Prudence. We often seem so focused on this one particular ERISA standard at times that it seems we do it to the exclusion of what is really ERISA’s own “prime directive”: “A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries.”
Sure, prudence is critical when dealing with plan investments, as is diversifying investments to minimize loss, as is administering a plan in accordance with its documents (these are each a specific fiduciary standard contained in ERISA Section 404(a)) These rules, however, do not exist in a vacuum.
We spend much of our time focusing on the minutiae of fiduciary investments making sure compensation is reasonable; finding ways to comply with variable compensation under the fiduciary rule; drafting compliant 404a-5 and 408b2 documents; documenting procedures; evaluating cost and fees related to investments; and all manner of plan financial issues. In doing so, however, we cannot lose sight of the proverbial forest for all the trees.
The DOL really laid it out well when it issued Advisory Opinion 95-17, giving its opinions on 401(k) credit cards. There it laid out the exclusive purpose standard when setting the terms and conditions of a loan: “it should be emphasized that the purpose of section 408(b)(1) and the regulations thereunder is not to encourage borrowing from retirement plans, but rather to permit it in circumstances that are not likely to diminish the borrower’s retirement income or cause loss to the plan.”
In the day to day operation of a plan (without plan credit cards!), this raises a troubling issue- particularly when a plan design forces a loan default offset of a participants accrued benefit following involuntary employment (such as a layoff, death or disability), where the retirement benefit is lost under difficult circumstances where there is little chance to recover. To add to the difficulties, a significant number of these offsets result in a 10% tax penalty being impose at a time it is most difficult to bear- a fundamental unfairness of which I have blogged in the past.
Loans, however, are really a necessary part of retirement plans. Without that sort of access, many employees would shy away from making deferrals, which also undermines retirement readiness. But there remains this tension between the exclusive obligation to protect the ability to provide the retirement benefit, and the practical demand to have a loan program.
There is a potential solution in the wings, as I have been working with Custodia Financial and a number of leading practitioners throughout the country to develop a program under which plans will have the ability to protect the benefit. We will keep you posted, as it is coming into the market.