Legislative and Judicial Actions
➜ IRS Updates Its OC List
To help practitioners and plan sponsors achieve operational compliance, the IRS has updated its operational compliance (OC) list, identifying changes in retirement plan qualification requirements effective during the calendar year. Such updates, as required by the OC list, identify matters that may involve either mandatory or discretionary plan amendments, depending on the type of plan, and may reference other significant guidance that affects
daily plan operations.
The IRS notes that, to be qualified, a plan must comply operationally with each relevant requirement, even if that does not appear on the OC list. A plan must also comply with any change in the requirements, starting from the effective date of the change. The updated OC list includes items effective this year. These include several made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act; amended rules regarding hardship withdrawals made by the Bipartisan Budget Act of 2018 and the Tax Cuts and Jobs Act; and regulations that have extended temporary nondiscrimination relief for closed defined benefit (DB) plans.
➜ New Proposed Fiduciary Rule
A proposed Department of Labor (DOL) conflict of interest regulation has taken a first step toward public release, having been turned over to the Office of Management and Budget (OMB), in June. The structure of the proposed rule is based on the DOL’s existing temporary policy adopted after the 5th Circuit Court of Appeals vacated the agency’s previous, 2016 fiduciary rule package.
The long-awaited proposed rule was published in tandem with a new prohibited transaction exemption for investment advice fiduciaries as defined and policed under the Employee Retirement Income Security Act (ERISA). As proposed, the exemption would authorize a wide range of investment advice compensation models and client relationship structures that could otherwise be prohibited under the new rule. To qualify, advisers must live up to a set of “impartial conduct standards,” such as those included in the Regulation Best Interest (Reg BI) framework recently implemented by the Securities and Exchange Commission (SEC). This is to say, they are still required to collect only reasonable compensation and to make no materially misleading statements.
➜ Cunningham ERISA Settlement Valued at Nearly $22 Million
The achievement of a settlement agreement in the Employee Retirement Income Security Act (ERISA) lawsuit known as Cunningham v. Wawa Inc. was first announced in January, but, at that time, no details of the settlement were made public. The basic contention of the lawsuit was that the company acted in a manner contrary to ERISA’s fiduciary requirements when it forced terminated employees to liquidate company stock holdings at an unfair price. Other claims suggested participants were misled about their rights under the employee stock ownership plan (ESOP).
Case documents have now emerged showing Wawa agreed to pay $21.6 million to resolve the litigation—with no admission of wrongdoing by itself as a corporate entity or by the individual fiduciaries of the ESOP at the heart of the case. The agreement stipulates that the settlement fund will be distributed among “all participants in the Wawa Inc. Employee Stock Ownership Plan with account balances greater than $5,000 as of the date they terminated employment, whose accounts were liquidated on or after September 12, 2015, and the beneficiaries of such participants.” None of the individual fiduciary defendants named in the lawsuit are eligible to receive payments from the settlement fund.
➜ Senators Challenge Proposed ESG Restrictions
More than a dozen Democratic members of the U.S. Senate have filed and openly published a comment letter addressed to Department of Labor (DOL) Secretary Eugene Scalia, calling on the regulator to dial back its proposed rule seeking to restrict the use of environmental, social and governance (ESG)-themed investments within tax qualified retirement plans governed by the Employee Retirement Income Security Act (ERISA). The senators wrote, plan sponsors and fiduciaries “should be able to consider whether or not companies have established diverse leadership teams, whether they foster inclusive or discriminatory workplaces, and whether they engage in a variety of other practices that may impact a company’s performance.
“ESG-based investing is a key way to grow a plan’s assets in a manner consistent with its corporate principles without sacrificing investment returns,” the letter states. “Racial justice, corporate diversity and other ESG factors are increasingly a consideration in investment decisions. Further, contrary to the skepticism and assumptions underlying the department’s proposed rule, ESG investments often outperform traditional investments and the overall financial markets, including over the past several years, showing investors can achieve strong returns while driving positive change.”
➜ Fidelity to Pay $28.5 Million to Settle Lawsuit
Defendants in a suit accusing Fidelity Investments and parent company FMR LLC of self-dealing in the company’s own 401(k) plan have agreed to pay $28.5 million to settle the case. The defendants agree that, on a prospective basis beginning no later than 30 days after the effective date of the settlement, one or more plan fiduciaries will undertake monitoring plan recordkeeping fees and the plan’s investment options, other than investments available through the plan’s self-directed brokerage account. According to the settlement agreement, it is entered into “solely for the purpose of avoiding possible future expenses, burdens or distractions of litigation,” and all defendants deny any wrongdoing.
The lawsuit accused plan fiduciaries of using the plan as an opportunity to promote Fidelity’s mutual fund business at the expense of the plan and participants. According to the complaint, the defendants loaded the plan exclusively with Fidelity-affiliated investments, without investigating whether plan participants would have been better served by investments managed by unaffiliated companies.
The suit alleges that the defendants knew that their conduct was unlawful because they had previously settled a similar lawsuit.
➜ Man Accused of Fleecing Boeing Retirement Plan
A federal grand jury has indicted an Orange County, California, man on charges that he fraudulently obtained access to Boeing employees’ retirement accounts. The grand jury heard sufficient evidence to charge Hao Vo for the theft of hundreds of thousands of dollars from Boeing employees’ accounts. According to the indictment, from January 2019 to June 2019, Vo obtained the personal identifying information of various Boeing employees, along with information about their retirement accounts. He then allegedly made fraudulent withdrawal requests for checks and electronic money transfers totaling hundreds of thousands of dollars, the indictment claims.
Federal prosecutors say Vo knew that notifications and checks related to these fraudulent requests would be mailed out, and so he placed holds on the Boeing employees’ mail with the U.S. Postal Service. Once the mail was held, Vo allegedly intercepted it by presenting to a postal employee a fraudulent California driver’s license with a Boeing employee’s personal identifying information, and a fraudulent note purportedly written or signed by the Boeing employee, authorizing Vo to pick up the employee’s mail.
The indictment states that Vo also cashed checks written to himself from the fraudulently opened bank account by using the Boeing employee’s forged signature and endorsed the checks himself. In total, Vo attempted to obtain approximately $783,328 from Boeing employees’ retirement accounts and actually obtained approximately $360,847, the indictment alleges.
➜ $300 Million Plan Faces ERISA Fiduciary Breach Lawsuit
Plaintiffs have filed a new Employee Retirement Income Security Act (ERISA) lawsuit in the U.S. District Court for the Eastern District of Pennsylvania, naming as defendants the CDI Corp. and its board of directors, among others. The claims echo those detailed in the numerous ERISA challenges raised in recent years, but this litigation is distinguished by the relatively small size of the plan in question. Court documents show that, as of December 31, 2018, the plan had roughly $263 million in assets entrusted to the care of its fiduciaries. It is much smaller than the $1 billion-plus retirement plans that, historically, have tended to be the focus of ERISA litigation.
Beyond this fact, the lawsuit closely resembles many others in its focus on excessive fees and share-class issues. The plaintiffs claim that, during the proposed class period of July 7, 2014, to the present, the fiduciary defendants failed to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent in terms of cost and performance. The complaint further alleges that the plan inappropriately maintained certain funds in the investment lineup presented to participants, despite the availability of identical or similar investment options with lower costs and/or better performance histories. Additionally, the plaintiffs claim that the defendants failed to select the lowest-cost share class for many of the funds in the plan.
➜ Relationship With Recordkeeper May Have Caused Excessive Fees
A lawsuit has been filed against Koch Industries, Koch Business Solutions and the Koch Benefits Administrative Committee alleging violations of their Employee Retirement Income Security Act (ERISA) duties with respect to certain Koch-affiliated defined contribution (DC) plans. These include the Georgia-Pacific Hourly Plan, the Georgia-Pacific Savings Plan, the Koch Plan and the Flint Hills Plan.