Compliance February 5, 2014

DOL Sues Contractors over Prohibited Loans, Investments

The Department of Labor (DOL) has filed a lawsuit against a Lilburn, Georgia contracting firm, on behalf of the firm’s retirement plan participants, to recover losses resulting from prohibited loans and investments.
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The lawsuit, Perez v. Burgess Baird Jr (docket number: 1:14-cv-00282-CAP), was recently filed in the U.S. District Court, for the Northern District of Georgia, Atlanta Division. It names Burgess Baird Jr., the fiduciary of the employee profit-sharing retirement plan, and DSI Contracting Inc. as defendants.

Through the suit, the DOL seeks to have the defendants restore all plan losses, including interest or lost opportunity costs to the plan, which occurred as a result of the defendant’s breach of their fiduciary obligations. The suit also asks the court to reverse each prohibited transaction. In addition, the DOL asks that the court permanently enjoin the defendants from serving as fiduciary, administrator, officer, trustee, custodian, agent, employee, representative, or having control over the assets of any employee benefit plan subject to the Employee Retirement Income Security Act (ERISA), and to appoint a successor fiduciary at defendant Baird’s expense.

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An investigation by the DOL’s Employee Benefits Security Administration (EBSA) found that after establishing a profit-sharing retirement plan for its employees in March 1980, DSI Contracting Inc. and Baird failed in their fiduciary responsibility to the plan, committing prohibited transactions by causing the plan to purchase real estate contiguous to property DSI was developing, known as the Stonebrook division.

The EBSA also found that Baird issued loans to participants in amounts that exceeded the amounts allowed under the terms of the plan document. The proceeds of the participant loans were used to invest in Stonebrook. Baird also issued a $490,000 loan from the plan to a real estate company, called Burge Realty LLC, which in turn, used the proceeds of the loan to buy 10 lots in the Stonebrook development. Finally, Baird failed to attempt to collect on the participant loans or the loan to Burge Realty, resulting in large losses to the plan.

The full text of the complaint can be downloaded here.

Perspectives February 5, 2014

DC Plan Loans: A Good Idea or Bad Idea?

In a perfect world, plan loans wouldn’t exist.
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Employees would embrace retirement saving and they would accept their money being locked away until retirement age.  They would manage their personal finances in a responsible way and they wouldn’t have any need to borrow against their retirement accounts.

However, until the world becomes perfect, loans are pretty much a necessary plan design feature. But just because we need to include the feature, doesn’t mean plan loans should be encouraged.

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We’ll admit to the shameless promotion of the loan feature when we are doing enrollment presentations to younger audiences.  In our experience, the knowledge that the money may be accessible to the employee way before the [unimaginable] age of retirement, makes the idea of giving up take-home pay more acceptable.  Nobody likes feeling trapped.  Knowing they could gain access to a portion of their savings, in the event of an emergency or opportunity, makes it seem like a smart idea to have a nest egg growing.

Promoting the existence of a loan feature has helped us recruit thousands of participants into their employers’ plans.  In our view, the end justifies the means.

Post-enrollment, though, perhaps the loan message should change.  There has been a proliferation of retirement plan loans in recent years, many of which have or will result in defaults.  A defaulted loan is financially damaging for the employee and it creates work and possible hard feelings for the employer.

Maybe we, as an industry, should provide loan education, either proactively or to accompany each loan request.  The theme could be, “Yes, loans are available, but fully understand what you’re getting into.”

Make employees understand:

  • Loans must be repaid with after-tax money, generally within five years, notwithstanding any leaves of absence;
  • While it’s true the interest paid goes back into the employee’s account, the outstanding loan balance is out of the market while on loan, possibly causing opportunity loss;
  • Commonly, employees reduce their savings rates while making loan payments, so in the long run, they may achieve a less favorable retirement outcome; and
  •  In the event they separate from service, most loans become due.  If not repaid at that time, the outstanding loan balance will be taxable, subject to penalty and will no longer be part of their retirement nest egg.

 

One of the most important hats advisers wear is their educator hat.  Most people make better decisions when they fully understand the potential pros and cons of a given action, and we are in the best position to provide that education.

 

Jim Phillips, President of Retirement Resources, has been in the investment industry for more than 35 years, the past 18 of which have been focused in the area of qualified retirement plans.  Jim worked for major national investment firms for 14 years before “going independent” in 1990.  Jim is an Accredited Investment Fiduciary, has contributed to two books on 401(k), and his articles have been published in Defined Contribution Insights, PLANSPONSOR’s (b)lines and ASPPA’s 403(b) Advisor, and Jim is a RetireMentor on MarketWatch.com. His work has been acknowledged with multiple Signature Awards from the PSCA, he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisers, by PLANADVISER Magazine, and he was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award. Jim has been a frequent speaker at national conferences, including SPARK, ASPPA, AAO and the PLANSPONSOR and PLANADVISER National Conferences.   

Patrick McGinn, CFA, Vice President of Retirement Resources, is a CFA charterholder and has been in the securities industry since 1993. In addition to the Chartered Financial Analyst designation, he is an Accredited Investment Fiduciary and a member of the Boston Security Analyst Society. Together with Jim, Patrick has co-authored a number of articles which have been published in industry publications on topics about managing successful 401(k) and 403(b) plans. His work has been acknowledged with multiple Signature Awards from the PSCA, and he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisors, by PLANADVISER Magazine. He was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award. 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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