Art by Kyle Stecker
Bill Would Halt Fiduciary Rule
A new bill introduced to halt the implementation of the Department of Labor
(DOL) fiduciary rule offers a dramatic contrast to the complicated rulemaking
due to take effect in April, running less than 200 words in total compared with
thousands of pages of rule language.
The measure stands before the House Ways and Means
Committee; it provides simply for a two-year delay in the effective date of the
rule—ostensibly to give Congress more time to dismantle the conflict of
interest rule entirely. Given the recent shift in political power, it stands a
much better chance of passage than previous attempts to influence the DOL and
could, in fact, spell the end of the road for the longstanding effort to revamp
advice standards under the Employee Retirement Income Security Act (ERISA).
Introducing the bill, Representative Joe Wilson, R–South
Carolina, described the “Protecting American Families’ Retirement Advice Act”
as a necessary step to maintaining open access to different forms of financial
DOL Issues FAQs on Advice
Two new frequently asked questions (FAQ) publications from
the Department of Labor (DOL) seek to inform investors about their rights as
consumers of products and services governed by the Employee Retirement Income
Security Act (ERISA).
The publications give advisers a look into the thinking on
consumer protection that has played a significant role in the DOL’s
fiduciary reform efforts.
On the question of whether the rule is expected to “cause
change in the financial services industry,” the DOL answers with an unequivocal
“Yes.” Questions covered in the second FAQ document range from the general to
the specific. For example, on the high-level question, “Is every communication
with a financial adviser about retirement accounts a fiduciary
recommendation?,” the agency answers, simply, “No.”
SEC Offers Guidance on Fiduciary Rule
The Securities and Exchange Commission (SEC) will not be in
charge of applying the stricter conflict of interest standards being introduced
for retirement plan advisers and for the investment providers supplying them
with products to sell, but many of its own rules and regulations will interact
intimately with the Department of Labor (DOL) rulemaking.
According to the SEC’s latest guidance, since the Labor
Department rule’s proposition and finalization, representatives of mutual funds
have been considering a variety of issues related to the rule’s implementation,
including “contemplating certain changes to fund fee structures that would, in
certain instances, level the compensation provided to a financial intermediary
for the sale of fund shares by that intermediary and facilitate intermediaries’
compliance with the rule.”
DOL Says Income Can Be Prudent Default
In an informational letter to Christopher Spence, senior
director, federal government relations at TIAA, the Department of Labor (DOL)
says a defined contribution (DC) plan could prudently choose a default
investment for the plan that contains lifetime income elements.
The letter was in response to a request regarding the
application of the Employee Retirement Income Security Act (ERISA) to TIAA’s
Income for Life Custom Portfolios (ILCP). The DOL notes that one requirement
for qualified default investment alternatives (QDIAs) is that any participant,
or beneficiary on whose behalf assets are invested, must have as frequent
opportunities to transfer such assets “in whole or in part” to any other
investment alternative available under the plan as do participants and
beneficiaries electing to invest in the QDIA, and no less frequently than once
in any three-month period. The ILCP’s Annuity Sleeve does not meet this
requirement so would not constitute a QDIA.
Claims Against Prudential and CAPTRUST Are Dismissed
A federal judge has dismissed complaints against Prudential
Retirement, an employer and its adviser in an excessive fee suit.
The participant who brought the proposed class action
alleged that certain fees, including revenue-sharing payments, were kickbacks
from mutual funds to Prudential. He also claimed that the 401(k) plan sponsored
by Ferguson Enterprises included too many actively managed funds with higher
fees vs. passively managed funds. Finally, he accused Prudential’s GoalMaker
program—an option within the plan that assisted individual plan participants in
making their investment selections—of directing participants to place their
investments in higher-cost mutual funds that engaged in revenue sharing with
Prudential; as a result, he said, the company received additional compensation
at the expense of the plan and its participants.
U.S. District Judge Victor Bolden of the U.S. District Court
for the District of Connecticut first determined that Prudential was not a
fiduciary with respect to the lawsuit’s allegations. The company did not have
the contractual authority to delete or substitute mutual funds from its menu
without first notifying Ferguson and ensuring its consent. In addition, Bolden
found, the trust agreement strips Prudential of its discretionary authority
over its own compensation, limiting that compensation to the fee schedule
provided to the employer and requiring advance notice to the employer of any
changes to the agreed-upon schedule.
Concerning Ferguson and CAPTRUST, Bolden ruled that the
plaintiff has made no allegations directly addressing the methods used by the
two companies to select investment options for the plan. Additionally, the
plaintiff makes no allegations that the funds in the plan underperformed,
instead stating broadly that the concentration of mutual funds imposes unwanted
expenses on plan participants without including any factual allegations
regarding the availability of lower-cost alternatives.
Disney Suit Dismissed
U.S. District Judge Percy Anderson of the U.S. District
Court for the Central District of California has dismissed a lawsuit in which a
participant in the Disney Savings and Investment Plan challenged plan
fiduciaries’ continued offering of the Sequoia Fund as a plan investment
According to the complaint, the Sequoia Fund is a high-cost
mutual fund run by adviser Ruane, Cunniff & Goldbarb and its portfolio
managers, Robert Goldfarb and David Poppe. The lawsuit claims that, in
violation of plan investment policies, the fund managers concentrated the
Sequoia Fund’s assets in a single stock, Valeant Pharmaceuticals Inc.
Anderson noted that, generally, plaintiffs in federal court
are required to give only “a short and plain statement of the claim showing
that the pleader is entitled to relief.” However, in Bell Atlantic Corp. v.
Twombly, the Supreme Court had rejected the notion that “a wholly conclusory
statement of a claim would survive a motion to dismiss whenever the pleadings
left open the possibility that a plaintiff might later establish some set of
undisclosed facts to support recovery.” Instead, Anderson said in his opinion,
the court adopted a “plausibility standard,” in which the complaint must “raise
a reasonable expectation that discovery will reveal evidence of [the alleged
In construing the Twombly standard, the Supreme Court has
advised that “a court considering a motion to dismiss can choose to begin by
identifying pleadings that, because they are no more than conclusions, are not
entitled to the assumption of truth. While legal conclusions can provide the
framework of a complaint, they must be supported by factual allegations.”
Stock Drop Suit Against Exxon
A participant in the Exxon Mobil Savings Plan has filed a
complaint on behalf of himself and other similarly situated current and former
employees of Exxon Mobil Corp., or its predecessor companies, alleging plan
fiduciaries breached their fiduciary duties under the Employee Retirement
Income Security Act (ERISA) by continuing to offer company stock when it was no
longer prudent to do so.
The plaintiff claims defendants’ breaches of
fiduciary duty occurred when they knew or should have known that Exxon’s stock
had become artificially inflated in value due to fraud and misrepresentation,
thus making Exxon stock an imprudent investment under ERISA and damaging the
plan and those plan participants who bought or held Exxon stock.