Compliance News
Art by Clarissa Liu
Bills Addresses Retirement Plan Access
A package of bills sponsored by Senators Cory Booker, D-New Jersey, Tom Cotton, R-Alaska, Heidi Heitkamp, D-North Dakota, and Todd Young, R-Indiana, would increase access to workplace retirement savings accounts, help workers who already have retirement accounts save more, and prevent leakage from retirement accounts by making it easier for people to save for short-term needs.
Specifically, the four bills would:
• Increase access to workplace retirement plans by allowing for pooled employer plans (PEPs), which will make it easier for small business owners to offer retirement benefits to their employees;
• Boost retirement savings by incentivizing employers to adopt plans with automatic enrollment;
• Reduce emergency withdrawals from retirement accounts and increase short-term savings by allowing employers to automatically enroll their workers in emergency savings accounts (also called sidecar accounts); and
• Make it easier for individuals to automatically save their tax refunds.
Court Upholds Rainbow ESOP Challenge
The U.S. District Court for the Central District of California has denied defendants’ motions to dismiss a complex lawsuit involving the allegedly imprudent and disloyal sale of employee stock ownership plan (ESOP) assets.
Several corporate entities are involved in the matter, including Rainbow Disposal Co., Southeastern Renewables, West Florida Recycling and Republic Services. In reaching this decision, the court considered five distinct motions to dismiss filed by defendants, which the plaintiffs opposed in a single omnibus brief—in response to which defendants filed separate replies. After reviewing the extensive written arguments, the court denied all the motions to dismiss.
Plaintiffs in the lawsuit are participants and beneficiaries of the Rainbow Disposal Co. Inc. Employee Stock Ownership Plan, who seek to restore losses to the plan and to otherwise remedy a complicated series of alleged breaches of fiduciary duty under the Employee Retirement Income Security Act (ERISA). In all, some 14 counts are included in the underlying complaint.
The text of the decision shows that on July 1, 1995, the plan was first created and held 100% of Rainbow’s stock. The plan is governed by a plan document, which was restated most recently in 2004. As noted in the text of the decision, the plan document includes a number of original provisions and ad hoc amendments made over a series of years that are relevant to the court’s thinking.
The lawsuit alleges a long and complicated series of alleged bad-faith dealings made by the executive leadership of Rainbow, through which they funded the creation of new companies and otherwise redirected ESOP assets. Apart from allegedly violating the plan document, these investments caused losses to the Rainbow ESOP while benefiting the executives, according to plaintiffs. Eventually the entire amount of Rainbow stock was unilaterally sold to a third party, triggering the filing of the lawsuit.
District Court Sides with Checksmart, Cetera
The U.S. District Court for the Southern District of Ohio has ruled in favor of the defense in an Employee Retirement Income Security Act (ERISA) excessive fee lawsuit targeting Checksmart Financial’s defined contribution (DC) plan and Cetera Advisors.
The original lawsuit was filed by a participant in the Checksmart Financial 401(k) Plan, contending in various ways that fees for funds offered in the plan are excessive. The plaintiff accused Checksmart, its plan committee, and the plan’s investment adviser, Cetera Advisor Network, of offering only expensive and unsuitable actively managed mutual funds, without an adequate or appropriate number of passively managed and less expensive mutual fund investment options.
According to the complaint, most investment options in the plan had expense ratios of 88 basis points (bps) to 111 bps, which, the complaint says, are four or more times greater than retail passively managed funds, the latter not being made available to the plan and its participants during the class period. In addition, the average expense of all funds was 104 bps, according to the complaint.
Simply put, the decision states that the plaintiff’s claims “are foreclosed by ERISA’s statute of limitations.” The court explained at it has applied the shorter of ERISA’s statute of limitations periods, based on date the plaintiff gained “actual knowledge” of the alleged breaches of fiduciary duty. Two issues orbit around this question, the decision explained. These are, one, the nature of the alleged breaches of fiduciary duty, and two, the definition of “actual knowledge.”
A Boost for Plans at Small Businesses
The SIMPLE [Savings Incentive Match PLan for Employees] Plan Modernization Act has been introduced by Senators Susan Collins, R-Maine, and Mark Warner, D-Virginia, to provide greater flexibility and access to small business employers and employees seeking to use SIMPLE plans to save for retirement. SIMPLE retirement plans were first introduced by Congress for businesses with 100 or fewer employees in the Small Business Job Protection Act of 1996.
The new law would raise the contribution limit for SIMPLE plans from $12,500 to $15,500 for the smallest businesses—those with one to 25 employees—along with an increase in the catch-up limit from $3,000 to $4,500. It would give businesses with 26 to 100 employees the option of the higher limits. Should they move to the higher limits, it would increase their SIMPLE plan mandatory employer contribution requirements by 1 percentage point. Further, it would allow for a reasonable transition period for employers whose hiring goes above 25 employees. It would also make the limit increases unavailable if the employer has had another defined contribution (DC) plan in the past three years.
The law, additionally, would modernize the SIMPLE plan form filing requirements and modify the transition rules from SIMPLE plans to traditional plans to facilitate and encourage such transactions. Finally, it would direct Congress to study the use of SIMPLE plans and report to Congress on such use, along with any recommendations.
Retirement Savings Lost and Found Act
U.S. Senators Elizabeth Warren, D-Massachusetts, and Steve Daines, R-Montana, have reintroduced legislation previously introduced in 2016, aimed at addressing the retirement plan missing participant problem. The Retirement Savings Lost and Found Act of 2018 would set up a lost and found online database that uses the data employers are already required to report, so that any worker can locate all of his former employer-sponsored retirement accounts. According to the bill text, the Retirement Savings Lost and Found Act will enable individuals to view contact information for only the plan administrator of any plans of which he is a participant or beneficiary, sufficient to let him locate his plan.
Under the bill, a plan that failed to find a missing participant would not be treated as violating the required minimum distribution (RMD) rules and the Employee Retirement Income Security Act (ERISA) fiduciary rules if it has fulfilled certain requirements. These include making at least one—i.e., unsuccessful—attempt to contact the individual at the most recent address for him in the plan records, by certified mail or other similar delivery service if that address is a physical address, and by electronic mail or other electronic communication if the only address on record is an electronic one, plus taking at least one—or two, if the plan records contain only an electronic address—additional measure.
Allergan Wins Stock Drop Case Dismissal
The U.S. District Court for the District of New Jersey has ruled strongly against plaintiffs in a stock drop lawsuit filed by employees of Allergan in the wake of the firm’s acquisition by Actavis.
Plaintiffs had filed their class action challenge more than a year ago against the Allergan Inc. Savings and Investment Plan and the Actavis Inc. 401(k) Plan, claiming breaches pursuant to Sections 404, 405, 409 and 502 of the Employee Retirement Income Security Act (ERISA). According to the initial complaint, the defendants “permitted the plans to continue to offer Allergan Stock as an investment option to participants even after the defendants knew or should have known that Allergan Stock was artificially inflated during the proposed class period,” which ran from February 25, 2014, to November 2, 2016.
Ruling in favor of a detailed motion to dismiss filed by defendants, the court cites a long list of precedent-setting cases, including the U.S. Supreme Court (SCOTUS)’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer. While SCOTUS made clear in that ruling that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, it also determined that “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing stock are implausible as a general rule, at least in the absence of special circumstances.” In addition, for claims alleging a fiduciary breach based on nonpublic information, the Supreme Court held that plaintiffs must “plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.”
As in other stock drop cases, the plaintiffs here have flatly failed to meet this high bar for proving standing. For example, on the matter of proving that plan fiduciaries should have known that the employer stock price was inflated, the court concludes that the plaintiffs’ examples, do not rise above the speculative level of misconduct.