Compliance August 22, 2019

DOL Sends Electronic Disclosure Rule to OMB

The proposed rule, which the OMB has up to 60 days to review is aimed at reducing costs and improving participant understanding of retirement plan disclosures.

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On August 16, the Office of Management and Budget (OMB) received from the Department of Labor (DOL) a proposed rule relating to the providing of electronic disclosures to retirement plan participants.

The title of the rule is “Improving Effectiveness of and Reducing the Cost of Furnishing Required Notices and Disclosures.” According to the DOL, it is aimed at reducing the costs and burdens imposed on employers and other plan fiduciaries responsible for the production and distribution of retirement plan disclosures required under Title I of the Employee Retirement Income Security Act (ERISA), as well as making these disclosures more understandable and useful for participants and beneficiaries. It is being proposed in response to Executive Order 13847, Strengthening Retirement Security in America.

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A study last year from the American Retirement Association (ARA) commissioned with the Investment Company Institute (ICI) found that eliminating the cost of delivering paper notices to 80 million participants annually can translate into additional retirement savings of about 2.4% over a lifetime of work. The study also concluded that e-delivery improves access for the visually impaired and others with disabilities and improves access and the quality of information for those who speak English as a second language.

In June, eight organizations associated with defined contribution (DC) plans submitted a letter to the DOL’s Employee Benefits Security Administration asking it to propose regulations that would permit plan sponsors to make electronic delivery the default method of delivery for retirement plan disclosures and notices. If employees did not want electronic delivery, they would have the ability to request paper copies.

The OMB has up to 60 days to review and act on the submission—but could act more quickly—after which the DOL would propose the rule in the Federal Register and provide a 60-day comment period for stakeholders. In its spring regulatory agenda, the agency indicated it planned to issue a Notice of Proposed Rulemaking (NPRM) on electronic delivery of disclosures in December of this year.
The Markets August 21, 2019

Issues That Can Trigger a Lawsuit Over TDFs in Retirement Plans

A litigation firm has listed what it is investigating for potential lawsuits over target-date funds (TDFs) in retirement plans.

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There’s been a recent wave of lawsuits over the target-date funds (TDFs) being offered in 401(k) plans recently.

A settlement in a lawsuit accusing Franklin Templeton of self-dealing in its 401(k) plan requires it to add a nonproprietary TDF option to the investment lineup in addition to the plan’s qualified default investment alternative (QDIA)—the LifeSmart Target Date Funds. More recently, a lawsuit was filed alleging fiduciaries of the Walgreen Profit-Sharing Retirement Plan selected and kept TDFs in the plan that underperformed their benchmarks. And, last week, retirement plan fiduciaries at Intel were accused of failing to properly monitor and evaluate “unconventional, high-risk allocation models” adopted within the company’s custom target-date funds.

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On its website, litigation firm Cohen Milstein says it is investigating a number of issues concerning the selection and offering of TDFs. The firm shares what it is looking for:

Improper Investment Strategy: The firm says, “The actual investment strategy (e.g. the allocation between equities and bonds) may not be same as the fund advertised.  The fund may be pursuing a far riskier investment strategy than participants and plan sponsors are led to believe, even as plan participants near retirement.”

Excessive Fees: “The fees charged by a target-date fund may not be justified by the performance of the investment.  The fees for target-date funds can vary significantly, particularly depending on whether the fund’s fees are “layered” or the underlying investments of the fund are actively or passively managed,” Cohen Milstein says.

Self-Dealing or Imprudent Selection: The firm says, “Many providers offer a wide variety of target-date funds.  The fiduciary of the plan may have chosen the particular provider for improper reasons.  For example, where the fiduciary of the plan or the employer sponsoring the plan markets a target-date fund, it improperly chose its own target-date funds without considering whether those funds are most appropriate for its own 401(k) plan participants.”

Improper Default Selection: Where a TDF suite is the plan’s QDIA, “the fiduciary of the plan has an obligation to ensure that the target-date fund was prudently, properly, and appropriately selected.”

This should inform retirement plan sponsors that offer TDFs in their plan investment menu.

In a blog post, Carol Buckmann, an Employee Retirement Income Security Act (ERISA) attorney with Cohen & Buckmann, P.C. in New York City, offers suggestions for plan fiduciaries which she says “will probably require consulting an investment adviser and ERISA counsel for assistance.”

She recommends fiduciaries:

  • Understand the basics of how TDFs work and the fees payable, including those for underlying investments;
  • Study the underlying investments.  Some TDFs can include alternative investments such as real estate and some will continue to alter the mix of investments after the assumed retirement age;
  • Understand the risk profile of the investments. Make sure that it is appropriate for plan participants; and
  • Benchmark TDFs for performance and fees.

She also says more plan sponsors should consider doing an actual request for proposals (RFP) for their TDFs.

“It is equally important to document the steps taken to evaluate the selected target-date funds so that there is a record to point to if a lawsuit is filed,” Buckmann concludes.

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