Compliance News

Art by Julie Benbassat

Lawsuit Targets Georgetown University

A new Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit filed in the U.S. District Court for the District of Columbia names as defendants Georgetown University and several officials tasked with overseeing the school’s defined contribution (DC) retirement plans.

Matching almost verbatim the charges filed previously against many large universities’ 403(b) plans, plaintiffs here suggest that instead of leveraging the Georgetown plans’ substantial bargaining power to benefit participants and beneficiaries, defendants failed to adequately evaluate and monitor plan expenses and caused the plans to pay unreasonable and excessive fees for investment and administrative services.

According to the text of the complaint, defendants’ first breach of duty “was to fail to select a suitable, single service provider to provide administrative and recordkeeping services to the plans in exchange for a reasonable amount of compensation.” Instead of negotiating a separate, reasonable and fixed fee for recordkeeping with a single administrative provider to the plans, plaintiffs argue, defendants continuously retained three different service providers: TIAA, Vanguard and Fidelity.

Plaintiffs argue it was inappropriate to allow all of these recordkeepers to supply the plans with, respectively, a separate menu of investment choices, including mutual fund share classes that charged higher fees than did other alternatives offering the same investment strategies, or less expensive share classes of the exact same investment fund—or both.

“Fees for administrative services were charged and paid to these three companies as a percentage of the overall expenses paid for investing in the various investment options offered within the plans (including expensive choices and/or share classes),” the challenge contends. “As a result, plaintiffs paid asset-based fees for administrative services, which continued to increase as the value of their accounts increased through additional contributions and investment returns even though no additional services were being provided to plaintiffs as their fees went up.”

SunTrust Settles Stock Drop Suit for $4.75mm

SunTrust Banks has agreed to settle a long-running Employee Retirement Income Security Act (ERISA) lawsuit for $4.75 million. According to the proposed settlement agreement, which a federal court is expected to rule on in June, the company denies “any fault, liability or wrongdoing.”

The case, originally filed in 2008, alleged that SunTrust Banks breached its fiduciary duty by keeping company stock as an investment option in its 401(k) plan after doing so was no longer prudent. The suit charged that the company said publicly it was tightening its underwriting standards for certain types of mortgages but actually had substandard procedures in place that allowed it to grant loans to undeserving borrowers.

The plaintiffs also alleged the company led investors to believe it had scoured its portfolio and found its loss exposure was “virtually zero” on loans known as “Alt A” transactions, when that was untrue. The participants argued that they lost money when the company’s share price dropped during the mortgage meltdown as part of the 2008 economic crisis.

In other terms of the settlement agreement:

• All participants whose date of hire was on or before December 31, 2010, are now 100% vested in matching contributions.
• Those hired on or after January 1, 2011, or who resumed employment after that date and were not fully vested, shall be 100% vested in matching contributions the earlier of the date of completion of two years of vesting service, disability or death.
• SunTrust will not amend the vesting schedule to a less generous one for a period of three years from the date the settlement agreement is executed unless otherwise required by fiduciary obligations or changes in law.
• SunTrust currently funds matching contributions in the form of cash or cash equivalents—not shares of SunTrust stock—and agrees not to change this for a period of three years from the date the settlement agreement is executed.
• SunTrust, at its expense, will provide fiduciary training to the committee responsible for the plan on an annual basis for at least five years from the date the settlement agreement is executed.

IRS Issues Guidance on 403(b) Plan RMDs

In a memorandum to Employee Plans Examinations (EP) employees, the Internal Revenue Service (IRS) has issued guidance about handling 03(b) plan efforts to issue required minimum distributions (RMDs) to missing participants.

Similar to one issued last year, the current memo states that EP examiners shall not challenge a 403(b) contract for violating RMD standards—viz., failing to begin or make a distribution to a participant or beneficiary to whom a payment is due—if the plan has taken the following steps:

• Searched plan and related plan, plan sponsor and publicly available records or directories for alternative contact information;
• Used a commercial locator service; a credit reporting agency; or a proprietary internet search tool for locating individuals; and
• Attempted contact via U.S. Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information, including email addresses and telephone numbers.

If a 403(b) plan has not completed the steps above, EP examiners may challenge it.

SEC Proposes Changes to Liquidity Disclosure

The Securities and Exchange Commission (SEC) has proposed a change to public liquidity risk disclosure requirements for certain open-end investment management companies.

The agency had issued a pending requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-PORT on a quarterly basis. Now, the SEC is suggesting that funds discuss the operation and effectiveness of their liquidity risk management program in their annual report.

The SEC adopted the open-end fund liquidity rule in October 2016 to help funds meet their statutory obligation—and investors’ expectations—regarding redemption of shares. Since then, SEC staff have reached out to investment management firms to identify any issues with compliance.

Besides the proposal to move the disclosures to funds’ annual reports, the SEC previously adopted a rule that extends by six months the compliance date for the classification and classification-related elements of Rule 22e-4 and related reporting requirements. In conjunction with this extension, the SEC issued new guidance to help funds comply with the liquidity rule’s classification requirements.

SEC Chairman Jay Clayton says of the new proposal that it “is another step toward completing the implementation of the 2016 final rule in a manner that protects investors while minimizing unnecessary costs on funds.”

Court Finds Pension Trustee Guilty of Embezzlement

After an investigation by the Department of Labor (DOL) Employee Benefits Security Administration (EBSA), the U.S. District Court for the Northern District of California, Oakland Division, has ordered a former pension benefit plan trustee to pay $234,271 in restitution and serve one year of probation for violating federal criminal statues pertaining to plans covered by the Employee Retirement Income Security Act (ERISA).

The trustee has also been barred from serving as a fiduciary or service provider to an employee benefit plan for 13 years.

EBSA discovered that Lisa Marie Rossi, the operating manager and trustee to E-D Coat Inc.’s profit-sharing plan, removed $66,049 from the plan’s accounts. After being charged with one count of theft, Rossi pled guilty.

PBGC Proposes Amendments to Terminated DB Plans

The Pension Benefit Guaranty Corporation (PBGC) proposes to amend its regulations on guaranteed benefits and asset allocation. The amendments would incorporate statutory changes to the rules for participants with certain ownership interests in a plan sponsor.

The amendments in the proposed rule would apply to single-employer defined benefit (DB) plan terminations under Section 4041(c) of the Employee Retirement Income Security Act (ERISA)—notices of intent to terminate are provided under Section 4041(a)(2) after December 31, 2005; and under Section 4042 of ERISA—notices of determination are provided under that section, also after December 31, 2005.

The agency says the proposed rule is necessary to conform the regulations of the PBGC to current law and practice. It proposes to incorporate statutory changes affecting guaranteed benefits and asset allocation when a plan has one or more participants with certain ownership interests in the plan sponsor.

The proposed rule would amend PBGC’s benefit payment regulation by replacing the guarantee limitations applicable to substantial owners with a new one applicable to majority owners.

HSA Limit for Family Coverage Reduced

In Internal Revenue Bulletin 2018-10, the Internal Revenue Service (IRS) describes changes to the limit on health savings accounts (HSAs) as prescribed by the Tax Cuts and Jobs Act of 2017.

For an individual with self-only coverage, nothing has changed since the IRS announced limits last year.

For calendar year 2018, the annual limitation on deductions under Internal Revenue Code (IRC) Section 223(b)(2)(B) for an individual with family coverage under a high-deductible health plan (HDHP) is $6,850, down from $6,900.

A high-deductible health plan is defined under Section 223(c)(2)(A) as a health plan with an annual deductible no less than $2,700 for family coverage, and an annual maximum of $13,300 for out-of-pocket expenses.