Compliance News

Voya Suit Dismissed
The U.S. District Court for the District of Connecticut has dismissed without prejudice a class-action Employee Retirement Income Security Act (ERISA) challenge filed by a participant on behalf of the Cedars-Sinai Medical Center 403(b) Retirement Plan.

Darlene Dezelan, the lead plaintiff, alleged in the suit that Voya Retirement Insurance and Annuity Co. improperly profited from stable value funds (termed “SVAs”) offered to the plan through annuity contracts.

According to the original complaint, Voya sells group annuity contracts to retirement plans, which include  Voya SVAs. The funds periodically credit a certain amount of interest income to the plans and to their participants invested in the accounts. This income, generally expressed as a percentage of the invested capital, is determined according to a crediting rate that Voya has the discretion to set, then reset periodically. The lawsuit alleged that Voya set the crediting rate “well below the internal rate of return (IRR) on the plan’s deposits to the SVAs, guaranteeing a substantial profit for itself.”

The court found that Dezelan, whose plan does not offer the Voya general account stable value funds, lacks the standing to bring her claims. The decision stressed that, to successfully bring an ERISA suit to trial, a plaintiff “must demonstrate both constitutional standing and a cause of action under ERISA.”

Self-Dealing Suit Filed Against Capital Group
D’Ann Patterson, individually and on behalf of all other similarly situated participants and beneficiaries of the Capital Retirement Savings Plan, has filed a lawsuit against The Capital Group Companies Inc., the board of directors of Capital Group, the U.S. Retirement Benefits Committee of the plan, Capital Guardian Trust Co. (CGTC), Capital Research and Management Co. (CRMC) and Capital International Inc. (CII) for violations of Employee Retirement Income Security Act (ERISA) provisions regarding fiduciary duties of and prohibited transaction provisions between June 13, 2011, and the present.

The lawsuit claims that when selecting and retaining investment options in the plan, the benefits com-mittee put the interest of Capital Group and its subsidiaries ahead of plan participants and beneficiaries by selecting, retaining and failing to remove expensive group-affiliated investment options managed by CGTC, CRMC and/or CII. The suit says this breached the plaintiffs’ fiduciary duties of prudence and loyalty, and generated significant revenue for Capital Group and its subsidiaries.

According to the complaint, during the relevant period, between 94.7% and 97.8% of all investments offered by the plan were “the unduly expensive Capital Group-affiliated investments managed by CGTC, CRMC and/or CII.” Further, it claims there was access to comparable investment options, from unaffiliated companies, that cost less and have performed comparably, if not better than, the Capital Group-affiliated investment options. It also says the benefits committee selected and retained the more expensive R5 share class of the funds despite the availability of the less expensive R6 share class.

DOL Requests Comments on Fiduciary Rule
The Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) published a request for information (RFI) in connection with its examination of the DOL’s final fiduciary rule under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).

Part of EBSA’s examination will be to evaluate the new and amended administrative class exemptions from the prohibited transaction provisions of ERISA and the IRC that were published in conjunction with the rule. The RFI specifically seeks public input that could form the basis of new  exemptions, or changes or revisions to the rule and prohibited transaction exemptions (PTEs). Input regarding the advisability of extending the January 1, 2018, applicability date of certain provisions in the best interest contract exemption (BICE); the class exemption for principal transactions, such as rollovers, between investment advice fiduciaries and employee benefit plans and individual retirement accounts (IRAs); and PTE 84-24.

The deadline for responses about extending the January 1 applicability date is 15 days after the request’s publication in the Federal Register, while the deadline for all other comments is 30 days after the publication date.

CVS Wins For 3rd Time in Fiduciary Breach Challenge
A district court judge has dismissed an Employee Retirement Income Security Act (ERISA) lawsuit filed against CVS Health Systems, representing the third victory for the company in the case.

According to the plaintiffs, the company’s leadership breached fiduciary duties owed to retirement plan investors by “imprudently investing too much of the plan’s stable value fund assets in ultra-short-term cash management funds that provided extremely low investment returns.”

Following an initial dismissal, the matter was put again before the U.S. District Court for the District of Rhode Island “on review of the second Report and Recommendation (R&R) issued previously in the case by Magistrate Judge Sullivan.” Upon this third review, the district court “[has] adopt[ed] the R&R in its entirety.”

Bill Would Encourage More Employee Stock Ownership
The House of Representatives passed the Encouraging Employee Ownership Act (H.R.1343) by a bipartisan vote of 331 to 87.

A press release from the office of representative Lee Zeldin, R-New York, says the legislation would reform outdated Securities and Exchange Commission (SEC) Rule 701, which imposes a slew of complicated regulations on small businesses, especially newly formed startups. Rule 701 exempts companies that offer securities as part of employee compensation from having to comply with federal securities registration requirements if those securities are valued at $5 million or less in a 12-month period. Companies exceeding that threshold must provide disclosures, including to participants, “creating a significant obstacle for [those] that want to compensate their employees through equity or other securities such as stocks,” the release says.

According to the National Center for Employee Ownership (NCEO), the bill would increase to $20 million the cap on how much stock closely held companies can award to employees before triggering SEC reporting requirements. The amount would be indexed for inflation annually.

Zeldin called the act “bipartisan legislation that will help small businesses grow and expand, encouraging job creation and economic growth, by allowing companies to retain their employees through incentives.”

Suit Against Chevron Dismissed
For the second time, Chevron Corp. has won dismissal of a lawsuit alleging it caused participants to pay excessive fees due to its choices of funds offered in its 401(k) plan.

U.S. District Judge Phyllis Hamilton of the U.S. District Court for the Northern District of California found that, for repeated claims, the plaintiffs failed to correct the deficiencies in the original complaint identified by the court in its prior order dismissing the suit.

In her new order, Hamilton wrote that the plaintiffs failed to distinguish between the Employee Retirement Income Security Act (ERISA)’s duties of loyalty and prudence.

Specifically, the six plaintiffs who filed the proposed class action alleged that plan fiduciaries “breached their duties of loyalty and prudence by providing participants with a money market fund as a capital preservation option, instead of offering them

a stable value fund; by providing retail investment options that charged higher management fees than lower-cost institutional versions of the same investments; by providing mutual funds that charged higher management fees than other lower-cost investment options such as collective trusts and separate accounts; by failing to put plan administrative services out for competitive bidding on a regular basis, and instead paying excessive administrative fees to Vanguard as recordkeeper through revenue sharing from plan investment options; and by retaining the Artisan Small Cap Value Fund as an investment option despite its underperformance compared [with] its benchmark, peer group, and lower-cost investment alternatives.”

All of these claims were again dismissed.

Starwood Excessive Fee Claim Found Plausible by Court
A federal district court has moved forward one claim in a lawsuit against Starwood Hotels regarding excessive recordkeeping and administrative fees for its 401(k) plan.

U.S. District Judge Dale Fischer of the U.S. District Court for the Central District of California said in his opin-ion, “When viewed in the light most favorable to Plaintiffs, the Court can infer from these facts that Starwood’s recordkeeping and administrative fees were excessive prior to 2015 and are still excessive. Although Plaintiffs do not specifically allege how Starwood breached its fiduciary duty through improper decisionmaking, they have pleaded sufficient facts from which the Court can reasonably infer that Starwood employed a flawed process for selecting recordkeeping and administrative services.”

Besides their breach of fiduciary duty claims that Starwood failed to ensure reasonable recordkeeping and administrative fees, the plaintiffs had similarly claimed the hotel chain failed to offer a stable value fund, follow participants’ investment instructions, provide adequate disclosure regarding revenue sharing, and eliminate the BlackRock LifePath 2050 Index Fund, which charged excessive fees, from the plan’s investment menu. Starwood argued the statute of limitations bars all five claims.

For the claim regarding the BlackRock LifePath 2050 Index Fund, Fischer relied on In re Northrop Grumman Corp. ERISA Litig., which found that a breach of fiduciary duty claim was time-barred because documents sent to plaintiffs disclosed the fees charged, putting them on notice of the allegedly excessive fees.