Compliance December 19, 2019

Congress Has Passed the SECURE Act

The Senate voted Thursday to approve appropriations legislation that has subsumed the SECURE Act, after the House approved the same measure on Tuesday.

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The retirement plan industry is hailing Congress for passage of the Setting Every Community Up for Retirement Security Act, better known as the SECURE Act, which is expected to be signed by the President as soon as Friday.

Technically, the SECURE Act has been incorporated into a broader 2020 fiscal year appropriations bill. On Thursday, the Senate voted 71 to 23 to approve the legislation. The House approved the same measure on Tuesday by a vote of 297 to 120.

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Through a laundry list of popular bipartisan provisions, the SECURE Act seeks to expand and modernize the defined contribution (DC) retirement plan system. Through the establishment of “open multiple employer plans,” or “open MEPs”, the SECURE Act is expected to expand access to workplace retirement plans for millions more full- and part-time workers, particularly small business employees.

The legislation also expands opportunities for workers to obtain guaranteed lifetime income products, increases the age at which required minimum distributions must be taken from retirement accounts and repeals the age limit for IRA contributors. Additionally, the SECURE Act will require that plan participants receive an illustration of how much monthly income their retirement savings will provide, which can help them plan to increase their retirement savings.

The SECURE Act also allows qualified automatic contribution arrangement (QACA) safe harbor plans to increase the cap on automatically raising payroll contributions from 10% to 15% of an employee’s paycheck, with the option to opt out.

“Our optimism that the SECURE Act would pass this year never wavered,” said Wayne Chopus, president and CEO of the Insured Retirement Institute. “Longer lifespans mean workers will have more years in retirement and will need a retirement financial plan that ensures they won’t outlive their savings. Greater access to lifetime income products within workplace retirement plans can provide monthly income for the life of a retiree.”

Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee (ERIC), said passage of the SECURE Act is a major accomplishment that will allow Congress to turn to other important retirement issues.

“ERIC looks forward to working with all interested parties in the new year to bring additional flexibility and modernization into the private retirement system,” Robinson says. “In particular, we look forward to updating the lifetime income disclosure rules to allow plan sponsors to continue providing disclosures that are specific to participants and beneficiaries; modernizing the 401(k) plan system through updating several provisions including the definition of a highly compensated employee and providing financial wellness through student loan debt repayment and emergency savings; and working with Congress to find a comprehensive solution to the multiemployer pension crisis.”

The Financial Services Institute (FSI) also quickly applauded Congress’ passage of the SECURE Act as part of the end-of-year spending package.

“The passage of the SECURE Act is a significant victory for Main Street Americans,” said FSI President and CEO Dale Brown. “We applaud Congress for passing this important measure to address the retirement savings crisis. Americans are living and working longer than ever before, and too many have inadequate savings as they enter retirement. Currently, 40% of private-sector workers do not have access to a workplace retirement plan. The SECURE Act will increase workers’ access to retirement savings and allow them to make contributions for as long as they are working. We urge President Trump to sign this legislation into law as quickly as possible.” 

Speaking with PLANADVISER just ahead of the Senate vote, Jamie Hopkins, director of retirement research at Carson Group, said this is indeed a big day for the retirement plan industry, but he wonders whether the small business community will benefit from the SECURE Act as much as some parties are anticipating at this early juncture.

“I’m more skeptical than most, particularly about the potential impact of the open multiple employer plan provision on small businesses,” Hopkins says. “We’ve been trying since the establishment of ERISA to help small businesses set up retirement savings plans—through very low-cost SEP and SIMPLE IRA plans, for example. Today, these options are already very affordable and very well-suited for the small business community, but they haven’t really moved the needle. I wonder whether access to open MEPs alone will help small businesses as much as some expect.”

According to Hopkins, the small business community in general perceives retirement plans of any type to be associated with complexity and risk. For that reason, it will require significant effort and investment from the retirement plan industry to help small business owners embrace open MEPs, or indeed any other type of retirement plan.

Compliance December 19, 2019

Cintas Corporation Accused of ERISA Fiduciary Breaches

Among other allegations, the national work uniform provider is accused of permitting high-cost mutual funds to persist on the retirement plan menu while cheaper but otherwise identical funds were available.

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A new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the Southern District of Ohio names as defendants the Cintas Corporation, its board of directors, its retirement plan investment committee, and some 30 John Does.

The complaint was filed by two plan participants, who are suing on behalf of similarly situated participants and the Cintas Partners’ retirement plan as a whole. They allege that during the putative class period of December 13, 2013, to the present, these fiduciary defendants breached the duties they owed to the plan and its participants.

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The lawsuit specifically alleges that the defendants “failed to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.”

The plaintiffs further allege that the defendants failed to utilize the lowest cost share class for many of the mutual funds within the plan, and failed to consider collective trusts, commingled accounts, or separate accounts as alternatives to the mutual funds in the plan. In addition, the plan fiduciaries are accused of overpaying for recordkeeping services. 

“Defendants’ mismanagement of the plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duties of prudence and loyalty, in violation of 29 U.S.C. § 1104,” the lawsuit states. “Their actions were contrary to actions of a reasonable fiduciary and cost the plan and its participants millions of dollars.”

Based on this conduct, the plaintiffs assert claims against defendants for breach of the fiduciary duties of loyalty and prudence (count one) and failure to monitor fiduciaries (count two).

Anticipating likely challenges about the lawsuits’ timeliness, the plaintiffs suggest they “did not have knowledge of all material facts (including, among other things, the investment alternatives that are comparable to the investments offered within the plan, comparisons of the costs and investment performance of plan investments versus available alternatives within similarly-sized plans, total cost comparisons to similarly-sized plans, information regarding other available share classes, and information regarding the availability and pricing of separate accounts and collective trusts) necessary to understand that defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before this suit was filed.”

Further, plaintiffs say they did not have and do not have “actual knowledge of the specifics of defendants’ decision process with respect to the plan, including defendants’ processes for selecting, monitoring, and removing plan investments, because this information is solely within the possession of defendants prior to discovery.”

“Having never managed a jumbo 401(k) plan such as the plan, plaintiffs lacked actual knowledge of reasonable fee levels and prudent alternatives available to such plans,” the lawsuit suggests. “Plaintiffs did not and could not review the committee meeting minutes or other evidence of defendants’ fiduciary decision making, or the lack thereof. For purposes of this complaint, plaintiffs have drawn reasonable inferences regarding these processes based upon (among other things) the facts set forth herein.”

The text of the lawsuit includes the typical recitations of the fiduciary duties demanded by ERISA, as well as arguments supporting the class certification of the claims. It also includes generic argumentation about the ability of large retirement plans to secure better-than-retail pricing for investment products and plan administration services, as well as an argument that passive investment funds are more appropriate for ERISA-covered retirement plans.

“During the class period, the plan lost millions of dollars in offering investment options that had similar or virtually identical characteristics to other investment options other than a higher price,” the lawsuit suggests. “For example, as of the end of 2017, all but two of the funds in the plan were much more expensive than comparable funds found in the market-place. The T. Rowe Price Retirement 2030, 2040, 2020, 2035, 2050, and 2025 Advisor target-date funds had expense ratios of 0.92%, 0.97%, 0.86%, 0.95%, 0.97%, 0.89%, respectively, which were nearly twice the category median fee of 0.56% for plans with at least $1 billion in assets. … The T. Rowe Price Growth Stock Adv. and Artisan Mid Cap Investor had .92% and 1.18% expense ratios, respectively, nearly three- and four-times the 0.31% median for domestic equity funds.”

Cintas leadership shared the following statement with PLANADVISER: “Cintas has no comment on this pending litigation beyond the fact that we believe it has no merit and will defend ourselves vigorously in court.”

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