In the Herman Melville short story “Bartleby the Scrivener: A Story of Wall Street,” the narrator lawyer finds himself employing a scrivener who, when repeatedly asked to complete his tasks, simply states that he would “prefer not to.” While Melville perfectly captured the exasperation of the employing attorney, as well as the absurdity of the situation, he could never had imagined the impact that such a scrivener not diligently performing his work would have on an ERISA plan sponsor.

With the number of plan amendments required by law -- as well as the frequency with which sponsors modify formulas and other aspects of their plan document -- it is not uncommon to see plan documents drafted that are not in compliance with the sponsor’s intent. Most practitioners refer to these errors as a “scrivener’s error,” although it’s a term not readily embraced by the IRS. Most of these scrivener’s errors in a plan document are just that, errors. They typically result in plans not being operated in compliance with their documents and are thus potentially subject to IRS disqualification.

To understand how the IRS sees these document errors, you need to look at the Code’s requirement as to the plan’s document. The IRS takes the position that a plan must be enacted subject to a “definite written program.” This ensures that plan participants, sponsors, and most importantly, the IRS, can determine exactly what rights, benefits and features the plan participants possess. If the IRS, plan participants, or plan sponsor cannot accurately rely on the provisions contained in the document, the document is essentially worthless. Thus, upon the discovery of a scrivener’s error, the IRS generally requires that the amendment to correct the “scrivener’s error” go through the Employee Plans Compliance Resolution System (EPCRS) correction process using the Voluntary Correction Procedures (VCP). You can’t self-correct where the document would require formative amendment to be in compliance.

However, in forcing this error through the formal processes of the filing under VCP, the IRS imposes fees for correction, not to mention the fees associated with the preparation and adoption of the new amendment and the VCP filing. Take, for example, a new client to my office who had continually operated their plan as having distributions available as soon as “administratively feasible.” During one of the plan restatements, the attorney who drafted the document failed to notice this provision and drafted the restated document allowing distributions only at the end of the plan year. The plan continued to operate as one that allowed immediate distributions, so no participants were adversely harmed during the period the plan did not comply with what the document required. The plan, however, had an operational failure, and thus its tax qualification was in jeopardy.

This being a moderately sized employer, the IRS will impose a fee of $5,000, in addition to the fees incurred to draft the EPCRS filing as well as the costs induced in notifying the employees of the filing and change in plan documents. The costs involved in a formal filing are astronomical when one takes into account that not a single plan participant was adversely affected. As a result, many plans which contain scrivener’s errors would “prefer not to” report these corrections to the IRS, but the consequences of plan disqualification would far outweigh the costs of a proper correction.

Remember there is no statute of limitation with respect to an operational or document failure.

As if the rocky, unchartered waters of the quarterly disclosure requirements of the Pension Protection Act weren’t enough to confuse and astound retirement plan participants, plan sponsors, and plan administrators, Representative George Miller (D – California) has recently introduced the 401(k) Fair Disclosure for Retirement Security Act of 2007 (H.R. 3185). We note the DOL has yet to meet the August 2007 deadline set by Congress to release regulations on disclosure.

Miller’s bill would require that plan administrators, prior to entering into any contract with a service provider, receive a disclosure statement identifying who will be performing services for the plan and describing each service along with an itemized listing of all annual costs making up the total cost of the services. This disclosure statement will also be required to include a written disclosure of any conflicts of interest arising from the relationship of the provider with any other parties involved in the plan.

These statements would be required to be produced on an annual basis or within 30 days of any material change in the information provided in the statement. These statements would need not be provided to the participants on an annual basis, but would have to be given to the participants within 30 days of their request for such a statement. Additionally, the statement would need to be made available on any such Intranet website maintained by the plan sponsor.

The bill also requires that the administrator of a plan which permits individual control of investments serve annual notice upon each participant of the investment options available for election under the plan 15 days prior to (a) the beginning of the plan year, or (b) 15 days prior to any material change in the plan’s investment menu.

If these potential new disclosure requirements were not enough, the distinguished congressman’s bill would amend ERISA section 402 to require that an individually directed investment plan include a nationally recognized market-index fund as an investment option.

While the bill will undoubtedly change as the congressional committees get ahold of it, it is only a matter of time before the basic ideas in the proposed bill become law. It is best advised to be prepared for what may be required in the near future.

On August 9, 2007, Judge Warren Eginton of the district court in Connecticut refused to dismiss the fiduciary breach case brought against United Technologies Corporation. The plaintiffs asserted that participants in two UTC plans paid unreasonably high fees for administrative and investment management services. In addition, they alleged that fees assessed against the plans’ employer stock funds caused participant investments in UTC stock to perform less well than comparable investments made outside the plans. Finally, the plaintiffs alleged that UTC failed to make adequate disclosure of various fee data.

The defendants argued that none of the plaintiffs’ claims described improper conduct or violation of any duty of a plan fiduciary. Judge Eginton disagreed, noting that the plaintiffs alleged that the defendants failed to take steps necessary to provide adequate oversight of fee matters, which could “plausibly entail a breach of fiduciary duty.” He also rejected the assertion that the plaintiffs failed to prove problems regarding fee sharing because the complaint states that fee sharing is ubiquitous in the industry. He concluded that simply because fee sharing is common does not mean that the plaintiffs cannot prove that it resulted in unreasonable fees for these plans.

Finally, Judge Eginton considered whether ERISA imposed a fiduciary duty to disclose fee information to participants. He noted that a prior case dismissed such claims because ERISA did not require disclosure of revenue-sharing fees. He agreed with that dismissal, stating that the “Court will not augment ERISA fiduciary duties where Congress has already created detailed rules governing such obligation.”

On August 13, 2007, Judge Michael Reagan of the U.S. District Court for the Southern District of Illinois issued his opinion regarding motions to dismiss and strike in the fiduciary breach case against Lockheed Martin. Lockheed argued that the complaint against it was “verbose and argumentative” and did not comply with the requirements that pleadings should be “simple, concise, and direct,” but Judge Reagan disagreed. He agreed that the complaint is “not necessarily a model of legal draftsmanship” but concluded that it “adequately” showed entitlement to relief and gave Lockheed notice of relevant facts and the legal basis of the plaintiffs’ claims. He also noted that the presence of “extraneous material” did not warrant dismissal. Judge Reagan also rejected Lockheed’s motion to strike parts of the complaint, which are “strongly disfavored and are rarely granted.” He concluded that striking the portions of the complaint identified by Lockheed “would merely serve to delay this litigation . . . without any significant benefits.”

If your 401(k) plan holds employer securities that are traded on an open market, a new diversified rule applies in 2007. The Pension Protection Act (PPA) requires a plan administrator to provide certain participants and beneficiaries with a notice of the right to divest employer securities in their accounts and reinvest those amounts in certain diversified investments. Plan administrators must provide this notice not later than 30 days before the first date on which the individuals are eligible to exercise their rights.

To put teeth behind this requirement, the DOL has issued regulations implementing the related penalties mandated by the PPA. Effective October 9, 2007, the DOL will have the regulatory authority to assess a civil penalty for each violation of up to $100 a day from the date of the plan administrator’s failure or refusal to provide the required diversification notice to an applicable individual. This is a per-participant penalty.

IRC §415 sets the limit for the total employee and employer contributions that may be allocated to an individual participant’s account. Treasury recently released final regulations under this Section.

The final IRC §415 regulations are a complete restatement of existing guidance and apply to virtually all tax-favored retirement programs, including 401(k) plans.

The key feature of IRC §415 is the definition and limiting of “annual additions” to tax qualified plans. These annual additions include employer contributions, employee deferrals and forfeitures. Basically, the total annual additions in any one year cannot exceed 100% of compensation or the dollar limit in effect under IRC §415(c). Annual additions do not include reinvested Employer Stock Ownership Plan dividends, catch-up contributions, rollover contributions or loan repayments.

The newly issued regulations clarify that a “restorative payment” allocated to a participant’s account is also not considered an annual addition. A restorative payment is a payment “made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for the breach of fiduciary duty.” Thus, payments to merely restore investment losses to a plan are not “restorative payments” and would be annual additions. Restorative payments do not include payments to a plan “to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of fiduciary duty.”

To properly apply the IRC §415 limits on contributions, one must determine the correct year to which an annual addition applies. The dollar limit in effect for the calendar year that includes the last day of the plan’s “limitation year” (generally the plan year) establishes the annual additions cap. An annual addition is credited to a participant’s account if it is allocated to that account under the terms of the plan as of any date within the limitation year. If an annual addition is made pursuant to a corrective plan amendment, it is included as part of the participant’s account for a particular limitation year if the terms of the corrective amendment allocate it to the participant’s account as of any date within that limitation year. If an allocation of an annual addition is dependent upon the satisfaction of a condition that occurs after the plan year, such as continuation of employment, then the regulations treat that annual addition as allocated as of the date the participant satisfies that condition.

An employer contribution is not treated as credited to a participant’s account for a limitation year unless it is made no later than 30 days after the due date, including extensions, of the employer’s tax return for the taxable year in which the limitation year ends. Contributions that are made after these deadlines are credited to the participant’s account for the limitation year during which the contributions were actually made, generally the next plan year.