regulations than additional legislation, according to industry analysts.

When Congress passed the Pension Protection Act of 2006, the employer community gave a particularly warm welcome to its provisions on automatic enrollment, investment options and qualified default investment alternatives. Here, employers felt, was the impetus needed to break employees' inertia on retirement savings.

However, some policymakers and retirement benefits analysts observe that PPA failed to thoroughly address 401(k) fee transparency, fiduciary compliance and saving mechanisms for individuals outside of the employer-provided system.

Unfinished business

On the surface, PPA appears to be working. Since 2005, about seven in 10 workers report that they participate in an employer-sponsored 401(k) plan, while almost 24% of all 401(k) plans had adopted automatic enrollment by 2006. That's up from 7% in 2002, reports MetLife in its recent study on employee benefit trends.

The DOL also estimates that new PPA rules will draw an additional $134 billion into 401(k) accounts by 2034.

The law not only helps employers create a framework for getting participants into retirement plans, it gives plan sponsors an "ancillary benefit" by minimizing fiduciary liability and litigation risks, said Robert Doyle, director of regulations and interpretations at DOL.

It's the proverbial win-win situation for employers and employees, he told attendees at MetLife's 4th annual National Benefits Symposium in April. The department realizes, however, that it has to pursue initiatives to try to improve fee transparency and fiduciary responsibilities related to service providers.

"The cost of investments and plan administration expenses can directly affect, in a dramatic way, retirement savings," he said. From a regulatory perspective, it's a big challenge to ascertain what information 401(k) participants need to make informed decisions about their individual accounts and investment options.

DOL believes the regulatory process is the best way to ensure that participants obtain fee information they need without overwhelming them or incurring a high cost, which, ultimately, participants and beneficiaries will have to shoulder.

Labor officials envision a format that allows participants and beneficiaries to easily compare basic information about investment options.

Regulators also see the need for guidelines on identifying plan administrative expenses charged against 401(k) accounts. The agency's 401(k) fee initiatives are "building on our existing disclosure requirements," Doyle said.

The regulatory drafting underway at DOL is much more likely to be the fine-tuning mechanism on 401(k) fee disclosure than additional legislation, said James Delaplane, a partner at the Washington, D.C.-based law firm of Davis and Harman, LLP.

No matter how 401(k) fee transparency is achieved, whether through regulation or legislation, participants will probably turn to their employers for information on how 401(k) fees can put a dent in their retirement savings.

The MetLife study, which surveyed 1,380 full-time employees, shows that 49% of workers are interested in receiving, via the workplace, financial advice and guidance on critical decisions about their 401(k) plans, an 11% jump from 2007.

"401(k) plans are one of the benefits that employees cite as highly important to them," said William Mullaney, president of MetLife institutional business.

"We will start to see employers getting more requests from workers about helping them to make the most out of their benefit plans," including 401(k) plans, he added.

On fiduciary compliance, DOL heard from some fiduciaries and plan sponsors that, in some cases, they understand what they need to do to stay compliant, but service providers were sometimes reluctant to provide compliance information.

"The regulatory goal here is to help employers to get the information they need, so that when plan sponsors work with service providers, they can walk away from the table knowing that they satisfied their fiduciary duties," Doyle explained.

Expect a major tax bill

DOL regulatory reforms on 401(k) fees differ from what Congress is considering.

"The bills on Capitol Hill have required bundled-service providers in the 401(k) marketplace to unbundle their offerings and give component pricing on each service, such as administration and investment management," said Delaplane, who specializes in employee benefits.

The DOL has been more open to continued utilization of bundled-service pricing in which several services are provided for a single price, he added.

Delaplane believes, however, that a post-PPA Congress, which will probably remain Democratically controlled in November, is headed for a national debate, similar to health care, on retirement savings.

"There is a lot of pent-up frustration among policymakers that despite all of the tax incentives, too few people have employer-based retirement coverage," he explained.

President Bush's tax cuts from 2001 and 2003 expire in 2010, and the alternative minimum tax has been expanded, which means Congress will have to pass a major tax bill in 2009 and 2010.

Some retirement policy experts contend that any new substantive legislation on retirement savings will focus on government-sponsored initiatives that will help people up and down the income scale, especially lower- and middle-income families.

Such measures, if passed by Congress, will result in tax increases on certain parties and individuals.

"Employers need to be prepared for a significant tax debate in the next 24 months, because they will probably be right in the middle of that discussion," Delaplane said.

Federal tax breaks tied to employer-sponsored benefits reached over $ 300 billion in 2007, according to a report by the Joint Committee on Taxation.

"There is no way that Congress can have a big-picture tax discussion in the next two years without evaluating those employer-based tax incentives, which are important to the benefits system," he said.

[top]