A popular theory in the business world is that three decades of burgeoning environmental controls and regulations have strangled the economy and undermined our economic competitiveness. Given the buzz, it’s no wonder executives often prefer to do the bare minimum or delay regulatory compliance as long as possible.
But what if adhering to the planet’s highest environmental standards actually created a competitive advantage by allowing agile, mid-size firms to zoom past their monolithic competitors? And what if compliance led to reductions in manufacturing and distribution costs? Being proactive and viewing compliance as an opportunity instead of an obligation could be just what the doctor ordered to heal our ailing economy.
“Adhering to the highest environmental standards can inspire innovation and the development of cutting edge products, because it can force everyone in the organization to coalesce around ways to meet the most stringent requirements,” says Dr. Gregory Theyel, associate professor of Business Management at California State University, East Bay. He teaches undergraduates and graduates about environmental, social and economic sustainability and helps companies with business development and the introduction of sustainability into their daily practices.
Smart Business spoke with Theyel about creating a competitive advantage by treating environmental compliance as an opportunity instead of an obligation.
Why should executives consider adhering to the highest global standards?
First movers often have the upper hand in the marketplace, and developing a product that adheres to the highest environmental standards can allow you to sell it anywhere on the planet without changing the design or manufacturing process to meet disparate regulations. Plus, proactive companies have more time to adapt to new regulations and grab market share by appealing to green-minded customers and touting their environmental stewardship. Meanwhile, the laggards stymie production, efficiency and profits when they wait until the eleventh hour to find new vendors or secure alternate manufacturing materials.
How can companies spot opportunities to benefit from environmental compliance?
First, interact with stakeholders to find out what they care about and anticipate their needs. Second, observe social change and stay connected to the community, because environmental laws usually begin as social movements before giving rise to new policies and regulations. For example, after environmental concerns surfaced following the Fukushima disaster in Japan, Germany decided to shut down its 17 nuclear power stations by 2022. The law has spawned a spate of new ideas for producing environmentally safe power across the European Union. Finally, stay in touch with regulators and engage in the law making process to give you a preview of pending legislation and the chance to influence the regulatory process by sharing information and ideas with political leaders and committee members. Regulators often seek input and solutions from the business community when evaluating new laws.
How can companies use open innovation to solve sustainability issues and reduce operating expenses?
Don’t focus on just R&D or fixing a single problem; invite everyone into the discussion and rethink your entire innovation process and business model. By attacking the problem holistically, you may uncover opportunities to sell ancillary services, reduce production costs, boost margins or enter new markets. For example, when an electronics manufacturer needed to find a substitute coating for its wiring products, it brought in customers and members of the supply chain to brainstorm solutions. In the process, they created an environmentally safe, yet more pliable material that not only opened the door to new markets, but also reduced manufacturing costs by facilitating the consolidation of several production lines. This company didn’t focus on meeting the minimum standards; it was successful because it seized the opportunity to rethink how it does business.
How can executives orchestrate an attitudinal shift?
The idea is to weave compliance and innovation into the culture of the organization and ensure that everyone is looking out for new ideas and the advent of environmental regulations. Start by asking employees to interact with stakeholders and participate in industry associations, and by hiring employees with collaboration skills so everyone is capable of nurturing relationships and developing strategic alliances across the entire supply chain. The idea of excluding outsiders is old school; successful companies remove the barriers to innovation by inviting everyone into the process. They even collaborate with competitors when it benefits the entire industry, such as for infrastructure development or standard setting. Finally, examine every component and step in the manufacturing and distribution process to identify chemicals and activities that are harmful to the environment. Once you’ve created a list, stay ahead of new regulations by investigating alternative systems and solutions. In the process, you may uncover ways to reduce waste, negotiate lower prices for raw products, substitute nontoxic chemicals or consolidate distribution simply by viewing compliance as an opportunity instead of an obligation.
Dr. Gregory Theyel is an associate professor of Business Management at California State University, East Bay. Reach him at firstname.lastname@example.org or (510) 885-3078.
The American Recovery and Reinvestment Act of 2009 (ARRA), also known as the stimulus bill, contains the HITECH Act that amends the Health Insurance Portability and Accountability Act (HIPAA), which was enacted in 1996.
“When HIPAA was first enacted, the health care industry was paper driven,” says Jeff Porter, a director with Kegler, Brown, Hill & Ritter. “HITECH is addressing some long-standing issues with HIPAA, as well as some newer issues that have arisen as a result of the advent of electronic health records and the online transfer of health information.”
Among the significant changes are the expansion of enforcement to states’ attorneys general and expansion of privacy and security provisions related to “business associates” and new breach notification provisions. In addition, penalties can now be imposed on individuals as well as entities.
Smart Business asked Porter for more information about the changes to HIPAA.
Who is covered by HIPAA?
You or a legal representative can determine whether you are a covered entity. The website for the U.S. Department of Health & Human Services (HSS.gov) and the Office of Civil Rights (OCR) provide good guidance in this regard. Covered entities typically include hospitals, nursing homes, medical offices that provide treatment and bill for those services, health insurance plans, and health care clearinghouses (e.g., companies that convert health records and other information into the coding necessary for billing and research). If you are a business associate of a covered entity (e.g., a medical billing firm or a home health care agency), and you are obtaining information for a purpose the covered entity might use it for, you fall under the HIPAA provisions which apply to business associates.
What changes have been made regarding penalties for noncompliance?
The penalties have changed in a couple of significant ways. First, in regard to enforcement, previously penalties could only be imposed on covered entities – now penalties can be imposed on individuals as well. If someone within an organization willingly neglects and doesn’t comply with the rules and makes wrongful disclosures, he or she will be subject to fines, as well as possible imprisonment. Second, in the past, enforcement and violations were addressed solely at the federal level by the Office of Civil Rights. Now, attorney generals are empowered to deal with enforcement and violations as well.
What is the impact on state privacy laws?
Although many believe that HIPAA is the sole controlling authority related to patient privacy, it does not however preempt state privacy laws and regulations. If provisions in the state privacy laws are more restrictive, then those provisions apply in addition to HIPAA. For example, Ohio has some of the stricter state privacy laws in regard to disclosure of protected health information. These laws have to be evaluated and reviewed to determine what additional actions might be needed in terms of notification and disclosures. The question for the future is whether states with these stricter privacy measures will impact exchange of health information with other states. In coming years, if we are going to have more free-flowing medical information, these issues will need to be addressed.
What is considered protected health information?
Protected health information is identifiable information related to treatment of a patient and that is maintained by a covered entity. In certain circumstances covered entities can release this information without authorization, for purposes of treatment, billing and health care operations. Covered entities can’t release information beyond those purposes without authorization of the patient. In addition, specific types of information are viewed as more sensitive (e.g., mental health and substance abuse information, information about certain diseases, such as HIV) in many states and more restrictions on disclosure exist at the state level.
What is a permissible disclosure?
Information can be disclosed if a patient authorizes it. Information must be disclosed by a protected entity if the HHS requests that information as part of an investigation. Permitted disclosures also include treatment information (to help treat a patient); information used to seek payment; or information used in the health care operations category if that information will improve the quality of care overall or part of the business overall.
Do patients have any new rights?
Patients will have a greater ability to try to find out who has accessed their protected health information. Past experience is that most patients never request such information. However, there will now be a greater ability for patients to request an accounting of disclosures. This means that covered entities and business associates could be asked to account for a good deal of information if they get a request. New regulations are being considered in this area, so it is an area to watch.
How can covered entities best keep up with the changes and protect themselves?
1) Keep an eye on releases from HSS about changes. 2) Consult with your legal representative. 3) Make sure your designated privacy officer is properly trained and that he or she is training your employees. 4) Keep open lines of communication with business associates and make sure any contracts you have with them include appropriate provisions that will require they comply with HIPAA and all other state laws which may come into play.
JEFF PORTER is a director with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5418 or email@example.com.
If you’re an employer who sponsors a 401(k) plan, April 1 is a date that you should circle on your 2012 calendar. This is the deadline for plan sponsors to obtain from plan advisors newly required disclosures stating specifically what services they’re providing and the cost of each.
To some sponsoring employers, this may sound like a bureaucratic requirement of little consequence. This is decidedly not the case. Beginning April 2, plan sponsors who can’t show that they met the April 1 deadline for disclosures — and the best way to do so is to get them in writing, with signatures — will be subject to federal fines, disqualification of their plans and employee lawsuits aimed at their personal assets.
This requirement is among many stemming from new rules from the Department of Labor (DOL) that go into effect in 2012. The intent of the rules is to protect participating employees from unreasonable service provider fees that shrink their 401(k) accounts. Unbeknownst to employees and many plan sponsors, many plans have long been charged excessive fees. Until now, disclosure of all fees has not been expressly required by federal rules.
In addition to obtaining the fee and service disclosures, the new rules also require sponsors to determine whether plan advisors are fiduciaries — a legal/regulatory status meaning that these advisors always put clients’ interests ahead of their own. (See “The 401(k) regulatory tsunami.”)
The combined content of the new advisor disclosures will have profound implications for sponsors’ compliance burdens stemming from new DOL rules, which expand or amplify longstanding requirements of the Employee Retirement Income Security Act (ERISA) of 1974.
Under ERISA, plan sponsors are themselves fiduciaries, with all of the attendant responsibility, accountability and liability. Many plan sponsors have always believed that their long-time advisors are fiduciaries, but this simply isn’t true. Typically, the dominant advisory role in a 401(k) plan is played by a broker, yet precious few brokers are fiduciaries.
Though ERISA rules prohibit non-fiduciaries from advising on the suitability of specific investments in these plans, enforcement over the years has been lax, allowing many brokers to cross the line between providing employee education and actually advising on the suitability of specific investment options.
Thus, they’ve engaged in the quintessential advisory role — one reserved by law for conflict-free fiduciaries who can share legal responsibilities with sponsors. By contrast, brokers may have conflicts of interest, such as business relationships with financial institutions that provide investments for the plan.
It is critical for plan sponsors to understand how the dynamics of these disclosures will put an increased regulatory and legal burden on them as fiduciaries: By making it a matter of record whether an advisor is or isn’t a fiduciary, the new DOL rules mean that sponsors will have no credibility in telling regulators that they believed they were outsourcing their own fiduciary responsibilities.
In many cases, details of the new advisor disclosures will trigger epiphanies for sponsors concerning fundamental inadequacies of their plans, bringing a growing awareness of some of the rigors that they must undergo to assure that these plans comply with the new DOL rules.
From the point of view of plan sponsors using a broker to service their plans, this epiphanic moment will often go something like this:
– The sponsor, aware of the importance of these disclosures, does some research and learns what services non-fiduciary advisors can and cannot legally provide.
– In disclosures from the broker, the advisor lists the fees that his or her company is charging and the services provided for these fees: selecting mutual funds for the plan’s investment options, making educational presentations to employees and enrolling them in the plan.
– The broker states unequivocally that he or she is not a fiduciary.
– The sponsor realizes that because plan-education presentations typically involve answering questions about specific investments, they can easily involve advisors’ rendering advice on investments — an activity prohibited for non-fiduciaries.
– Further, the sponsor realizes that this advisory scenario is even more likely at enrollment meetings.
– It dawns on the sponsor: The plan is getting far less actual service than previously believed. Hence, fees for the actual, legitimate services being provided are far higher than the sponsor thought.
These disclosures are intended to serve as a wake-up call for companies who may be paying far too much for far too little, so they can take steps to change their plans.
When doing so, sponsors should be careful not to make the same mistakes that got them into trouble in the first place. When non-fiduciary advisors pitched them business, they likely said, “We’ll be standing right behind you.”
By having fiduciaries as their plan advisors, sponsors can be assured that these advisors will be standing with them shoulder to shoulder, sharing their exposure to any incoming regulatory or legal fire.
Anthony Kippins is president of Retirement Plan Advisors LLC, a Cincinnati-based financial services company that provides retirement-plan fiduciary services and employee-benefit solutions to small companies. Kippins holds the AIFA (Accredited Investment Fiduciary Analyst) designation. He can be reached at firstname.lastname@example.org.
While the light of economic recovery may be appearing on the horizon, many sectors of the economy continue to suffer slow growth and persistent or periodic struggles with liquidity as a result of low demand for goods and services. Until consumers determinatively shake off the historically low levels of confidence and reverse the current trends of debt reduction and increased savings rates, some businesses will fall on hard times.
A struggling business and its leaders (e.g., directors and officers of corporations, or managers of limited liability companies) seeking to avoid the entity’s failure as it experiences liquidity challenges or insolvency need to heed some legal rules that may not be readily apparent.
Smart Business spoke to Steve Dettmann and Douglas Landrum of Jackson DeMarco Tidus Peckenpaugh about a few common legal matters for those businesses, and their principals (and guarantors), to consider when the business experiences difficult times.
Management may be liable to creditors
Normally, the duties of the directors of a corporation and the managers of a limited liability company are owed to the equity holders of the business. However, if a business has insufficient equity or is insolvent, management personnel may become personally liable for approving distributions to shareholders or other equity owners. For a Delaware business entity, the Delaware Supreme Court has held that when a corporation is actually insolvent, fiduciary duties arise for the benefit of creditors in the place of shareholders — under the theory that the creditors of an insolvent corporation become the beneficiaries of any increase in value and suffer the detriment of further decreases in value of the corporation’s remaining assets. Thus directors and managers should ascertain an accurate financial understanding of proposed actions of struggling businesses.
Not all guaranties are the same
Another area where principals become exposed to personal liability for obligations of the business is by executing guaranties. In many lending circumstances involving small and medium-sized business entities, lenders will require guaranties of varying types from principal equity owners. These guaranties come in many forms — some absolute, some limited and some contingent. Some guaranties are unconditional and others may limit the lender’s recourse to a specific set of assets or circumstances. Most guaranties contain a set of waivers pursuant to which the guarantor waives statutory suretyship defenses — some ironclad and others suffering notable deficiencies. Understanding the difference is key.
In commercial real estate lending, the borrower’s principals are frequently induced to give the lender a “springing” guaranty (sometimes referred to as a “recourse carve-out” guaranty) under which the lender’s right to seek recovery beyond the borrower or the specific secured collateral arises only upon the occurrence of specified events. These events typically include “bad boy” acts of the borrower (notwithstanding that only certain of the acts are inherently “bad”) including, among others, fraud, misrepresentation, commission of waste, prohibited transfers, failure to pay real estate taxes or failure to properly apply security deposits, reserves or insurance proceeds. The spring on some guaranties is sprung (i.e., the recourse obligation arises) when the borrower, during times of financial difficulties, seeks legal protection from its creditors through the filing of a petition in bankruptcy — even though the bankruptcy petition may be later dismissed (i.e., like bells that cannot be unrung, certain springs cannot be unsprung). Therefore, if a commercial real estate enterprise is failing, guarantors having influence over the actions of the borrower should consult with counsel to ascertain the potential consequences of a borrowing entity’s proposed actions before those actions are taken, and to carefully navigate through potential foreclosure of real property security so as to avoid, where possible, the triggering of liability under a guaranty.
Completion guaranties are commonly used as credit enhancements for construction financing, but the remedies available to a lender are uncertain. Generally, recovery under a completion guaranty is limited to the increase in value of the collateral that completion would offer; and where a lender on an underwater project cannot demonstrate that the value upon completion would exceed the as-is value, then the completion guaranty may be worthless.
Knowing which type of guaranty binds the principal, and whether there may exist a partial or complete defense to recovery, is essential to determining what actions should be taken or decisions should be made on behalf of the business.
Filing bankruptcy may not be a good idea
While a debtor-in-possession (DIP) usually acts as the trustee upon the filing of a bankruptcy petition under Chapter 11 of the United States Bankruptcy Code, if the business cannot present or implement a viable plan to reorganize in a Chapter 11 bankruptcy, under certain circumstances, the bankruptcy case can be converted to a Chapter 7 liquidation upon request of the creditors. Independent U.S. Trustees appointed by the court in Chapter 7 bankruptcy liquidations are compensated based upon what they are able to collect on behalf of the estate for payment to the creditors of the bankrupt entity. With this motivation, the trustees frequently look into the pre-petition acts of management and equity holders to determine whether the bankruptcy estate may have causes of action that could bring a recovery. A Trustee may therefore act in a manner opposed to management and equity holders, as they look for evidence of insider transactions, misuse of corporate assets for personal benefit, distributions to equity holders at or near the time of insolvency or breaches of duties that could provide access to policies of directors and officers liability insurance.
Accordingly, if a struggling business is unlikely to be able to reorganize in bankruptcy, then it may be a better course for management to wind-up the business and distribute assets to creditors (similar to a bankruptcy liquidation) without filing a case with the United States Bankruptcy Court. Negotiating with creditors for a liquidation of the company’s assets without a bankruptcy case may avoid the appointment of a trustee who turns out to be the worst enemy of former management or owners.
Remember tax obligations
One of the knee-jerk reactions of management in a difficult business setting is to use funds withheld from employee wages (income tax, social security tax or Medicare withholdings) for liquidity purposes instead of paying over the funds to the IRS and other tax authorities. This is one of the worst methods that management could employ to prop up the business as it begins to fail, as any “responsible person” of the business (meaning the individual or group of individuals within an organization who, individually or collectively, has sufficient authority to pay over withholding taxes) may be held personally liable by the IRS for a Trust Fund Recovery Penalty — a 100 percent tax penalty — for failing to pay over taxes withheld from the employee.
If a business is struggling, management and equity holders must be mindful of the many traps that exist from which could arise personal liability, and a small investment in consultation with legal counsel before actions are taken may be essential to avoiding unnecessary loss.
Steve Dettmann is Senior Counsel, Real Estate Practice Group and Douglas Landrum is a Shareholder and a Member of the Corporate Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach them at SDettmann@jdtplaw.com and DLandrum@jdtplaw.com, respectively.
All too often, small businesses sponsoring 401(k) plans sign contracts with service providers that call for outrageously high fees that are passed on to participating employees.
Many plan sponsors have no inkling that their fees may be unreasonable for the services they’re receiving because they don’t even know the amounts involved. Under new regulations from the federal Department of Labor (DOL) that go into effect this year (see “The 401(k) Regulatory Tsunami”), plan sponsors are now required to determine these amounts and whether they’re reasonable.
The new regulations present a series of compliance hurdles that employers must clear, beginning with a requirement to demonstrate that they’ve determined their plans’ arrangements for fees and services (see “April 1 deadline for 401(k) plans is no April Fool’s joke”). The original deadline was April 1, but the DOL has extended it until an as-yet-unspecified date in July. This extension merely delays the inevitable, so plan sponsors should begin obtaining fee and service disclosures now rather than waiting until the last minute.
The federal government has mounted a regulatory drive to keep workers’ accounts from being drained by 401(k) plan service providers. There is ample evidence to suggest that many of the large financial institutions in this industry (primarily insurance companies offering plans through investment brokers) have long charged fees that are exorbitant.
Under the new DOL rules, workers’ quarterly account statements will now include a listing of fees, so workers will be able to see this drainage. Previously, they received only investment return figures net of fees.
As fiduciaries — a legal status that carries great potential liability — employers have long failed to comply with federal rules designed to protect employees from high fees. Because of the new regulations and their disclosure provisions, employers who continue in this failure will face not only steep fines from regulators, but also hostility from employees when they see just how much they’re paying in fees.
In fees applied to 401(k) accounts over a lifetime of employment, every fraction of a percentage point is significant. Half a percentage point can make the difference between a comfortable retirement and an uncomfortable one.
One would think that, like many products and services, these fees would become homogenized. This is the case in efficient markets. But the market for 401(k) plan services is by no means efficient because plan sponsors, who are busy running their businesses, don’t pay enough attention. They tend to haplessly enter into arrangements with service providers that persist for decades without scrutiny. As a result, fees in this market are all over the map.
For many plan sponsors, especially small companies that lack in-house benefits expertise, this market is foreign terrain. Now, the DOL is requiring that sponsors explore it. This process is known as benchmarking fees — determining where a given plan’s fees stand relative to what’s available on the open market. The data for this is fairly accessible. Far more difficult than finding the data is interpreting it and applying it to a given company’s situation.
For sponsors seeking to avoid apples-to-oranges fee comparisons, the logical move would be to break down fees for each service. Yet many service providers historically haven’t itemized services. They take a sizeable percentage from accounts according to the terms of a vaguely worded contract that guarantees little — except the fees. The new rules require service providers to specifically disclose fees for each service provided.
With this detailed information in hand, sponsors can go about the time-consuming task of researching the market to make fee comparisons. Yet, there’s a way that sponsors can save the time it takes to scroll through endless screens of fee data. They can use a tool with which they are probably already familiar: a request for proposals (RFP).
Instead of going to the market, sponsors issuing RFPs can bring the market to their doorsteps. If much lower fees come in for the same services, then sponsors can engage new service providers. Then, to monitor an ever-shifting market over time, plan sponsors can periodically run spot checks (preferably, every three years) on where their fees stand, issuing RFPs to take serial snapshots of fees against which to benchmark their current arrangements. Thus, sponsors can convincingly demonstrate to employers and regulators that they are continuously endeavoring to determine where their fees stand in relation to what the market has to offer and, if appropriate, changing providers to contain fees.
Procedurally, using RFPs is fairly simple, but the devil lies in the RFP details. Care must be taken to construct the RFP to elicit fee-itemized proposals from firms that are accustomed to servicing plans of the company’s size and contribution levels. As the RFPs should be constructed with this kind of market knowledge, it’s a good idea for smaller companies to engage the services of a qualified advisor to write their RFPs.
Companies that engage qualified fiduciaries for this function have the advantage of actually outsourcing some of their fiduciary responsibility and attendant liability. But when sponsors use brokers, few of whom are fiduciaries, they retain all liability.
The key to complying with the DOL requirement for reasonable fees is to establish a clear, sensible benchmarking process. Plans sponsors can take comfort in the fact that regulators are more interested in seeing a clear process than in a given set of fees, as there is no right or wrong fee solution in this subjective arena. The point is to make an effort by adopting and steadfastly following a sound process.
Yet, employers whose efforts not only result in a good process but also identify reasonable fees for high-quality services — and take advantage of them — will fulfill not just the letter but the spirit of their fiduciary duties. And, most importantly, they will assure a better retirement for their employees.
Anthony Kippins is president of Retirement Plan Advisors LLC, a Cincinnati-based financial services company that provides retirement-plan fiduciary services and employee-benefit solutions to small companies. Kippins holds the AIFA (Accredited Investment Fiduciary Analyst) designation. He can be reached at email@example.com.
A regulatory tsunami is headed toward companies sponsoring 401(k) plans. It will arrive next year when new federal rules take effect, creating an unprecedented burden of accountability for employers.
More than ever, employers will be required to assure that fees associated with these plans are reasonable for the services being provided. To do so, they should move expeditiously to determine and evaluate all plan fees.
Employers are already required to exercise this due diligence by the Employee Retirement Income Security Act of 1974. Yet the fees charged by large financial institutions providing 401(k) plans vary widely and are extremely difficult for employers and employees to ascertain. Many aren’t aware that their fees may be too high because, until now, the government hasn’t required plan providers to voluntarily disclose all fees.
Nevertheless, by entering into arrangements with plan providers that involve unreasonably high fees, many employers have been failing to protect participating employees as required by ERISA. To remedy this lack of compliance and to help employees make more informed investing choices, the U.S. Department of Labor has issued the new rules, which reinforce and expand employers’ existing responsibilities as plan sponsors.
Effective in 2012, these rules will open up new terrain for potential federal fines — as the DOL is substantially increasing its investigative staff — as well as lawsuits from employees. This liability stems from employers’ role as plan fiduciaries, a regulatory/legal status meaning that they must consistently put plans’ and participants’ financial interests ahead of their own.
The new rules require plan providers to disclose fees to employees in chart format in quarterly statements. Currently, these statements show investment returns net of fees, so employees don’t know how much they’re paying plan providers or investment companies that supply products for their plans.
Though the rules require plan providers to disclose fees in an easily understandable format, there are indications that the revised account statements may turn out to be long, confusing documents — something on the order of a prospectus. Confusion will ensue, and employees will queue up at HR to ask what it all means.
After making sure employees understand the newly required disclosures — which is, itself, a fiduciary responsibility — employers will undoubtedly be lambasted with bitter complaints from employees who were unaware of the amounts of fees being deducted from their accounts and others who simply thought their actual investment returns were lower.
Accordingly, it’s imperative that employers act now to “X-ray” their plans or engage a qualified consultant for that purpose, so they understand precisely what fees are being charged for the services being provided. This will involve reviewing reams of plan documents and confronting plan providers to ascertain fee information.
But that’s only the beginning. The tsunami’s force is amplified by the “reasonableness” requirement: How can employers know whether fees are reasonable?
To do so, they must determine where their plans’ fees fall relative to industry norms, so employers must benchmark fees against the full spectrum of the national market for plans of the same size providing the same services. These data-intensive comparisons can be highly complex, especially for small firms that lack the necessary expertise in-house.
The new rules also put increased pressure on sponsoring employers to assure that anyone advising 401(k) plans or participating employees is a fiduciary. ERISA rules have long prohibited non-fiduciaries, including brokers, from advising employees on the suitability of specific investments — a scenario rife with potential conflicts of interest.
Yet, because of lax enforcement that the government is now trying to repair, brokers typically play a dominant role in servicing 401(k) plans. By contrast, fiduciaries — who must avoid even the appearance of conflicts — must comply with stringent regulatory standards that don’t apply to brokers. Moreover, fiduciary advisors are subject to substantially greater legal liability.
Hence, the new DOL rules require employers to determine whether plan consultants are fiduciaries. If they aren’t, fiduciary responsibility — and liability — for the plan resides with the employer.
Companies that proactively get out in front of the tsunami by lining their corporate doorsteps with due diligence sandbags will minimize the damage. They have no time to waste.
Anthony Kippins is president of Retirement Plan Advisors LLC, a Cincinnati-based financial services company that provides retirement plan fiduciary services and employee benefit solutions to small companies. He is an Accredited Investment Fiduciary Analyst.
Do you know what, exactly, your employees do? Believe it or not, many executives haven’t taken the necessary steps to truly understand each position in their organization.
In today’s chaotic employment landscape, a job analysis should be the first step in every major human resources effort. A job analysis provides the objective criteria needed for executives to make informed decisions regarding staffing, selection, performance, succession planning and compensation.
While some people use the term job description interchangeably with job analysis, the processes are actually quite different, says Jody Wheaton, director of Organizational Effectiveness for Corporate College. “A job description is a written statement about the job,” she says. “A job analysis is a systematic process that captures the entire job in compliance with professional and legal guidelines. Ultimately, this helps you develop a selection system that is valid and legally defensible.”
Smart Business spoke with Wheaton about the benefits of a job analysis, what approaches are available and who should be involved.
How can an organization benefit from conducting a job analysis?
Conducting a job analysis is important because organizations are being asked to work leaner and more efficiently while developing growth and innovation. It’s important to be aware of the critical responsibilities for each position, especially those that are considered strategic in nature, and those that impact the customer and the bottom line. In addition to determining the critical tasks associated with each job, it’s crucial to identify the desired knowledge, abilities, skill sets and other preferred characteristics.
Job analysis serves as the foundation for helping select the right people into an organization, in terms of job fit as well as cultural fit. A job analysis allows companies to not only create better selection systems, but also create effective training development programs, compensation and talent management systems. Often organizations hire for technical ability and fire for personality flaws. Organizations should consider hiring for both experience and cultural fit. Job analysis provides the needed data. In the event an organization is challenged legally, the court will look to see if a job analysis was done properly and if the selection system was considered to be job-relevant. Organizations should take a proactive approach to minimize legal challenges.
What job analysis approaches are available?
Many companies begin with reviewing the Occupational Informational Network (O*NET), which provides comprehensive occupational descriptions and data under the sponsorship of the U.S. Department of Labor/Employment and Training Administration.
To build on the O*NET data, the first approach is conducting interviews and focus groups. Typically these are conducted with job incumbents and supervisors. The drawbacks to this approach include the time required, scheduling and large number of people that need to be included if there are a large number of incumbents serving in the role.
Surveys are another option. This method allows you to gather data quickly and summarize the data statistically. Drawbacks include the inability to ask clarifying questions and gain needed buy in.
Off-the-shelf job analysis systems don’t allow for flexibility and are often too generic. We believe a blended tailored approach is the best choice, gathering and leveraging multiple perspectives and methods. We also believe leveraging technology in the process is critical.
What kind of components should be included?
Knowledge, skills, abilities, work behaviors, tasks associated with the job, competencies and cultural aspects of the organization should all be part of the data collection process. Be sure to distinguish between essential and non-essential characteristics for Americans with Disability Act (ADA) purposes.
Who should be included?
You want to make sure you have a good sample of high performers who understand the job and do it well. You should include senior-level management, direct supervisors and anyone who has critical knowledge about the job. Finally, include those who understand the training and development function, because they can often best articulate where people go wrong after attending training.
How much time will it take?
It depends on your approach. It can take anywhere from a few weeks to three months. You don’t have to take a manual- or labor-intensive approach. Often, a manual approach involves time, resources, creation of job analysis questions, summarizing the data, availability of employees, travel, schedules, etc.
Having a systematic process and leveraging technology-based tools allow job analysis participants to go through the process in a more efficient manner. Such tools provide standardized questions that can be edited to ensure they are customized to that job, as opposed to off-the-shelf tools, which use generic statements that can’t be customized.
How can businesses ensure standardization and legal compliance?
The best practice is educating and training all employees on the process, the importance behind it, and why you do it. In some organizations, stakeholders get involved in the process, even becoming engaged in the selection measures that are chosen. With other organizations, the HR department bears the entire burden. For legal compliance, it’s important to follow professional guidelines regarding sampling — who you include, the type of information you include, etc. The Equal Employment Opportunity Commission’s (EEOC) Uniform Guidelines and the Society for Industrial and Organizational Psychology’s (SIOC) Principles for the Validation and Use of Personnel Selection Procedures are a couple of good resources to help with compliance.
Jody Wheaton is director of Organizational Effectiveness for Corporate College. Reach her at firstname.lastname@example.org or (216) 987-5867.
Now more than ever, companies are under the microscope, as federal investigators are beefing up the enforcement of regulations.
For instance, although the anti-bribery and public company accounting statutes in the Foreign Corrupt Practices Act were established nearly 40 years ago, enforcement has exploded in recent years. In 2004, the U.S. Securities and Exchange Commission and the Department of Justice brought a combined five FCPA enforcement actions. That number rose to 33 in 2008 and 66 in 2009, as reported by Corporate Secretary, a news service for general counsel and governance professionals.
In addition to increased regulatory scrutiny, the recent passing of The Wall Street Reform and Consumer Protection Act (commonly referred to as the Dodd-Frank Act) is resulting in increased enforcement of a federal anti-bribery law, as reported by Compliance Week, a corporate governance news service.
Created with the intent of preventing another financial crisis, the new law contains financial incentives for whistle blowers to bypass internal corporate compliance protocols and go directly to authorities. The new legislation adds to the risk exposures associated with the decisions made by corporate directors and officers, especially as they act on issues of governance and executive compensation.
“A number of silver-bullet remedies — audits, policies in a box, even software — have been on the market well before the Sarbanes-Oxley Act, which declared specific awards for employees to notify government agencies of any tax fraud committed by their employers,” says Edward X. McNamara, a senior vice president at Aon Risk Solutions. “The conflict is that these solutions are mostly reactive or after the fact, doing little to directly avoid or prevent legal or ethical violations.”
Smart Business spoke with McNamara about the rise in enforcement actions and why establishing a culture of compliance is so important.
Why is an effective compliance program so vital?
Several studies reveal that employers with credible, proactive compliance programs that encourage employees to speak up are most effective at discouraging bad behaviors before they manifest into irreversible actions.
The Association of Certified Fraud Examiners studied 508 companies that had experienced occupational fraud and discovered companies that unearthed troubling activity were more likely to have learned of it from a coworker’s tip than from any internal or external audit. Moreover, organizations that had anonymous reporting systems in place suffered less than half the financial losses from fraud sustained by companies without such systems.
Building a culture of compliance empowers a company to easily mitigate risks and be vigilant about regulatory requirements. It fundamentally influences and shapes decisions made involving the attraction and retention of ethical people. The byproduct of such a culture is an operational framework that is effective, measurable and delivers long-term results.
What are the risks of false accusations?
Increased regulatory enforcement leads to increased claims. Even historically good companies that have invested considerable time and resources establishing robust compliance programs are at risk when incentives to serve as a whistle blower are so rich. Compounding this risk exposure is the requirement that a public company must disclose it is being investigated or has received a subpoena. Increasingly, these announcements are triggering hungry plaintiffs’ lawyers to file shareholder derivative lawsuits. Settlements in these cases are becoming larger and larger, resulting in unpredictable drops in a company’s stock price, which can unleash securities class action suits.
There’s no avoiding such risks, as directors and officers cannot diminish the complexity of the business, legal and regulatory environment in which they operate. A company’s ability to attract good, ethical corporate leaders is only complicated by the threat of unfounded legal action. Solutions do exist, as a great deal can be done to protect the personal assets of directors and officers through a combination of strong corporate governance, broad corporate indemnification and a risk transfer program that includes a customized D&O liability insurance program.
What should companies do going forward?
The days of a ‘see no evil; hear no evil; speak no evil’ approach to compliance are over, because what you don’t know can hurt you. As organizations move from a mentality of erratic compliance validation to one that uncovers and addresses risks head-on, several benefits can be realized: improved planning, cost savings from elimination of redundant programs, increased morale and the attraction of top talent.
Best of all, a culture of compliance allows an organization to invest greater quantities of managerial time and resources on business-critical functions, which can only improve bottom line performance.
Edward X. McNamara is a senior vice president at Aon Risk Solutions, a leading risk management and insurance brokerage firm. Reach him at email@example.com or (216) 623-4146.
Upcoming health care reforms will require employers to monitor and report so much information that staying compliant will require a lot of time and effort.
“There are already many laws and rules that exist today affecting employers who offer health insurance benefits to their employees. The Patient Protection and Affordable Care Act, popularly referred to as the health care reform law, will impose many more responsibilities, including many new reporting requirements,” says Alicia Saporito, partner, Millennium Corporate Solutions. “That’s why it is so important to partner with a broker or consultant that not only understands how your business is affected by the health care reform law but also how to use existing technology to help you stay on top of the rules and minimize your liability for failure to comply with many of the thousands of laws you are required to follow today and in the future.”
Smart Business spoke with Saporito about how technology can make compliance easier.
What do businesses need to know about new initiatives and requirements?
The new initiative is going to require that companies track and document much more information than they ever had to in the past. In addition, employers will have to report much more information about their health plan to the federal government. For example, employers must document it when they offer medical insurance to qualified dependents up to age 26 and that the employee had a full 30 days to make the election. Employers must also provide notice to employees that lifetime limits under medical insurance plans are no longer legal. Employers will have to provide a uniform explanation of coverage to their employees and they will have to provide notice to the employee 60 days in advance of any change in the benefit plan. A new reporting requirement will mandate that all employers report the value of the employee benefits on the W-2 of each employee. Noncompliant employers would be subject to hefty fines.
How can technology assist employers in complying with existing rules and requirements?
COBRA requires that employers provide timely notice to eligible participants of their rights and contains many important notices and timelines. HIPAA requires health plans offered by employers to document certain business processes and rules. This law also requires you to provide information about benefits availability to eligible participants of the plan on a uniform basis.
Technology can help you provide historical proof that you offered benefits to eligible participants and document the reasons employees waived their right to participate under the health and welfare benefit plan. A good system will track all transactions and approvals and show a timestamp to provide an audit trail. You can track COBRA notices and prove how quickly required notices were issued. By using an automated system, employees will be notified well within the guidelines and this will minimize employer liability for failure to provide timely and accurate notices.
Using a technology tool will ensure that benefits deductions are fed to payroll correctly. When done manually, incorrect deductions may be sent to payroll and, instead of taking advantage of having their employees help pay for the cost of insurance, employers are then paying the full cost or, in some cases, overpaying the incorrect cost.
How can leveraging technology increase efficiency in the administration of benefit plans?
Employers are responsible for timely and accurate reporting of new enrollments and terminations to their benefit plan administrators or insurance companies. If there is a delay when an employee becomes eligible for coverage and is actually added into the insurance company’s system, this could present a challenge not only to the employee but also the company’s HR department. If the employee experiences an urgent need to see a provider or in obtaining a required medication, the HR department will spend a lot of time helping the employee receive the medical attention they need while they wait for coverage verification from the insurance company. Even worse, from a risk management standpoint, if HR forgets to send the paperwork on a timely basis the insurance company can deny coverage altogether. The employer may be liable for the coverage promised to the employee. There is another employer liability if a deduction is taken from the employee’s pay while there was no coverage in place.
Employers who rely on manual reporting of changes in coverage to the insurance company may end up overpaying for their benefit plans. For example, if a company terminates someone’s employment, it has to terminate the coverage on a timely basis to avoid paying unnecessary premium for that individual. When you streamline the process by making it automatic with an electronic component, it makes it a lot more foolproof.
Where should an employer start with the compliance and technology evaluation process?
Employers should begin by performing an audit of their current practices and business process as they relate to the health and welfare benefit plans and evaluate them against the requirements set forth by state and federal law. Also, review all the information provided to employees. There should be practices in place to track and document all of this.
It is important to correct any deficiencies before they are discovered either by an employee complaint or through a Department of Labor audit. The federal government uses random audits to ensure that employers are complying with their various obligations under their health and welfare benefit plans. It’s important for employers to demonstrate they have the required documentation, systems and tools in place and that the information is stored in a secure manner as to protect the information as required under existing laws. A good employee benefit broker/consultant who is familiar with the laws as well as the technology available to employers to assist with compliance is a valuable resource.
Alicia Saporito is a partner and senior vice president in the Employee Benefit Plan Risk Management division of Millennium Corporate Solutions. Reach her at (949) 679-7117 or firstname.lastname@example.org.
Do the right thing. This may seem like a simple task, but there are many circumstances in the workplace that challenge employees’ ability to act within their organization’s core mission and values. With a strong ethics program, employees can better grasp expectations and understand their individual role in making the culture of compliance thrive within the organization as a whole.
“The law is the minimum standard,” says Debbie Wheeler, regional compliance director, Tenet Florida. “To help employees make the right decisions that properly reflect the organization, employers need to take a step further by developing, communicating and enforcing clear standards of conduct.”
Wheeler discusses with Smart Business why ethics in the workplace is critical, and offers suggestions for building a strong employer-driven compliance program.
What are the benefits of managing ethics in the workplace?
A strong ethics program aligns the organization and its employees. It provides a solid foundation from which an organization can build a consistent culture of ethical decision-making, transparency and accountability. I always say that the law is the minimum standard; what goes beyond that in our daily decision-making of ‘right’ versus ‘wrong’ is guided by integrity and ethics. Employers can play an important role in helping employees make more ethical decisions in the workplace by routinely communicating and enforcing a standard of conduct. This serves as a guide for employees to understand their organization’s specific expectations for communication, decision-making and actions in their work. When employees feel that their own standards and values align with their employers, they are generally more positive about their work and even more productive.
What is a code of conduct and why is it important?
A code of conduct can be viewed as a guide or reference for employees, as it provides a resource to influence ethical decision-making and behavior. The code of conduct also reaffirms the values of the organization, which often include integrity, transparency, honesty and respect. For example, the code may communicate that employees are expected to: make decisions that support the organization’s values; be responsible for their decisions and doing the right thing; raise issues that are inconsistent with their workplace values; seek appropriate help when the right decision is not clear; and have the tools to effectively solve problems.
It’s important to have a code or standard of conduct, but it’s even more important to enforce it and offer consistent support and resources for employees who may need help with the ethical decision-making process. At Tenet, our Standards of Conduct provide employees with an Ethical Decisions Guide. The guide is a step-by-step algorithm that can assist individuals with making decisions when the right one is not obvious or clear. In addition, Tenet has created the culture of open communication and trust, where employees understand how to go through the proper channels to discuss and report their concerns. One of these channels is the Ethics Action Line (EAL), which is available 24 hours a day. Employees know that they can call this line and anonymously talk to a qualified professional who can help address their problems and offer a suggested process to reach a resolution. Employees are also encouraged to go to their supervisors and express ethical issues without fear of retaliation. We have taken every effort to open communication within all organizational levels while ensuring that employees feel protected. I recommend that organizations promote their code of conduct and ethics program by fostering a high level of trust between employees, management and administration.
What does a highly ethical organization look like?
A highly ethical organization sends out a clear and consistent message of its expectations; employees are aware of their standard or code of conduct and put it into practice each and every day in their work. It’s an organization where everyone understands the culture of transparency and full disclosure. Because of this, employees feel comfortable about speaking up when they perceive a potential ethical dilemma personally, or see a potential problem within the organization. When the entire work force is acting based on shared values and standards, the organization has a more influential force to reach its goals.
What are some ways to train people about an ethics program and ethics in the workplace?
It’s important for every employee to be trained on the organization’s standard or code of conduct at the start of and routinely throughout their employment. I recommend requiring specific ethics training for every new employee upon hire and at least annually thereafter for review. In my experience, it is beneficial for employees to hear real-life examples of ethical dilemmas as well as their resolutions. These examples give employees an opportunity to apply the standards of conduct to real situations and it creates an applied learning experience that will be remembered.
Organizations should also consider designating a qualified point person who is responsible for managing and emphasizing ethics in the workplace, such as a compliance officer. This person must display sound ethical judgment and character as the role model for the organization. He or she should also engage employees and earn their trust in order to influence the entire organization’s culture of compliance. This person is the advocate and resource for all employees as they strive each day to ‘do the right thing.’
Debbie Wheeler is the regional compliance director of Tenet Healthcare Corporation, Florida region.