Compliance November 29, 2022

Judge Dismisses Charge of “Unreasonable” 401(k) Fees by Electronics-Maker Ricoh

A federal district court bounced two fiduciary breach claims brought by participants against Ricoh USA, saying plaintiffs failed “to plausibly allege the committee breached its ERISA-imposed fiduciary duty by charging unreasonable recordkeeping fees."

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A federal district court chief judge has bounced both fiduciary breach claims brought in February against Ricoh USA by 401(k) retirement plan participants under the Employee Retirement Income Security Act.

The plaintiffs’ complaint—Keith Krutchen, Angel D. Muratalla and William Begani, V. Ricoh USA, Inc., the Board of Directors of Ricoh USA, Inc., the Ricoh Retirement Plans Committee and John Does 1-30—“fails to provide a reasonable inference that defendants breached their fiduciary duty to participants,” wrote Juan R. Sánchez, chief judge of the U.S. District Court in the Eastern District of Pennsylvania, who was not convinced by the plaintiffs’ arguments that the defendants’ conduct, as the 401(k)-plan sponsor, was imprudent or a violation of ERISA.

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“Plaintiffs fail to plausibly allege the committee breached its ERISA-imposed fiduciary duty by charging unreasonable recordkeeping fees,” Sánchez wrote. “Plaintiffs also do not state a failure to monitor claim against Ricoh and the Board, since this second claim is derivative of the first. Accordingly, defendants’ motion to dismiss will be granted.”

The motion to dismiss was granted with leave to amend, which permits the plaintiffs to amend the complaint and refile one time in an effort to state a cause of action.

The complaint fails because it does not “provide meaningful benchmarks by which the Court can assess the prudency of defendants’ actions,” Sánchez wrote. “A meaningful benchmark must include both the quality and type of recordkeeping services provided by comparator plans to show that identically situated plans received the same services for less.”

The plaintiffs’ lawsuit alleged two counts against the plan sponsor for breach of fiduciary duty to participants and failure to monitor plan fiduciaries. The plaintiffs alleged in the complaint the plan sponsor failed to use its substantial bargaining power, by virtue of its size, to negotiate lower fees for investments, plan administration and recordkeeping services.

“Since Count I does not state a claim, neither does Count II,” Sánchez wrote. “A failure to monitor claim cannot survive without an underlying breach of an ERISA-imposed duty. Plaintiffs do not plausibly allege a breach of fiduciary duty, so they do not plausibly allege a failure to monitor.”

As of 2020, the plan had more than 18,619 participants and more than $2.1 billion in assets under management, according to the complaint.

Sánchez confirmed that mismanagement of plan expenses—overcharging for recordkeeping and administrative fees—is a breach of fiduciary duty, because excessive fees can erode the value of an account in a defined contribution plan. But the plaintiffs failed to show the court “substantial circumstantial evidence” at the pleading stage for the court to sanction the conduct by the plan sponsor as imprudent, Sánchez wrote. Such evidence may include the range of investment options, reasonableness of fees, selection and retention of investment options and practices of similarly situated fiduciaries, he wrote.

The plaintiffs’ complaint fails to survive defendants’ 12(b)(6) motion to dismiss, brought under the Federal Rule of Civil Procedure, because it does not include any information about the specific services used by Ricoh’s 401(k) plan or the benchmark comparator plans, according to the court memo.

“Without this ‘apples to apples’ information this Court cannot assess whether the plan even pays for the same services as its comparators, much less what ‘similarly situated fiduciaries’ would do,” wrote Sánchez.

Citing relevant precedent in Sweda v. Univ. of Pa. Sánchez stated, “a breach of fiduciary duty under ERISA occurs when ’(1) a plan fiduciary (2) breaches an ERISA-imposed duty (3) causing a loss to the plan,’ … [but here] plaintiffs only contest the second element: whether the Committee breached its duty of prudence in managing the Plan,” according to the court document.

Sánchez referred to the 3rd U.S. Circuit Court of Appeals’ decision in Sweda to outline some of the key factors the plaintiffs would need to include if they amend and refile.

A Ricoh spokesperson said the company is pleased with the ruling by the court, in an email.

“Ricoh USA, Inc. takes great care in the prudent management of its retirement savings plan,” the spokesperson said.

The original filing can be found here.

Products November 29, 2022

NQDC Plans Increasingly Used to Try and Draw, Retain Execs

Nonqualified deferred compensation plans are an increasingly popular tool in the talent war for top executives, with significant growth at small and mid-size firms.

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Over the past two years, the use of nonqualified deferred compensation plans for executives has shifted from a retirement plan perk beyond the workplace 401(k) to a tool in the war for talent, according to recent surveying and industry experts.

Of 350 organization who offer NQDC plans, 42% said they do so to “retain and attractive executives,” up from 26% in 2020, according to a survey released this fall by Newport Group and PLANSPONSOR.

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“With easily accessible compensation data, prevalent remote work opportunities, and improved video meeting technologies, employers must evaluate benefit offerings that will attract top talent,” Mike Shannon, Newport’s senior vice president, nonqualified consulting, said in a press release. “This year’s survey revealed a fundamental shift towards offering a nonqualified plan as a critical benefit to retain key talent and attract senior leaders in today’s highly competitive talent marketplace.”

The talent war has not shown signs of abating despite increasing inflation and recession concerns among companies. Employers are still poised to continue hiring much needed talent through 2022, according to staffing agency Manpower’s Q4 global employment outlook. Its survey of 40,700 employers found an expected hiring rate of 30% in the quarter, 6% higher than the same period last year.

Overall, the Newport survey showed that of the respondents that sponsor a NQDC plan, 38% offering two or more plans. There was also a substantial increase in the number of nonqualified plans being used for small and mid-sized companies ($500 million of revenue) in order to stay competitive at 80% of those surveyed, which compared to 50% in 2020, which was the last time Newport did the survey.

Fidelity Investments is also seeing a trend toward more small-to-medium sized companies leveraging NQDC plans, according to Kevin Mitchell, vice president of Workplace Consulting at Fidelity.

“One characteristic of the changing workforce dynamic has been a shifting of executive talent moving from larger organizations to smaller/mid-sized companies,” Mitchell said in an email to PLANADVISER. “As these executives cross-pollinate, they are frequently highlighting executive benefits they had access to at their former employer (frequently including NQDC plans).”

Another reason for the use of NQDC plans is that the product can’t be replicated by other benefits in part due to the tax savings it can provide on deferred income, Mitchell said.

“The ability to manage current and future income and taxes is a critical component of meeting executives’ financial planning needs,” Mitchell wrote.

Jim Crone, co-founder of Acru Insurance, currently works with small businesses on NQDC offerings after focusing on Fortune 500 companies earlier in his career. Crone says he is having more conversations with small business owners about an NQDC option, particularly as many are looking to attract and retain executive-level talent without giving up equity in the companies they worked hard to build.

“These [NQDCs] are plans that become very valuable in bringing extra layers of protection for the executives without the owner giving up equity,” Crone says.

NQDCs were initially focused on large corporation in the late 1990s, Crone says, referring to his time in the industry. Now, Crone is working to offer NQDCs that defer payments beyond just investment options to tax-deferred life insurance or long-term care, depending on the executive’s needs.

“You can craft the plan however you want,” Crone says. “It’s customizable—that the beauty of it.”

Many executives want to save more than the maximum DC plan deferral contribution of $22,500 allowed by the IRS, which makes an NQDC plans an attractive option, says Kirk Penland, senior vice president of nonqualified markets Voya Financial. Meanwhile, bonus and long-term incentive programs only go so far in giving people incentive to stay.

“Compensation is nice, don’t get me wrong,” Penland says. “But from a golden handcuff perspective it’s only good until the day you pay it, after which it’s lost all retention value.”

The use of NQDC’s is a combination of the employer wanting to retain people, and the executive looking for the most tax effective way to play for their future, he says.

One important difference between the NQDC plan and a 401(k), Penland says, is that participants not only need to opt in during open enrollment season, but they have to request the timing of their distribution. If the company you work at faces a disruption of some kind, or you’re terminated, a participant has to take the planned distribution no matter the market situation. In this current downturn, for instance, many would be facing a loss.

In November, Voya released an NQDC plan that gives participants the option to invest in private equity through the plan as managed by Pomona Capital. This type of investment option can give participants a chance to participate in “market returns, but with quite a bit less risk on the downside,” Penland says.

The Newport/PLANSPONSOR survey found that mutual funds or market-related investments are the most common participant investment option, used at 93% of firms who offer NQDCs. Model portfolios (risk-based and target-date) are offered by 61% of those surveyed, and fixed rate or debt-based investments came in third at 31%. Overall, a broad range of variable investment funds (similar to a 401(k) menu) is by far the most popular approach to investment menu construction for NQDC plans, Newport found.

NQDC plan assets have more than doubled in recent years, reaching $183 billion as of 2021, a 130% jump from 2015, according to the 2021 NQDC Survey from PLANSPONSOR.

Even though there has been growth, companies are concerned with plan education, enrollment materials, and generally understanding of the offering, according to Newport. When considering changes to their plan, 34% of sponsors noted improving participant communication and education, second only to the 40% saying they will look to review and enhance the investment menu.

The survey found that a company contribution can be one of the most effective ways for companies to increase the rate of active participation in their NQDC plans. Eighty-four percent of companies report contributing matching dollars to the NQDC, up from 79%.

Fidelity Investments has the most NQDC plan participants with 275,869, followed by Newport at 140,625, and then Transamerica at 113,825, according to the latest PLANSPONSOR data.

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