Compliance June 14, 2024

DOL Backs Unenforceability of Class Action Waivers

The regulator filed an amicus brief with the 6th Circuit in May arguing that class action waivers in plan agreements are not legally valid.

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The Department of Labor filed an amicus brief to the U.S. 6th Circuit Court of Appeals in May which argued that a mandatory arbitration provision in a 401(k) plan document is unenforceable if it is tied to a class-action waiver.

The case in question is Tanika Parker et al. v. Tenneco, Inc., et al. First brought in April 2023, the suit alleges that Tenneco and its affiliates maintained a plan with excessive fees. Tenneco argued that the case should be sent to arbitration individually, per their plan documents.

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The district court disagreed, because the combination of mandatory arbitration and a class action waiver compels the participant to forfeit a statutory right, namely to secure plan-wide relief for fiduciary misconduct.

The defendants then appealed to the U.S. 6th Circuit Court of Appeals. The DOL filed an amicus brief for the case in December 2023 at the appeals court. The department argued that “the district court correctly refused to compel arbitration because the Arbitration Procedure includes a non-severable provision precluding Plaintiffs from obtaining in arbitration the very relief that ERISA expressly allows them to seek in court,” that being plan-wide remedies.

The DOL asked the court to uphold the ruling that “the Representative Action Waiver is unenforceable because it prevents the effective vindication of Plaintiffs’ statutory right to seek plan-wide relief.”

In May, DOL sent a supplementary amicus brief to the 6th Circuit. This was in reaction to a decision of the U.S. 2nd Circuit Court of Appeals, which ruled in another case, Cedeno v. Sasson, on May 1 that the class action waiver was unenforceable. The DOL wrote that the plaintiff’s “avenue for relief under ERISA is to seek a plan-wide remedy, and the specific terms of the arbitration agreement seek to prevent Cedeno from doing so,” which renders the agreement unenforceable.

The U.S. 3rd and 10th Circuit Courts of Appeal have also previously ruled this way in similar cases.

The Supreme Court in October 2023 declined to hear two cases concerning the enforceability of mandatory arbitration and class action waivers in plan documents. Those cases, from the 10th and 3rd Circuit Courts of Appeals, the defendants’ moves to force individual arbitration and prevent a class action remedy were denied.

Client Service June 14, 2024

Nonqualified Compensation Moves Downstream

A Newport executive discusses how early findings from an annual survey show plan sponsors providing nonqualified compensation programs to a wider pool of employees.

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The benefits world is entering a time when COVID-19 and the Great Resignation are becoming moments in the rearview mirror. But one challenge has not changed, according to a nonqualified deferred compensation expert speaking at the 2024 PLANSPONSOR National Conference: The need to expand retirement saving options for employees.

“What we’ve seen is a lot of plan sponsors going down in the income range [for nonqualified deferred compensation] because of lack of ability for somebody to defer enough money into the 401(k),” said Clay Kennedy, vice president of insurance and nonqualified retirement plans at Newport, an Ascensus company. “Before we were seeing [salary ranges] of $200,000 or $250,000 in income that got you invited into the plan … we’re seeing that number go down a little bit as we’re seeing more emphasis on retirement savings.”

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Kennedy added that the retirement focus is also there for C-suite executives, many of whom may have high salaries and compensation programs, but still need to work on income replacement in retirement.

“Some people think that this is only for executives, and they’ve got the money and aren’t worried about retirement saving,” he said. “But they have a great need for retirement savings because of the gap in what statutory limits are.”

Kennedy’s comments, made on June 6 at the conference in Chicago, were not just anecdotal; he was presenting preliminary findings from a NQDC survey fielded every other year by Newport and PLANSPONSOR, the sister publication of PLANADVISER.

Among those findings was that the top goal for the use of nonqualified plans among sponsors, not surprisingly, was talent and retention attraction.

But interestingly, Kennedy said, the focus on this area has grown, not diminished, even as the economy has moved on from COVID and the Great Resignation.

“Half of the plans that we worked on last year were focused on that recruiting and retention strategy,” he says.

Lower down the list, but still among the top five goals for using nonqualified plans, was the financial wellness benefit of offering a nonqualified compensation plan.

Kennedy noted that, while plan sponsors may not often think about this aspect of the offering, it can help higher-paid employees not just with savings, but with managing that retirement savings and having access to resources and advice. The Newport executive cited research finding that many high-paid executives “don’t truly understand their compensation and benefits.”

“It’s really important to educate these folks to help them with financial wellness …. and to educate them about the benefits and how to use those benefits,” he said.

This financial wellness aspect of nonqualified plan offerings also goes toward a need for improved communication and education around the plan. Kennedy noted that, among DC plan sponsors offering nonqualified compensation, there are some that aren’t totally pleased with the services, in part due to “feeling like their participants are less satisfied with education and communication.”

Addressing this need, Kennedy noted, can come from a focus on plan design to really make the nonqualified deferred compensation worthwhile. Companies can decide on who is eligible based on a variety of factors, including title, wage earnings, or whatever parameters they feel will lead to best results.

“What money can go into deferred compensation plans?” Kennedy asked the audience. “For those of you who don’t have a plan right now, it’s a pretty simple answer: Any earned income paid by the company is eligible to go into the deferred comp plan.”

That can come by way of company matching that, like the 401(k) plan, is communicated clearly and as part of the full benefits package to employees.

“Just because you may not want to defer your own money does not mean that the company can’t give you some dollars as a reward or some type of retention strategy,” he said.

Meanwhile, Kennedy noted a trend that plan sponsors are moving toward nonqualified compensation programs that are not bundled with recordkeeper services. He noted that, as plan sponsors seek to meet more needs via the program, the “bare bones” services via the recordkeeping platform may not be enough.

He admitted his bias working for an unbundled provider, but made the case that if the nonqualified plan is “a key component of the business model, [the recordkeeper] may not have the nonqualified specialist communications relationship managers … it is a very different beast, as you well know, than a 401(k).”

Newport and PLANSPONSOR surveyed 268 non-qualified deferred compensation plan sponsors; findings were discussed on June 13 in a webinar hosted by PLANSPONSOR, which can be watched on-demand at this link.

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