Compliance News
Art by Jennifer Rostowsky
SEC Reg BI Called ‘A 2019 Priority’
During a recent speech, Securities and Exchange Commission (SEC) Chairman Jay Clayton made it a point to say the agency is aiming to finish work on its Regulation Best Interest (Reg BI) proposal this year.
For retirement industry fiduciary advisers, the SEC’s introduction last April of its proposed Reg BI was one of the seminal moments of the year. Coming fairly soon after the defeat of the Department of Labor (DOL)’s fiduciary rulemaking process in appellate court, the SEC’s new rulemaking effort quickly took a central place in many advisers’ thoughts as to important regulatory changes on the horizon.
“These proposals, individually and collectively, are designed to enhance retail investor protection and decision-making by elevating the broker/dealer [B/D] standard of conduct and reaffirming—and in some cases clarifying—the fiduciary standard for investment advisers, as well as requiring more candid and plain language disclosures,” Clayton said.
New Multiemployer Pension Bill
House Ways and Means Committee Chairman Richard Neal, D-Massachusetts, has introduced his first bill of the 116th U.S. Congress, dubbed the Rehabilitation for Multiemployer Pensions Act. The legislation is related to efforts undertaken in the previous Congress to address the severe funding shortfall measured among some union multiemployer pension plans.
According to Neal and eight bipartisan co-sponsors, there are some 1,400 multiemployer plans in the U.S., covering about 10 million people. The legislation is aimed at supporting the 1.5 million who are in plans that are quickly running out of money.
“Although multiemployer pension plans have been successful historically, today, a significant number of [them] have funding problems, and many are almost certain to run out of money,” Neal says. “If they do, retirees, workers and their families would lose benefits earned over a lifetime of work, through no fault of their own.”
Empower Suit Voluntarily Dismissed
The U.S. District Court for the District of Colorado has dismissed an Employee Retirement Income Security Act (ERISA) lawsuit targeting Great-West, now doing business as Empower Retirement.
The decision notes that this outcome was reached voluntarily by the plaintiffs and defendants. Both parties agreed to dismiss this action, pursuant to Federal Rule of Civil Procedure 41(a), with each party to bear its own attorneys’ fees, costs and other expenses of litigation.
The underlying lawsuit alleged that Empower Retirement entered into revenue-sharing agreements and similar arrangements with various mutual funds—as well as other investment advisers, instruments or vehicles—leading it to receive revenue-sharing payments for its own benefit in violation of ERISA. Plaintiffs suggested in the lawsuit that the revenue sharing represented “kickback payments” and that they were part of a “pay-to-play scheme” in which Empower received various types of mutual fund fees, including 12b-1 fees.
A Look at Recent Cases
Mayer Brown partners Nancy Ross and Laura Hammargren, of the Chicago office, and Brian Netter, of the Washington, D.C., office, hosted a webcast recently to discuss the Employee Retirement Income Security Act (ERISA) litigation landscape and the ongoing compliance risks facing benefit plan fiduciaries.
In 2016 and 2017, over 100 complaints were filed in federal courts targeting 401(k) plans, the attorneys said. The results of these complaints have been both positive and negative from the perspective of plan fiduciaries, Hammargren said. “The most positive outcome has been overall improvements in transparency, and the most negative is that plans are offering less diverse investments—they are taking a more conservative approach to designing their plan menus,” she said.
Georgetown Defeats ERISA Suit
The U.S. District Court for the District of Columbia has ruled in favor of the defendants in an Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit filed against Georgetown University regarding its two 403(b) plans.
The text of the defeated complaint closely echoed charges filed previously against other large universities’ 403(b) retirement plans. Plaintiffs suggested that instead of leveraging the Georgetown plans’ substantial bargaining power to benefit participants and beneficiaries, defendants failed to adequately evaluate and monitor the plans’ expenses and caused the plans to pay unreasonable and excessive fees.
The plaintiffs also claimed defendants failed to negotiate a “separate, reasonable and fixed fee for recordkeeping with a single administrative provider to the plans.” Instead, they said, the defendants “continuously retained three different service providers—TIAA, Vanguard and Fidelity.” The court disagreed, writing, “plaintiffs’ allegations challenge the fundamental structures of the Georgetown plans, not the fiduciary attentions or prudence of its trustees,” and plaintiffs provided no evidence that the three recordkeepers would have consolidated their services or lowered their fees.
Details of Duke’s Settlement
A case accusing Duke [University] Faculty and Staff Retirement Plan’s fiduciaries of causing the plan to pay unreasonable and greatly excessive fees for recordkeeping, administrative, and investment services, and a second complaint—this one focusing on revenue sharing the plan took but did not deliver for distribution to plan participants—have been combined for a settlement agreement.
The agreement was announced by counsel for both parties this past December, but the details had yet to be reported to the U.S. District Court for the Middle District of North Carolina. Now recently filed, however, the agreement calls for a gross monetary payment of $10.65 million to a settlement fund for the plaintiffs.
The agreement also lists nonmonetary actions to be taken by Duke. The school agreed, for a three-year period, to hire an independent consultant regarding bids for recordkeeping services; to ease the ability of participants to transfer their investments out of frozen annuity accounts; to analyze the cost of different share classes of mutual funds considered for inclusion in the plan; and to avoid using plan assets to pay salaries of Duke employees who work on the plan.
Duke University denies all allegations of wrongdoing and denies all liability for the allegations and claims made in the lawsuits.
‘Compensation’ Definition at Heart of ConAgra Lawsuit
A participant in ConAgra Brands’ retirement plan has filed an Employee Retirement Income Security Act (ERISA) lawsuit against the company, alleging the firm is failing to adhere to the definitions of “compensation” and “permissible contribution” stated in its plan documents.
The proposed class action was filed in the U.S. District Court for the District of Illinois. According to the text of the complaint, defendants had denied the plaintiff and a similarly situated class of participants certain retirement benefits to which they are entitled and had based that denial on a “reinterpretation” of plan documents that violates the plan’s clear language.
The text of the suit also challenges the way defendants “have interpreted and applied the plan for years,” arguing that they violated ERISA duties by reinterpreting plan language in a conflicted manner aimed at reducing employer costs.
“Defendants’ purported reinterpretation of the plan was motivated by their desire to save money,” the complaint states. “However, by wrongfully denying millions of dollars in benefits to a large number of plan participants and their beneficiaries, defendants have violated their fiduciary and other legal duties.”
Court Refuses to Dismiss Mutual of Omaha Suit
A federal district court has denied Mutual of Omaha’s motion to summarily dismiss a lawsuit accusing the fiduciaries of its 401(k) plan of violating their duties by selecting numerous investment options not to benefit the plan or employees, but because they paid fees to Mutual of Omaha or its subsidiaries.
Citing a series of precedent-setting cases, Senior U.S. District Judge Joseph F. Bataillon of the U.S. District Court for the District of Nebraska explained in his opinion that an Employee Retirement Income Security Act (ERISA) complaint of this nature need not describe in exhaustive detail the ways in which plaintiffs claim defendants breached their fiduciary duties.
“Under the federal rules,” he wrote, “a complaint must contain a short and plain statement of the claim, showing that the pleader is entitled to relief. Specific facts are not necessary; the statement need only give the defendant fair notice of what the claim is and the grounds upon which it rests.”
On the other hand, the judge explained, for a claim to survive a motion to dismiss under federal rules, the plaintiff’s obligation to provide the grounds for his entitlement to relief necessitates that the complaint contain “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
In this instance, the court found, “the facts as alleged by plaintiffs [do] constitute a plausible claim of misconduct in the form of a breach of fiduciary duty and loyalty … [and] will deny the motion to dismiss the claims.”
Transamerica Faces Familiar Allegations
Participants in Transamerica’s own retirement plan have sued the company under the Employee Retirement Income Security Act (ERSIA), alleging that the plan has favored investment products managed by a Transamerica affiliate, to the detriment of plan performance.
Parent company Aegon previously settled similar class-action litigation filed in early 2015. The new complaint, filed in the U.S. District Court for the Northern District of Iowa, Eastern Division, echoes the 2015 lawsuit, but there are some differences.
Specifically, Transamerica is accused of “imprudently retaining” the following portfolios: Transamerica International Equity Portfolio, Transamerica Small Core Portfolio, Transamerica Large Value Portfolio, Trans-america Large Growth Portfolio, Transamerica High Yield Bond Portfolio and Transamerica Mid Value Portfolio.
In a statement, Transamerica denied the allegations, saying it offers a range of nonproprietary funds as well, complies with all applicable regulatory and statutory requirements, and “will vigorously oppose the case.”