Carol's most recent "Ask the Lawyer" column for 401ktv discusses why target date fund rfps make sense and contains a list of some suggested questions for the rfp request. Here is the link: https://401ktv.com/rfp-target-date-funds/
By Carol Buckmann
We are stuck at 43%. A 2017 defined contribution plan survey by J.P. Morgan indicates that there has been no improvement in this percentage of corporate plan decision-makers who don’t understand that they are fiduciaries. 17% even thought that they could pass on all of their fiduciary responsibilities to third parties such as their provider, recordkeeper or investment adviser. Not surprisingly, the survey also indicated that those who were aware of their fiduciary status were more confident in their processes, more aware of fiduciary protections and more likely to follow best practices.
What are we to make of this? It appears that all of the recent publicity about the Fiduciary Rule and the role of advisers hasn’t made any impression on this group. Nor have the statements in the service contracts they sign which either acknowledge that the provider is not a fiduciary or provide that the adviser will be a “co-fiduciary” for investments. What do they think the “co” means? While it may be that some of these clueless fiduciaries won’t get the message until they are audited or sued, this survey provides a compelling reason to expand fiduciary education efforts.
Overcoming Resistance. The first reaction of busy executives to the suggestion that they need fiduciary education is usually “I have to run my business. I don’t have the time.” This is a good opportunity to explain the concept of personal liability for fiduciary breaches, which usually gets their attention. It is also a good time to explain how good processes and procedures, as well as delegation to other professional fiduciaries, can limit their liability exposure. Decision-makers who don’t know they are fiduciaries probably also don’t have fiduciary insurance covering their plan activities, and understanding available protections can also be a selling point for fiduciary education. Finally, while fiduciary education isn’t legally required by any specific rule, Department of Labor auditors do look to see if there has been fiduciary education as part of their audits. This makes sense, as it is unlikely that company insiders are effectively fulfilling their fiduciary responsibilities if they don’t know what they are.
Topics to Include. Start with bonding. Even today, I find plan fiduciaries who don’t understand that they need to be bonded for losses caused by fraud or dishonesty. If they haven’t complied, they can be required to personally make up losses that should have been covered. In addition, good education should include discussion of the following:
· Safe harbors, including ERISA 404 (c) and qualified default investment alternatives
· Outsourcing to fiduciary investment managers and professional plan administrators
· Sharing responsibilities with co-fiduciaries
· The importance of written policies and procedures
· Monitoring plan providers
· What auditors look for
The bottom line is that corporate decision-makers need to be made to understand that “the buck stops here.”
Carol's post was published by 401ktv. The answer may surprise you.
Carol's blog post-Say it Loud and Clear-has just been published by PenChecks. Here is the link.
By Carol Buckmann
No fiduciary wants a prolonged legal battle. Sometimes, though, fighting rather than settling 401k (or 403b) litigation can result in complete or partial vindication for beleaguered plan fiduciaries. My last post discussed victories for fiduciaries in cases involving the Chevron and Wells Fargo plans. While it is still true that the majority of these cases get settled at a price, and that some fiduciaries still don’t take their responsibility to pick and monitor investments seriously enough, responsible fiduciaries get caught in the net of class action litigation as well. At least a few other courts are carefully examining the conclusory allegations in these complaints and finding them wanting. It is too early to tell whether this is will be a trend in fee litigation, but responsible fiduciaries should be heartened by these victories.
Is It Really That Simple? One of the misconceptions about ERISA that we see in fee litigation complaints is that always choosing the cheapest option is a legal requirement or, put differently, that it is imprudent not to select the least expensive investments or service provider. In fact, ERISA has always required fiduciaries to consider performance as well as fees, and the test is that fees must be reasonable in relation to the services provided. This makes sense if you think about it-should fiduciaries pick a poorly performing fund with low fees over a fund with stellar performance but slightly higher fees? If they have a complex plan, should they hire a recordkeeper that can’t deal with the complexity simply because the recordkeeper charges less? Complaints also posit that there is only one responsible way to invest, even though investment specialists have many different views on that issue. One of the trendy current claims is that it is always a fiduciary breach to have a money market fund as the cash equivalent investment rather than a stable value fund, though stable value funds can have transfer and withdrawal restrictions. And some of the basics of litigation-such as standing and causation-have also been found to be missing in these suits. The complaints put forth an oversimplified view of the law, and some judges have seen through it.
Here are some of the other victories----
In June, Putnam Investments defeated a claim that putting its own funds in its 401k plan was imprudent. The court said that the employee-plaintiffs hadn’t demonstrated how Putnam’s actions caused them losses.
In the past few days, a decision involving Voya was released dismissing claims based on its stable value fund. The plaintiff in that case questioned Voya’s ability to profit by setting the minimum guarantee rate in funds which were not even available under her 403b plan. The court appropriately found that she had no standing to pursue the claims or to be a class representative. Other claims regarding stable value funds were previously rejected in a case involving CVS. Plaintiffs claimed that the funds, which are cash equivalent investments which compete with money market funds, were too heavily weighted towards ultra-short term investments. The court concluded that whether the fund was a prudent investment could not be determined in hindsight, and found the actual investments to be consistent with the fund’s objectives.
403b plans became litigation targets last year, and we have now had a decision involving Emory University dismissing plaintiffs’ claims that having too many funds in the menu could be a fiduciary breach. Similar claims were not dismissed, however, in a case involving Duke University. The court hearing the Duke University case dismissed claims based on failure to monitor investments because plaintiffs had not specified how the monitoring process was deficient. Duke and Emory won only partial victories, as several other claims were cleared for trial.
If Fiduciaries Choose to Fight--These cases are still a small percentage of those being litigated but they should provide some comfort to fiduciaries who fear being liable no matter what they do or how careful they are in selecting investments. Fiduciaries who choose to fight these suits are still well advised to follow good procedures, hire professional co-fiduciary advisers and document the reasons for their decisions. Having experienced ERISA lawyers on board can also make a big difference.
By Carol Buckmann
Can plan fiduciaries ever win a fee lawsuit? Most suits survive the early challenges and go on to be settled or, in a few cases, on to trial and appeal. But once in a while, cases get dismissed in the early stages.
This is encouraging because while there are still many fiduciaries out there who should be paying more attention to their fiduciary responsibilities, plan fiduciaries also sometimes rightly complain that if they become a target of a 401k class action, whatever they have chosen to do will be challenged without any real evidence that they acted improperly. The complaints contain conclusory statements such as “investments were made in X fund, while Y fund in the same class had lower fees.” Last year, a court in the Chevron litigation determined that mere conclusions in a complaint weren’t enough and dismissed a suit against Chevron. We have now had a second case in Minnesota in which a judge looked under the hood and found no substance there. The Minnesota judge dismissed the case with prejudice (meaning plaintiffs won’t have a second bite at the apple.) Is this the beginning of a trend? We can only hope so.
This case involved a challenge to Wells Fargo's putting its own target date funds in its 401k plan. The complaint alleged that Vanguard’s and Fidelity’s target date funds had lower fees. The court correctly ruled that ERISA does not require fiduciaries to scour the market to find the cheapest investments, and that factors other than fees can be relevant to an investment decision. The decision also questioned the comparison between the funds, given that the cited target date funds were designed for different purposes and choose their investments differently. The court found that plaintiffs had not introduced evidence of an appropriate benchmark to which the Wells Fargo funds could be compared.
It is important to note that the decision does not vindicate Wells Fargo’s selection of its own funds. As I noted in a prior post, fiduciaries need to carefully consider their selection of target date funds and we don’t know from this decision whether or not Wells Fargo did that. Other lawsuits involving the use of proprietary funds are proceeding to trial (or settlement).
While these two judges may be swimming against the tide, the point they make is a valid one. No fiduciary should be subjected to a trial without a showing that there is some real basis for the allegations of fiduciary breach. These suits should not be fishing expeditions. Judges should look under the hood, and if there is nothing of substance there, determine that this vehicle can’t move forward.
By Carol Buckmann
The Department of Labor has confirmed that the initial June 9 compliance date for the Fiduciary Rule will not be postponed, as opponents of the Rule had hoped. In fact, the Department has just issued FAQs that clear up some of the confusion about what those affected will and won’t need to do. Secretary Acosta reportedly shares the Trump administration’s position regarding the Rule, so it would be wrong to read this as anything other than a short-term victory for the Rule’s supporters.
Secretary Acosta recognizes- as the Trump Executive Order that initiated further review of the Rule does not-the constraints placed by the Administrative Procedure Act. The Department won’t act highhandedly, but will continue its review of the Rule despite the multiple court decisions upholding it. In fact, Acosta’s statements parrot arguments that have been made repeatedly by the Rule’s opponents and rejected in the past. Odds are that wholesale changes will be made to the Rule in the future, which its supporters will undoubtedly fight.
What Happens on June 9? A new group of people who give advice to plans and IRAs, including many brokers, will be subject to a fiduciary standard requiring them to give advice that is in their client’s best interest. If they receive compensation that varies depending on what they recommend, they will have to follow a watered-down version of the Best Interest Contract Exemption (“BICE”). They won’t have to give any warranties or special disclosures, but they will also need to determine that their compensation is reasonable and avoid making materially misleading statements. This standard has been incorporated in some revised prohibited transaction exemptions that will also become effective, but those receiving variable compensation and using BICE, the principal transactions exemption or PTE 84-24 need only comply with the 3-part best interest standard. The Department of Labor has separately stated that it will not pursue claims or enforce taxes against those acting in good faith during the transition period before January 1, 2018. This weakens the Rule and may stymie lawsuits before January 1, 2018.
What Can We Expect on January 1, 2018? There is plenty of time to give the notice required and to hold hearings on wholesale changes to the Rule, so I wouldn’t place any bets on the other parts of the Rule coming in as scheduled. Acosta has suggested that the SEC, which was consulted by the Department when the Rule was developed, needs to be consulted again. The SEC was directed under the Dodd-Frank Act to consider whether a fiduciary standard should apply to all advisers, but nobody expects any action on this in a Trump Administration that is committed to scaling back Dodd-Frank. Acosta also suggested that the development of “clean shares” in mutual funds-that is, shares whose price does not include built-in commissions or 12b-1 or other fees-may obviate some of the conflicts the Rule is designed to control. An additional exemption for clean shares could make sense.
Today you are a fiduciary, tomorrow you are not? It is hard to imagine a scenario in which the Department would backtrack completely and restore the old 1975 regulation or establish new rules under which most brokers will not be fiduciaries. How would this work after they had been operating under the new Rule since June 9? Some became fiduciaries in anticipation of the Rule, and all would find that stating that they would no longer be fiduciaries would not sit well with their clients. A substantial watering-down of the protections in the Rule is more likely. There is bound to be a court challenge if this happens, and Congress might still act, so the ultimate status of the Rule is still in question.
Carol's recent blog for PenChecks-the third installment of a series on participant education and retirement readiness- has received a lot of attention. Here is the link: http://www.penchecks.com/the-supported-participant-how-401k-plan-design-can-increase-retirement-savings/
It seems as if every day we read about a new lawsuit filed against ERISA plan fiduciaries. Fiduciaries can't insulate themselves from being sued, but they can minimize their risk and be in a good position to defend a lawsuit if they follow good fiduciary practices. Carol has been blogging and speaking about these topics for some time, via her "Intelligent Fiduciary" series and "Intelligent Fiduciary" programs for Worldwide Employee Benefits Network and Westlaw. We have complied some of her more popular posts in a booklet that is now available without charge.
By Carol Buckmann email@example.com
June 9 is now the magic date when, unless the Department of Labor or Congress acts quickly, parts of the Fiduciary Rule will come into effect. June 8 is the last day of the 60 day extension granted in response to President Trump’s executive order directing the Department of Labor to reexamine the Fiduciary Rule, and after that brokers and others who give investment advice to plans will be subject to fiduciary responsibilities and a best interest standard (though not to many requirements of the Best Interest Contract Exemption). We are all advising about what people will need to do by June 9. Being prepared is important, but I am still not sure that anything will really happen then, as numerous actions are being taken by opponents of the Rule to further extend the June 9 effective date or to repeal the Rule.
How Much Time is Needed? Some may question why any review of a rule that was more carefully studied than any in recent memory, has been upheld by every court that has looked at it, and was supported by an overwhelming majority of those who filed comments on the proposed delay is necessary, but President Trump’s executive order directs that a review be made and it hasn’t been completed yet. Opponents of the Rule continue to lobby against it, though their efforts to stay the court decisions pending the Department of Labor’s review were unsuccessful. They argue that the Department of Labor’s action making parts of the Rule effective on June 9 (which surprised many practitioners) is not consistent with the directive in the executive order to fully review the Rule. In fact, though, the prior analysis was so thorough that limited additional time should be needed for review.
What Is Happening Now? New Labor Secretary Acosta, who has expressed reservations about the Rule, had not been confirmed when the delay was finalized, and various interested groups, including supporters such as AARP, have requested meetings with him to discuss the Rule. Last week, 100 Republican lawmakers wrote a letter to Secretary Acosta urging further delay, and the Dodd-Frank overhaul bill, called the CHOICE Act, was approved by the House Financial Services Committee with an added provision repealing the Rule. The repeal provision also prohibits the Department of Labor from enacting another rule until the SEC has taken action on broker responsibilities, which no one expects to happen while the Republicans are in charge. Virtually anything can happen now.
· The Department of Labor could further extend the effective dates while it continues to examine the Rule, and then decide that it either does or does not need to be changed. It may or may not, on its own, decide to defer to SEC rulemaking.
· Congress could still overturn the Rule legislatively, though the full House and the Senate would need to approve the repeal provision. (Due to the date it was adopted, the Fiduciary Rule was not eligible to be removed under the Congressional Review Act.)
· The Department of Labor could eliminate the most controversial parts of the Rule, such as extending fiduciary protections to IRA holders and the special protections in the Best Interest Contract Exemption and let a watered down fiduciary standard come into effect.
· The Department of Labor could withdraw the Rule and propose a completely different version, such as one that relies solely on disclosure, though this seems a long shot, given its initial position not to further delay parts of the Rule.
· Lawsuits may be brought by proponents of the Rule to challenge administrative actions that further delay or change it, seeking to enforce the original provisions as upheld by several courts. Standing will be an issue.
Where Does This Leave Us? While I don’t pretend to have a crystal ball, my prediction is that some parts of the Fiduciary Rule will survive, but the watered down version will be less effective in reining in conflicted advice. However, the playing field has already changed; more and more providers will voluntarily adhere to a fiduciary standard. Retirement plan investors and sponsors will still be responsible for providing their own protections by hiring those who adhere to fiduciary standards and seeking contractual protections.
By Carol Buckmann
Odds are high that target date funds are your 401k plan’s default investment. These funds, which shift the mix of stock, bonds and cash based on the participant’s expected retirement age, are referred to as tdfs and have become extremely popular since the Department of Labor designated them as a permissible qualified default investment alternative, or “QDIA”. Plan fiduciaries receive the protection of a safe harbor if they prudently select a QDIA for participants who don’t or can’t make their own investment choices. However, if fiduciaries imprudently select a tdf, the safe harbor doesn’t protect them.
Although participants’ entire accounts may be invested in these funds, all too many tdfs are selected by fiduciaries simply because it is convenient, or there is some incentive, to offer their provider’s funds. This makes them an easy target for class action lawyers. Custom funds, which are designed for an employer’s specific participant group, are also vulnerable if they don’t include appropriate investments.
The plaintiff’s firm Cohen Milstein has a section on its website on target date fund investigations. Their review focuses on improper investment strategies, excessive fees, self-dealing issues and whether the selection of the funds was prudent. Participants are encouraged to contact the firm to review the plan’s information.
We have had a number of suits already filed challenging tdfs. A suit against Intel challenging use of alternative investments such as hedge funds in a custom target date fund was recently dismissed as not timely filed, but the complaint raises issues that, if true, might have been found to be a fiduciary breach. Johnson v. Fujitsu challenged the use of alternative asset classes such as real estate partnerships and natural resources in a custom target date fund. Wells Fargo was sued for using its own tdfs even though plaintiffs contended that they cost 2.5 times the cost ofsimilar funds offered by Fidelity and Vanguard. In fact, use of proprietary tdfs is a red flag for the litigators.
These funds may be a ticking time bomb for plan fiduciaries who haven’t prudently investigated and compared their plan’s tdfs to other options available in the market. There are lots of differences between tdfs. Do you know what they are?
Here is a short checklist for company fiduciaries:
- Do we know the alternative QDIA choices (balanced funds and managed accounts) and have we compared them to tdfs?
- Do we know our funds’ glide path? This is the way the asset allocation changes as participants age, and it can differ from fund to fund, making some more conservative and some riskier than others.
- Have we benchmarked our tdf’s fees against competing offerings?
- Have we considered whether to use an off-the shelf tdf (usually investing in mutual funds) or a custom tdf?
- If we are using a custom tdf, have we evaluated the investments included, particularly alternative investments? How much of the tdf is invested in alternative investments?
- Have we evaluated and benchmarked our funds’ performance?
- Do we regularly monitor our tdf’s performance and fees, which can change over time?
A prudent fiduciary process remains the best defense if your plan’s tdf is challenged.
Most employees consider financial literacy so complex and daunting they won't make an effort to learn about it, even though it's in their best interests to do so. How do you motivate employees to attend retirement planning? What topics should you cover, if they do?
Carol Buckmann explains her views on How to Create an Effective 401(k) Plan Education Program, as a guest blogger for PenChecks Trust.
By Carol Buckmann
ERISA fiduciaries seem to have more and more to worry about. Plan fiduciaries worry not only about being a target of class action lawsuits, but also about the possibility of being selected for an IRS or Department of Labor audit. More and more fiduciaries are coming to realize that memorializing a set of carefully-thought out plan policies and following them can be their best defense in these situations. Written policies allow them to sleep better at night.
Why should we give up flexibility? Plan fiduciaries sometimes think that they have total flexibility to deal with issues if they don’t commit their processes to writing, but we have seen that when fiduciaries act without policies that set out good fiduciary processes, they may be missing important issues, such as benchmarking fees regularly, or monitoring the limits on plan loans. Just putting a policy together forces you to focus on how you will do what needs to be done. If you act without written policy guides, you are also risking acting in ways that are not consistent, which makes your decisions harder to defend. Needed flexibility can be built into written procedures if they are properly drafted.
Here are some of the policies that are becoming more common and the reasons to consider them-
- Investment Policy Statements. Most plans have these nowadays, though they vary a lot in quality. The worst are provided by advisers who try to draft models to protect themselves by listing every step they take when they review investments and expressing the standards as mathematical formulas that provide no flexibility. Formula policies are especially problematic if there are material changes that may alter future performance, such as a change in fund managers. The best investment policies set forth the criteria for selecting an appropriate investment menu and for monitoring and replacing underperforming funds, but don’t lock the company fiduciaries into taking or not taking specific actions.
- Fee Policy Statements. Fee review can be part of the Investment Policy Statement, but more and more we are seeing separate fee policies that deal with issues such as revenue sharing and fund classes, regular benchmarking and even regular rfps to compare fees. Given the focus of litigation on allegedly excessive fees, thinking carefully about a fee policy seems like good protection.
- Internal Controls Policy. These policies aren’t just about preventing plan losses. They list processes to prevent operational violations of the qualification rules, such as making sure there are contribution suspensions after hardship distributions or that those distributions are made only for the proper reasons. They can be very helpful in the event of an IRS audit, which may not dig deeper if the appropriate controls are shown to be in place. They can also decrease the employer’s costs of correcting violations by permitting prompt identification and self-correction of violations without having to go through the Voluntary Corrections Program or Audit Cap.
- Education Policy. This helps insure that participants understand how the plan works, why they should contribute, and basic investment information. It helps participants accumulate more, but it also helps employers by making it less likely that participants will complain that they haven’t received necessary information to make decisions or prepare for retirement.
- Uncashed Check/Missing Participants Policies. Fiduciaries need to be doing more to deal with this problem. Both the IRS and the Department of Labor are looking at whether benefits are being distributed at age 70 ½ as required, but the issue is much bigger. Fiduciaries should be making reasonable efforts to find people who are owed vested benefits through actions such as searching public documents and contacting beneficiaries listed for other plans. Often providers are lax about these issues and just want to escheat benefits that haven’t been claimed. An appropriate policy should be developed by consulting all parties involved.
Establishing the Policies is Just the First Step. As helpful as having policies may be, not following them is worse than having no written policies at all. The plan’s fiduciaries should all be familiar with what the policies require. And you can’t set it and forget it. The law and the investment climate are always changing, and all plan policies should be reviewed and updated on a regular basis.
by Carol I. Buckmann
Changes are coming so fast it is hard to process them. Since I wrote about President Trump’s Executive Order directing the Department of Labor to re-evaluate the Fiduciary Rule (as a guest blogger published by Pen Checks), the Department of Labor proposed a 60 day delay in the effective date of the Fiduciary Rule. In response to concerns that the delay might not be final until after the Fiduciary Rule’s April 10 compliance date, the Department also issued FAB 2017-1 indicating that it will not enforce the Rule during any such gap period.. We have also had a chance to analyze the February 8 decision by a district court judge in Texas that upheld the Obama administration’s regulations in all respects. This is particularly significant since the challenge to the Fiduciary Rule was filed in Texas on the assumption that a court in Texas would be more sympathetic to the business interests fighting the Rule.
So far, all three cases challenging the Fiduciary Rule have upheld it without reservation. You would think that a 3-0 win record would have some impact on the new analysis to be performed by the Trump Department of Labor, particularly since the courts have reviewed the same issues the Department of Labor has been directed to re-evaluate. The Trump directive simply copied language used by challengers to the Fiduciary Rule in their failed court efforts to derail it. However, that isn’t necessarily the case. And the Trump directive also has a catchall at the end allowing changes to the Rule for other reasons the Department of Labor deems valid. Given the focus of this Administration, I view the language in the directive as an instruction to the Department of labor as to where it should come out. A total repeal of the Rule is still a real possibility.
Even though the Trump Department of Labor is not bound to follow the reasoning in the court decisions, it IS required to hold new hearings on its proposals with respect to the Rule. Proponents will have another chance to go through the exercise of expressing their views. And even though the court decisions aren’t binding, the bar may now be higher for the Trump Department of Labor to credibly justify a different conclusion than the courts when it moves forward on the Rule.
Can Others Step Forward to Defend the Rule? It is an interesting question whether a contrary determination by the Trump administration could be challenged as “arbitrary and capricious” given the court decisions, assuming that private parties have standing to raise this argument. If this Administration cannot get stays in pending litigation and stops defending the Rule, we may have the possibility of a future decision invalidating the Rule by default unless others are allowed to step in. Private parties may claim standing to try to step in to defend the Rule to avoid this result.
Of course, the Fiduciary Rule could still be repealed by legislation. However, Congress may well be far too busy right now dealing with issues such as replacing the Affordable Care Act to focus on repealing a rule that is extremely likely to be scaled back or eliminated anyway.
What a Mess! But the genie is already out of the bottle. Those firms that have prepared to comply with the Rule must decide how to proceed, and there have been indications that at least some of them are not rolling back their changes. This could be a good thing for retirement plan participants generally, as conflicted advice and the limits of the suitability standard that applies to brokers have been brought to the public’s attention in the years during which the Fiduciary Rule was developed. More options for fiduciary advice can only be a good thing for investors. It could also be a good thing for those who have chosen to comply voluntarily, as they can ignore the chaos caused by the Executive Order for the time being and proceed to pay attention to business.
On February 3rd, President Trump signed an Executive Order directing the Department of Labor to reevaluate the Fiduciary Rule. Although it hasn't happened yet, this review could well delay the Rule's scheduled April 10th implementation. Carol Buckmann wrote about this in an article for PenChecks Trust, Is This the End of the Fiduciary Rule? And Will it Matter?
MAKE YOUR 401k (or 403b) PLAN A LITIGATION TARGET
By Carol Buckmann
Nobody wants to be sued. Still, writing about plan fee and investment litigation really focuses attention on what plan fiduciaries are doing (or not doing) to come into the sights of the class action lawyers representing plaintiffs. Sometimes it seems as if these defendant fiduciaries were almost asking to be sued, since the practices being described in the complaints are so vulnerable to challenge. These lawsuits keep proliferating, so fiduciaries of 401k and 403b plans would be well advised to learn from what the defendants were alleged to have been doing wrong.
If you want to invite a lawsuit, do the following----
Adopt an Investment Policy Statement, then never consult it again. Outside advisers rightly urge their fiduciary clients to adopt a formal investment policy statement (IPS) setting forth the goals and procedures for selecting, monitoring and replacing investments. Yet adopting a policy and not following it can be worse than not having a written policy at all. The Department of Labor considers the policy one of the instruments and documents governing the plan, which means that mere failure to follow the IPS can be a fiduciary breach. More importantly, failure to follow the IPS will likely result in your participants having a sub-optimum investment menu.
Don’t Benchmark Your Fees or Do Periodic RFPs. If you are happy with your current provider, why do this? You need an ongoing reference to determine whether you are overpaying for services and whether other competitors might be providing useful additional services that your current provider doesn’t offer. You might find reasons not to be so satisfied with your current provider, but at the least, you will know whether you should be renegotiating your current provider’s fees.
Load Your Investment Menu with Proprietary Funds. Recent litigation has focused on providers who put their own funds in their employee plans even though they weren’t top performers. Another red flag is the use of the provider’s target date funds without investigating whether they are the best in their class.
Try to Do Everything In House. Unless you are a very large business with employees who have real expertise about pension investments, and the time to properly review them, you are courting disaster trying to do everything in house. With smaller businesses this is sometimes a result of a reluctance to cede control to an outsider rather than trying to cut costs. However, just about every plan needs professionals advising about investments and fees. And those professionals should acknowledge that they are ERISA fiduciaries, regardless of what happens with the Fiduciary Rule under the new administration. There are many good advisers currently operating under a fiduciary standard to choose from.
Enter into a Revenue Sharing Arrangement, then fail to monitor payments. There are alternatives to paying for plan services through revenue sharing that are more transparent, but if you do enter into a revenue sharing arrangement, make sure that your provider isn’t being overpaid or that revenue sharing is not being used to pay for services to the plan sponsor rather than the plan participants.
Use Multiple Recordkeepers and Providers. This has become a big issue in the lawsuits that have recently targeted large universities and health care providers who sponsor 403b plans. Often there may be historic reasons for using multiple providers, but the use of multiple providers to provide the same services seems likely to result in overlapping services, inefficiencies, and a failure to leverage total asset size to get lower fees. The same argument could be made for plans with multiple funds in the same asset class. For example, if these investments were consolidated into one fund, they might become eligible to invest in cheaper institutional class shares.
Set It and Forget It, because nobody is complaining. Just because you picked an appropriate menu years go does not mean that your menu is the best for participants today. Fiduciaries need to monitor performance against benchmarks, and to be aware of new funds and alternatives to regular mutual funds, such as separate accounts and collective investment funds. The U.S. Supreme Court in Tibble v. Edison affirmed that fiduciaries have an ongoing duty to monitor plan investments.
Don’t Hold Regular Committee Meetings. Running your business may be a priority, but business priorities shouldn’t cause frequent delays or cancellations of Committee meetings. And you should have a committee, or at least specific employees assigned to oversee specific plan operations. Meeting with your outside advisers on a regular basis facilitates monitoring of fees and investments, and also makes sure that the plan’s fiduciaries keep abreast of changes in the law. Prepare agendas and keep written Minutes to record what is discussed and the reasons for decisions.
The most important “don’t” may be don’t assign your plan or plans a low priority. The big lesson of recent litigation is that fiduciaries always need to have the plans on their radar screens.
- August 2017
- Jul 14, 2017 Does the Fiduciary Rule Apply to Plan Sponsors and Committees? Jul 14, 2017
- Jul 13, 2017 The Importance of Good Communications Jul 13, 2017
- Jul 12, 2017 Tracking Down the Valid Claims-More Victories for 401k and 403b Fiduciaries Jul 12, 2017
- Jun 6, 2017 What's Under the Hood? Another Court Dismisses Conclusory 401k Fee Suit Jun 6, 2017
- May 25, 2017 Win the Battle, Lose the War? The Fiduciary Rule Moves Forward May 25, 2017
- May 16, 2017 The Supported Participant-How 401k Plan Design Can Increase Retirement Savings May 16, 2017
- May 15, 2017 Free Guide: "The Intelligent Fiduciary" May 15, 2017
- May 9, 2017 The Difference a Delay Makes-Will the Fiduciary Rule Survive? May 9, 2017
- May 3, 2017 Are Your Target Date Funds Making You A Target? May 3, 2017
- Apr 17, 2017 The Confident Participant: Effective 401(k) Plan Education Apr 17, 2017
- Mar 15, 2017 Put it in Writing! Why Your Pension or 401(k) Plan Should have Written Policies Mar 15, 2017
- Feb 21, 2017 Upheld, Delayed and Under Review-Heads are Spinning over the Fiduciary Rule Feb 21, 2017
- Feb 13, 2017 Is This the End of the Fiduciary Rule? Feb 13, 2017
- Jan 18, 2017 How To Make Your 401(k) or 403(b) Plan a Litigation Target Jan 18, 2017
- Jan 4, 2017 Archive: Benefits Blog Cohen & Buckmann Jan 4, 2017
- Jan 3, 2017 Size Matters: Do Your Fiduciaries Negotiate for Lower 401(k) Plan Fees? Jan 3, 2017
- Dec 19, 2016 Two More Victories for the Fiduciary Rule - But Will They Be Hollow Ones? Dec 19, 2016
- Nov 14, 2016 Fiduciary Rule Survives First Court Challenge - Will Other Courts Follow? Nov 14, 2016
- Oct 31, 2016 Is Your Pension Plan Auditor Making the Grade? Five Ways to Get a Better Audit Oct 31, 2016
- Sep 26, 2016 Denial is Not an Option: Why Savvy Investment Advisors will Accept Fiduciary Status Sep 26, 2016
- Sep 14, 2016 Is Your 401(k) Plan Income "Floating" Away? New Lawsuit Challenges Fidelity's Practices Sep 14, 2016
- Sep 1, 2016 Score One for 401(k) Fiduciaries - Excessive Fee Suit Against Chevron Dismissed Sep 1, 2016
- Aug 16, 2016 403(b) PLANS (AND MORE 401(k) PLANS) IN THE CROSSHAIRS----FEE LITIGATION FINDS NEW TARGETS Aug 16, 2016
- Aug 14, 2016 Are They Playing Pokemon Go at Your Office? Aug 14, 2016
- Aug 7, 2016 Vanished Into Thin Air? Lost Participants Create Pension Plan Audit Risk Aug 7, 2016
- Jul 26, 2016 401(K) Plans Still in the Crosshairs: New Cases Challenge Plan Fees Jul 26, 2016
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- Apr 30, 2016 After Sun Capital ERISA Decision: What's Next for Private Equity? Apr 30, 2016
- Apr 30, 2016 WHAT YOUR PROTOTYPE PLAN PROVIDER DOESN'T TELL YOU Apr 30, 2016
by Carol Buckmann
Fiduciaries of very large plans who wouldn’t think of not haggling with a dealer over the price of a new car or a hotly negotiating a business deal have sometimes neglected to leverage their plan’s size to negotiate lower 401(k) fees. The result is a sharply increased risk of being sued.
Fund Classes Matter.
A few years ago, Wal-Mart entered into an expensive settlement of a lawsuit challenging its use of retail mutual funds in its 401(k) plan and requiring changes in its fiduciary practices. One of the contentions in the suit was that Wal-Mart’s fiduciaries didn’t use the plan’s size to invest in institutional class funds that made the same investments with lower fees than the retail funds Wal-Mart made available to participants. (Only large investors are eligible to invest in institutional class finds.) We have just had another lawsuit filed against a jumbo 401(k) plan (with over $5 ½ billion in assets) sponsored by Delta Airlines which underscores the need for fiduciaries to use their plan’s bargaining power. The newly filed suit names the plan committee as defendents and also challenges the class of funds selected for investment as not having the lowest fees available.
Too Many Funds?
Some of the other allegations in the Delta complaint are similar to those made in recent suits filed against the university sponsors of 403(b) plans. For example, it is alleged that the Delta plan had 200 investment options prior to 2011. In addition to resulting in participant confusion, the complaint alleges that consolidation of these funds, many of which were in the same asset class, would have increased the plan’s bargaining power. Though not mentioned in the Delta complaint, it is also possible that having so many funds could be a fiduciary breach, since there will inevitably be a mix of good and not-so-good funds in such a large menu. The complaint cites survey results indicating that the average 401(k) plan has only 14 options. Shouldn’t the fiduciaries have tried to winnow the menu down to the best funds?
The following additional arguments were made in the Delta complaint:
- the inclusion of many funds of the same type mimicked an index fund but without the low fees that would have applied if actual index funds were selected for the menu.
- using funds with higher fees can’t be defended, because studies show that funds with higher fees don’t outperform other funds over the long haul.
- the fiduciaries should have regularly solicited competitive bids for recordkeeping services.
- plan recordkeeping fees should be determined as a flat fee per participant rather than a percentage of assets. It doesn’t cost more to administer a plan with more assets or to service larger accounts.
- the fiduciaries should have monitored the amount of revenue sharing payments going to the recordkeeper on top of the basic recordkeeping fee, and should have negotiated for a refund of any revenue sharing payments that caused the plan to overpay for the value of services provided.
Some of these claims seem to be an attempt to convert opinions into hard-and-fast rules-for example, is it never appropriate to select a fund with higher fees? Individual managers can beat the averages and might generate good net returns. However, others, if true, are just describing a failure to follow prudent procedures. How many of these practices apply to your plan?
Don’t Forget the Agreement:
One of the biggest mistakes fiduciaries can make is starting off by simply accepting the service provider’s form service agreements. Not only the fees, but other provisions of these agreements are negotiable. For example, size can be leveraged to get better indemnification provisions or to remove mandatory arbitration provisions that the plan sponsor may not want. It is always useful in these situations to have input from an ERISA attorney who negotiates these provisions on a regular basis and know the right things to ask for.
by Carol I. Buckmann
The score is now 3-0.
More Decisions Back the DOL.
Following in the footsteps of a District of Columbia district court judge, a second judge in Kansas refused to issue an injunction barring enforcement of parts of the Department of Labor's fiduciary rule. The Kansas judge, in another well-reasoned decision, found that the United States Department of Labor did not violate the Administrative Procedure Act when it issued the rule, and that plaintiffs were not likely to prevail in their challenges to the rule as it applied to fixed index annuities. Just a few days ago, the D.C. appeals court upheld the D.C. district court decision and refused to enjoin enforcement of the rule pending a decision on appeal. This is another sign that the plaintiffs are not likely to prevail on the merits at the end of that litigation.
More Decisions to Come.
Although a pattern seems to be emerging, consistent with typical judicial deference to overturn an agency's interpretation of a statute, there are other cases challenging the fiduciary rule pending in Texas and Minnesota. Courts in the Fifth Circuit sometimes march to a different drummer, though, and that has in the past been the source of some unanticipated decisions, including the recent decision overturning the new overtime rules.
Appeals will undoubtedly follow, regardless of how the remaining courts come out, and we are not likely to have all of these resolved by the April, 2017 general implementation date for the rule.
What Will the Trump Administration Do?
However, the big question here is whether any decisions upholding the fiduciary rule will be nullified by actions of the new Trump administration. No one knows yet, for as far as we know, Mr. Trump himself has not directly expressed any views on the rule one way or the other. He and his advisers may be opponents of complex regulations, but as they are finding out in trying to plan for repeal of the Affordable Care Act, undoing things is not always easy. The President-elect did not identify as a strong supporter of Wall Street during his campaign, so I think it is too soon to conclude with any certainty that the fiduciary rule is dead. Delaying or revising it are also possibilities.
What to Do Now.
What should those affected by the rule be doing? My colleagues have been speaking and writing about this issue, and their consensus seems to be that it is likely that some form of the fiduciary rule, perhaps with a delayed effective date, may remain in place. For example, this was SEI's comment on releasing a recent advisor survey:
"We believe advisors need to continue to prepare for the DOL rule despite current speculation that it will not come to fruition because of the incoming administration," said Wayne Withrow, Executive Vice President of SEI and Head of the SEI Advisor Network. "These survey results demonstrate that the rule is impacting advisors' considerations in several aspects of their business when looking at 2017, which is one reason we are seeing advisors re-evaluate their infrastructure, increase attention to client-facing activities and focus on the outsourcing of non-client facing activities."
The only safe advice we can give clients at the moment is to go ahead with their compliance efforts. Many large players on the field, like Merrill Lynch and Morgan Stanley, have already determined how they plan to comply and are taking steps to implement those changes.
Can You Put the Genie Back in the Bottle?
As I have previously written, regardless of the fiduciary rule's fate, the genie is already out of the bottle. The mainstream press has focused attention on the current situation that permits non-fiduciaries to give conflicted advice. The wave of class action litigation against plan fiduciaries challenging plan fees and investments continues unabated. Department of Labor audits will continue. It will be hard for plan sponsors and in-house fiduciaries to justify relying on advice from advisers who are not fiduciaries, regardless of whether the law is changed. And it will not be so easy for entities that have already announced that they will take on a fiduciary role to backtrack and revert to non-fiduciary status. The landscape has already changed.
by Carol Buckmann
A district court in Washington D.C. has just handed the Department of Labor a significant victory in its efforts to derail legal challenges to the fiduciary rule. The decision itself is 92 well-reasoned pages, and contains a clear refutation of the arguments put forth by NAFA, a group of whose members sell fixed annuities, challenging the rule. The court not only refused to enjoin the regulations on an interim basis, but made a final ruling on summary judgement.
The Big Picture.
Prior to the effective date of the fiduciary rule, a broad class exemption generally permits the receipt of commissions in connection with annuity sales, and due to the rule that recommendations do not result in fiduciary status unless advice is given on a “regular basis”, a one-time sale would not currently trigger fiduciary responsibilities. In addition to objecting to the new fiduciary definition, plaintiffs specifically objected to the new structure that will impose Impartial Conduct Standards (including prudence, loyalty and avoidance of misleading statements) in order to receive commissions on annuity sales under the Best Interest Contract (BIC) Exemption.
Courts are usually reluctant to substitute their judgment for that of the agency with authority to interpret a statute, and this decision is no exception. The court rejected arguments that the Department of Labor exceeded its authority in issuing the fiduciary rule and was not sympathetic to claims that sellers of annuities would not be able to operate under the new rules, even noting that a commission-based compensation system was not the only option.
What Was Decided.
The decisions made by the court can be boiled down to the following:
1. The Department of Labor has statutory authority to interpret Title 1 of ERISA and to determine the conditions of any prohibited transaction exemptions it issues, and did not exceed that authority in issuing the fiduciary rule or imposing Impartial Conduct Standards on certain annuity sales under the Best Interest Contract (BIC) Exemption.
In response to arguments that the fiduciary rule was an improper interpretation of the statute, the court stated that: “Nothing in the statutory text forecloses the Department’s current interpretation.” Judge Moss went on to explain why the prior regulation (the “five part test”) was not the only permissible interpretation of the law:
“… there is a vast difference between accepting an existing interpretation of a statute and treating that interpretation as the only permissible one. NAFA’s efforts to support the latter approach prove too much: If taken to its logical extreme, it would suggest that every pre-1986 Treasury Department regulation interpreting the Internal Revenue Code was forever frozen in place when Congress reenacted the Code in 1986. That is not the law.”
2. The Department of Labor did not exceed its authority in regulating IRAs under the fiduciary rule. Even though IRAs are not subject to Title I of ERISA, the Department of Labor may impose requirements of Title I of ERISA, such as the duties of prudence and loyalty, on those using exemptions for transactions involving IRAs.
3. The Department of Labor’s requirement under the BIC Exemption that compensation be “reasonable” was not unconstitutionally vague because it is a commonly understood term. The court pointed out that other prohibited transaction exemptions and many IRS rules also use the term “reasonable compensation.”
4. The Department of Labor was within its authority and not acting in an “arbitrary and capricious” manner in requiring that the BIC Exemption be used for fixed index annuity sales.
5. The Department of Labor was not impermissibly creating a private right of action when it established requirements for the written contracts to be used for sales to IRAs under the BIC Exemption. State laws, rather than ERISA, would govern the contract’s enforceability.
6. The Department of Labor didn’t fail to do a sufficient regulatory analysis of the impact of the fiduciary rule on small business.
Where Do We Go From Here?
There are other challenges to the fiduciary rule waiting for decision in other courts, and judges in other jurisdictions may come out differently. This decision is expected to be appealed, so it is certainly not the last word on whether all or parts of the fiduciary rule are valid. However, the reasoning in this decision may provide a blueprint for the other courts issuing their decisions.
Since these cases were filed, some financial firms such as Merrill Lynch and Morgan Stanley have announced how they plan to comply with the new rules, which undercuts the arguments put forward by plaintiffs in these cases that they will be unable to operate under the fiduciary rule. And at least this one court appears to be saying that the fact that you don’t want things to change from the way you have always done them is not grounds for invalidating a regulation.
Of course, the election may well make all of this legal maneuvering moot, given Republican opposition to the rule. However, even if the fiduciary rule is withdrawn or overturned by Congress, it may not be possible to turn back the clock to a time when plans were unaware that many of the people who give them advice and sell them products were not doing so as fiduciaries. There may be long-term changes in their hiring and supervisory practices.