Trust Company Suspends Services for New ESOPs Following Lawsuit

In April, a federal judge found First Bankers Trust Services Inc. liable for causing an ESOP to overpay for shares of the company’s stock.

Following a Department of Labor (DOL) lawsuit, First Bankers Trust’s Board of Directors decided to suspend the engagement of its services for transactions related to new employee stock ownership plans (ESOPs).

In a letter obtained by PLANSPONSOR, the president of the company said, “These are certainly unsettling times for ESOP fiduciaries and the community as a whole.”

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According to the letter, First Bankers will continue to provide its services to its existing ESOP clients, including serving as ESOP trustee for transactional matters. In addition, First Bankers will continue to pursue and accept successor trustee relationships with ESOP companies that are not currently clients.

“We believe that this change will allow First Bankers to focus more of its resources on its existing clients and their needs, while enabling us to provide the highest quality fiduciary services available,” the letter says.

In April, a federal judge, presiding over the DOL lawsuit found that First Bankers Trust Services Inc. breached its duties of prudence and loyalty to the participants of an ESOP when it caused the plan to overpay for shares of the company’s stock. U.S. District Judge Michael A. Shipp of the U.D. District Court for the District of New Jersey awarded to the plan $9,485,000 (plus interest), subject to the reduction in a 2016 consent order against the plan sponsor’s CEO.

Fiduciary Rule Debate Impacts State-Run Plans for Private Sector

A new bill introduced by Senate minority Democrats, seeking to protect ERISA exemptions for state- and city-run retirement plans for the private sector, would likely be made redundant with the removal of the Obama-era fiduciary rules. 

A gang of Senate Democrats have submitted a bill to the Committee on Health, Education, Labor, and Pensions, aiming to reverse recent moves by majority Republicans to roll back the regulatory safe harbors created by the Obama administration’s Department of Labor (DOL) to exempt from the Employee Retirement Income Security Act (ERISA) state- and city-run retirement plans created for private-sector workers.

The Democrats’ bill runs just seven pages and would directly amend Section 3 of the Employee Retirement Income Security Act of 1974, by adding at the end the following: ‘‘(C)(i) The terms ‘employee pension benefit plan’ and ‘pension plan’ do not include an individual retirement plan (as defined in section 7701(a)(37) of the Internal 12 Revenue Code of 1986) established and maintained pursuant to a payroll deduction savings program of a State or qualified political subdivision of a State.”

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The bill also lays out some stipulations states and cities would have to follow to ensure their safe harbor exemption from ERISA, for example that participation must be mandatory and that basic standards of communication and transparency are met. 

Conventional political wisdom clearly has its limits in the current environment, but common sense says the measure stands very little chance of passing the full Senate, or of eventually getting a signature from the anti-regulatory Trump administration. Interestingly, however, some experts have actually argued that the Democrats and Republicans in Congress are closer on this issue than they probably even realize.

The argument is that originally the states had put together this type of plan across the board using individual retirement accounts (IRA) so as not to be subject to ERISA, which made sense before the new fiduciary rule came into play during the Obama era. Readership will know that through the fiduciary rule, which is now in real jeopardy under Republican leadership, the DOL was pushing hard to have all IRA products subjected to ERISA, whatever the context in which they were delivered. Against this backdrop, the states reiterated their need to be exempt from ERISA, and the Obama-era DOL in turn issued an exemption for these state- and city-based programs to be free from ERISA standards. 

In sum, because the current administration is seeking to delay or outright kill the fiduciary rule, this in large part should remove the states’ original concern about their exposure to ERISA. In other words, the abolishment of the fiduciary rule would make all this a moot point, since the IRA plans would not be subject to ERISA anyway.

And so this is one of the many story lines in the retirement planning marketplace that will hinge on whether or not the Trump administration actually kills, rather than simply delays, the DOL fiduciary rule.

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