Compliance March 10, 2020

‘INFORM Act’ Seeks Pension Lump-Sum Buyout Transparency

The bill would require an explanation of how a lump sum was calculated—including the interest rate, mortality assumptions and whether any additional plan benefits were included in the lump sum, such as early retirement subsidies.

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U.S. Senator Patty Murray, D-Washington, the ranking minority member of the Senate Health, Education, Labor and Pensions (HELP) Committee, has introduced the Information Needed for Financial Options Risk Mitigation Act.

Given the short title “INFORM Act,” the bill would require pension plan sponsors to provide plan participants and retirees with what Murray calls “critical information” when offering defined benefit (DB) lump-sum buyouts.

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“No one should ever have to make a decision that could seriously affect their plans to securely retire without being given all the information they need to understand the consequences,” Murray says in a statement published alongside the legislation.

Technically, the bill requires that “a plan sponsor of a pension plan that amends the plan to provide a period of time during which certain participants or beneficiaries who are receiving or will receive lifetime annuity payments into a lump sum under section 401(a)(9)(A)(i) of the Internal Revenue Code of 1986 shall provide notice to each participant or beneficiary offered such lump-sum amount, in paper form and mailed to the last known address of the participant or beneficiary, not later than 90 days prior to the first day on which the participant or beneficiary may make an election with respect to such lump sum.” The bill further requires notice be similarly sent to the U.S. Secretary of Labor “not later than 30 days prior to the first day on which participants and beneficiaries may make an election with respect to such lump sum.”

The text of the bill spells out a fairly extensive set of requirements plan sponsors would need to include in their lump-sum notices. For example, the notices would have to include a summary of available benefit options, “including the estimated monthly benefit that the participant or beneficiary would receive at normal retirement age (if not already in pay status).” The notices would have to enumerate “whether there is a subsidized early retirement option, the monthly benefit amount if payments begin immediately and the lump-sum amount available if the participant or beneficiary takes the option.”

Also required is an explanation of how the lump sum was calculated—including the interest rate, mortality assumptions and whether any additional plan benefits were included in the lump sum, such as early retirement subsidies. Further, the bill requires that plan sponsors calculate and share with participants the “relative value of the lump sum option compared to the plan’s lifetime annuity, in comparable terms.”

Other requirements are that plan sponsors clarify “whether it would be possible to replicate the plan’s stream of payments by purchasing a comparable retail annuity using the lump sum,” as well as detail the “potential ramifications of accepting the lump sum, including possible benefits, investment risks, longevity risks, loss of protections guaranteed by the Pension Benefit Guaranty Corporation [PBGC], loss of protection from creditors, loss of spousal protections and other protections under this act that would be lost.”

Various other points of information are required by the text of the INFORM Act, such as explanation of the general tax rules related to accepting a lump sum and a statement that financial advisers “may not be required to act in the best interest of participants and beneficiaries with respect to determining whether to take the option.”

As Murray emphasizes, the filing of the INFORM Act comes one year after the Trump administration made its own policy changes in this domain. Back in March 2019, the Trump administration announced it would not pursue a proposal made by the Internal Revenue Service (IRS) under President Barack Obama that would have prohibited certain lump-sum buyouts, for example buyouts entered into after the pension annuity income stream has already commenced.

In announcing it would not pursue the project to limit lump-sum buyouts, the Trump administration said at the time that the policy change would give more flexibility to both employers and employees. Critics, including Murray, said the Trump administration’s actions in truth “gave employers the green-light to offload pension liabilities and transfer risk to retirees through buyouts.”

Compliance March 9, 2020

Counterarguments Filed in ERISA Lawsuit Targeting Teva Pharmaceuticals

The defense says the lawsuit should be dismissed because the plaintiffs’ theory of liability is ‘antithetical to the discretion afforded to ERISA plan fiduciaries in designing a 401(k) plan investment menu and contrary to precedent.’

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The defense has filed a motion to dismiss the Employee Retirement Income Security Act (ERISA) lawsuit known as Pinnell v. Teva Pharmaceuticals USA.

The case is pending in the U.S. District Court for the Eastern District of Pennsylvania. In the underlying suit, the plaintiffs—three former employees of Teva Pharmaceuticals USA—claim that the defendants breached their ERISA fiduciary duties by imprudently managing the company’s retirement plan.

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Distinguishing this challenge from other ongoing fiduciary breach lawsuits is the fact that the plaintiffs do not challenge the performance of any plan investment. Rather, their claims focus solely on the fees paid by the plan’s participants, alleging the defendants violated ERISA’s duties of prudence and loyalty by failing to select the least expensive investment options and permitting participants to pay excessive recordkeeping fees.

While similar ERISA “excessive fee” lawsuits have seen some success in the district and appellate courts, the defense says the Eastern District of Pennsylvania should dismiss this complaint because the plaintiffs’ theory of liability is “antithetical to the discretion afforded to ERISA plan fiduciaries in designing a 401(k) plan investment menu and contrary to Third Circuit precedent.”

On this point, the defense cites a variety of cases, including Renfro v. Unisys Corp., which was decided in 2011 by the 3rd U.S. Circuit Court of Appeals. According to the defense, that case established that, “where participants can choose from a diverse mix of investments charging a reasonable range of fees, the fact that fiduciaries did not select the cheapest investment does not plausibly suggest a breach of fiduciary duties.”

The defense goes on to argue that ERISA establishes the “outer bounds” of prudent conduct, as judged by the reasonableness of a fiduciary’s decision process under “the circumstances then prevailing.”

“Within those bounds, ERISA affords fiduciaries substantial discretion to structure a plan that best suits its participants and the intent of the plan sponsor,” the defense argues. “Plaintiffs’ scattershot critiques of the plan fail to suggest even one plausible legal claim. Plaintiffs advance four primary theories to support their excessive-investment-management-fee claim, all of which are simply different iterations of the contention that the plan could have offered less-expensive investments.”

The plaintiffs, as detailed in the original complaint, are arguing that Teva’s plan fiduciaries did not have a prudent or reasonable process in place to manage the retirement plan investment menu. They say the offering of “retail” share class mutual funds that are more expensive than the otherwise identical and easily available institutionally priced mutual funds is imprudent on its face—as are the plan’s alleged failures to consider the use of collective investment trusts in a timely manner and other cost-savings strategies available to “jumbo retirement plans,” such as the aggressive negotiation of lower recordkeeping fees.  

Specifically, Teva’s new dismissal motion argues that the plaintiffs fail to state an actionable claim under ERISA.

“Renfro disposes of plaintiffs’ claim that the plan’s investments were too expensive,” the motion states. “The Renfro plaintiffs alleged that the defendants breached their fiduciary duties by offering retail share class mutual funds that charged excessive investment management fees compared to alternative funds. The plan’s investments charged fees that ranged from 0.10% to 1.21%. The Renfro plaintiffs did not allege ‘any sort of concealed kickback scheme relating to fee payments’ or make other allegations of mismanagement; rather, the allegations concerning fees were directed exclusively to the fee structure. The Third Circuit affirmed dismissal of Renfro because the allegations did not support a reasonable inference that the defendants utilized a flawed fiduciary process.”

In turn, the defense argues, the allegations found deficient in Renfro “are materially indistinguishable from those in the Pinnell complaint.”

“Throughout the class period, plan participants could choose from roughly 27 different investments with varying profiles and expense ratios that ranged from 0.04% to 1.10%, lower than the expense ratios found reasonable as a matter of law in Renfro,” the motion states.

The dismissal motion further states there is “nothing in [ERISA] that requires plan fiduciaries to include any particular mix of investment vehicles in their plan.” Thus, the defense argues, the claim that plan fiduciaries breached their duties because they could have switched to collective investment trusts or separately managed accounts at an earlier date fails as a matter of law.

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