Qualified Retirement Plans: July 2004 Developments

Cash balance plan scores a court victory. In an action by a former employee against a company, the federal district court in Maryland has determined that the conversion of the employer's traditional pension plan to a cash balance plan did not violate the prohibitions against age discrimination in ERISA. The court found that it was appropriate to use ERISA's rules for individual account plans, and not the rules for traditional pension plans, to measure compliance with ERISA nondiscrimination requirements. The class certification sought by the plaintiff and the plaintiff's age discrimination claims were dismissed. Tootle v. ARINC, Inc., et al., 2004 WL 1285894. The court's holding is consistent with the earlier Eaton v. Onan decision in the southern federal district court of Indiana but inconsistent with the Cooper v. IBM Personal Pension Plan decision in the southern federal district court in Illinois. The future of cash balance plans remains up in the air, but this is a win for their proponents.

The Securities and Exchange Commission is examining payments by mutual fund companies to 401(k) plan promoters and sponsors. The Director of the SEC's Office of Compliance Inspections and Examinations announced the examination program in a press release issued on July 6th. Detailed questionnaires have been received by Putnam Investments and Fidelity Investments, according to their spokespersons. The SEC Director's statement said: "We're looking into payments by funds and their advisers to 401(k) plans, plan consultants, and plan platforms." It is especially important now for 401(k) plan fiduciaries to "follow the money" and know as much as they can about expenses borne by their various investment funds and options, who is being compensated by those funds, and in what amounts.

Final regulations were published on July 22nd relating to establishing "deemed IRAs" as a component of tax-qualified retirement plans. The rules (Treasury Decision 9142) permit qualified plans to incorporate .deemed IRAs.. The deemed IRA may be in the same trust as the qualified plan assets, but the qualified plan and the deemed IRA will remain subject to their own respective statutory requirements. Deemed IRAs are intended to make retirement saving easier for employees. It is not clear, yet, that their administration under these rules will be simple enough to induce many employers to offer deemed IRAs.

Here's a case to remember if you are thinking about a plan amendment...