Legislative and Judicial Actions
Art by Samuel Berenfield
Rutledge Takes EBSA Helm
The Department of Labor (DOL) has appointed Preston Rutledge head of its Employee Benefits Security Administration (EBSA). Rutledge is former senior tax and benefits counsel on the Majority Tax Staff of the Senate Finance Committee and top aide to Republican Senator Orrin Hatch.
This puts Rutledge at the helm of one of the lead regulatory bodies tasked with policing the tax-qualified retirement investing industry.
It will take some time for Rutledge to make an impact in the DOL, and within EBSA, but his longstanding ties to the government, and particularly to a legislator known for being active on retirement and labor issues, have many in the retirement benefits industry cautiously looking forward to his tenure.
What Lies Ahead in Litigation
According to Nancy Ross, partner and head of the Employee Retirement Income Security Act (ERISA) litigation practice at Mayer Brown LLP in Chicago, the last year in litigation saw excessive fee cases starting to divide themselves fairly neatly into a few different categories.
“The most active subcategory is probably the lawsuits being filed against financial services providers regarding self-dealing within their own retirement plans,” Ross observes. “During 2017, we saw the district courts react in a fairly open manner to these allegations. Many of the cases, as we have discussed …, have avoided various preliminary motions to dismiss. As a result, there are cases involving Franklin Templeton, Allianz, BBT and Deutsche Bank, just to name a few, that will likely move ahead in 2018.”
According to Ross, these proprietary fund lawsuits are viewed by plaintiffs’ firms as, indeed, “one of the types of excessive fee cases that are likely to get past motions to dismiss,” meaning more cases are likely.
Details From the Simplification Act
Among the retirement reform proposals submitted late last year by House Ways and Means Committee Ranking Member Richard Neal, D-Massachusetts, is the Retirement Plan Simplification and Enhancement Act of 2017.
The bill is tied to another recently published by Neal, the Automatic Retirement Plan Act of 2017 (see this issue’s cover story), which is also garnering the support of retirement plan industry lobbying groups. Broadly speaking, the Simplification and Enhancement Act includes provisions aimed at expanding retirement plan coverage, increasing savings levels, preserving lifetime retirement income, simplifying and clarifying qualified retirement plan rules and implementing a more limited set of defined benefit (DB) plan reforms.
The bill seeks to eliminate the current 10% cap on automatically increased deferral rates of employees who are automatically enrolled into a plan. Related to this, the bill would require the Treasury Department to issue regulations or guidance “simplifying the timing for providing notices to automatically enrolled employees[,] in particular, in plans that permit immediate participation or that have multiple payroll systems.”
The bill would require employers to expand retirement coverage in a variety of ways. Perhaps most significantly, employees who work for three consecutive years with at least 500 hours of service each year, would have to be made eligible to participate in an employer’s plan but would be excluded from coverage, top-heavy and nondiscrimination testing.
Allianz Settles Self-Dealing Suit
According to the text of a settlement motion filed in the U.S. District Court for the Central District of California, Allianz Asset Management has agreed to settle a sizable Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit dating back to 2015.
Two participants in an Allianz retirement plan initially filed the claims, suggesting the company and its asset management partners, including PIMCO, misused employees’ 401(k) plan assets for their own financial benefit. To industry observers, the lawsuit represented one of the first examples of the now common self-dealing fiduciary breach claims.
Under the terms of the proposed settlement, for the benefit of class members, Allianz will pay $12 million into a common fund, which will be allocated pro rata among the members in proportion to their account balances in the plan during the relevant period. This sum will be distributed to participants “after deduction of any attorneys’ fees, expenses and class representative awards approved by the court.”
Among the nonmonetary relief agreed upon, for a period of no less than three years from the settlement agreement’s effective date, Allianz must retain an “unaffiliated investment consultant” to provide an annual evaluation of the plan’s investment lineup and review the plan’s investment policy statement (IPS), among other prospective relief.
Great-West Prevails in Stable Value Suit
A federal district court judge has granted summary judgment to Great-West Life & Annuity Insurance Co. in a lawsuit that alleges it breached its fiduciary duty of loyalty under Employee Retirement Income Security Act (ERISA) Sections 502(a)(2) and (3)—namely by setting predetermined interest rates artificially low and charging excessive fees in order to increase its own profits from the sale and servicing of the Great-West Key Guaranteed Portfolio Fund.
U.S. District Judge William J. Martinez of the U.S. District Court for the District of Colorado noted in his opinion that at the center of plaintiff’s first and second claims was the allegation that Great-West failed to comply with ERISA’s requirements for fiduciaries of plan assets, so it first needed to be determined whether Great-West was a fiduciary.
Great-West’s primary summary judgment argument was that it was not a fiduciary with respect to the fund because ERISA contains an exemption for a guaranteed benefit policy (GBP), meaning “an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer.”
DOL Sues Retirement Plan Fiduciaries
Following a U.S. Department of Labor (DOL) investigation, the U.S. District Court for the Northern District of Illinois entered a judgment requiring Michael Lewis, former president of Acme Orthotics and Prosthetic Laboratories Inc., to restore $128,536 in losses owed to the company’s Profit Sharing 401(k) Plan and Trust.
As fiduciaries, Lewis and co-defendant Monica Fox failed to remit $58,532 in employee salary deferral contributions and loan repayment contributions, including lost opportunity costs, to the plan from July 2010 through April 2012. In addition, Lewis liquidated $70,004 in plan assets, including lost opportunity costs, from April 2012 to March 2015, and used the funds for non-plan purposes.
Headquartered in Chicago, Acme Orthotic and Prosthetic Laboratories sponsored the plan and closed it in February 2015. Lewis was Acme’s president and sole owner; Fox was the firm’s executive director responsible for the company’s payroll.
The judgment permanently enjoins Lewis and Fox from acting as fiduciaries or service providers to employee benefit plans subject to the Employment Retirement Income Security Act (ERISA).
Delta Lawsuit Dismissed
Nearly a year to the day after participants in Delta Air Lines’ Delta Family Care Savings Plan filed a proposed class action lawsuit against the company, the plan’s administrative committee and other fiduciaries, a federal district court judge has dismissed the amended complaint.
The complaint alleged that, given its size and prominent place in the marketplace, the plan had, and has, the ability to demand and obtain lower-cost investment options from providers.
The judge ruled in favor of dismissal due to a lack of standing on the part of the proposed class of plaintiffs. The decision states that, for a complaint to qualify as a “case or controversy” that can be tried, the plaintiff must have “suffered an injury in fact that is fairly traceable to the challenged conduct of the defendant and is likely to be redressed by a favorable judicial decision.”
Legislation Would Increase Plan Access
Late last year, U.S. Representatives Ron Kind, D-Wisconsin, and Dave Reichert, R-Washington, introduced the Small Businesses Add Value for Employees (SAVE) Act of 2017, H.R. 4637.
According to a statement from Kind, the bill would encourage more small businesses to offer retirement savings plans to their employees. It also removes the “common bond” requirement for multiple employer plans (MEPs), enabling small businesses to pool together, regardless of industry, to offer retirement plans to their employees.
The bill would also facilitate lifetime income disclosure by showing participants how their balance would translate into monthly income.
PBGC Increases Penalties
The Pension Benefit Guaranty Corporation (PBGC) is required to amend its regulations annually to adjust, for inflation, the maximum civil penalty for failure to provide certain notices or other material information and certain multiemployer plan notices.
The agency has therefore issued a final rule adjusting the maximum civil penalties that PBGC may assess under Sections 4071 and 4302 of the Employee Retirement Income Security Act (ERISA). Section 4302, added to ERISA by the Multiemployer Pension Plan Amendments Act of 1980, authorizes the agency to assess a civil penalty of up to $100 a day for failure to provide a notice under Subtitle E of Title IV of ERISA, which deals with multiemployer plans. Section 4071, added to ERISA by the Omnibus Budget Reconciliation Act of 1987, authorizes PBGC to assess a civil penalty of up to $1,000 a day for failure to provide a notice or other material information under Subtitles A, B and C of Title IV and Sections 303(k)(4) and 306(g)(4) of Title I of ERISA.