Category: Archive

As Congress, regulators and the plaintiffs bar increase their scrutiny of 401(k) fees, plan sponsors received a bit of good news late last month when a judge threw out part of a class-action lawsuit against Chicago-based Exelon.

The suit was one of a dozen similar class-action lawsuits filed by St. Louis-based law firm Schlichter, Bogard & Denton, alleging that companies violated pension laws by allowing 401(k) participants to be overcharged by the managers of the plans.

Other companies named in the suits include Lockheed Martin, Northrop Grum­man, Boeing, General Dynamics, United Technologies, Bechtel Group, Caterpillar and International Paper.

In several of these suits, including the complaint against Exelon, plaintiffs claim that since the companies violated their fiduciary duties under the Employee Retirement Income Security Act, the employers should be liable for all investment losses that 401(k) participants realized.

But on February 21, U.S. District Judge John Darrah in Chicago dismissed that part of the complaint, questioning the causal relationship between excessive fees and investment losses.

The judge’s dismissal came much to the relief of 401(k) plan sponsors, says Michael Crowley, associate general counsel at the National Futures Association, a Chicago-based organization for the futures industry with 249 employees and a $51 million 401(k) plan.

“If this had gone the other way, it would have been really bad for small plans with expenses much greater than ours because it would have meant employers were now insurers for their participants,” Crowley says.

The judge’s dismissal comes at a time when 401(k) fees are top of mind on Capitol Hill.

On March 6 the House Committee on Education and Labor held its first hearing on the topic, and the Department of Labor has said that it will issue guidance next year to address fee disclosure. The issue, experts say, is that often employers don’t know what they are paying service providers to oversee their 401(k) plans.

But to say that high fees result in investment losses is taking the argument a little too far, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) consultant.

“If the fees are high, then the fees are high, but that has nothing to do with investment losses,” he says, noting that employers can’t be held accountable for how the stock market performs.

While the judge’s dismissal was good news for 401(k) plan sponsors, the issue isn’t dead yet, says David Wolfe, a partner in the benefits practice of Drinker Biddle & Reath.

Schlichter Bogard, the plaintiffs’ firm, can still revamp the complaint to better prove a causal relationship between fees and losses, he says. “Higher fees clearly reduce the rate of return on an investment, but the issue becomes whether that reduced rate of return is enough to show an actual loss,” he says.

Jerome Schlichter, a partner at Schlichter Bogard, did not return calls seeking comment.

—Jessica Marquez

Democrats have vowed to repeal laws enacted to make health savings accounts better investment vehicles for consumers, but in lieu of a unified front, the Bush administration and Congressional Republicans are moving ahead with plans to expand the role of HSAs.

In his State of the Union address in January, President Bush focused on eliminating tax preferences for employer-sponsored health care in favor of a flat deductible—$15,000 for family coverage and $7,000 for individual coverage.

Tucked into his 2008 budget is a proposal to make it easier for health plans to qualify for HSAs if the plan has a 50 percent co-insurance (meaning employees are responsible for paying half of the cost of a medical procedure) or a minimum out-of-pocket requirement that equals the current minimum exposure of a high-deductible plan (which is $1,100 for individuals and $2,200 for families in 2007).

In legislation that went into effect in January the Bush administration countered a criticism that health savings accounts favored the rich over the poor. The new law allows employers to contribute more money to employees with low incomes than they do to employees with high incomes. This discrepancy would otherwise have been discriminatory, but the new law amends that risk and is intended to make it easier for people to pay for the deductible.

The proposals in the president’s budget look to build on the concept of giving employers the discretion to help those disproportionately hit financially by a high deductible. The proposal seeks to allow employers to contribute more money to the HSAs of people with chronic illnesses.

Saying they favor the rich over the poor, Democrats have largely attacked health savings accounts on principal, and have instead focused on addressing the issue of the 47 million Americans who do not have health insurance.

Sen. Tom Coburn, a Republican from Oklahoma, has recently come out with a plan to address the uninsured. It includes expanding the role of health savings accounts by giving a tax break people can only use to buy health insurance, including high deductible plans with health savings accounts.

Other provisions in the law governing HSAs that went into effect in January are aimed at applying the lessons learned in the three years since the accounts were first launched.

“It has become a bit clearer how these plans are supposed to work,” says Chris Calvert, vice president and senior health consultant at Sibson Consulting.

For example, employees can transfer unused funds from flexible spending arrangements and health reimbursement arrangements into health savings accounts. This has prompted employers like CNH Case New Holland to design plans that transfer money from HRAs to HSAs.

“It kind of loosens the use-it-or-lose-it rule” that once governed flexible spending accounts, Calvert says.

Critics said limits on contributions to HSAs do not allow people to save an adequate amount of money for retirement. This year the federal government raised the maximum amount that can be contributed to health savings accounts to $2,850 for individuals (up $150) and to $5,650 for families (up $200).

Still, the maximums are not enough to pay for estimated retiree health costs, says Jay Savan, a consultant and actuary with Towers Perrin in St. Louis.

Savan estimates that people will need $600,000 in 20 years if they retire at age 65 and health care costs continue to grow at more than twice the rate of inflation. Saving the maximum of $2,850 a year and earning 7 percent interest returns about $155,000 after 20 years. Fidelity Investments on March 27 estimated that 65-year-old retirees will need $215,000 to pay for health care, a 7.5 percent increase over the 2006 estimate of $200,000. That cost, calculated annually since 2002, assumes retirees do not have retiree health benefits from their employer and are paying for health care expenses associated with Medicare premiums, co-pays and co-insurance. 

“If you max out your HSA and if you never touch that money and save it for 25 years, the money you amass is a shadow of what you’ll need to cover your care expenses,” he says. “And that is a dirty little secret nobody wants to talk about.”

—Jeremy Smerd

Democrats have vowed to repeal laws enacted to make health savings accounts better investment vehicles for consumers, but in lieu of a unified front, the Bush administration is moving ahead with plans to expand the role of HSAs.

In his State of the Union address in January, President Bush focused on eliminating tax preferences for employer-sponsored health care in favor of a flat deductible—$15,000 for family coverage and $7,000 for individual coverage.

Tucked into his 2008 budget is a proposal to make it easier for health plans to qualify for HSAs if the plan has a 50 percent co-insurance (meaning employees are responsible for paying half of the cost of a medical procedure) or a minimum out-of-pocket requirement that equals the current minimum exposure of a high-deductible plan (which is $1,100 for individuals and $2,200 for families in 2007).

In legislation that went into effect in January the Bush administration countered a criticism that health savings accounts favored the rich over the poor. The new law allows employers to contribute more money to employees with low incomes than they do to employees with high incomes. This discrepancy would otherwise have been discriminatory, but the new law amends that risk and is intended to make it easier for people to pay for the deductible.

The proposals in the president’s budget look to build on the concept of giving employers the discretion to help those disproportionately hit financially by a high deductible. The proposal seeks to allow employers to contribute more money to the HSAs of people with chronic illnesses.

Other provisions in the law governing HSAs that went into effect in January are aimed at applying the lessons learned in the three years since the accounts were first launched.

“It has become a bit clearer how these plans are supposed to work,” says Chris Calvert, vice president and senior health consultant at Sibson Consulting.

For example, employees can transfer unused funds from flexible spending arrangements and health reimbursement arrangements into health savings accounts. This has prompted employers like CNH Case New Holland to design plans that transfer money from HRAs to HSAs.

“It kind of loosens the use-it-or-lose-it rule” that once governed flexible spending accounts, Calvert says.

Critics said limits on contributions to HSAs do not allow people to save an adequate amount of money for retirement. This year the federal government raised the maximum amount that can be contributed to health savings accounts to $2,850 for individuals (up $150) and to $5,650 for families (up $200).

Still, the maximums are not enough to pay for estimated retiree health costs, says Jay Savan, a consultant and actuary with Towers Perrin in St. Louis.

Savan estimates that people will need $600,000 in 20 years if they retire at age 65 and health care costs continue to grow at more than twice the rate of inflation.  Saving the maximum of $2,850 a year and earning 7 percent interest returns about $155,000 after 20 years.

“If you max out your HSA and if you never touch that money and save it for 25 years, the money you amass is a shadow of what you’ll need to cover your care expenses,” he says. “And that is a dirty little secret nobody wants to talk about.”

—Jeremy Smerd

For years the Securities Exchange Commission has tried to pierce the dense fog of legal jargon that obscures the details of executive compensation packages. And although a rule requiring companies to write proxy statements in plain English went into effect in January, it doesn’t appear that much ground is being gained on this front.

“Companies are still allowing lawyers to have the final say on writing the proxies,” SEC Chairman Christopher Cox told a gathering of business leaders at the USC Marshall School of Business in Los Angeles on Friday, March 23. Cox was keynote speaker for a corporate governance conference at the school.

An analysis finds that the proxy statements recently filed by about 40 companies read more like Ph.D. dissertations than the plain-English, easy-to-understand documents required by the SEC, Cox said.

A variety of readability measuring tools were used to arrive at this conclusion, Cox explained. The proxies were assigned an average readability score of 16.45, using the “Gunning Fog Index,” which assesses the readability of written material by taking into account sentence length and complexity of words being used.

By comparison, The Wall Street Journal, which has a sophisticated base of readers, ranks around 12 on the index and Reader’s Digest, which is aimed at a broad audience, comes in at an 8.

The proxies are not only complex, but lengthy, stacking up to 30 to 40 pages, rather than the handful pages called for by the SEC.

Cox said he was disappointed with the lack of clarity in the early batch of proxies. “We are determined to stop bad habits in writing to retail investors,” he said.

It appears, however, that there won’t be significant ramifications for those companies that fall short in complying with the plain-English requirements. The companies that have submitted these difficult-to-understand texts won’t have to refile, and they won’t be fined, according to Cox.

—Gina Ruiz

Immigration reform officially kicked off on Capitol Hill on Thursday (March 22) with a potential setback to the electronic verification system that the government is trying to get companies to adopt.

Reps. Luis Gutierrez, D-Illinois, and Jeff Flake, R-Arizona, offered the first piece of major immigration legislation in the new Congress.

Their comprehensive measure would strengthen border security, increase work-site enforcement, allow 400,000 low-skill workers into the country annually, make it easier for high-skill immigrants to obtain green cards and establish a path to legalization for illegal aliens that requires them to leave the U.S. and return.

Unlike previous immigration legislation, however, the employment verification piece of the Gutierrez-Flake bill does not revolve around the Basic Pilot electronic system that is run by the Department of Homeland Security.

Instead, the bill, dubbed the Security Through Regularized Immigration and a Vibrant Economy Act, would establish a biometric verification system, according to Flake.

Each U.S. worker would possess a card—perhaps a secure driver’s license or Social Security card—containing a data-bank-linked proof of his or her identity that could be scanned by a machine.

This kind of system likely would obviate the need for Basic Pilot. About 15,000 companies are currently participating in the voluntary program. Under last year’s immigration bills, which died when the congressional term ended, U.S. employers would have been required to sign up.

The Basic Pilot system has been criticized as inefficient, ineffective and too weak to support use by all 7 million U.S. employers. The Bush administration, which touts it as the switch for turning off the jobs magnet that attracts illegal worker, says the program is improving rapidly. About 50 new employers are signing up each day.

Flake, however, is unimpressed. “We get rid of Basic Pilot,” he said following a press conference on March 22. “It may work on a small scale, but DHS hasn’t convinced us that it can work on a broad scale.”

Five major human resource organizations also have raised concerns about Basic Pilot.  The groups, led by the Society for Human Resource Management, launched the HR Initiative for a Legal Workforce in early March to help shape the employer verification portion of the immigration debate.

A major worry about Basic Pilot stems from a December DHS raid on six Swift & Co. meat processing facilities in which 1,282 people were arrested for immigration violations. Despite Swift’s use of the verification system, it became the target of enforcement because illegal workers stole identities to pose as eligible applicants. The Swift raid is part of DHS’ increased enforcement emphasis.

“The problem with Basic Pilot is that it doesn’t combat identity fraud,” Flake says. “We need a machine-readable biometric identifier for each worker.”

Although scrapping Basic Pilot could be good news to the business community, no one is celebrating just yet. As of March 22, the 700-page bill had not been released. Corporate lobbyists, while pleased that comprehensive reform has gotten the debate under way, cautioned that they haven’t parsed the bill.

“We’re going to be going over [verification] with a fine-toothed comb,” says John Gay, senior vice president of government affairs and public policy for the National Restaurant Association. “We really want to study that carefully because it’s critical we get that right.”

The idea of a biometric card could run into trouble on a number of different fronts. Many groups involved in the immigration debate have objected to such an approach because it can be enormously expensive, overburden the Social Security system, fall victim to document fraud and raise the specter of a government database of biometrics.

The HR initiative promotes the use of biometrics for verification. But it proposes implementing a system in which workers register their biometric information—and key identifier questions—with private firms. Companies could then check those databases for employment eligibility.

It may take months to work out the details of verification. For now, though, the important achievement for immigration proponents is that a comprehensive bill has been introduced in the House.

Last year, the conservative Republican House majority passed a bill that focused solely on border security and workplace enforcement. That bill was never reconciled with comprehensive Senate legislation because of political stalemate in advance of the fall elections.

In November, voters ousted the Republican majorities in the House and Senate. With Democratic leadership now in both houses, observers think the chances have improved for comprehensive reform.

But political obstacles remain. Many conservative Democrats share some of the same qualms with their Republican counterparts about a path to legalization. And the Senate hasn’t yet produced a bill, although it can start with the comprehensive measure it passed last year.

Still, observers say there is measurable immigration momentum—in large part because the Bush administration is working hard behind the scenes to promote comprehensive reform.

“They like a lot of what’s in this bill,” Rep. Ray LaHood, R-Illinois, says of administration reaction to the Gutierrez-Flake bill.

Flake himself is optimistic. “The planets are finally aligning to get this done,” he says.

The business community also is heartened that comprehensive legislation has launched the immigration debate.

“This is a great day to focus on a bill that has the big picture right and sets the stage for Congress to take action,” Gay says.

Mark Schoeff Jr.

HR software firm Kronos plans to pursue its ambitious expansion as a privately owned company.

Chelmsford, Massachusetts-based Kronos said Friday, March 23, that it has agreed to be acquired by private equity investors for about $1.8 billion. The lead investor in the deal is Hellman & Friedman, a private equity investment firm with offices in San Francisco, New York and London. JMI Equity, a private equity firm focused on the software and business services industries, also is slated to invest in the takeover.

“Our board of directors believes this transaction is in the best interests of our shareholders and affirms Kronos’ tremendous value, market leadership and the exciting growth opportunities in front of us,” Kronos executive chairman Mark Ain said in a statement.

Under the terms of the deal, Kronos shareholders will receive $55 in cash for each share of Kronos common stock, representing a 34 percent premium over Kronos’ closing share price from 20 trading days ago.

Kronos’ board has resolved to recommend that shareholders adopt the agreement. The deal is subject to regulatory approvals.

Founded in 1977, Kronos for years specialized in time-and-attendance tools. But in the past five years, the company has been pushing beyond those roots. A milestone in that effort was Kronos’ acquisition last year of hiring technology firm Unicru. Kronos has signaled its interest in making more strides in the hot field of “talent management” applications, and has stated that it wants to be the first software firm dedicated solely to HR matters to rake in $1 billion in annual revenue.

For the year ended September 30, 2006, Kronos brought in revenue of $578 million. A report last summer from AMR Research ranked Kronos third in revenue for human capital management applications in 2005. Only Oracle and SAP, which both offer a range of business software besides HR applications, ranked ahead of Kronos. AMR’s figures include revenue from professional services.

Naomi Bloom, managing partner at Bloom & Wallace, a consulting firm in Fort Myers, Florida, says the Hellman & Friedman buyout could help Kronos invest in a needed software upgrade, broader functionality and expanded geographic reach, all without investors pouncing on the company for not maximizing short-term profits. Customers are likely to benefit from the resulting stronger products, she says.

On the other hand, Bloom says, it’s always possible that private owners will choose to squeeze all the profits they can out of a software company and neglect product enhancements. If that scenario were to occur, she says, a sure sign will be defections from Kronos.

“It will be easy to spot,” Bloom says. “Talented people will simply not stay in a company that’s being milked.”

The Kronos buyout plan, combined with an effort to take HR outsourcer Affiliated Computer Services private and talk of a possible Hewitt Associates buyout, suggest that the HR software and services field may be ripe for more private equity acquisitions. Bloom says a number of companies in the industry may have gone public sooner than they were ready for, and may welcome the change. “I think we’re going to see a deluge,” she says.

—Ed Frauenheim