Compliance April 30, 2021

New York City Council Approves Auto-Enroll IRA Program

The proposal creates a mandatory automatic enrollment individual retirement account program for employers that do not offer a retirement plan and employ at least five people.

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The New York City Council voted Thursday to approve a measure to create a city-facilitated retirement savings program for private sector employees.

The legislative action would create a mandatory automatic enrollment individual retirement account (IRA) program for employers that do not offer a retirement plan and employ at least five people. It awaits the mayor’s signature or veto.

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According to a summary published on the City Council website, the default employee contribution rate would be 5%, which employees could adjust up or down, or opt out of at any time, up to the annual IRA maximum of $6,000 (or $7,000 if age 50 or above). The plan would be portable, so that when employees switch jobs they can continue to contribute or roll over their accounts into other retirement savings plans.

Employers would not contribute on behalf of employees.

The council also voted to establish a retirement savings board to facilitate the implementation the retirement security program. The board would consist of three members, who would be appointed by the New York City mayor.

The powers of the board would include determining the start date of the program, entering into contracts with financial institutions and administrators, minimizing fees and costs associated with the administration of the program, creating a process for those not employed by a covered employer to participate, and conducting education and outreach to employers and employees.

According to the council’s summary, the board would work with the New York City comptroller—who is responsible for managing trust funds held by the city, such as the pension funds—to select the investment strategies and policies. The board would be required to report annually on its activities and actions. The bill technically takes effect in 90 days, but the board has been granted up to two years to implement the program.

The council summary cites the fact that, out of roughly 3.5 million private sector workers in New York City, only about 41% have access to an employer-sponsored retirement plan. This is lower than the national average, which the council estimates at 53%, and down from 49% a decade ago. Even more troubling, according to the council’s data, 40% of New Yorkers near retirement age have less than $10,000 saved for retirement.

“Even in our beloved but expensive city where the cost of living is high, every New Yorker should be able to save for retirement, says Council Member Ben Kallos, who is an ERISA [Employee Retirement Income Security Act] attorney. “This legislation is a huge first step in helping generations of New Yorkers working for small businesses to save and be that much more ready to be self-sufficient when it is time to retire. With this legislation, New York City is leading the way by providing residents something in addition to their Social Security.”

Sources view state-run retirement savings plans as useful for improving retirement readiness, as well as a potential business opportunity for advisers. At a high level, experts say, the states and cities that are offering these plans realize that they will face strains on their social insurance, food assistance and Medicaid resources if they do not help their residents who are not saving for retirement do something. Because the federal government has not acted in this area, they are stepping into the void.

Compliance April 30, 2021

WakeMed Quickly Settles 403(b) Fee Lawsuit

The emergency medical services company has settled an ERISA lawsuit suggesting it failed to meet its fiduciary duties of prudence and loyalty in the operation of a staff retirement plan.

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A settlement has been reached in an Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit filed against WakeMed, an emergency and urgent care operator located in North Carolina.

Though the counts in the complaint are familiar, one unique feature of this lawsuit was the speed with which the parties filed a settlement—on the very day the suit was filed. As recounted in the settlement agreement, they had entered into pre-trial mediation starting in December. Through several rounds of negotiations, the parties reached a settlement, the terms of which are memorialized in the settlement agreement.

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In their short-lived complaint, the plaintiffs suggested WakeMed fiduciaries have not acted prudently or loyally in the operation of the 403(b) retirement plan in question.

“First, the defendant failed to utilize a prudent process or methodology when selecting and monitoring the investment options for the plan,” the complaint states. “The lack of a prudent process or methodology is demonstrated by, among other things, the following: (i) defendant selected share-classes of mutual funds that had higher fees and expenses than other available share classes of the exact same mutual funds; (ii) the plan offered funds targeted at retail investors which had higher expenses than more prudent investment options available to the plan; and (iii) six out of the seven primary investment options were actively managed mutual funds, even though the plan could have easily offered a selection of passively managed funds with lower expenses.”

The complaint also suggested the defendant’s choice of structure for the plan’s administrative, recordkeeping and other expenses raised the likelihood of excessive fees for these services.

“Based on WakeMed’s Form 5500 filings during the class period, the plan appears to pay [recordkeeper] Valic directly for services rendered during the class period, while also paying Valic gross annual administrative fees based on a percentage of mutual fund assets in connection with what is commonly referred to as revenue sharing,” the complaint states. “If the benefits of revenue sharing do not outweigh this concern, the plan’s administrative and recordkeeping fee payments would be excessive and against the interests of plan participants. Any unnecessary revenue sharing would have deprived the plan of a portion of its assets for a period of time, causing the plan to lose out on their growth prior to their reimbursement.”

The complaint goes on to argue the defendants’ failures to offer prudent investment options and eliminate unnecessary fees were the result of a failure of effort or of competence, either of which was in violation of its fiduciary duties under ERISA.

In the text of the settlement agreement, the defense admits no wrongdoing related to such matters, while the plaintiffs agree to give up any future related claims in exchange for a settlement payment of $975,000 and the establishment of other nonmonetary relief. Nonmonetary elements of the settlement include the requirement to conduct multiple requests for proposals (RFPs) seeking better service terms and pricing from various providers over the coming years. Notably, the agreement states WakeMed may choose to retain its current service providers after the RFP process.

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