Legislative and Judicial Actions
Art by Dalbert B. Vilarino
GAO Is Asked to Review TDFs
Senator Patty Murray, D-Washington, chairwoman of the Senate Health, Education, Labor and Pensions (HELP) Committee, and House Representative Bobby Scott, D-Virginia, chairman of the House Education and Labor Committee, have sent a letter to the Government Accountability Office (GAO), requesting it conduct a review of target-date funds (TDFs).
According to the legislators, while TDFs are billed as offering participants retirement security by placing their assets in an age-appropriate glide path that grows more conservative as they approach retirement, some of the funds might actually be placing some participants at risk. Specifically, they say, expenses and risk allocations vary considerably among funds.
Murray and Scott requested the GAO look into 10 aspects of TDFs. These are:
- What percentage of total defined contribution (DC) plan assets are invested in TDFs, as well as what percentage of participants are offered and participate in TDFs?
- For participants invested in TDFs who are approaching retirement, to what extent have they been affected by market fluctuations as a result of the COVID-19 pandemic—and how much variation is there in the performance of TDFs of the same vintage?
- Do investors defaulted into TDFs reassess their investments, and, if so, how often?
- How does the asset allocation and fee structure vary across TDFs used as qualified default investment alternatives (QDIAs)? Along this line, how do TDF fee structures compare with other investment products?
- How are TDFs marketed and advertised?
- What percentage of plan sponsors select off-the-shelf TDFs and what percentage turn to custom TDFs? Does one or the other deliver different performance?
- What kinds of alternative investments do TDFs invest in?
- Has the Department of Labor (DOL) taken steps to help sponsors select appropriate TDFs for their plan and to help educate participants about these funds?
- When a plan does not have automatic enrollment but has a TDF in its investment lineup, what percentage of participants select the TDF?
- Are there legislative or regulatory measures that could protect plan participants?
Complementary ‘SECURE 2.0’ Legislation
A bipartisan trio of senators has introduced a bill called the Improving Access to Retirement Savings Act, which, among other goals, would extend new retirement plan choices to nonprofit groups and expand and clarify incentives to encourage small businesses to offer plans to their employees.
The legislation parallels, but does not exactly match, the Securing a Strong Retirement Act, a piece of legislation recently introduced in the House of Representatives and a recipient of a unanimous affirmative vote from the House Ways and Means Committee. Lawmakers in the House have taken to calling the bill “SECURE 2.0,” recognizing how it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Sponsors of the Improving Access to Retirement Savings Act include Senator Chuck Grassley, R-Iowa; Senator Maggie Hassan, D-New Hampshire; and Senator James Lankford, R-Oklahoma. The legislators say their bill provides common-sense, bipartisan solutions that will help address the challenges and obstacles that continue to inhibit adequate saving and make it difficult for people to manage their income during retirement.
Passage of SECURE 2.0 in the full House and passage of the Improving Access to Retirement Savings Act in the Senate could lead to a reconciliation process that would eventually see a compromise piece of legislation become law.
2022 HSA Contribution Limits Are Inflation-Adjusted
The IRS has published Revenue Procedure (Rev. Proc.) 2021-25, setting the 2022 inflation-adjusted amounts for contributions to health savings accounts (HSAs), as determined under Section 223 of the Internal Revenue Code (IRC).
For calendar year 2022, the annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan (HDHP) is $3,650, up $50 from this year’s limit. The annual limitation on deductions for an individual with family coverage under an HDHP is $7,300, up $100. The new revenue procedure defines an HDHP for calendar year 2022 as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and for which annual out-of-pocket expenses—i.e., deductibles, co-payments and other amounts, but not premiums—do not exceed $7,050 for self-only coverage or $14,100 for family coverage.
Wells Fargo 401(k) Self-Dealing Suit
A federal district court judge has moved forward a lawsuit alleging that Wells Fargo 401(k) plan fiduciaries should have been able to obtain superior investment products at a very low cost but instead chose proprietary products for their own benefit, increasing fee revenue for the company and providing seed money to newly created Wells Fargo funds.
The lawsuit, filed in March 2020, claims that, upon the creation of the Wells Fargo/State Street Target CITs [collective investment trusts] in 2016, the committee defendants added the CITs to the plan even though the funds had no prior performance history or track record that could demonstrate they were prudent. Despite the lack of a track record, the committee defendants “mapped” nearly $5 billion of participant retirement savings from the plan’s previous target-date option into the Target CITs.
In addition, the plaintiff alleges that the committee defendants used the plan’s assets to seed the Wells Fargo/Causeway International Value Fund, as evidenced by the fact that the plan’s assets constituted over 50% of the total assets in the fund at year-end 2014. “Without such a substantial investment from the plan, Wells Fargo’s ability to market its new, untested fund would have been greatly diminished,” the complaint states.
The lawsuit further alleges that plan fiduciaries selected and retained for the plan 17 Wells Fargo proprietary funds, many of which underperformed the benchmark that the defendants selected as an appropriate broad-based market index for each fund.
The defendants argued that the fiduciary breach allegations should be dismissed because they fail to give rise to an inference of imprudence or disloyalty. The defendants said the Target Date CITs and the Causeway fund could not have been offered to generate seed money when the Target CITs were designed exclusively for the plan, and the investment manager of the Causeway fund was unaffiliated with Wells Fargo. They also argued that the Target CITs were modeled after two other substantially similar investments with extensive track records.
The defendants said the plaintiff failed to identify suitable comparators to establish that the Wells Fargo funds charged excessive fees. However, Judge Donovan W. Frank of the U.S. District Court for the District of Minnesota decided that the plaintiff’s “numerous and specific allegations are sufficient to support an inference of imprudence and disloyalty.”
Frank also found that the plaintiff plausibly pleaded that the defendants engaged in transactions prohibited under the Employee Retirement Income Security Act (ERISA). He said the plaintiff plausibly alleged that the defendants caused the plan to purchase property in Wells Fargo-affiliated funds from Wells Fargo and Wells Fargo Bank, which are parties-in-interest; that defendants Wells Fargo Bank and Galliard Capital Management caused the transfer of plan assets to Wells Fargo and its affiliates through fees associated with the Wells Fargo funds; and that Wells Fargo and Galliard seeded newly launched funds and directed revenue to Wells Fargo from the plan’s assets through fees.
“The court finds that [the plaintiff’s] allegations are far more than general assertions and that, accepted as true, show that defendants engaged in prohibited transactions,” Frank wrote in his opinion. “The court similarly finds that whether any prohibited transaction exemption applies to [the plaintiff’s] claims is an affirmative defense that cannot be resolved on a motion to dismiss.”
CalSavers Suit Dismissed Again
The 9th U.S. Circuit Court of Appeals has affirmed the District Court for the Eastern District of California’s dismissal of claims made by a group that sought to block California’s state-run automatic individual retirement account (IRA) program.
The lawsuit, filed by the Howard Jarvis Taxpayers Association, sought to block the CalSavers Retirement Savings Program on the grounds that the Employee Retirement Income Security Act (ERISA) pre-empts CalSavers, therefore invalidating the program.
In its dismissal, the court found that ERISA does not pre-empt CalSavers. “We hold that the pre-emption challenge fails,” it said in its ruling. “CalSavers is not an ERISA plan, because it is established and maintained by the state, not employers; it does not require employers to operate their own ERISA plans; and it does not have an impermissible reference to or connection with ERISA. Nor does CalSavers interfere with ERISA’s core purposes. Accordingly, ERISA does not pre-empt the California law.”
The case was previously dismissed last March, after a lower court found no impermissible reference to or connection with ERISA plans in the statute. In his dismissal, U.S. District Judge Morrison C. England Jr. had noted that, per ERISA, the legislation establishing the CalSavers program would “supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.” He stated that an “employee pension plan” is “any plan, fund or program … established or maintained by an employer” that provides retirement income to employees.
New York City Mayor Approves Auto-Enroll IRA Program
New York City Mayor Bill de Blasio, on May 12, signed a measure to create a city-facilitated retirement savings program for private-sector employees. The legislative action will create a mandatory automatic enrollment individual retirement account (IRA) program for employers in New York City that do not offer a retirement plan and that employ at least five people. According to a summary published on the New York City Council website, the default employee contribution rate would be 5%, which employees could adjust up or down, or opt out of at any time, up to the annual IRA maximum of $6,000—or $7,000 if age 50 or older. The plan would be portable, so that when employees switch jobs they can continue to contribute or roll over their accounts into other retirement savings plans. Employers would not contribute to the IRA on behalf of employees.
The council voted to establish a retirement savings board to facilitate the implementation of the retirement security program. The board would consist of three members, who would be appointed by the New York City mayor.
The council summary cites the fact that, out of roughly 3.5 million private-sector workers in the city, only about 41% have access to an employer-sponsored retirement plan. This is lower than the national average, which the council estimates at 53%, and down from 49% a decade ago. Even more troubling, according to the council’s data, 40% of New Yorkers near retirement age have less than $10,000 saved for post-employment.
Columbia University Settles Fee Suit
Parties in a lawsuit alleging fiduciaries of two Columbia University retirement plans engaged in breaches of the Employee Retirement Income Security Act (ERISA) that caused participants to pay excessive fees have agreed to settle.
The case is a consolidation of two lawsuits filed within the same week in 2016. In 2019, U.S. Magistrate Judge Stewart D. Aaron of the U.S. District Court for the Southern District of New York recommended a district court judge deny Columbia University’s motion to dismiss claims in the combined lawsuit as well as its motion to throw out some testimony by plaintiffs’ expert witnesses.
Allegations in the lawsuit included that the university selected and retained expensive and poor-performing investment options that consistently and historically underperformed their benchmarks and similar funds. In addition, the complaint said the school loaded the plans—the Retirement Plan for Officers of Columbia University and the Columbia University Voluntary Retirement Savings Plan—with many retail share class options that were more expensive than the institutional share class options in the same mutual funds that were otherwise available for it to include in the plans.
The complaint also called out annuity products offered by the plans, which have restrictions for when participants may liquidate assets in the products and will charge a surrender fee if they liquidate assets before the restriction period.
According to the complaint, the university used two recordkeepers for its plans, TIAA and The Vanguard Group Inc., which caused participants to pay duplicative, excessive and unreasonable fees for plan recordkeeping and administrative services.
The settlement agreement says Columbia University “denies all liability for the claims made in the class action and maintains that it is without any fault or liability.”