Compliance November 29, 2022

What Do the Mid-Terms Mean for ESG and SECURE 2.0?

ESG-minded investors have cause for concern, as Republicans prepare to take control of the House.

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This year’s midterm elections resulted in Democrats keeping their narrow lead in the Senate but losing control of the House to Republicans.

Republicans are expected to have a nine-seat majority in the House, and Democrats will either have a one-seat majority or the tiebreaking vote in an evenly split Senate, pending the result of the Georgia runoff election on December 6.

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With the House changing hands, some key committee gavels will switch from Democrat to Republican control. What does that mean for the retirement, tax and investment issues that PLANADVISER has been covering?

ESG Issues

First, Republicans taking control of the House means Rep. Virginia Foxx, R-North Carolina, who has frequently expressed opposition to government initiatives to encourage environmental, social and governance-informed investing, will likely become the next chair of the House Committee on Education and Labor, which has jurisdiction over the Department of Labor.

Foxx has described the recent DOL rule to permit retirement plan fiduciaries to use ESG strategies as an attempt to “satisfy the woke mob” and has said it will put Americans’ retirement at risk in order to prioritize left-wing political goals. Foxx is currently the ranking member of the committee, and a spokesperson for the committee confirmed she intends to seek the position.

The House Committee on Financial Services is currently led by Rep. Maxine Waters, D-California, who will likely be replaced by Rep. Patrick McHenry, R-North Carolina, the current ranking member. A spokesperson for McHenry’s office confirmed that he intends to seek the position.

Like Foxx, McHenry is also known for his opposition to ESG and to the Securities and Exchange Commission’s proposed climate-related disclosure regulations. McHenry was critical of the SEC’s proposal from March to require issuers to disclose their climate-related risks to investors. He argued that climate policy should be set in Congress, not from the executive bureaucracy. The SEC proposal has not yet been finalized.

Republican control of the House could lead the administration of President Joe Biden to pursue executive-branch regulation more aggressively, since legislative reform would be harder to achieve with divided government.

This observation applies not only to ESG, of course, but other regulations put forward by the DOL and SEC, such as those concerning swing-pricing and qualified professional asset manager reform.

In reaction to such an effort, Republicans could hold hearings and summon the heads of executive branch departments or business executives to hearings that carry headline risk. They could also use the federal budget and appropriations process for leverage in a wide range of negotiations. Concern over such action might be informing recent statements from Democrats on the need to increase the federal debt ceiling before the next Congress.

There has also been legislation proposed in the Senate that seeks to reign in ESG. The Maximize Americans’ Retirement Security Act, proposed by Senator Mike Braun, R-Indiana, is a bill that would essentially codify the Trump-era DOL guidance on ESG investing, which required fiduciaries to only consider financial factors and was understood as a challenge to ESG strategy. Braun’s bill would also require that a fiduciary distinguish between two investments on a pecuniary basis alone before considering other factors, but they must disclose to investors why pecuniary factors were insufficient.

Senator John Boozman, R-Arkansas, introduced legislation in October that would prevent the SEC from requiring corporate disclosure related to climate and emissions, and it was referred to the Senate Committee on Banking, Housing and Urban Affairs yesterday.

These bills are not expected to pass this year, but both indicate that Republican skepticism of ESG also exists in the Senate.

Retirement

The consequences of the election for the retirement reform package dubbed SECURE 2.0, which is still expected to pass during the current Congress, is less dramatic.

The changing composition in both chambers is unlikely to alter the trajectory of SECURE 2.0. The package has little opposition from either party, and the only challenge would be reconciling its conflicting terms before the next Congress.

If it fails to pass during this Congress, it can be re-proposed in the next Congress, but the new bills would have been informed by months of negotiating and could therefore move faster through the legislative process. SECURE 2.0 would likely receive the same widespread support it enjoyed during this Congress.

SECURE 2.0 is expected by insiders to be attached to a must-pass bill this December and to be signed into law by President Biden.

Compliance November 29, 2022

Judge Dismisses Charge of “Unreasonable” 401(k) Fees by Electronics-Maker Ricoh

A federal district court bounced two fiduciary breach claims brought by participants against Ricoh USA, saying plaintiffs failed “to plausibly allege the committee breached its ERISA-imposed fiduciary duty by charging unreasonable recordkeeping fees."

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A federal district court chief judge has bounced both fiduciary breach claims brought in February against Ricoh USA by 401(k) retirement plan participants under the Employee Retirement Income Security Act.

The plaintiffs’ complaint—Keith Krutchen, Angel D. Muratalla and William Begani, V. Ricoh USA, Inc., the Board of Directors of Ricoh USA, Inc., the Ricoh Retirement Plans Committee and John Does 1-30—“fails to provide a reasonable inference that defendants breached their fiduciary duty to participants,” wrote Juan R. Sánchez, chief judge of the U.S. District Court in the Eastern District of Pennsylvania, who was not convinced by the plaintiffs’ arguments that the defendants’ conduct, as the 401(k)-plan sponsor, was imprudent or a violation of ERISA.

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“Plaintiffs fail to plausibly allege the committee breached its ERISA-imposed fiduciary duty by charging unreasonable recordkeeping fees,” Sánchez wrote. “Plaintiffs also do not state a failure to monitor claim against Ricoh and the Board, since this second claim is derivative of the first. Accordingly, defendants’ motion to dismiss will be granted.”

The motion to dismiss was granted with leave to amend, which permits the plaintiffs to amend the complaint and refile one time in an effort to state a cause of action.

The complaint fails because it does not “provide meaningful benchmarks by which the Court can assess the prudency of defendants’ actions,” Sánchez wrote. “A meaningful benchmark must include both the quality and type of recordkeeping services provided by comparator plans to show that identically situated plans received the same services for less.”

The plaintiffs’ lawsuit alleged two counts against the plan sponsor for breach of fiduciary duty to participants and failure to monitor plan fiduciaries. The plaintiffs alleged in the complaint the plan sponsor failed to use its substantial bargaining power, by virtue of its size, to negotiate lower fees for investments, plan administration and recordkeeping services.

“Since Count I does not state a claim, neither does Count II,” Sánchez wrote. “A failure to monitor claim cannot survive without an underlying breach of an ERISA-imposed duty. Plaintiffs do not plausibly allege a breach of fiduciary duty, so they do not plausibly allege a failure to monitor.”

As of 2020, the plan had more than 18,619 participants and more than $2.1 billion in assets under management, according to the complaint.

Sánchez confirmed that mismanagement of plan expenses—overcharging for recordkeeping and administrative fees—is a breach of fiduciary duty, because excessive fees can erode the value of an account in a defined contribution plan. But the plaintiffs failed to show the court “substantial circumstantial evidence” at the pleading stage for the court to sanction the conduct by the plan sponsor as imprudent, Sánchez wrote. Such evidence may include the range of investment options, reasonableness of fees, selection and retention of investment options and practices of similarly situated fiduciaries, he wrote.

The plaintiffs’ complaint fails to survive defendants’ 12(b)(6) motion to dismiss, brought under the Federal Rule of Civil Procedure, because it does not include any information about the specific services used by Ricoh’s 401(k) plan or the benchmark comparator plans, according to the court memo.

“Without this ‘apples to apples’ information this Court cannot assess whether the plan even pays for the same services as its comparators, much less what ‘similarly situated fiduciaries’ would do,” wrote Sánchez.

Citing relevant precedent in Sweda v. Univ. of Pa. Sánchez stated, “a breach of fiduciary duty under ERISA occurs when ’(1) a plan fiduciary (2) breaches an ERISA-imposed duty (3) causing a loss to the plan,’ … [but here] plaintiffs only contest the second element: whether the Committee breached its duty of prudence in managing the Plan,” according to the court document.

Sánchez referred to the 3rd U.S. Circuit Court of Appeals’ decision in Sweda to outline some of the key factors the plaintiffs would need to include if they amend and refile.

A Ricoh spokesperson said the company is pleased with the ruling by the court, in an email.

“Ricoh USA, Inc. takes great care in the prudent management of its retirement savings plan,” the spokesperson said.

The original filing can be found here.

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