Compliance December 13, 2023

Adviser, Planner Communities Give Qualified Support for Fiduciary Proposal

The highly controversial proposal from the DOL has received support from major industry actors, including the CFP Board and FPA, at times with reservations.

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The Department of Labor hosted the second of two hearings Wednesday to discuss the retirement security proposal, sometimes called the fiduciary adviser proposal, with stakeholders. Representatives of the adviser and planner industries expressed general support for the proposal, with some caveats.

The proposal would scrap the traditional five-part test in determining who is a fiduciary and would apply a test in which meeting one of three criteria would make the professional a fiduciary: having discretionary authority, claiming to be a fiduciary, or regularly giving individualized advice on which investors rely when making decisions.

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Patrick Mahoney, the CEO of the Financial Planning Association, testified that the “FPA believes all consumers are deserving of objective, personalized financial advice that is in their best interest, and we share the Department’s concern that many consumers lack understanding of how the financial industry is regulated and therefore may be challenged to discern among professionals who are legally required to act in their best interest.”

Mahoney and the FPA also supported provisions in the rule that restrict use of adviser-like titles, such as financial planner, when they are misleading.

He did, however, express concern about the DOL’s implementation schedule, which could be as little as 60 days from the finalization of the rule to its effective date. Mahoney also asked for additional clarity on how the proposal would interact with other regulations and for the DOL to have an enforcement regime that initially focuses on education and warnings so that affected parties can adjust to the new rule, once finalized.

Best Interest Advice

Dan Moisand, the chair of the CFP Board, also supported the proposal: “We support the department’s proposal, which makes clear that the definition of fiduciary and the obligations that flow from it apply where investors reasonably believe advice is being provided in their best interests.”

Moisand said that the CFP Board has required its certificants to act as fiduciaries since 2018, and this has not caused its certificant numbers to decline or for the planning industry itself to decline. He argued that fiduciary standards must apply in all recommendations, “including in circumstances where the adviser is providing one-time advice. This is consistent with CFP Board’s standards, where the fiduciary duty extends to one-time advice, such as rollover recommendations.”

Better Rules

Some company representatives were also supportive of the proposal.

Joshua Rubin, the vice president and associate general counsel at Betterment, a financial advisory providing digital investment, retirement and cash management, said the company “enthusiastically supports the goal of expanding access to retirement advice that is in the retirement investors’ best interest.”

Rubin explained that Betterment’s compensation is not based on trading volumes, so the firm has “no incentive to engage in frequent trading.” He added that “unfortunately, this client-aligned business model is far from universal across retirement offerings,” and conflicted advice likely costs savers billions every year.

Rubin also praised the proposal’s updates to PTE 2020-02, which would apply it to digital advice explicitly: “Advice is advice, regardless of the medium,” he said.

However, Rubin expressed misgivings about the breadth of the rule, specifically that it might apply to educational materials or “hire me” conversations in which an adviser is initially offering their services to a potential client.

Tim Hauser, the deputy assistant secretary for program operations at the DOL, reassured Rubin and other commenters that the proposal is not intended to pick up education materials, regulatory disclosures, “hire me” discussions, marketing, or HR communications. It is instead intended to only cover recommendations, understood as a “call to action.”

Compliance December 13, 2023

Litigation Trends to Watch in 2024: Drop in TDF Suits, More Forfeiture Complaints

Attorneys from Faegre Drinker Biddle & Reath LLP discuss qualified retirement plan litigation trends for the new year.

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There is good and bad news when it comes to the litigation targeting defined contribution plan fiduciaries in 2024, according to attorneys from Faegre Drinker Biddle & Reath LLP.

In one area of class action complaint, attempts to sue plan fiduciaries for choosing one type of low-cost target-date fund versus other options appear to be petering out, in part due to a string of losses. However, an area of increased litigation, and focus, is emerging in a series of complaints targeting how retirement plan forfeitures are being used by plan sponsors.

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Low Cost Effort

Kimberly Jones, a partner at Faegre Drinker, discussed during a client webinar on Tuesday the key trends in the near decades-long “wave of litigation” targeting plan fiduciaries for allegedly paying excessive recordkeeping and administrative fees or maintaining expensive or underperforming investments in the plan offering.

In fall 2022, Jones noted, law firm Miller Shah LLP filed a string of lawsuits attacking fiduciaries for offering allegedly underperforming BlackRock Inc. target-date funds. The complaints were unique in essentially admitting that the TDFs were low-cost, yet alleging they were not the best option.

“Not surprisingly, this criticism for choosing low-cost investments has really infuriated plan fiduciaries and defense attorneys alike, because it really feels like the fiduciaries are in between a rock and a hard place,” Jones said. “If you are getting sued for offering low-cost investments, then you feel like you just can’t win.”

The response from courts, as noted by Jones, has been mostly uniform: siding with defendants. Nine out of 12 lawsuits have been at least initially dismissed, pending amended complaints, and six were dismissed with prejudice or voluntarily dismissed.

Only one, Trauernicht v. Genworth, was won by the plaintiff, but only after the court found “more details about deficient monitoring process” in the discovery process. Meanwhile, there has only been one new complaint filed since August 2022 regarding the BlackRock TDFs.

“It turns out this may have been a failed experiment by the plaintiffs’ bar in this situation,” Jones said. “We’re not expecting to see any more filings any time soon.”

BlackRock is the country’s largest manager of defined contribution investment assets, according to PLANADVISER’s 2023 DCIO survey.

New Frontier: Forfeitures

A new area for the plaintiffs’ bar has emerged in place of low-cost TDFs, however: how plan fiduciaries are managing forfeitures in qualified retirement plans.

This year, five lawsuits were filed by law firm Hayes Pawlenko LLP regarding how plan sponsors managed funds from nonvested portions of terminated participant accounts, Jones noted.

According to the IRS, such forfeitures can be used to pay plan expenses, reduce employer contributions or allocate back to plan participants, as per Faegre Drinker’s interpretation. How fiduciaries handle them, however, must be laid out in the plan documents.

The five complaints allege that the plan sponsors in question were incorrectly using the forfeiture funds to reduce employer contributions instead of allocating the funds to remaining plan participants, Jones noted. The suits are now pending against the Clorox Co., HP Inc., Intuit Inc., Qualcomm Inc. and Thermo Fisher Scientific Inc.

“There are no relevant decisions at this point, but we have identified some weaknesses in the complaints that are going to come to light,” Jones said. “Primarily … using forfeitures to reduce employer contributions is permitted by the IRS, and the complaints explicitly allege that the plans at issue provided that forfeitures could be used for the purpose that the employers were using them for, which is offsetting contributions.”

Jones said Faegre Drinker expects motions to dismiss to be filed shortly, and there should be some clarity by spring 2024 on whether the cases “have any legs.”

During the webinar, attorneys for Faegre Drinker also discussed legal issues related to trending areas such as environment, social and governance investing in defined contribution plans; the more stringent regulatory environment in the health care industry; and artificial intelligence use in retirement planning and advisement.

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