Compliance News

Dodd–Frank Repeal Battle Parallels Fiduciary Fight
Many in the retirement plan advisory industry are closely watching the Trump administration’s effort to repeal the Department of Labor (DOL) fiduciary rule, but the wider financial services community is clearly focused on the related effort to attack the Dodd–Frank reforms.

The Dodd–Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010, and it was expected to at least peripherally impact the standard of conduct of those financial advisers who serve as  registered representatives of broker/dealers (B/Ds). The rulemaking mainly affected consumer and investment banks, but the extent of the changes mandated by Dodd–Frank was massive in scope.

As the helpful “Dodd–Frank Act: A cheat sheet,” from legal firm Morrison & Foerster, observes, the term “Dodd–Frank” represents an entire ecosystem of rules and requirements that are now, to varying degrees, well-established among the nation’s large and small financial institutions. As with the DOL fiduciary rule, millions have been spent on compliance efforts marketwide.

Exactly how Dodd–Frank or the DOL fiduciary rule will be unraveled is still unclear. The Trump administration cannot simply snap its fingers and undo the amazingly complex package of rules casually referred to as Dodd–Frank. There are standards of prudence and process that must be followed in dialing back any properly established and enforced rulemaking—an area governed by both the Regulatory Flexibility and the Administrative Procedures acts, as well as by the U.S. Constitution.

Edward Jones Self-Dealing Suit Permitted to Proceed
A federal court judge has denied most of Edward Jones’ motions to dismiss a lawsuit alleging the company favored its own investments and those of its “preferred partners” in its 401(k) plan, at the expense of performance.

In arguing that the breach of fiduciary claims against them should be dismissed, the Edward Jones defendants said they had fulfilled their duties by offering an array of investment options. Plaintiff Charlene McDonald’s complaint asserts that defendants violated their fiduciary obligations and affiliated themselves with funds that benefited defendants at the expense of the plan participants. U.S. District Judge Rodney Sippell of the U.S. District Court for the Eastern District of Missouri found Edward

Jones’ defense that they offered an array of investment options does not insulate them from McDonald’s claims.

Edward Jones defendants argued that the complaint fails to state a claim for a breach of fiduciary duties and for a failure to defray plan expenses, but Sippell found that the complaint, when read as a whole, has provided sufficient facts to plausibly state the claims. Defendants dispute the complaint’s factual allegations and argued that they acted within Employee Retirement Income Security Act (ERISA) standards. “In deciding a motion to dismiss, I must determine whether the complaint states a claim for relief. Defendants’ arguments in support of their motion to dismiss challenge the factual allegations of the complaint and are premature at this stage of the litigation,” Sippell wrote in his opinion.

JPMorgan Sued Over 401(k) Fees
Fiduciaries of the internal JPMorgan Chase 401(k) plan face a proposed class action suit, being brought by an employee who argues the retirement plan’s fees were not properly controlled and that conflicts of interest damaged net-of-fee performance.

The suit, filed in U.S. District Court for the Southern District of New York, names as defendants JPMorgan Chase Bank, as well as the company’s board, various benefit committee members, human resources (HR) executives and others.

The complaint echoes allegations that are by now familiar to retirement plan industry professionals: “Plan’s fiduciaries breached their duties of loyalty and prudence to the plan and its participants by failing to utilize an established systematic review of the investment options in its portfolio to evaluate them for both performance and cost, regardless of affiliation to JPMorgan Chase … This failure to adequately review the investment portfolio of the plan led thousands of plan participants to pay higher than necessary fees for both proprietary investment options and certain other options for years.”

In no uncertain terms, the lawsuit alleges “blatant self-dealing” that occurred when fiduciaries “allowed higher than necessary fees to continue to be paid on their own proprietary options.” Again, like a long list of other proposed class action suits filed in recent years and months, the plaintiff says the large size of the plan, valued between $14.64 billion and $20.94 billion during the class period, should have been enough to allow plan fiduciaries to negotiate fees down to levels near the lowest available in the market—regardless of whether a proprietary or outside provider was utilized.

IRS Updates Reporting Disclosure Guide
Administrators and sponsors of retirement plans are generally required by law to report certain information to the Internal Revenue Service (IRS), the Department of Labor (DOL) and the Pension Benefit Guarantee Corporation (PBGC). Keeping it all straight is no small task.

Sponsors who need help can reference the newly updated “Reporting and Disclosure Guide for Employee Benefit Plans,” prepared by the IRS as a “quick reference tool for certain basic reporting and disclosure requirements for retirement plans under the Internal Revenue Code [IRC] and provisions of Employee Retirement Income Security Act of 1974 [ERISA] administered by the IRS.”

Covered in the guide are such subjects as Form 5500, annual zone status certifications, various forms related to distributions paid, Form 5330, safe harbor notices, etc. The IRS warns that the guide is “not intended to be an exhaustive list of possible civil penalties and other consequences for reporting and disclosure violations.”

Kickback Lawsuit Calls Out Aon Hewitt
Another recent example of Employee Retirement Income Security Act (ERISA) industry litigation targets Aon Hewitt for, in the words of plaintiffs, permitting excessive fees to be paid and then taking kickbacks.

The challenge was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division. Lead plaintiff Cheryl Scott began the action on behalf of herself and similarly situated participants in the Caterpillar 401(k) Retirement Plan. Named as defendants are a number of Aon Hewitt companies, including Aon Hewitt Financial Advisors, Hewitt Financial Services and Hewitt Associates.

According to the complaint, Scott is a retiree and a participant in the Caterpillar plan, while defendant Hewitt Associates serves and has served as the recordkeeper. Another provider, Financial Engines, is also named in the text of the suit but is not actually challenged as a defendant.

The central claims in the proposed class action suggest plaintiffs feel they overpaid significantly for the services provided by Financial Engines, with the excess payments essentially amounting to kickbacks returned to defendant Aon Hewitt.

Lawmakers Move to Ban State-Run Plans
Representative Tim Walberg, R-Michigan, chairman of the U.S. House Subcommittee on Health, Employment, Labor and Pensions, and Representative Francis Rooney, R-Florida, have introduced two resolutions of disapproval to block regulations issued by the Department of Labor (DOL) regarding the setup of state-run retirement plans for private-sector employees.

Their concerns are that small businesses will be discouraged from offering retirement plans to employees, also that employees put into state-run plans will lack the protections of the Employee Retirement Income Security Act (ERISA) and will have limited control over their retirement savings.

The Walberg resolution (H. J. Res 66) would roll back the regulatory safe harbor created by the Obama administration that will cause private-sector workers to be forced into government-run individual retirement accounts (IRAs) managed by states. Rooney’s resolution (H. J. Res 67) would block a second regulation that extended the safe harbor to include cities and counties.

Tussey Decisions Not Over
In the long-running case of Tussey v. ABB, Inc., the 8th U.S. Circuit Court of Appeals has found that a district court mistook the appellate court’s direction for a definitive ruling on how to measure plan losses and, as a result, entered judgment in favor of the ABB fiduciaries, despite finding they did breach their duties.

In the back-and-forth on the case, on previous remand, the U.S. District Court for the Western District of Missouri found that the fiduciaries to the 401(k) plan abused their discretion when making an investment lineup change, but, because plaintiffs in the case failed to prove damages using the appropriate calculation, judgment was entered in favor of the fiduciaries.