The end of one year and the beginning of the next is traditionally a time to take stock of new developments and compliance issues. Though nobody has a crystal ball, it’s also a good time to assess trends and changes likely to occur in the future. Here is a list of items for compliance calendars and my subjective predictions of what to watch for in 2023.
These developments, which affect 2023 compliance, should be on everyone’s radar:
· The deadline for SECURE Act and CARES Act amendments was extended. However, It is important to remember that plans still need to be administered in accordance with the new requirements, some of which became effective on January 1, 2020.
· The Supreme Court in its Hughes v. Northwestern decision (2022 WL 199351 (S. Ct. Jan. 24, 2022)), defined a fiduciary’s responsibility when constructing investment menus for participant-directed plans, which includes most 401(k) and many 403(b) plans. This decision put an end to a defense that some fiduciaries raised in litigation that just including some or even many prudent options in an investment menu satisfies ERISA. Each option in the menu must be a prudent investment.
· There is still no final word on mandatory arbitration of ERISA claims, which has the potential to rein in ERISA litigation. The courts continue to issue decisions that are not consistent with each other and also seem inconsistent with prior Supreme Court decisions on the scope of the Federal Arbitration Act. The Supreme Court has been asked to review a lower court case requiring that the plan agree to arbitration, Hawkins v. Cintas Corp., (No. 22-226, petition for cert. docketed September 12, 2022) but hasn’t decided whether to accept the case. While we still have no national rule in effect, the Supreme Court has been generally receptive to arbitration provisions and the drafters of ERISA didn’t prohibit arbitration. If the Supreme Court accepts the case, it will be an opportunity to clarify the ability to compel arbitration of ERISA claims once and for all.
· More states adopted retirement programs for employees without access to employer plans in 2022. Employers with plans are exempt, and employers who would be brought into these programs because they don’t currently sponsor a plan should explore their options, as much higher contributions can be made to 401(k) plans and SIMPLE IRAs.
· Fee disclosure for welfare plans-similar to the disclosures required for pension plans-is required. Some fiduciaries are still not aware that brokers and other service providers must now disclose their fees to hiring fiduciaries in advance. Fiduciaries need to keep this in mind when entering into or renewing contracts.
· A new health plan transparency requirement to provide internet-based price comparison tools comes into effect in 2023.
· Final Department of Labor ESG regulations removed some barriers to ESG investing, but investments must still satisfy ERISA’s duties of prudence and loyalty.
· The Department of Labor came down hard on cryptocurrency. Participant demand remains strong even following the market meltdown, but those making cryptocurrency available as a 401(k) investment option should restrict investment to a percentage of the account balance to limit potential losses. Even then, it is risky for fiduciaries, who should proceed with caution and ideally with expert advice.
· More internet imposters stole participant benefits, and some of those participants have had to go to court to try to get their benefits restored. See, e.g., Disberry v. Employee Relations Committee of the Colgate-Palmolive Company, (22 Civ. 5778, S.D.N.Y., December 19, 2022.) allowing the case to proceed against the Committee and recordkeeper. Department of Labor guidance on best cybersecurity practices indicates that keeping benefits secure is a fiduciary responsibility. Fiduciaries of pension and welfare plans need to review and monitor vendor systems as well as their own. These recent lawsuits have highlighted the need for old-fashioned employee training in addition to procedures such as two factor authentication.
· Congress finally passed SECURE 2.0, and some of the changes are effective in 2023. One example is that the age at which RMDs begin will change from 72 to 73 for participants who weren’t 72 or older by December 31, 2022. It is important to become familiar with these changes as soon as possible.
Some Predictions for 2023
We should expect to see:
· More use of managed accounts-these options can provide for more personalized investing than target date funds. A hybrid combination of the two switches to a managed account arrangement as the participant approaches retirement age.
· Increasing interest in alternative investments in defined contribution plans as a way to diversify portfolios and reduce risk. Surveys show that younger participants want more plan choices.
· More efforts to provide coverage for workers without employer plans. More states will adopt or implement state- facilitated retirement programs and, at the end of 2022, legislation was introduced that would provide a federal option for uncovered employees.
· Fee and investment litigation will continue, but courts will be more skeptical of cookie-cutter and conclusory complaints. There has been a recent mini-trend to dismiss lawsuits that don’t provide sufficient backup for the claims. See, e.g., Smith v. CommonSpirit Health, (2022 WL 2207557, 6th Cir. 2022). Fiduciaries who have fulfilled their responsibilities should not be required to expend the time to defend these claims in lengthy court proceedings.
· Interest in PEPs-plans managed by professionals in which unrelated employers can participate- will increase. SECURE 2.0 makes them available to 403(b) plans for the first time.
· Interest and use of telehealth will increase. The ability of high deductible health plans to offer first dollar coverage for telehealth and remote care services without jeopardizing health savings account participation has been extended through plan years beginning before January 1, 2025. This rule may be made permanent.
· Steps will be taken to protect innocent participants whose accounts are stolen due to lax cybersecurity practices. Courts will look more carefully at what plan fiduciaries and recordkeepers have done to fulfill their responsibilities. Ideally, we need a federal insurance program to reimburse reasonable losses, or at least a requirement that all plans have cybersecurity insurance.
Not all of my predictions will pan out, but last year’s predictions were correct more often than they were wrong, so stay tuned.