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Fiduciary Duties

The SEC’s Fiduciary Proposal – Form CRS

On April 18, the Securities and Exchange Commission issued a proposal package that includes two new rules and one interpretative release.  The package consists of three components – Regulation Best Interest, Investment Adviser Standard of Conduct Interpretation, and Form CRS – Relationship Summary.   According to the SEC, the proposal is intended to balance investor protections and regulatory requirements with investor access and choice.  Each component of the proposal is available for public comment for 90 days after publication in the Federal Register.

In a series of three articles, Spencer Fane LLP describes the SEC’s proposal and potential impacts on broker-dealers and investment advisers.  This third article describes the Form CRS – Relationship Summary portion of the SEC’s fiduciary proposal.

The SEC’s Fiduciary Proposal – Regulation Best Interest

In an open meeting on April 18, the Securities and Exchange Commission voted four to one to issue two new rules and one interpretative release that are intended to provide investor protections and regulatory clarity, as well as investor access and choice.  Specifically, the SEC issued Regulation Best Interest, Investment Adviser Standard of Conduct Interpretation, and Form CRS – Relationship Summary.  Each component of the SEC’s proposal is available for public comment for 90 days after publication in the Federal Register.  In a series of three articles, Spencer Fane LLP describes the SEC’s proposal and potential impacts on broker-dealers and investment advisers.  This first article describes the Regulation Best Interest portion of the SEC’s fiduciary proposal.

Here We Go Again… Fifth Circuit Strikes Down DOL’s Fiduciary Rule

In a significant blow to the Department of Labor’s controversial regulation re-defining what constitutes an investment-advice fiduciary, a split three-judge panel of the Fifth Circuit Court of Appeals ruled on March 15 that the DOL exceeded its authority when creating the rule.  The 2-1 decision of the appellate court strikes down the regulation and its associated prohibited transaction exemptions in their entirety.  (Chamber of Commerce v. U.S. Dept. of Labor (5th Cir. March 15, 2018)).  In its wake, the court’s decision leaves even more of the confusion that has plagued the DOL’s 2016 rulemaking.

Investment Advisers and Conflicts Of Interest

The Department of Labor and the Securities and Exchange Commission have expressed concerns regarding potential conflicts of interest that investment advisers do not explicitly disclosed.  Thus, plan fiduciaries may not be aware of such conflicts when they engage and monitor their plan’s investment consultant.  These concerns were recently highlighted when the SEC launched an initiative in connection with investment advisers’ selection or recommendation of a higher-cost mutual fund share class for their clients when a lower-cost share class of the same fund is available.  The SEC’s initiative reminds plan fiduciaries of the importance of obtaining appropriate information to fulfill their fiduciary obligations when engaging and monitoring investment advisers.

SEC Launches Share Class Selection Disclosure Initiative

The Securities and Exchange Commission recently announced a temporary program for investment advisers who may have inadequately disclosed potential conflicts of interest related to their selection or recommendation of mutual fund share classes. Participation in the program, however, is not without its drawbacks.

Fiduciary Rule – Status Quo until July 1, 2019

On November 29, 2017, the Department of Labor granted an extension of the transition period for the Fiduciary Rule’s Best Interest Contact Exemption and Principal Transaction Exemption, and delayed the applicability date of the amendments to Prohibited Transaction Exemption 84-24. The new transition period will end on July 1, 2019, rather than January 1, 2018. The Department also extended the temporary enforcement policy in Field Assistance Bulletin 2017-02 to July 1, 2019. Thus, financial institutions and advisers impacted by the Fiduciary Rule and related exemptions remain subject to the same requirements as they have been since June 9, 2017, when the Fiduciary Rule and the Impartial Conduct Standards became applicable.

The Fiduciary Rule is Alive

According to U.S. Labor Secretary Alexander Acosta, the Department of Labor’s Fiduciary Rule will become effective on June 9th. As discussed in our May 9th article, the Rule’s expanded definition of “fiduciary” will apply, and advisers and financial institutions providing investment advice as fiduciaries must comply with the Rule’s “impartial conduct” standards, beginning on June 9, 2017. At this time, the full scope of the Fiduciary Rule and its related prohibited transaction exemptions will be applicable on January 1, 2018.

DOL’s Fiduciary Rule Countdown

For investment advisers and financial institutions, the countdown to compliance with the Department of Labor’s new “conflict of interest” rule ends on June 9, 2017. The Department of Labor (“DOL”) issued a final rule on April 7, 2017, that delays the original applicability date of its conflict of interest regulation (the “Fiduciary Rule”) and its related prohibited transaction exemptions for 60 days, creating a “Transition Period” that starts on June 9, 2017, and ends on December 31, 2017.

DOL Fiduciary Rule Enforcement – Confusion and Disruption Relief

The Department of Labor (“DOL”) has proposed to delay for 60 days the “applicability date” of the Fiduciary Rule (“Rule”), and the new and revised prohibited transaction exemptions related to the Rule. The proposed delay has created confusion within the financial services industry because it is not certain that a final rule implementing the delay can be published (and become effective) before the Rule’s April 10th applicability date. In response to the confusion, the DOL issued Field Assistance Bulletin 2017-01 (“Bulletin”) announcing a temporary enforcement policy that assures advisers and financial institutions that the DOL will not seek to enforce the Rule or the related prohibited transaction exemptions in the event the Rule becomes applicable before it is officially delayed.

DOL Proposes 60-Day Delay for Fiduciary Rule

After nearly a month of regulatory machinations and behind-the-scenes lobbying, the Department of Labor has released a proposed rule that would delay the “applicability date” of its recently enacted “conflict of interest” (or “fiduciary”) regulation (the “Fiduciary Rule”). The 60-day delay in the applicability of the Fiduciary Rule would have only an indirect effect on employers, but is of great interest to investment advisors and other service providers.

Trump Orders DOL to “Reconsider” Fiduciary Rule

On Friday, February, 3, 2017, President Trump issued a Memorandum directing the Secretary of Labor to “re-examine” the Department of Labor’s final regulation defining “fiduciary” investment advice (sometimes referred to as the “Fiduciary Rule” or the “Conflict of Interest Rule”), and to consider whether the Rule should be revised or rescinded. The Rule, which significantly expands the circumstances under which an individual becomes a “fiduciary” by reason of providing investment advice for a fee, was finalized in April of 2016, and technically became effective last July, but was drafted such that its provisions generally do not become “applicable” to financial advisers until April 10, 2017.

SEC Guidance Update and the DOL’s Fiduciary Rule

In December, the Division of Investment Management of the Securities and Exchange Commission issued Guidance Update No. 2016-06. The Update provides disclosure and procedural guidance to address potential issues for mutual funds responding to the Department of Labor’s adoption of the Conflict of Interest Rule. To address concerns by financial intermediaries that variations in mutual fund sales loads may violate the Rule, Funds are exploring various options, including changing fee structures and creating new share classes. Such changes may impact fiduciary decisions regarding a plan’s investments and compensation arrangements.

DOL Releases Final Regulation Defining Investment Fiduciaries

After years of effort, the Department of Labor released final rules on April 6, 2016, that will substantially alter the way investment advice is provided to ERISA plans, their participants, and even non-ERISA IRAs.

It’s Unanimous: The Fiduciary Duty to Monitor Has Teeth

The United States Supreme Court gave considerable comfort to defined contribution plan participants – and their lawyers – who sue plan fiduciaries for failing to keep track of plan investment options. In a unanimous decision handed down on May 18, 2015, the Court held in Tibble v. Edison International that ERISA fiduciaries have a “continuing duty” to monitor investment options, and that plan participants have six years from the date of an alleged violation of that duty to file a lawsuit against the plan’s fiduciaries. This ruling significantly undercuts the utility of a statute of limitations defense that had been successfully deployed by plan fiduciaries in previous cases, and creates fertile ground for more litigation.

Anthem Security Breach May Require Plan Sponsor Action

The well-publicized cyber-attack on Anthem, Inc.’s information technology system may require employers to take prompt action to protect the rights of their health plan participants. Although neither the scope nor the cause of the security breach has yet been determined, the attack has been described as both “massive” and “sophisticated.”

Target Date Funds: Don’t Just “Set It and Forget It”

The Department of Labor (“DOL”) has released an informal set of tips for ERISA plan fiduciaries to consider when selecting and monitoring target date funds (“TDFs”) for their 401(k) plans.  Fiduciaries that offer TDFs as an investment option under their 401(k) plans should review these tips and incorporate them into their investment review process.

THE FIDUCIARY CORNER: Correcting Operational Mistakes Can Eliminate Fiduciary Liability

Operational errors in administering a retirement plan not only threaten the plan’s “qualified” status under the Tax Code, but can also result in fiduciary liability under ERISA for those who are responsible for the errors.  As a Massachusetts employer recently learned, however, correcting those administrative mistakes can eliminate the risk of fiduciary liability under ERISA.  (Altshuler v. Animal Hospitals Ltd., (D. Mass. Oct. 31, 2012)).

To Be or Not To Be: Court Holds TPA “To Be” an ERISA Fiduciary

In Borroughs Corp. v. Blue Cross Blue Shield of Michigan, a federal trial court held that a third-party administrator of self-funded employer health plans was an ERISA fiduciary.  Moreover, because the TPA had not disclosed certain of its fees that it deducted from plan assets, it was held to have breached its fiduciary duty under ERISA.  Although this decision is somewhat surprising in finding the TPA to be a fiduciary, it may spur plan sponsors and TPAs to reexamine their funding arrangements and service agreements.

Murder Victim’s Mother May Rely on Post-Amara Equitable Remedies

In McCravy v. Metropolitan Life Insurance Company, an ERISA plan continued to accept life-insurance premiums for a participant’s dependent daughter after the daughter was too old to be covered as a dependent.   But when the daughter died, the insurer denied the plaintiff’s claim.  Citing the Supreme Court’s 2011 decision in CIGNA Corp. v. Amara, the Fourth U.S. Circuit Court of Appeals held that the “other equitable relief” available to the plaintiff under Section 502(a)(3) of ERISA should include a monetary recovery equal to the amount that would have been due under the terms of a plan, had the daughter satisfied the plan’s definition of dependent child at the time of her death.  In so doing, the Fourth Circuit became the first federal appellate court to reverse its own pre-Amara rejection of such a remedy under Section 502(a)(3).

THE FIDUCIARY CORNER: Unintended Consequences of Individual Benefit Discussions

Although a retiree’s promissory estoppel claim against the sponsor and fiduciaries of an employer pension plan was ultimately rejected by a federal court, the case of Stark v. Mars, Inc., illustrates the importance of coupling any pension calculation with an appropriate caveat.  It also demonstrates why plan fiduciaries should avoid answering participant questions that are more properly delegated to individuals who can respond in a purely ministerial capacity.

Overview of Medical Loss Ratio Rebates

The Affordable Care Act requires health insurers to spend a minimum percentage of their premium dollars on medical claims and quality improvement.  Insurers that fail to achieve these percentages must issue rebates to their policyholders.  The first of these MLR rebates are due in August of 2012, so plan sponsors should begin planning how to handle any rebates they might receive.  Among other things, this article discusses both ERISA and tax implications that any plan sponsor receiving a rebate should consider.

As Fee Disclosure Deadlines Approach, DOL Issues Additional Guidance

After more than four years of regulatory starts and stops, plus the threat of a legislative solution, two separate sets of fee disclosure regulations issued by the Department of Labor (“DOL”) will finally become effective this summer.  Covered service providers must provide certain compensation and fee information to plan fiduciaries by July 1, and fiduciaries of participant-directed plans must provide participants with certain plan expense and investment fee information by August 30.  As those deadlines approach, the DOL has just issued additional guidance (in the form of Field Assistance Bulletin 2012-02) on the participant fee disclosure rules, and has indicated that it plans to issue similar guidance regarding the service provider fee disclosure requirements in the very near future.

Federal Appeals Court Rejects Equitable Remedies When SPD Promises More Generous Benefits Than Pension Plan Document

A federal appeals court has handed down the first significant decision to interpret the Supreme Court’s recent ruling on ERISA remedies.  In CIGNA Corp. v. Amara, the Supreme Court suggested three methods by which participants might enforce the terms of an SPD that promises greater benefits than the underlying plan document:  estoppel, reformation, and surcharge.  In Skinner v. Northrop Grumman Retirement Plan B, participants tested two of these methods.  The Ninth Circuit rejected both.

THE FIDUCIARY CORNER: Costly Fiduciary Breaches in 401(k) Fee Case Provide Many Lessons

The recent decision in Tussey v. ABB, Inc. provides many lessons for 401(k) plan fiduciaries.  One such lesson is to avoid having an overly rigid investment policy statement.  Failing to follow the protocol outlined in a plan’s IPS for replacing an underperforming investment option led the Tussey court to tag the plan’s fiduciaries with substantial liability for the participants’ lost earnings.

Federal Appeals Court Upholds $243,000 Damage and Fee Award for Employer’s Failure to Provide SPD and Election Forms

A recent ruling from the federal Court of Appeals highlights two critical ERISA basics:  fiduciary duties and disclosure requirements.  In Kujanek v. Houston Poly Bag, the Fifth Circuit upheld an award of damages and fees of more than $243,000 for an employer’s failure to provide a participant with a copy of a retirement plan’s summary plan description (“SPD”) and a rollover election form.  As explained more fully in the rest of this article, that amount could increase significantly when the lower court reconsiders the question of statutory penalties.

THE FIDUCIARY CORNER: You ARE Your Brother’s Keeper – Co-Fiduciary Liability Under ERISA

Plan fiduciaries must not only make sure that their own conduct complies with ERISA’s exacting standards, they also have a duty to monitor the conduct of the plan’s other fiduciaries.  The failure to do so can result in personal liability under ERISA’s co-fiduciary duty rules, as demonstrated by Smith v. Stockwell Construction Co. (W.D.N.Y. Dec. 10, 2011).

Department of Labor Finalizes, Delays 401(k) Fee Disclosure Rules

On February 2, 2012, the Department of Labor (“DOL”) released final regulations under Section 408(b)(2) of ERISA, requiring retirement plan service providers to disclose information about their services and fees to plan sponsors.  In doing so, the DOL delayed the effective date of those rules and made minor modifications to them. 

Failing to Notify Participants of Plan Changes Can Be Costly

Among ERISA’s many notice and disclosure obligations, the requirement to timely inform participants of important plan changes is one that is too often overlooked.  Although there is no monetary penalty for failing to distribute a summary of material modifications (“SMM”) or an updated summary plan description (“SPD”) within the time periods set by the regulations, such a failure can still have severe consequences.  AT&T recently learned that lesson – to the tune of a six-figure judgment awarded to a deferred vested participant in its defined benefit pension plan.  (Helton v. AT&T, Inc., Sept. 16, 2011).

Investment Providers and Advisors May Now Provide “Conflicted” Advice to Plan Participants

Both the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”) generally prohibit fiduciary investment advisers from receiving compensation from the investment vehicles that they recommend to plan participants and IRA holders. However, the Pension Protection Act of 2006 amended ERISA to create a new statutory exemption from the prohibited transaction rules that is designed to expand the availability of fiduciary investment advice to participants in individual account plans and IRAs, subject to specific safeguards and conditions.

THE FIDUCIARY CORNER: Loss of Privilege: Another Reason Not to Give the Company a Fiduciary Role

In our efforts to help plan sponsors minimize their fiduciary risk, we consistently advise against giving the sponsoring employer a fiduciary role. Designating the “company” or “employer” as an ERISA fiduciary can unintentionally subject the employer’s executive officers and board of directors to ERISA’s fiduciary standards, and potentially to personal liability. The United States Supreme Court recently reminded us of another reason to avoid this plan governance mistake: the potential loss of the attorney-client privilege.

Employer Stock Funds Continue to Vex 401(k) Fiduciaries

Offering employees the opportunity to invest in the stock of their employer through a tax-favored vehicle like a Code Section 401(k) plan or employee stock ownership plan (“ESOP”) must have seemed like an innocuous idea at one time. Indeed, Congress expressed its approval of such arrangements by creating special tax benefits for both the sponsors of such plans (in the form additional deductions) and participants in them (in the form of favorable tax treatment on unrealized appreciation in the value of employer stock). Yet these “employer stock funds” are now the quickest path to the courthouse for employers that sponsor them and fiduciaries that administer them.

THE FIDUCIARY CORNER: Supreme Court Decision Requires New Focus on Participant Communications

A long-awaited ruling issued by the United States Supreme Court this spring gives employers both reason to celebrate and cause for concern. The Court’s decision in CIGNA Corp. v. Amara (May 16, 2011) reaffirms that courts will not enforce benefit rights that are described in a summary plan description (“SPD”) as if those rights were actually set forth in the plan document. At the same time that it foreclosed this avenue of relief for plan participants, however, the Court apparently opened up another by concluding that participants who are actually harmed by inconsistent or misleading plan summaries may have an equitable right to be compensated for that harm. As a result, participant communications are likely to be a new source of ERISA litigation in the coming years.

Fee Disclosure: A Three-Ring Circus for Plan Fiduciaries and Service Providers!

Employers sponsoring ERISA-covered, participant-directed, individual account plans (such as 401(k) or 403(b) plans) are constantly reminded of their fiduciary duties. In recent years, almost any discussion of these duties has included the issue of fees that are charged to participants’ accounts (or that otherwise affect a participant’s account balance).

THE FIDUCIARY CORNER: Misplaced Enrollment Form Creates ERISA Liability for Sponsor

A small, Oklahoma-based employer recently learned that inattention to 401(k) plan governance can create costly corporate liability. It also learned that retaining the responsibility for collecting plan participants’ investment election forms, and then forwarding them to the plan’s recordkeeper, may not be advisable.

A New VEBA Boomlet?

One of the unanticipated effects of health care reform appears to be a renewed need for welfare benefit trust funds, though only in the rather narrow context of a self-insured, stand-alone retiree health plan.

THE FIDUCIARY CORNER: Selecting the 401(k) Fund Lineup Creates Risk and Opportunity

In late January the United States Court of Appeals for the Seventh Circuit (whose jurisdiction includes Illinois, Indiana, and Wisconsin) weighed in yet again on the extent to which ERISA’s fiduciary duty rules apply to the selection of 401(k) plan investments. As you may recall, the Seventh Circuit issued one of the most important rulings on this topic in recent years in Hecker v. Deere & Co. (2009), a case challenging as imprudent the fees attached to such investment options.

THE FIDUCIARY CORNER: DOL Expands Definition of “Fiduciary”

In an effort to improve its enforcement efforts and better protect participants from service provider conflicts of interest and self dealing, the Department of Labor issued proposed regulations on October 21, 2010, that would significantly expand ERISA’s definition of a “fiduciary.” These regulations will, when finalized, replace guidance issued in 1975 which governs when investment advisors become subject to ERISA’s fiduciary duties. The new standards will apply to all employee benefit plans subject to ERISA – including health plans – although their primary application will be to defined contribution retirement plans. They have the potential to substantially change the nature of the relationships between employers and service providers.

Regulations Require Specific Disclosure of Fees Received by Service Providers

On July 15, 2010, the Department of Labor (“DOL”) issued “interim” final regulations regarding the fee information that service providers must disclose to fiduciaries of ERISA-covered retirement plans. This information is intended to assist fiduciaries in assessing the reasonableness of contracts or arrangements for the provision of services to the plan, including the reasonableness of the service provider’s compensation and the potential for conflicts of interest.

The Fiduciary Corner: The Duty to Ask for a Better Deal

When is it appropriate to accept the sticker price listed on a product without asking the salesman for a better deal? Maybe never, at least if you’re a fiduciary of a $2 billion 401(k) plan spending the participants’ money, according to a federal court in California. (Tibble v. Edison International, 7/8/2010). That’s true even if an independent consultant advises you to buy the higher priced product.

DOL Adopts Safe-Harbor Rule For Depositing Participant Contributions In Small Plans

For years, the Department of Labor (“DOL”) has focused much of its enforcement resources on delinquent deposits of participant contributions. Under the general rule set forth in existing regulations,
participant contributions to ERISA plans become plan assets “as soon as they can reasonably be segregated” from the employer’s general assets. The current regulations set outer limits on when participant contributions become plan assets (90 days for welfare plans; for retirement plans, 15 business days after the end of the month in which the employer either receives the amount or would have paid it in cash to the participant). However, we have always cautioned employers that the outer limits are not safe harbors. Employers cannot rely on them if it is shown that the employer could reasonably have segregated the contributions sooner.

Late COBRA Notice Voids Stop-Loss Coverage

A recent decision by an Illinois federal court (Majestic Star Casino, LLC v. Trustmark Insurance Co.) carries two important lessons for sponsors and administrators of self-funded health plans. Unfortunately for the plan sponsor involved in this case, those lessons came at a steep price — in the form of denied stop-loss claims.

THE FIDUCIARY CORNER: No Judicial Deference if Claim Denial Is Untimely

We are occasionally reminded that the claims and appeals procedures carefully spelled out in ERISA plans have real meaning. Although the regulatory deadlines within which plan fiduciaries must render decisions on benefit claims and appeals may appear arbitrary – and although many plan administrators treat them as mere “guidelines” – the failure to abide by those deadlines can have disastrous consequences in court.

THE FIDUCIARY CORNER: A Fiduciary Duty to Set Reasonable Executive Compensation?

When corporate executives also serve as ERISA fiduciaries for employee stock ownership plans (“ESOPs”), their business decisions may become subject to heightened legal scrutiny. That was the holding of the Ninth U.S. Court of Appeals in a recent case in which ESOP participants raised ERISA challenges to a CEO’s compensation package. The decision also upheld a California federal trial court’s ruling that barred the executives from using corporate assets to pay their defense costs. (Johnson v. Couturier, 7/27/09). Although this decision is at odds with holdings from the Eighth U.S. Circuit Court of Appeals (whose jurisdiction includes Missouri), it may nonetheless give ESOP fiduciaries pause when making certain business decisions.

Department Of Labor Updates Guidance On ERISA Bonding Requirements

Part 4 of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) sets forth the rules that apply to fiduciaries of ERISA-covered employee benefit plans. These “fiduciary responsibility” rules include the requirement to hold plan assets in trust, a fiduciary’s duties of loyalty, prudence, diligence and diversification, and the prohibition on certain transactions between the plan and parties-in-interest.

THE FIDUCIARY CORNER: Severance Plan Subject To ERISA Can Protect Employer

The economic recession has caused many employers to reevaluate their severance policies. We find that employers often strive to ensure that those policies do not amount to enforceable promises to provide similar benefits to similarly situated employees, but rather are non-ERISA, ad hoc arrangements. That strategy, however, may be short-sighted. A recent decision from a federal court in California serves as a reminder that ERISA-covered severance plans often give employers more protection than informal, “one-off” arrangements. (Pierce v. Wells Fargo Bank)

THE FIDUCIARY CORNER: Misleading Participants About Contributions Is a Bad Idea

Tough financial times may tempt struggling employers to fudge a little when it comes to making contributions to their retirement plans. A construction company owner in Michigan recently learned the hard way, however, that leading participants to believe that contributions have been made, when in fact they haven’t, is a bad idea. (Safran v. Donagrandi, E.D. Mich. 1/30/09).

DOL Finalizes Safe Harbor for Annuity Selection

Section 401(k) plans are not required to offer annuity distribution options – and most do not. Instead, participants are typically offered a lump-sum payment and, perhaps, a range of installment options. Of those few 401(k) plans that do offer annuity options, only a tiny fraction of retirees select them. Nonetheless, there is now a trend toward encouraging sponsors to offer annuity options. In this regard, both Congress and the Department of Labor have taken steps to insulate sponsors from fiduciary liability in the event the issuer of such an annuity becomes insolvent.

THE FIDUCIARY CORNER: The Perils of 401(k) Brokerage Windows

The analysis of a federal district judge last year in a decision dismissing a class action complaint that challenged Deere & Co.’s 401(k) fee practices generated a great deal of excitement about 401(k) brokerage windows. The court seemed to imply that the existence of such an investment portal – through which participants may invest their plan accounts in almost any mutual fund or security – insulated the plan sponsor from claims that the plan’s core funds were too expensive or otherwise imprudent. That analysis is currently being tested as the parties appeal the judge’s decision. It has also drawn a cool reception from the Department of Labor.

New Rules Proposed for Fee Disclosures to Participants in Individual Account Plans

On July 23, 2008, the Department of Labor issued proposed regulations setting forth the information that plan fiduciaries will soon be required to provide (and the manner in which such information must be provided) to participants who are allowed to direct the investment of their accounts in defined contribution plans. This is the third and final piece of guidance in a three-part initiative by the DOL (starting with regulations finalized in November 2007 regarding Form 5500 reporting, and followed by regulations proposed in December 2007 on the information service providers must disclose to plan sponsors) designed to improve the transparency of fees and expenses in participant-directed defined contribution retirement plans (such as 401(k) plans and 403(b) arrangements) that are subject to ERISA.

THE FIDUCIARY CORNER: Rollovers to Plan Service Providers Present Fiduciary Concerns

Plan sponsors and retirement plan service providers each have reason to be concerned about a recent decision in an ERISA lawsuit pending before a federal court in Iowa. That decision allowed former participants in two separate 401(k) plans to proceed with their claims that the Principal Financial Group, the third-party service provider for each plan, breached its fiduciary duties by encouraging retired participants to roll their plan accounts into high-cost IRA products affiliated with Principal. (Young v. Principal Financial Group, Inc.) Although the court rejected one of the participants’ theories of relief on the grounds that they did not have standing to pursue it, a second theory survived.

Labor Department and Congress Focus on Disclosure of 401(k) Fees

There has never been greater attention in Washington, D.C. to the issue of fees charged to individual participants in 401(k) plans, how those fees are shared among a plan’s service providers, and the disclosure of those fees/revenue sharing arrangements to plan sponsors and plan participants.

THE FIDUCIARY CORNER: Fiduciary Liability After LaRue

As we reported in our last issue of Benefits in Brief (Volume 2008, No. One, p. 1), the Supreme Court’s latest foray into ERISA left open many questions about the liability of ERISA fiduciaries and the remedies available to plan participants. In LaRue v. DeWolff, Boberg & Assocs., the Court opened the door for individual participants in defined contribution retirement plans (e.g., 401(k) plans) to sue for losses suffered in their own accounts. Although the Court’s ruling allowed Mr. LaRue to proceed with his claim against his employer, it did not decide whether his employer was, in fact, an ERISA fiduciary which could be liable for Mr. LaRue’s alleged losses.

Be Careful What You Promise

A major insurer learned, to its chagrin, that it doesn’t pay to include soothing words in a summary plan description (“SPD”) unless those words are actually acted upon. The result in Rosenberg v. CNA Financial Corp. was potential liability for nearly $5 million in severance benefits that were clearly not payable under the terms of the plan.

THE FIDUCIARY CORNER: The Duty to Collect Delinquent Contributions

In a Field Assistance Bulletin issued February 1, 2008 (FAB 2008-01), the Department of Labor highlighted a problem that apparently is pervasive in retirement plan and trust documents: confusion over the responsibility to collect delinquent contributions. Recent DOL investigations uncovered plan and trust documents that neglected to assign responsibility for monitoring and collecting contributions, and some that even purported to relieve all of the plan’s fiduciaries from this responsibility. This guidance cautions that plan fiduciaries who ignore delinquent contributions do so at their own peril. Employers should review their documents carefully in light of this Bulletin, to make sure that these responsibilities are properly assigned.

Supreme Court Ducks Tough Questions in Latest ERISA Ruling

Like almost 70 million other Americans, James LaRue elected to save money for retirement through his employer’s 401(k) plan. When administrative errors reduced his account balance by nearly $150,000, Mr. LaRue sued his employer in federal court under ERISA to recover that amount. Initially, he lost. In a decision handed down on February 20, 2008, however, the United States Supreme Court resurrected his claim, in an apparent victory for Mr. LaRue and similarly situated 401(k) plan participants. (LaRue v. DeWolff, Boberg & Associates, Inc.) Unfortunately, the Supreme Court’s decision raises more questions than it resolves.

DOL Issues Final Rules For Qualified Default Investment Alternatives

The Pension Protection Act of 2006 (“PPA”) amended ERISA to provide fiduciary relief for certain default investments when plan participants do not provide investment direction. The DOL has now issued final regulations, which will take effect on December 24, 2007, under which plan sponsors may enjoy a “safe harbor” from certain fiduciary liability. The final regulations provide that participants and beneficiaries in individual account plans will be treated as exercising control over the assets in their accounts if, in the absence of their investment directions, the plan invests in a “qualified default investment alternative” (“QDIA”). Provided that the plan invests in a QDIA, the plan fiduciary will not be liable for any investment losses that are the direct and necessary result of investing all or part of a participant’s or beneficiary’s account in any QDIA.

Why ERISA Was Enacted

It’s sometimes tempting to conclude that ERISA imposes unnecessary duties on plan fiduciaries – but then we see a case that confirms Congress’ wisdom in creating those duties. Such a case was recently decided by an Alabama federal court. The decision in this case, Cromer-Tyler v. Edward R. Teitel, M.D., P.C., serves as a roadmap for what plan fiduciaries should not do in administering a retirement plan.

THE FIDUCIARY CORNER: Eighth Circuit Says No Finger Pointing Among Fiduciaries

It’s a practice first developed in the early stages of life, witnessed countless times by the parents of young children, and frequently associated with a distraught youngster wailing something like “It wasn’t my idea, Dad; it was his fault.” Such blame-shifting is so ubiquitous it has even found a place in the American judicial system.

THE FIDUCIARY CORNER: Supreme Court to Decide Scope of Fiduciary Relief

Imagine that you are a 401(k) plan participant who, over the course of many years and at a significant sacrifice to your take-home pay, has accumulated a hefty account balance. As your retirement date approaches, you decide to move your plan balance from the moderately aggressive equity funds in which it had been invested to a conservative money market fund. You fill out the on-line account transfer request, sit back, and contemplate the hammock and mystery novel awaiting you on the beach after retirement

THE FIDUCIARY CORNER: Identifying Fiduciaries – The Ministerial Function Exception

Not everyone who has a role in the administration of an ERISA plan is a “fiduciary” under the Act’s special definition of that term. Even those who process claims and calculate benefits may be excluded from this category, so long as they do so within a framework of policies and procedures made by others. And not being a fiduciary is significant, because those on the outside of the fiduciary circle are not subject to the special obligations and personal liability that attaches to those on the inside.

THE FIDUCIARY CORNER: Fiduciary Liability for Delinquent Contributions

Failing to make required contributions to a multiemployer benefit plan can become a matter of fiduciary liability in some circumstances. And according to a federal court in Connecticut, that liability attaches personally to company executives who control the corporate checkbook. (Trustees of Connecticut Pipe Trades Local 777 Health Fund v. Nettleton Mechanical Contractors, Inc. (March 15, 2007)). 

Wal-Mart Hit with Class-Action Over 401(k) Plan

Plaintiffs’ attorneys have filed a purported class-action lawsuit class action lawsuit against Wal-Mart and the fiduciaries of its 401(k) retirement plan.

401(k) Plans In The Cross-Hairs

A recent spate of litigation involving 401(k) plan fees has drawn the attention of employers, the media, and Congress. At issue in these cases is hundreds of millions of dollars in potential liability, and also the very backbone of the retirement plan industry. Employers can expect more scrutiny of their plans from employees and, in some unfortunate circumstances, from plaintiffs’ attorneys.

Court Faults Employer for LTD Enrollment Glitch

A recent decision by a Utah federal court serves as a reminder that fully insured welfare plans actually achieve their goal of transferring an employer’s risk to an insurer only if the employer meets its fiduciary obligations during the enrollment process.

District Court Declines to Dismiss Kraft 401(k) Fee Case

In an opinion dated March 16, a judge for the Southern District of Illinois ruled against defendants’ motion to dismiss claims that they breached their fiduciary duties by permitting the Kraft Foods 401(k) plan to charge excessive and undisclosed fees. The court also refused to strike or order clarification of portions of the complaint that defendants claimed were lengthy and ambiguous, but did grant defendants’ motion to transfer the case to the Northern District of Illinois.

THE FIDUCIARY CORNER: Look Closely at ERISA Bonds

Don’t have enough reading material on your night stand? Try adding your ERISA bond to the pile of murder mysteries; it’s a quick read, and you’ll be glad you did. Just ask the trustees of the Colorado Operating Engineers Health and Welfare Fund.

THE FIDUCIARY CORNER: Plan Language Governs Whether Beneficiary Designation Forms Must

It’s a scenario that occurs all too frequently for 401(k) plan administrators: a participant completes a beneficiary designation form naming his current wife as beneficiary, then is divorced, subsequently fills out another beneficiary designation form naming someone else as his beneficiary, but omits information required by the form. Must the administrator honor the new beneficiary designation, or is the former spouse entitled to the plan’s death benefit? The answer lies in the language of the plan.

DOL Issues Proposed Regulations on Default Investments

The Pension Protection Act of 2006 (PPA) made several changes intended to facilitate automatic enrollment plans, including new ERISA Section 404(c)(5), which provides fiduciary relief for certain default investments under participant-directed individual account plans.

THE FIDUCIARY CORNER: Mistakes Aren’t Necessarily Fiduciary Breaches

In a ruling that comes as good news to pension plan administrators, the United States Court of Appeals for the Eighth Circuit (whose jurisdiction includes Missouri) recently confirmed that erroneous benefit estimates generally do not amount to breaches of fiduciary duty under ERISA.

401(k) Fee Practices Challenged

As we first reported in a Benefits Alert! e-mail blast several weeks ago, a series of ten class action lawsuits filed in recent weeks challenges the fee structure employed by most 401(k) plans. These cases attack investment-related fees paid by plans to service providers, including revenue sharing arrangements between plans, mutual funds, and recordkeepers.

THE FIDUCIARY CORNER: Employee Handbooks May Increase ERISA Risk

In addition to summary plan descriptions that describe benefits offered to employees, employers often describe such benefits – along with dress codes, vacation policies, and other employment rules – in employee handbooks. Doing so, however, can create additional fiduciary risk.

THE FIDUCIARY CORNER: Firestone Language Belongs in Plan, Not SPD

For nearly 17 years, plan fiduciaries have known that their decisions on benefit claims will be treated with deference by courts that review those decisions – so long as the governing plan documents clearly grant the fiduciaries the discretionary authority to interpret the plan. This rule of judicial deference, under which a court will overturn a fiduciary’s interpretation only if it was “arbitrary and capricious,” has its roots in the U.S. Supreme Court’s ruling in Firestone v. Bruch. If a plan does not clearly grant this discretion to its fiduciaries, a court is free to take a “fresh look” at a benefit decision, without giving any deference to the fiduciary’s interpretation of the plan (a “de novo” review).

Employer Deemed Plan Administrator and Fined After Failing to Provide Plan Information

ERISA guarantees plan participants and beneficiaries the right to request and receive certain information about their plans. If the plan administrator receives such a request and fails to respond within 30 days, ERISA authorizes the federal courts to impose statutory penalties on the administrator. According to a recent district court decision, those penalties may be assessed against the plan sponsor – even if the plan identifies someone else as the plan administrator – when the identity of the plan administrator is unclear and the sponsor either “acts like” the plan administrator or makes it difficult for participants to locate the plan administrator.

THE FIDUCIARY CORNER: Failure to Distribute SPD Makes Sponsor Liable For Benefit

Long-standing ERISA regulations require plan administrators to distribute summary plan descriptions (SPDs) to individuals within 90 days after they become plan participants.

DOL Issues Guidance on Mutual Fund Settlement Distributions

The Department of Labor (“DOL”) recently issued guidance regarding the distribution and allocation of mutual fund settlement payments made to employee benefit plans and their participants. This guidance is directly related to SEC enforcement actions alleging late trading and market timing activities. As a result of these actions, numerous mutual funds have established settlement funds.

DOL Facilitates Distributions To Missing DC Plan Participants

In the context of final regulations concerning abandoned defined contribution plans (so-called “orphan plans”), the Department of Labor (“DOL”) has also clarified its 2004 guidance on the permissible means of distributing accounts of participants and beneficiaries who cannot be located at the time of a plan’s termination.

THE FIDUCIARY CORNER: Fiduciaries Must Read Insurance Policies

Fiduciaries who rely on insurance brokers for an explanation of policy language should think twice before merely paraphrasing that explanation for participants and beneficiaries. Not only do fiduciaries have a duty to understand a policy’s coverage, they also must accurately describe that coverage. If the broker’s summary proves to be inaccurate or incomplete, the fiduciaries may be liable.

Third Party Administrator’s Review Of Appeal Violates ERISA Appeals Procedures

Under ERISA’s claims and appeals regulations, participants and beneficiaries are entitled to a “full and fair” review process. In St. Joseph’s Hospital of Marshfield Inc. v. Carl Klemm Inc., a federal district court in Connecticut ruled that a plan beneficiary was not given a full and fair review when the plan’s third-party administrator (“TPA”) made both the initial decision to deny benefits and the appeal determination.

THE FIDUCIARY CORNER: Microsoft Language Defeats Independent Contractor’s Claim

Plan sponsors who are worried about increasingly common claims for benefits filed by independent contractors recently received support from a federal court in New York. In the late 1990s Microsoft was held liable for failing to provide health and retirement benefits to a group of independent contractors who claimed that they should have been classified as common-law employees. Reacting to that holding, many employers added special “Microsoft” clauses to their plan documents in an effort to avoid a similar result. Typically such clauses are found in the definition of “eligible employee,” excluding from that term individuals who are treated in good faith by the sponsor as independent contractors, regardless of whether they are later reclassified as employees.

Are You Ready For SEC Redemption Fee Rules?

Market timing and other short-term trading patterns impose costs on mutual funds by disrupting management, forcing funds to maintain excessive liquidity, and driving up tax expenditures.

DOL Modifies Exemption for Loans Made to Plans

Many sponsors of employee benefit plans have found it necessary to lend money to a plan, as a way of easing a liquidity problem or otherwise facilitating the plan’s operation. Such loans have occurred in the context of failed insurance companies, other illiquid assets, or delays in the disbursement of distributions by plan trustees or custodians. Because a plan sponsor is a “party-in-interest,” however, such a loan constitutes a “prohibited transaction” under both ERISA and the parallel Tax Code provisions.

THE FIDUCIARY CORNER: Abdicating Duties Does Not Prevent Liability

When companies fail to remit 401(k) plan contributions, the Department of Labor almost always looks for – and usually finds – fiduciaries to hold responsible. Cases such as these often can be traced to financially troubled plan sponsors trying desperately to juggle the claims of competing creditors. Employee salary deferral contributions somehow become mixed with company cash, and thus delayed on their way to the trust account.

THE FIDUCIARY CORNER: Information Requests Should Be Honored–Promptly

Ignoring a participant’s request for copies of plan documents and SPDs is never a good idea. It is even less so when the participant has already filed a lawsuit against the plan sponsor or its fiduciaries, and when the letter comes from the participant’s attorney. A federal judge in Tennessee imparted this lesson to Nissan North America, Inc. in a decision earlier this year.

Minimal Employer Involvement May Create ERISA Plan

Yet another recent federal court opinion reminds us that ERISA plans – and thus ERISA obligations – may be created even when they are not intended. While an Ohio court was construing the “payroll practices” exemption from ERISA in the Langley case (see “What is in a Name? Not an ERISA Plan”), a court in Texas construed a similar exemption for “voluntary insurance arrangements,” and found it unavailable.

THE FIDUCIARY CORNER: The Truth, The Whole Truth, And Nothing But The Truth

When ERISA fiduciaries speak, they must recognize that what they say, and how they say it, will be held to a higher standard than ordinary speech. This is because ERISA imposes special rules governing the manner in which information about benefits is communicated. Although courts disagree about the scope of this duty of disclosure, it is well established that communications must give participants information that is both accurate and sufficiently detailed to allow them to make informed decisions.

What Is In A Name? Not An ERISA Plan

A recent decision by an Ohio federal court illustrates an important distinction between two regulatory exemptions from ERISA’s definition of an “employee welfare benefit plan.”

THE FIDUCIARY CORNER: Individual Financial Planners May Be ERISA Fiduciaries

An Advisory Opinion recently issued by the Department of Labor may come as quite a shock to many personal financial planners and investment advisors. According to the DOL, ERISA’s prudence, exclusive benefit, and prohibited transaction rules apply to many of the bread-and-butter recommendations that these professionals give, if their advice relates to assets held in qualified individual account plans.

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