Compliance News
Art by Jennifer Xiao
5th Circuit Vacates DOL Fiduciary Rule
The U.S. Court of Appeals for the 5th Circuit ruled, by a two-to-one majority, to vacate the Department of Labor (DOL) fiduciary rule, based on arguments put forward by the U.S. Chamber of Commerce and the Securities Industries and Financial Markets Association (SIFMA).
This latest decision comes nearly a year after a Texas district court judge roundly rejected the investment industry advocacy groups’ arguments that the DOL exceeded its authority in crafting the fiduciary rule. Exactly what this latest move spells for the regulation’s future under the Trump administration is yet unclear, especially given that the 10th Circuit issued an essentially opposite ruling, determining in no uncertain language that the DOL’s fiduciary rulemaking process has played out properly and within the confines of the regulator’s broad existing authority. Experts are still grappling with the question of how the conflicting rulings should be interpreted, particularly on the point of whether an appeal to the Supreme Court could occur.
Ropes & Gray tax and benefits partner Josh Lichtenstein warns that the 5th Circuit’s decision to vacate the DOL’s fiduciary rule in its entirety creates “a new round of uncertainty in the ongoing saga of the rule.”
“The 5th Circuit is now at odds with multiple other courts that have upheld the rule, including the 10th Circuit,” he says. “While the government decides whether to request an en banc review of the ruling, appeal the case to the Supreme Court, or take no action, financial institutions are forced to decide how to react, especially if part of their operations is located in the 5th Circuit.”
Settlement Reached in Excessive Fee Lawsuit
One day after the filing of an Employee Retirement Income Security Act (ERISA) excessive fee lawsuit, the parties signed a settlement agreement.
In the complaint filed in the U.S. District Court for the Southern District of Illinois, participants of the Philips North America LLC 401(k) plan noted that, as of December 31, 2014, the plan offered 11 Vanguard mutual funds, Vanguard collective trust target-date funds (TDFs) and three non-Vanguard mutual funds.
Plaintiffs’ first bone of contention was that the company offered the “microscopically low-yielding” Vanguard Prime Money Market Fund, rather than a stable value fund that would have provided better returns while preserving capital and liquidity without any greater increase in risk compared with money market investments. The complaint suggests most 401(k) plans offer stable value funds.
As for other funds offered in the plan, the complaint said that, rather than taking advantage of the plan’s economies of scale, as required by its investment policy statement (IPS), to reduce the investment expenses charged to plan participants, Philips North America selected and maintained high-priced share classes of mutual funds, instead of identical lower-cost share classes of those same mutual funds, which were readily available to the plan.
DOL Wins Restitution of Misused 401(k) Assets
The U.S. District Court for the Middle District of Tennessee has ordered eye-care company Eye Centers of Tennessee LLC, its owner, Dr. Larry E. Patterson, and its office administrator, Raymond K. Mays, to pay $971,622 in restitution to the company’s 401(k) plan after an investigation by the Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) found violations of the Employee Retirement Income Security Act (ERISA).
This amount is in addition to the $788,850 the defendants paid to the plan in May 2016 as restitution in a related criminal matter. The court also ordered that Eye Centers of Tennessee, Patterson and Mays be removed as fiduciaries and permanently enjoined from serving as fiduciaries to any future employee benefit plans.
The EBSA investigation found that Patterson and Mays—the plan’s trustees—used plan assets to pay $344,225 to Park Street Properties, which Mays owned. They also transferred $782,250 in plan assets to Maple Leaf Development LLC, which both men owned; $17,077 to Upper Cumberland Building Consultants LLC, which was owned by Mays’ brother; and $50,000 worth of plan’s assets back to Eye Centers of Tennessee.
Wells Fargo Faces Revenue-Sharing Lawsuit
The Chattanooga Fire & Police Pension Fund filed a complaint in Tennessee state court asking for a full accounting from Wells Fargo of any compensation it has received from third parties during its years as trustee of the fund.
According to correspondence between the fund and the bank reviewed by The Wall Street Journal, the bank admitted it had kept revenue-sharing payments it owed to the retirement fund. Wells Fargo said this resulted from “a system set-up error.”
According to the Journal, the bank recently told the pension fund that the system problem had been corrected. However, the retirement fund disagrees with the amount of revenue sharing Wells Fargo says it received.
In a statement provided to PLANADVISER, Wells Fargo said, “We acknowledge that because there was a change directed by the client in 2017, we made an error in setting up the revenue sharing associated with that change appropriately, and the revenue-share rebates did not occur as intended. We are sorry this error occurred, and upon discovery, the issue was fixed, and the total revenue share received from the third-party fund companies (approximately $15,000) was returned to the pension fund. We have been in active dialogue with the client and have been committed to resolving this matter and are disappointed they felt the need to file a complaint requesting information we have provided and are very willing to provide.”
ERISA Lawsuit Against Lowe’s, Aon Hewitt
The latest example of Employee Retirement Income Security Act (ERISA) litigation has been filed in the U.S. District Court for the Western District of North Carolina, targeting both the Lowe’s Companies Inc. and Aon Hewitt Investment Consulting for a number of alleged fiduciary breaches.
The core of the complaint is as follows: “Lowe’s imprudently selected and retained the Hewitt Growth Fund for the [company 401(k)] plan, in consultation with Hewitt (which served as the plan’s fiduciary investment consultant), despite the fact that: 1) The Hewitt Growth Fund was a new and largely untested fund at the time it was added to the plan; 2) The … fund was underperforming its benchmark at the time it was added … and continued to underperform after[ward]; and 3) The fund was not utilized by fiduciaries of any similarly sized plans and was generally unpopular in the marketplace.”
According to the text of the complaint, defendants placed $1 billion of the Lowe’s 401(k)’s assets into the new fund. At least some of the money, plaintiffs allege, was inappropriately reallocated from eight existing funds in the plan, “which were generally performing well,” when the Hewitt Growth Fund replaced these options on the investment menu.
Prison Time for Two ERISA Fraudsters
An investigation by the U.S. Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) and the FBI has led to prison sentences for two former officials of First Farmers Financial LLC (FFF) in Orlando, Florida.
Both officials have entered guilty pleas for their involvement in the sale of $179 million in fraudulent loans to a Milwaukee company that provided investment services to 42 retirement plans covered by the Employee Retirement Income Security Act (ERISA). Following the guilty pleas, the U.S. District Court for the Northern District of Illinois sentenced former FFF President Timothy Fisher to 120 months in prison, then two years’ supervised release, and ordered restitution of $27,651,838. Fisher pled guilty to money laundering.
According to the DOL and FBI, Fisher’s plea agreement follows the March 6 sentencing of former CEO Nikesh Patel, who pleaded guilty to five counts of wire fraud in connection with the sale of the loans. The court sentenced Patel to 25 years in prison and three years of supervised release, and ordered him to make $174,791,812 in restitution to the sham loan scheme’s victims, including 42 retirement plans.
DOL Issues Further ESG Guidance
The Department of Labor (DOL) has issued Field Assistance Bulletin (FAB) No. 2018-01, which provides guidance to the Employee Benefits Security Administration (EBSA)’s national and regional offices to assist in addressing questions they may receive from plan fiduciaries and other interested stakeholders about the exercise of shareholder rights and written investment policy statements (ISPs) in relation to Interpretive Bulletin (IB) 2015-01, which concerns “economically targeted investments” (ETIs).
The DOL directly acknowledged that environmental, social and governance (ESG) factors “may have a direct relationship to the economic and financial value of an investment. When they do, these factors are more than just tiebreakers, but rather are proper components of the fiduciary’s analysis of the economic and financial merits of competing investment choices.”
But, in the new FAB, the DOL says fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision. “It does not ineluctably follow from the fact that an investment promotes ESG factors, or that it arguably promotes positive general market trends or industry growth, that the investment is a prudent choice for retirement or other investors,” the FAB says. “Rather, ERISA [Employee Retirement Income Security Act] fiduciaries must always put first the economic interests of the plan in providing retirement benefits. A fiduciary’s evaluation of the economics of an investment should be focused on financial factors that have a material effect on the return,” the FAB says.