Legislative and Judicial Actions

CHOICE Act Targets Fiduciary Rule
The Financial Services Committee has approved the CHOICE Act for consideration by the full House of Representatives, a move considered by some to be the first real step towards Congressional repeal of Dodd-Frank regulations and the Department of Labor (DOL) fiduciary rule.

The legislation is sweeping and would undue or replace much of the Dodd-Frank Wall Street reforms adopted by Democrats when they held significant majorities in the wake of the 2008-09 financial crisis.

Interestingly, in the executive summary of the CHOICE Act published by the Republican members on the Financial Services Committee, there is only one very brief, single-bullet-point mention of the DOL fiduciary rule—and this bullet point comes at the very end of the document. It is probably too much to read into that symbolic detail, but the CHOICE Act’s impact on the DOL fiduciary rule, and even on particular elements of Dodd-Frank, could potentially be renegotiated by the full House and Senate.

Acosta Named Head of DOL
The U.S. Senate has quietly approved President Trump’s Secretary of Labor nominee, Alexander Acosta, following a previously failed effort by the administration to install fast food executive Andrew Puzder to the position.

Acosta’s appointment was more or less a non-event from the perspective of the wider media and the general political conversation, which seems more focused on tax reform proposals and geopolitical tensions, particularly those involving China, North Korea and Iran. However for the retirement planning marketplace, the appointment represents a significant development.

Acosta, working with whomever is named to fill the role of head of the Employee Benefits Security Administration (EBSA), will oversee the implementation of the Department of Labor (DOL) fiduciary rule reforms championed by the Obama White House. Numerous attorneys, executives and analysts have told PLANADVISER they have been very eager to get to this point; without a Labor Secretary in place there has been a lack of clarity from within the DOL as to what the future of the rulemaking might be.

American Airlines Suit Proceeds
A federal district court judge has denied most motions to dismiss filed by American Airlines in a case accusing the firm 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 were managed by another subsidiary of AMR Corp. This fund manager was later renamed American Beacon Advisors, Inc. in 2005. These mutual funds were then known as American Beacon Funds.

According to the court opinion, AMR Corp. sold American Beacon Advisors, Inc. in 2008 to Lighthouse Holdings, Inc. As a part of this deal, AMR Corp. received an equity stake in Lighthouse Holdings, Inc. Plaintiffs contend that this sale was premised on American Airlines’ continued use of American Beacon Funds in the plan. Although American Airlines employed an independent third party to approve the continued use of American Beacon Funds in the Plan, Plaintiffs allege that this was done merely to “whitewash” American Airlines’ actions.

Plaintiffs claim that the defendants breached their fiduciary duties because a prudent fiduciary would not retain the American Beacon Funds because they were more expensive than similar alternatives; American Beacon Funds underperformed compared to other similar investments; and American Beacon Funds were not included in other 401(k) plans.

Bank of America Prevails in ERISA Challenge
An opinion handed down by The United States District Court for The Western District of North Carolina, Charlotte Division, rules in favor of the defendant, Bank of America, which had been accused of profiting from imprudence and disloyalty in the management of a cash balance plan.

The case has had a lengthy and complicated procedural history, stretching back to a time before Bank of America even existed as such and calling out cash balance plan design/administration decisions made by then-NationsBank leadership. Most recently the case was revived and remanded by the 4th U.S. Circuit Court of Appeals, leading to the current decision.

Plaintiffs originally filed their cash balance plan lawsuit in 2004, claiming the way their employer created a cash balance plan by essentially transforming an existing 401(k) represented impermissible benefit cutbacks. After that, in 2005, an audit of the bank’s plan by the Internal Revenue Service (IRS) resulted in a technical advice memorandum order, in which the IRS concluded that the transfers of 401(k) plan participants’ assets to the cash balance plan between 1998 and 2001 violated relevant Internal Revenue Code provisions and Treasury regulations.

Bill Would Address Loan Repayments
U.S. Senators Bill Nelson (D-Florida) and Mike Enzi (R-Wyoming) introduced legislation to address leakage from defined contribution (DC) retirement plans.

The Shrinking Emergency Account Losses (SEAL) Act would give workers who leave their jobs up until they file their federal taxes to repay loans they’ve taken out of their company-sponsored retirement plan, according to news reports.

The SEAL Act further would allow workers to keep making contributions immediately after taking a loan. The lawmakers’ bill would also allow employees to continue to contribute to their defined contribution (DC) plans during the six months following a hardship withdrawal.

The act additionally would limit to three the number of loans a worker can take from a DC plan and outlaw debit cards linked to DC plan assets.

BlackRock Charged With Excessive Fees
Charles Baird, an employee of Barclays from 2000 until 2009, when Barclays was acquired by BlackRock Institutional Trust Company, and an employee of BlackRock from 2009 until July 2016, has filed suit against the firm, claiming the use of proprietary funds in its 401(k) plan caused the plan participants to incur excessive fees.

In a statement, BlackRock said, “The suit is without merit and contains a number of factual inaccuracies. We will vigorously defend against the action. BlackRock is committed to making the best decisions in the interest of our plan participants, continually looking for ways to help them secure a better financial future.”

According to the complaint, the plan has approximately $1.56 billion in assets and approximately 9,700 participants. “Combined with BlackRock’s investment sophistication, the Plan has enormous leverage to demand and receive superior investment products and services,” the complaint says.

The plan fiduciaries are charged with failing to honor their fiduciary duties under the Employee Retirement Income Security Act by selecting and retaining high-cost and poor-performing investment options, with excessive layers of hidden fees that are not included in the fund expense ratios. The complaint notes that almost all of the fund options offered to BlackRock employees and participants are funds affiliated with BlackRock, Inc., meaning managed and/or maintained by a subsidiary of BlackRock, Inc., such as BlackRock Institutional Trust Company, N.A. or BlackRock Advisors, LLC.

Congress Considers Lifetime Income Disclosure
Lawmakers on Capitol Hill are looking at the Lifetime Income Disclosure Act. This bi-partisan legislation would require employer-sponsored retirement plans to provide participants with an estimate of how much monthly income they could generate if they were to take all their retirement savings and purchase an annuity.

Under this law, employees would receive an annual statement of how their savings would reflect monthly income payments through an annuity.

Disney Suit Dismissed Again
The U.S. District Court for the Central District of California has again ruled in an Employee Retirement Income Security Act (ERISA) lawsuit targeting the Walt Disney Company—concluding a motion to dismiss from the company should be granted.

In this instance the court, pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule 7-15, moved on the matter without oral argument, ruling that plan fiduciaries cannot be held liable for losses suffered by participants who had exposure to Valeant Pharmaceuticals stock at the time of that company’s dramatic fall from grace.

Important to note, “plan participants are themselves required to select the specific funds into which their individual contributions are invested … Plan participants are offered a choice of 26 different funds.” As a result, case documents suggest, plan participants can allocate their individual plan accounts among a number of investment options, reflecting a broad range of investments styles and risk profiles.

Court Advances Starwood Case
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 S. Fischer of the U.S. District Court for the Central District of California said in his opinion, “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 decision-making, they have pleaded sufficient facts from which the Court can reasonably infer that Starwood employed a flawed process for selecting recordkeeping and administrative services.”

In addition to the plaintiffs’ breach of fiduciary duty claims based on its alleged failure to ensure reasonable recordkeeping and administrative fees, they claimed Starwood breached its fiduciary duties by failing to offer a stable value fund, follow participants’ investment instructions, provide adequate disclosure regarding revenue sharing, and exclude the BlackRock LifePath 2050 Index Fund, which charged excessive fees, from the plan’s investment menu.