Legislative and Judicial Actions

Art by Joseph Park

Fiduciaries Get Final Win in Disney Suit

A federal appellate court has affirmed a lower court decision in a lawsuit against Fidelity Management Trust Co. as a fiduciary to the Disney Savings and Investment Plan. That is, it found retirement plan participants failed to prove that continuing to offer the Sequoia Fund as an investment option in the plan was a breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

In their second amended complaint, the plaintiffs argued that the Sequoia Fund purported to be a value fund but increased investments in Valeant Pharmaceuticals, which saw a decline in stock value after the company’s accounting practices and investment strategies were called into question. This created a “clear indicia of a growth stock,” the complaint said, and did not meet the Sequoia Fund’s purported investing criteria of seeking out value stocks. They argued that plan fiduciaries should have moved, even before the Valeant accounting issues and subsequent losses, to vacate the plan’s investment in the fund, according to their duties of prudence and loyalty under ERISA.

In its opinion, the 9th U.S. Circuit Court of Appeals said allegations based solely on publicly available information that a stock is excessively risky in light of its price do not, generally speaking, state a claim for breach of the ERISA duty of prudence.

In addition, the appellate court found that Sequoia’s investment and concentration in Valeant was facially consistent with the retirement plan documents and observed that both the plan’s summary plan description (SPD) and Sequoia’s 2015 prospectus note that the fund is “nondiversified” and that there are risks associated with its investment strategy.

Bill Would Create  Annuity Safe Harbor

U.S. Representatives Lisa Blunt Rochester, D-Delaware, and Tim Walberg, R-Michigan, have introduced another piece of legislation aimed at tackling a longstanding retirement savings issue faced by private-sector workers.

H.R. 1439, or the Increasing Access to a Secure Retirement Act, seeks to help more Americans retire with dignity and peace of mind, according to Blunt Rochester and Walberg. In short, the bill would clarify the rules for annuities and strengthen safe harbor protections for plan fiduciaries under the Employee Retirement Income Security Act (ERISA). They say their bipartisan bill “clarifies and strengthens existing rules to make it easier for retirement plan sponsors to provide guaranteed lifetime income products as part of their employee benefits.”

While a variety of in-plan income options have been available for a while, in-plan guaranteed lifetime income solutions are not being used as much as they could, industry experts agree. According to Prudential, less than half of plan sponsors offer a retirement income solution as part of their 401(k) or other defined contribution (DC) plan, and only one-fifth of those offer a guaranteed income product.

Fidelity Faces ERISA Prohibited Transaction Charges

A participant in the T-Mobile USA Inc. 401(k) Retirement Savings Plan and Trust has sued Fidelity Management & Research (FMR) and several of its affiliates, claiming the firm engaged in prohibited transactions by charging a “secret” fee for mutual funds and engaging in self-dealing.

In a statement to PLANADVISER, Fidelity said, “Fidelity emphatically denies the allegations in this complaint. Fidelity fully complies with all disclosure requirements in connection with the fees that it charges.”

The proposed class action explains that Fidelity acts as a recordkeeper, service provider, a party-in-interest and a fiduciary for thousands of defined contribution (DC) retirement plans in the U.S. It offers plans the opportunity to invest in third-party mutual funds and similar investment vehicles through its “Funds Network,” which the company launched in 1989 and, according to the complaint, describes as “one of the industry’s leading fund supermarkets.”

The complaint also says that, beginning in or about 2017, Fidelity began requiring various mutual funds, affiliates of mutual funds, mutual fund advisers, sub-advisers, investment funds—including collective trusts—and other investment advisers, instruments or vehicles offered to the plans through Fidelity’s Funds Network to make what the suit calls “secret” payments or “kickbacks” “to Fidelity for its own benefit. These were allegedly made in the guise of “infrastructure” payments or so-called relationship-level fees, in violation of the prohibited transaction rules of the Employee Retirement Income Security Act (ERISA).

Vanderbilt University Suit Settles

Parties in a lawsuit against Vanderbilt University and its 403(b) fiduciaries announced that they have reached a settlement agreement.

According to the document report, Chief U.S. District Court Judge Waverly D. Crenshaw Jr. of the U.S. District Court for the Middle District of Tennessee has granted the parties’ request to set a deadline of April 22 to file a motion for preliminary approval of the settlement. Details of the agreement will be available at that time.

The lawsuit claims plan fiduciaries breached their fiduciary duties by: locking the plan into the CREF Stock Account and the services of recordkeeper TIAA—both prohibited transactions; breaching their fiduciary duties by paying unreasonable administrative fees; engaging in prohibited transactions by paying excessive administrative fees; breaching their fiduciary duties by agreeing to unreasonable investment, management and other fees, and failing to monitor imprudent investments; engaging in prohibited transactions by paying fees to certain third parties in connection with the plan’s investment in those parties’ investment options; and failing to monitor other fiduciaries.

Franklin Templeton Settles Suit for $13 Million-Plus

Franklin Resources Inc. will pay $13,850,000 and make other provisions to settle a lawsuit alleging that defendants breached their Employee Retirement Income Security Act (ERISA) fiduciary duties by causing the firm’s 401(k) plan to invest in funds it offered and managed when better-performing and lower-cost funds were available.

A month before the trial was set to begin, the parties in the lawsuit announced they had reached a settlement but needed 60 days to file a motion for preliminary approval.

According to the settlement agreement, besides the settlement payment, the plan fiduciaries tasked with selecting plan investment options will add a nonproprietary target-date fund (TDF) option to the investment lineup, which will be maintained as an investment option for the duration of the compliance period along with the plan’s qualified default investment alternative (QDIA)—LifeSmart Target Date Funds. “The choice of TDF will be made by the fiduciaries responsible for selecting plan investment options in a manner consistent with their fiduciary oversight responsibilities, following a search of nonproprietary TDF options conducted by the plan’s independent investment consultant, Callan Associates Inc.,” the settlement agreement says.

Also, Franklin has agreed to increase the company match contributions to the plan from 75% to 85%, starting with the first full 25% of participant deferrals, from the effective date of the settlement agreement for a period of three years.

GAO Is Called On to Check Cybersecurity

Senator Patty Murray, D-Washington, ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee, and Representative Bobby Scott, D-Virginia, chairman of the House Committee on Education and Labor, sent a letter to Gene Dodaro, comptroller general of the U.S. Government Accountability Office (GAO), asking the GAO to examine the cybersecurity of the retirement system.

The letter identifies 10 questions the lawmakers would like the GAO to answer, following its examination.

“Retirement savings held in defined contribution (DC) plans, such as 401(k) plans, have grown steadily in recent years, reaching over $5 trillion in 2017,” the legislators wrote. “These savings are a tempting target for criminals who could hack into plans and individuals’ accounts to access information, commit identity fraud and steal retirement savers’ nest eggs.”

PBGC to Get Help With Finding Missing Participants

The Pension Benefit Guaranty Corporation (PBGC) has hired Serco Inc. to provide it with field office support services.

The service arrangement has a one-year base period plus four option years, with a ceiling value of $200.5 million. Serco will provide services in the areas of benefit administration, document management, records management, administrative support, document intake, database building support, data analytics and process automation. The company will also operate PBGC’s contact center and help find missing pension plan participants.

Over the last few years, Congress, the Government Accountability Office (GAO) and all three federal agencies that regulate retirement plans have focused on missing participants. All Employee Retirement Income Security Act (ERISA) plans and tax-qualified plans, including 401(a) and 403(b) plans, need to worry about locating missing participants.

SIFMA Asks Nevada to Hold Off on Fiduciary Rule

The Securities Industry and Financial Markets Association (SIFMA) issued a comment letter to the state of Nevada’s Securities Licensing and Registration division questioning the approach the state took in its proposed fiduciary standard.

The letter also asks the state to await the conclusion of the rulemaking underway at the Securities and Exchange Commission (SEC) to create a Best Interest Standard, which would apply nationwide.

SIMFA cautions that, while Nevada’s intentions are in the right place, its action could result in conflicting standards that would confuse investors and, ultimately, restrict information and access to a range of investment choices up until then available to them.

SIFMA further says that Nevada’s approach would increase movement toward fee-based models, leaving many investors with reduced access to brokerage accounts.