Compliance March 22, 2016

Question of Timing Focus of Top Hat Plan Lawsuit

Because an appellate court found claims against Marriott's plan were time-barred, it did not consider the question of whether the plan was a top hat plan.
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The 4th U.S. Circuit Court of Appeals granted summary judgment to Marriott International in a lawsuit claiming that its Stock and Cash Incentive Plan was not a top hat plan and was subject to vesting requirements of the Employee Retirement Income Security Act (ERISA).

The plaintiffs in the case—former participants in the plan—argued that the plan was not a top hat plan originally because it did not cover only a select group of management or highly compensated employees, as defined by ERISA. At one time the plan covered more than 2,500 employees, but it was amended after a Department of Labor (DOL) 1990 advisory opinion letter, and after that covered only about 100 employees. The plan used a prorated vesting schedule based on each participant’s time until he or she reached age 65. The plaintiffs in the case did not fully vest in their benefits because they left employment before reaching age 65.

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However, although an amicus brief was filed by the DOL reiterating this definition, the court did not focus on whether the plan was a top hat plan, but focused on Marriott’s appeal that a district court erred in finding the claim “timely.”  The court noted that except for breach of fiduciary duty claims, ERISA contains no specific statute of limitations, and it therefore looked to state law to find the most analogous limitations period. It found that Maryland’s three-year statute of limitations for contract actions applies.

A district court had determined that an ERISA cause of action does not accrue until a claim of benefits has been made and formally denied, but the appellate court said the district court applied the wrong analysis. In a previous case, the 4th Circuit found that “a formal denial is not required if there has already been a repudiation of benefits by the fiduciary which was clear and made know to the beneficiary.”

With this in mind, the court found that a 1978 prospectus of the plan clearly stated that it was intended to be a top hat plan and did not need to comply with ERISA vesting requirements. The same language was included in prospectuses distributed in 1980, 1986 and 1991.

Since it found that the plaintiffs’ claims were untimely, it reversed a district court opinion and granted summary judgment to Marriott. However, the appellate court noted that since it did not reach the question of whether Marriott’s plan was a valid top hat plan, it vacated the district court’s decision on that. There may be more to come on this case.

The opinion in Bond v. Marriott International is here.

Compliance March 22, 2016

Examining the Fiduciary Rule Proposal’s Education Carve-Out

Among the many provisions and definitions in the forthcoming DOL fiduciary rule will likely be an “education carve-out,” considered to be one of the most high-stakes elements of the rulemaking for retirement plan industry providers.
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ERISA attorneys will be looking to learn a lot from the final version of the fiduciary rule, expected any day now from the Department of Labor (DOL) and the Office of Management and Budget (OMB).

Two of the most widely quoted voices in the often-contentious debate that has surrounded the rulemaking effort are Brad Campbell, counsel in Drinker, Biddle and Reath’s Employee Benefits & Executive Compensation Practice Group, and Fred Reish, a partner in the firm who leads the teams dedicated to employee benefits, compensation and financial service.

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The pair recently hosted a webcast covering the fiduciary rule in-depth, highlighting a variety of elements in the complex regulation that could derail current industry practices around variable compensation and other real or perceived sources of conflicts of interest. During the call, Reish and Campbell repeatedly stressed that the “education carve-out will be vital to how advisers, recordkeepers and investment managers set up and rely on call centers, and how they talk to participants and retirees.”

Reish explains the DOL’s proposed version of the rulemaking would bring most service providers touching a retirement plan into the fiduciary relationship, “meaning they could no longer make recommendations that will directly or indirectly increase their own compensation without potentially triggering a prohibited transaction.” Many service providers have expressed worry that the sources currently providing the most basic and widely available education and advice—the call centers of defined contribution plan recordkeepers and investment managers—will be prohibited from answering any questions that touch on specific products. Some worry that the rule, as proposed, will be so strict that any discussions about portfolio allocations or different asset classes might also range into the realm of fiduciary advice. 

In an effort to appease these and other concerns, the DOL rulemaking includes an extensive number of “carve-out” provisions, among them the “education carve-out,” which would discount some forms of non-product focused investment education from the range of services to be brought under the fiduciary umbrella.  

“Under the carve-out, services that constitute pure investment education—including call centers providing general information about the different forms of accounts or distributions and the important considerations for using each—would probably not be considered fiduciary advice under the proposal. However, it will be important to keep in mind that under the rule, ‘education’ is not a vague concept to be skimmed over in a general discussion about products. The education should be unbiased and complete, and avoid discussion of individual products.”

NEXT: More on this key carve-out 

Reish and Campbell further explain that in the proposed version of the fiduciary rule, asset-allocation models and educational charts showing the performance of different asset classes “probably would also just be education, not fiduciary advice.” But, Campbell warns, “if you start to mention specific products at all or start to answer these questions, that is almost certainly going to be fiduciary advice. Even if a participant asks you directly, you won’t be able to answer it.” 

This is the basis of the industry concern that call centers may have to stop answering even very simple questions from defined contribution (DC) plan participants, even questions that would not present much of an opportunity for conflict or harm. 

Not a surprise, Reish and Campbell say they will be closely reading the final version of the rule to see how it addresses these concerns, “which the industry has voiced very clearly by now.” A related aspect to watch closely, they suggest, is how the DOL “handles the large-plan carve-out for advice,” which would essentially give plans with $100 million or more in assets more flexibility to solicit investment advice on a non-fiduciary basis.

“As we take the proposal, if a plan has $100 million or more, I can give fairly specific investment information to that plan without being a fiduciary,” Campbell explains. “How this part of the proposal is or is not modified will be significant in terms of what compliance challenges the industry faces and, ultimately, what paths of communication and compensation are available under the final rule.”

One potential outcome is that the DOL will lower that asset hurdle or find another way to allow plans to continue to bring in some basic level of education from non-fiduciary providers. “We think DOL will fix some of this with respect to DC plans,” Reish says. “If you want to come in an talk about one product or one asset class, they’ll probably force you to mention a list of options that could serve the client equally well. On the individual retirement account (IRA) side, it is even more tricky to see how this carve-out would be workable, given the way IRA platforms are structured today. So this will be very important.”

“This will be yet another important aspect to watch for, the platform provider carve-out, and whether it will be workable for IRA providers,” Campbell agrees. “The proposal includes some limitations on when investment and DC recordkeeping platform providers will be considered fiduciaries, but it doesn’t seem to apply the limitations to IRA platforms. There is not an automatic carve-out for IRA providers, in other words, but many people would like to see this change in the final version.”

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