The steep decline in the stock market will have an impact on most of our clients’ retirement programs. The impact will vary depending upon the type of program and the investment philosophy. This article is intended to provide you with an outline of those areas with which you need to be concerned. Please contact your Senior Consultant if you feel that any of these areas require further discussion.

Many clients mistakenly believe that offering participants the right to direct their own investments relieves the client of all fiduciary responsibility. Unfortunately, that is not the case. The Department of Labor estimates that 75% of all plans offering investment discretion do not meet the strict requirements for relief from fiduciary responsibility. Furthermore, even if your plan is in the 25% that does meet the rules, you can still be sued by participants angry that their accounts have lost money.

The recommended approach is to do whatever you can to prevent your employees from becoming angry. Holding an employee investment meeting with your financial advisor may be appropriate at this time both for public relations and to give participants the opportunity to make informed investment decisions in these changing market conditions. At the very least you may want to work with your investment advisor to create a cover letter to be distributed prior to the participant receiving his or her first quarter account statement. You can never protect yourself fully from participant lawsuits but maintaining communication during these difficult times is the best way to prevent problems.

ERISA requires that assets be invested prudently so as to avoid large losses. Does this mean that the trustees of a fund largely invested in the stock market are subject to lawsuits if that fund suffers a large loss? In the past, the overwhelming majority of "breach of fiduciary responsibility" lawsuits have involved bad investments in loans, real estate, or a single high risk stock. Trustees who invest in a diverse range of stocks have generally been safe even when the market has declined. It is likely, however, that these rules will be tested in court especially where plans suffered significant losses. If you receive inquiries from participants (or their lawyers) requesting information on the plan’s investment policies, please forward those letters to us immediately so that we can assist you in responding properly.

Clients whose plans are valued annually have an additional concern in 2001. Typically, terminated employees of annually valued plans are paid based on their account balances the previous December 31. If plan assets have declined significantly since then, however, you may want to consider either delaying payments or performing a interim valuation. Otherwise, the losses attributable to the accounts of the terminated participants will be absorbed by the other members giving their accounts a larger loss than they otherwise would have had. Your consultant at CAI will discuss this matter with you before preparing benefit distribution forms for your terminated participants.

When plan assets do not earn the assumed rate of interest (generally between 5% and 8%) in a defined benefit plan, the company must make up the difference through higher contributions in future years. The loss is spread out over several years and can be offset by future favorable investment experience. Therefore, all other things being equal, your required contribution for 2001 will be higher than it was in 2000.

The second effect is that lower assets combined with the reduction in interest rates which also occurred last year will move many defined benefit plans into the "underfunded" category. If the plan does not terminate, the only impact of being underfunded is an increase in premiums payable to the Pension Benefit Guaranty Corporation. If the plan does terminate, the underfunding must first be eliminated in one of two ways. Either the company must fund the plan sufficiently to make up the shortfall, or the owner must waive a portion of his benefit. Please note that these rules apply to newer cash balance plans as well as traditional defined benefit plans.

Just as there was a need to rebalance assets when the market was going up, there is a need to review the allocation with the market being down. CAI does not provide financial services to our clients so do not call your Senior Consultant with questions on how best to invest plan assets. You may, however, want to schedule a full investment policy review with your financial advisor.

The deadline for amending plans remains the later of December 31, 2001 or one year after the master volume submitter or prototype plan is approved by the IRS. The IRS has not yet approved most master plans so the deadline for most of our clients remains at least one year away. We will keep you informed and do everything we can to make sure that all plans are amended timely.

In a welcome development, IRS has issued new regulations simplifying the minimum distribution rules. For most individuals, the simplification will also result in a reduction in the minimum amount which must be withdrawn. Those of you who have been required to take substantial distributions either from an IRA or a plan in the past year should request that a calculation be done under the new rules so that, if appropriate, you can reduce your quarterly withholding payments for 2001.

Pension Reform Legislation Passed!: 

The tax cut bill passed by Congress before Memorial Day contains many pension related provisions. Included are increases in the defined contribution maximum (from $35,000 to $40,000), the defined benefit maximum (from $140,000 to $160,000), the Compensation maximum (from $170,000 to $200,000) and the 401(k) maximum (to $11,000). All of these increases are effective beginning in 2002. We will be providing a full summary of this landmark legislation to all of our clients as soon as we have had an opportunity to analyze its major provisions.