Compliance December 21, 2022

Adviser NFP Absolved in ERISA Case; Molina Healthcare and flexPATH Still Face Charges

The plaintiffs in a suit against plan sponsor Molina Healthcare had sought to include advisory NFP for recommending “untested” TDFs. A judge dismissed the charges against NFP, but kept those against Molina and flexPATH.

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A federal judge in California dropped retirement and investment adviser NFP Retirement, Inc. from a complaint tied to plan sponsor Molina Healthcare, while allowing claims to move forward against Molina Healthcare and a target-date fund provider with ties to NFP.

Three plaintiff claims against NFP were dismissed by the U.S. District Court for the Central District of California on December 8. Judge Stanley Blumenfeld said two of the complaints happened too far in the past to meet the Employee Retirement Income Security Act’s timeline of six years, and a third complaint failed to state an appropriate claim.

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Blumenfeld otherwise denied Molina Healthcare, its board committee and target-date fund provider flexPATH Strategies’ dismissal motion for three counts against them, noting they should go ahead for further hearing.

The original lawsuit targeting Molina Healthcare said the plan sponsor caused participants to invest in flexPATH’s “untested target-date funds,” which the plaintiffs claimed partially repackaged existing products from asset manager BlackRock and sold it to investors at a higher fee. The funds also allegedly replaced “established and well-performing target-date funds” previously offered to participants, which, the complaint alleged,added complexity, but not value.

A subsequent lawsuit sought to tie in New York-based NFP, alleging that the adviser was also a fiduciary to the retirement plan based on the advice it gave to Molina Healthcare to include the flexPATH TDFs. The complaint also alleged that the decision to add the TDFs to the plan benefitted NFP and flexPATH by providing an immediate and substantial transfer of more than $200 million of plan assets.

NFP is closely affiliated with flexPATH, according to court documents, which state that NFP’s parent corporation, CEO and president collectively own the TDF provider. The plaintiffs’ suit claimed that NFP and flexPATH are closely related due to sharing the same offices and headquarters, bu,t in the defense, the firms argued that they operate independently.

Ultimately, Blumenfeld dismissed the counts that included NFP but kept three of the claims of fiduciary breach against Molina Healthcare and flexPATH.

Blumenfeld did deny a request from the plaintiffs for an advisory jury. He said the court has the capability to assess the lawsuit, which the plaintiffs are seeking to make a class action.

The Molina Healthcare plan had grown to more than $740 million in assets, with more than 15,600 participants, by the end of 2020, according to the court filing.

The full text of the new complaint is available here.

Compliance December 21, 2022

Employee Stock Ownership Plans To Get a Boost from Omnibus Package

Provisions found in the Work Act and SECURE 2.0 Act, both parts of the spending package, are intended to promote employee ownership through ESOPs.

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The omnibus spending bill currently being debated in Congress contains two bills that would reform employee stock ownership plans, the Work Act and the SECURE 2.0 Act. If the budget is passed by the end of this week, as anticipated, these two bills will become law.

ESOPs are a qualified 401(a) retirement plan invested in the stock of the sponsoring company. Offered by some corporations, ESOPs are often intended to improve employee commitment to the health of a company by enabling employees to benefit from company growth. ESOP funds are managed by a trustee.

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The Work Act, initially sponsored by Senator Bernie Sanders, I-Vermont, and Senator Jerry Moran, R-Kansas, contains two key reforms for ESOPs. The first would provide $50 million in funding for the Department of Labor to give grants to state and local governments for improving knowledge of and about ESOPs. If a state does not apply for the funding within one year, then a nonprofit can apply on behalf of that state to promote ESOP outreach.

Corey Rosen, founder of the National Center for Employee Ownership, says “lack of knowledge is a huge barrier” for businesses that might be interested in ESOP creation. Many do not know that the plan type exists and, if they do, may not know how to start one.

The second provision in the Work Act related to ESOPs instructs the DOL to establish regulations for properly appraising the value of the company stock to be sold to ESOP plans. Currently there are no guidelines for such valuation, which creates a litigation risk.

Rosen explains that it is hard for businesses to follow rules that do not exist, and ESOPs can be vulnerable to lawyers who are just “trying to find a settlement.” The DOL writing formal regulations for valuation should bring more legal certainty to sponsors of ESOPs, sources said.

Noelle Montano, executive director of Employee-owned S Corporations of America, explains that the absence of DOL regulations on valuation is a “longtime concern” and ESOP advocates have been calling for a formal DOL rulemaking process on valuation for many years. Montano says the DOL has been relying on audits and litigation and that the industry want “rules of the road.” Now they are set to get them.

The SECURE 2.0 Act also contains two provisions relevant to ESOPs. Under current law, only shareholders in C Corporations are allowed to defer 100% of their tax liability from gains when they sell their stock to an ESOP, provided they invest those gains in the stocks or bonds of another U.S. company.

The SECURE 2.0 Act would also allow shareholders in S Corporations to defer taxes in the same fashion when selling to an ESOP. However, they could only defer 10% of their gains upon investing in other stock. Rosen explains that only allowing a 10% deferral instead of 100% deferral was designed to reduce the bill’s total cost to the federal government in terms of lost tax revenue.

An aide from the House Ways and Means Committee confirmed this to PLANADVISER, saying, “the cost of this provision was high.” The aide said there is interest in expanding this tax treatment to reach parity between S and C corporations, but they “can only afford 10%.” House Ways and Means Chairman Richard Neal, D-Massachusetts, said in a call with reporters Wednesday that SECURE 2.0 was scored at costing $53 billion and is fully offset by corresponding tax revenues.

The other relevant provision in SECURE 2.0 says that if the shares of an ESOP sponsor trade in unlisted markets but meet criteria for frequency of trading, then they would not have to undergo a formal valuation to set the value of their ESOP stocks.

Publicly traded companies do not need full valuations because those values can be deduced from the market value of their shares. However, corporations that trade on unlisted venues lack that transparency because they are traded less frequently. The provision would allow those corporations with adequate trading volume on unlisted venues to avoid the process of a formal appraisal to start an ESOP plan.

Rosen explains that this provision would mostly apply to small community banks, since ESOPs are common among them, and some are traded on unlisted markets. He calls it a “very narrow provision.”

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