TRUSTEES SHOULD CHECK OUT THE “FLOAT”:
In Field Assistance Bulletin 2002-3, the U.S. Department
of Labor framed the following issue: “What does a fiduciary need
to consider in evaluating the reasonableness of an agreement under
which the service provider will be retaining ‘float’ and
what information is a service provider required to disclose to plan
fiduciaries with respect to such arrangements in order to avoid engaging
in a prohibited transaction?” Although the issue deals specifically
with ERISA and statutorily-prohibited transactions, the advice is nevertheless
valuable to public plan trustees. Many financial services providers
acting as non-discretionary directed custodians maintain general accounts
to facilitate transactions of employee benefit plans. The service provider
may retain earnings -- “float” -- resulting from anticipated
short-term investment of funds held in such accounts. Typically, these
accounts hold contributions and other assets pending investment directions
from plan fiduciaries. In addition, fiduciaries transfer funds to a
general account of the financial institution in connection with issuance
of checks to make plan distributions or other disbursements. Funds
are then held in the account, earning interest, until checks are presented
for payment. In connection with the service agreement pursuant to which
the service provider may be retaining the float as part of its compensation,
the Department recommends that the service provider take the following
A. Disclose the specific circumstances under which the float will
be earned and retained.
B. In case of the float on contributions pending investment direction,
establish, disclose and adhere to specific time frames within which
cash pending investment direction will be invested following direction
from the fiduciary, as well as any exceptions that might apply.
C. In case of the float on distributions, disclose when the float
period commences (for example, the date check is requested, the date
check is written, the date check is mailed) and ends (e.g., the date
on which the check is presented for payment). Also, disclose and adhere
to time frames for mailing and any other administrative practice that
might affect the duration of the float period.
D. Disclose the rate of the float or the specific manner in which
such rate will be determined. For example, earnings on cash pending
investment and earnings on uncashed checks are generally at a money
market interest rate.
In short, the float should be considered by trustees and custodians
as part of the custodian’s compensation for services rendered
to the plan. As such, trustees must have an adequate understanding
of how the service provider will earn the float and how it contributes
to the service provider’s compensation.
DC PLAN STILL STRUGGLING:
Almost two years ago the Florida Division of Retirement offered tutorials
on how to make choices and giving employees the chance to switch from
safety of the traditional defined benefit plan to the risk and rewards
of a defined contribution system. Although State officials expected
a 25% to 30% enrollment in the new vehicle, less than 5% have gone
the DC route. Not only did more than 95% stay in the DB plan, 7 out
of 10 didn’t even make a choice; they simply “defaulted” into
staying put by ignoring the whole thing! However, new hires found the
DC option more popular: 12% opted for the DC plan. DC participants
are offered a wide range of pension options, including stocks and “bundled
products.” A study in Nebraska found that employees in the optional
DC plan averaged a 6% return on investments from 1983 to 1999, while
the state’s professionally-managed defined benefit plan posted
an 11% return. Don’t just do something -- stand there.
SAY GOODBYE TO ASSET SMOOTHING?:
The Financial Accounting Standards Board and the International Accounting Standards
Board will consider a study on whether to adopt a mark-to-market standard in
place of the widely used “smoothing” technique. Although adoption
of a new rule is uncertain, according to PlanSponsor.com, actuaries and pension
advisers are already complaining that the change would make financial statements
far more volatile. Among other things, opponents believe marking pension assets
to market is inappropriate, considering the long-term nature of pension investments.
Besides, a shift to mark-to-market could push companies to phase out traditional
defined benefit plans or prompt a stampede by pension plans out of equities and
into bonds (with the attendant reduction in earning assumptions). That would
not make for smooth sailing. Hopefully, the Government Accounting Standards Board
will not follow suit.
“WORKERS WIN,” ACCORDING TO DOL:
U.S. Secretary of Labor Elaine L. Chao has announced the final regulations
governing overtime eligibility for “white-collar” workers under the
Fair Labor Standards Act. The regulations had not been substantially updated
for over fifty years, creating confusion for workers and employers, generating
wasteful class action litigation and failing effectively to protect workers’ pay
rights. The new rules expand the number of workers eligible for overtime by nearly
tripling the salary threshold. Under the old regulations, only workers earning
less than $8,060 annually were guaranteed overtime. Under the new rules, workers
earning $23,660 or less are guaranteed overtime, strengthening protection for
some 6.7 million low-wage salaried workers (including 1.3 million salaried white-collar
workers who are not entitled to overtime pay under the existing regulations).
These workers should gain up to $375 million in additional earnings per year.
Further, the rules now clearly state that “blue-collar” workers,
police officers, fire fighters, paramedics, emergency medical technicians and
licensed practical nurses are entitled to overtime protection.
DRUNK SEEKS JOB -- WITH COPS:
A man who dropped in to State Patrol headquarters to inquire about a job
didn’t get what he wanted, according to Associated Press. He did, however,
learn how a hand-held alcohol tester works. Robert Gulley, 25, walked into Patrol
headquarters, requesting an application for employment. He was slurring his words,
had glassy eyes and reeked of alcohol. When a trooper told Gulley it wasn’t
a great idea to apply to be a trooper while intoxicated, Gulley denied drinking.
Another trooper offered to measure Gulley’s blood alcohol level with a
hand-held breath tester. Gulley blew over the state’s legal limit, indicating
he’d had at least three drinks. After troopers warned Gulley not to drive,
he got into his car and sped off. He was promptly pulled over and ticketed. “I
actually still want to join the police department. Those guys are doing their
job keeping the roads safe.” But one state trooper believes Gulley’s
career prospects with the Patrol appear dim: “I guarantee he’s not
going to get a job with us. We’ve arrested drunks in unexpected ways and
places before, but this one just blew me away.” (“Blew me away?” Is
that supposed to be a play-on-words?).