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Capitol News | PLANADVISER September/October 2017

Compliance News

Legislative and judicial actions

By PA editors@assetinternational.com | September/October 2017
Art by Tiffany Pai

Another Tibble v. Edison Decision Handed Down
The latest ruling in Tibble v. Edison comes out of the U.S. District Court for the Central District of California, applying the now-famous “distinct duty to monitor” standard set forth by the U.S. Supreme Court (SCOTUS) on an appeal of this very same litigation. 

The lawsuit has played out over the last full decade, filed first in the Central California District Court and eventually reaching the Supreme Court after an appellate ruling.

The Supreme Court’s decision was taken to establish clearly that the “ongoing duty to monitor” investments is a fiduciary duty separate and distinct from the duty to exercise prudence in the initial choice of an investment.

The big, practical result was that plan sponsors can no longer rely on the statute of limitations under the Employee Retirement Income Security Act (ERISA) to protect themselves from accusations of potentially imprudent investment decisions made in the past when the investment options in question remain on the menu. However, the SCOTUS decision declined to apply that determination to the facts of the case at hand, leaving that task to the lower courts.

Based on the new ruling that has emerged, it seems the SCOTUS and appellate court instructions have led the District Court to side with the plaintiffs, ruling that defendants breached their fiduciary obligations of prudence and monitoring in the selection of all 17 mutual funds at issue. Damages will be calculated from 2011 to the present, the decision states, “based not on the statutory rate, but by the 401(k) plan’s overall returns in this time period.”

The ruling examines in detail the process surrounding the adoption of 14 mutual funds that the plaintiffs contend should have been switched by the defendants from retail to institutional shares on August 16, 2001, the start of the statutory period. An additional three mutual funds in dispute had their institutional-class shares become available later, during the statutory period, and had no statute of limitations questions.

Second DOL Fiduciary Rule Delay
The new applicability date for the Department of Labor (DOL) fiduciary rule and its accompanying exemptions is January 1, 2019, according to an as-yet-unpublished notice that will soon appear in the Federal Register.

This extension gives the Trump administration a year-plus to consider what it will ultimately do with the signature Obama-era rulemaking. In particular, this additional year for transition  gives the DOL and the White House a more reasonable timeframe in which to consider the vast amount of industry commentary submitted in response to President Donald Trump’s request for information (RFI) about the initial and potential impact of the fiduciary rulemaking.

American Agrees to Pay $22 Million
A preliminary settlement agreement has been submitted for court approval in a case accusing American Airlines of including affiliated funds in its retirement plan investment lineup though they were more expensive and lower-performing than other funds.

The core of the plaintiffs’ claims relate to the use of American Beacon Funds in the plan. AMR Corp., American Airlines’ parent company, created a line of mutual funds that was managed by another subsidiary of AMR Corp. This fund manager was later—i.e., in 2005—renamed American Beacon Advisors Inc. Earlier this year, a federal district court judge refused to dismiss the case.

The gross settlement amount agreed on is $22 million, of which $12 million will be contributed by the American Airlines defendants or their agents or insurers, and $10 million will be contributed by American Beacon or its agents or insurers.

Closed DB Plan Nondiscrimination Relief
The Internal Revenue Service (IRS) has issued Notice 2017-45, which extends closed defined benefit (DB) plans’ temporary nondiscrimination relief, as provided in Notice 2014-5 and extended in Notice 2016-57. The relief will be available for plan years beginning before 2019 if the conditions of the original notice are satisfied.

The IRS and the Treasury Department expect that the final regulations regarding closed DB plans will include some significant changes, in response to stakeholder comments. However, it is unlikely that the final regulations will be published in time for plan sponsors to make plan design decisions accordingly, before expiration of the relief provided under the two notices.For that reason, the IRS and Treasury Department felt it appropriate to extend the relief for an additional year.

Morningstar and Prudential Deny Racketeering
Another Employee Retirement Income Security Act (ERISA) lawsuit has emerged in federal court, this one naming both Morningstar and various Prudential companies as defendants in the U.S. District Court for the Northern District of Illinois.

The case is unique because it cites both the Employee Retirement Income Security Act (ERISA) and the Racketeer Influenced and Corrupt Organizations Law of 1970, known as RICO. The lead plaintiff in the would-be class action suit is an employee of Rollins Inc. and a participant in the Rollins retirement plan. The Rollins plan is a defined contribution (DC) plan with assets of roughly $500 million and more than 10,000 participants and beneficiaries, case documents show. Defendants are investment analysts, investment-related software developers, investment consultants, recordkeepers and investment managers with respect to the Rollins plan and other 401(k) retirement plans across the country.

Specifically, the suit focuses on the various groups that manage the plan-participant-level automated investment advice program marketed under the trade name GoalMaker.

“Plaintiff and the other participants in the plans used and were injured by this innocuous-sounding investment advice program, which in reality was a predatory racketeering enterprise developed, maintained and marketed by defendants,” the suit contends. “Defendants’ so-called investment advice program gets retirement plan investors to turn over the investment management of their plan accounts to defendant PRIAC. PRIAC, along with its corporate siblings [that] facilitated the instant racketeering scheme, is a core part of the RICO racketeering enterprise at issue here.”

It should be noted straightaway that both Prudential and Morningstar have filed extensive responses to the suit, denying the charges here described and requesting summary judgment against the plaintiff. It is also relevant to observe that the GoalMaker product has been challenged unsuccessfully in a federal district court before by a disgruntled participant.

Lawsuit Against Deutsche Bank
A federal district court judge has granted class certification to a sizable group of Deutsche Bank employees who have filed an Employee Retirement Income Security Act (ERISA) challenge, alleging self-dealing in the company’s retirement plan benefit.

The now class-certified case comes out of the U.S. District Court for the Southern District of New York. The underlying allegations are that Deutsche Bank and other defendants violated their fiduciary duties by offering, in the company 401(k) plan, proprietary, high-cost investments that profited the bank. This development comes nearly a year after the court rejected defendants’ argument that the lawsuit, filed in December 2015, should be time-barred by ERISA’s various statutes of limitation. The bank otherwise denies the allegations.

DOL Secretary Urged to Call for Auto-Portability
In a letter to Department of Labor (DOL) Secretary R. Alexander Acosta, U.S. Senator Tim Scott, R-South Carolina, and other lawmakers requested that the agency issue an advisory opinion or other appropriate guidance regarding application of the Employee Retirement Income Security Act (ERISA) to automatic portability of retirement savings.

The letter notes, “Retirement plan cash leakage at the time of job change is harmful to workers’ retirement.” It cites an Employee Benefit Research Institute (EBRI) analysis, which found that a clearinghouse that could automatically roll over a participant’s retirement plan balance to a new employer every time he changed jobs would result in an additional $2 trillion in retirement savings for all employees, nationwide, by age 65.

A demonstration for PLANADVISER by Retirement Clearinghouse showed that, in just over 30 years, total cash-outs could reach $282 billion, and rollovers to other qualified plans would be only $14.7 billion among 8.4 million participants. The firm’s analysis did not include appreciation, so these amounts would be larger if average returns were included. If auto-portability were available, in just over 30 years, cash-outs would be reduced to $144.3 billion, and rollovers would be $133.5 billion among 77.5 million participants.

In the letter, lawmakers ask that Acosta use all of the resources at his disposal to ensure the DOL examines the issue of auto-portability and provides guidance as soon as possible.

Hurricane Harvey Relief
Following up on a previous announcement, the Pension Benefit Guaranty Corporation (PBGC) has shared more detail about its intent to waive certain penalties and extend certain filing deadlines in response to the Hurricane Harvey disaster in Texas and Louisiana.

Technically speaking, this disaster relief announcement provides relief relating to PBGC deadlines to “designated persons.”  A “designated person” is defined as “any person responsible for meeting a PBGC deadline (e.g., a plan administrator or contributing sponsor) that is located in the disaster area for which the Internal Revenue Service (IRS) has provided relief in TX-2017-09, in connection with filing extensions for Form 5500 series returns, or cannot reasonably obtain information or other assistance needed to meet the deadline from a service provider, bank, or other person whose operations are directly affected by the severe storms and flooding from Hurricane Harvey that began on August 23, 2017, in Texas.”

In TX-2017-09, the IRS provides relief for taxpayers who reside or have a business in the disaster area and, who because of the disaster, needed extensions for filing Form 5500 series returns.