U.S.
District Judge Paul A. Crotty of the U.S. District Court for the Southern
District of New York has preliminarily approved a settlement between the
Federal National Mortgage Association (FNMA) and a group of retirement plan
participants who claim the firm held onto company stock when it was imprudent
to do so.
The
settlement agreement provides for $9,000,000 (less attorneys’ fees and
settlement expenses) to be set aside in an account for all persons who were
participants in or beneficiaries (including alternate payees) of the FNMA
Employee Stock Ownership Plan at any time between April 17, 2007, and May 14,
2010, and whose plan accounts included investments in the Fannie Mae Stock Fund
at any point during the class period.
In
2012, Crotty found that the plaintiffs plausibly alleged that defendants named in the lawsuit knew
both the causes of the price drop of FNMA stock and the reasons it was imprudent
to retain the plan’s investment in the stock.
The
benefit plan committee defendants argued that they cannot be found liable for a
breach of their duty of prudence under the Employee Retirement Income Security
Act (ERISA) because divesting the plan’s assets of FNMA’s stock would involve
trading on insider information; alternatively, disclosure of non-public information
before divesting would have caused the very decline in stock price that
plaintiffs sought to avoid. Crotty rejected their arguments, saying defendants
could have “taken a variety of steps that would not have been violations of the
securities laws, including independently evaluating the prudence of the
maintenance of the [company] stock fund as an investment option under the
plans, ceasing new investments in the [company] stock fund, questioning the
valuation of in-kind stock contributions to the plans, [or] considering whether
public disclosure of material information would have been in the best interests
of the plans’ participants … .”
Employers that offer defined contribution
(DC) retirement plans are required to distribute a host of statements
and disclosures quarterly as well as annually, a process many plans would prefer to do electronically. But current rules stand in the way, according
to “Improving Outcomes with Electronic Delivery of Retirement Plan Documents,”
a new SPARK report.
Extensive guidance from the Department of Labor (DOL) and
the Internal Revenue Service (IRS) governs the manner in which plans can
distribute retirement plan information electronically. But depending on the
nature of the information, any one of four different IRS or DOL standards can
apply. In some contexts, plans can default participants into electronic
delivery; for other types of information, the plan sponsor must sign up each
participant for electronic delivery—which can mean a formidable battle against
inertia. This lack of consistency causes considerable confusion for retirement
plan administrators as well as their participants, the report says.
The framework that guides electronic delivery, which the
report calls highly restrictive, is trapped in the 20th century.
Neither the emerging information trends and technologies of recent years nor
their many benefits are reflected in the current guidelines, the report
contends, pointing out that both retirement plan participants and
administrators benefit from these newer technologies.
SPARK cites research that finds plan participants benefit
from electronic delivery, as well as the savings a plan can realize when
eliminating printing and its associated costs. The paper examines the reasons
for allowing plan sponsors to make electronic delivery the default method for
communicating with retirement plan participants.
NEXT: Nearly all Americans rely on digital technology for
financial communications and transactions.
Recent surveys indicate that virtually all Americans have
access to online services, in the workplace or at home, or both. Access cuts
across age group, race, household income and region. As growth in computer and
Internet use has skyrocketed, so has Americans’ reliance on electronic
technology for financial communication and transactions, with growth in areas
of critical importance to everyday life, such as banking and financial
transactions.
SPARK cites the rise of online and mobile phone banking as
the preferred banking method across all age groups to support its thesis that
plan participants want and even prefer electronic communication. Nearly all
Social Security recipients (99% in 2014) receive their benefits through
electronic payment, the paper observes. The trend to file individual tax
returns electronically continues to experience steady growth: 85% of the 137
million returns filed as of May 16, 2014, were filed electronically.
Since conducting day-to-day financial transactions online
serves as a proxy for a retirement plan participant’s interest in
electronically distributed plan-related notices, disclosures and statements,
that behavior is a strong indicator that participants would prefer and benefit
from electronic delivery of plan information, according to SPARK.
One of the paper’s findings is that relying on paper
communication is both inefficient and costly. Even the federal government has
recognized in its DC plan for federal employees that electronic delivery of
plan information is the appropriate default. It allows participants to respond
quickly to plan information, ensures information remains up to date and is
accessed by participants in real time, and it provides more accessible
information.
Information delivered electronically can be more easily
customized, the paper notes, and it can provide a better guarantee of actual receipt
of information.
NEXT: Lower costs could mean $200 to $500 in aggregate
savings passed on to plan participants.
Compared with distributing plan documents by mail,
electronic delivery has significantly lower costs, with savings from printing,
processing and mailing, SPARK says, lowering costs by much as 36%. Plan
participants, too, could see some savings: Allowing retirement plan
administrators to make electronic delivery a default would reduce the costs
associated with their plans.
The paper maintains these cost savings would ultimately be
passed back to participants, translating to lower expenses—and higher net
investment returns. SPARK estimates switching to an electronic delivery default
would produce $200 to $500 million in aggregate savings annually, and that
would accrue directly to individual retirement plan participants.
Despite the changing attitudes toward electronic mediums in
all aspects of daily life, the current rules have inhibited plans from adopting
opt-out electronic delivery practice for plan documents. Yet, in a poll of
retirement plan participants by Greenwald & Associates, which fielded
SPARK’s report, 84% find it acceptable to make electronic delivery the default
option, with the ability to opt out without cost.
A side benefit of electronic communication, SPARK observes,
is that directing participants to electronic mediums can also promote the use
of electronic tools—such as retirement readiness calculators—that ultimately
play an important role in promoting superior retirement outcomes. In fact, as
provider data demonstrate, mere exposure to online tools has been shown to
encourage participants to increase deferrals or modify their investment
strategy to achieve a secure retirement. Consequently, participants who receive
plan communications electronically have better retirement outcomes.
SPARK polled 1,000 randomly selected plan participants
nationwide, employed either full- or part-time and participating in an employer
retirement plan, in a 10-minute telephone survey. Data was collected between
December 3, 2014, and January 2, 2015, by Greenwald & Associates and its
affiliate National Research.
“Improving Outcomes with Electronic Delivery of Retirement
Plan Documents” is available for download here. SPARK—the Society of Professional
Asset-Managers and Record Keepers—is an inter-industry organization that serves
retirement plan professionals.