Legal Developments in Retirement Plans

Compliance.BLOGSo far, 2016 is off to a wild start in the world of retirement plans.

The Department of Labor (DOL) remains committed to its mission of providing transparency for plan participants. To that end, on January 29, the DOL sent its proposed Fiduciary Rule to the Office of Management and Budget (OMB) for final review. This proposed rule seeks to help protect plan participants from the hidden fees that lurk deep within plan investments, operations, and transfers. Among other things, the Fiduciary Rule would require advisers to disclose all the ways they receive indirect compensation and require them to put the best interest of plan participants and beneficiaries first. The OMB generally has up to 90 days to review a rule before it is released to the public for comment.

Fiduciary rules are also a hot topic in the halls of Congress. The House Committee on Education and the Workforce has already approved two related bills: (1) The Affordable Retirement Advice Protection Act (ARAP Act: yes, really, a “RAP” Act), and the Strengthening Access to Valuable Education and Retirement Support Act (SAVERS Act). The House Ways and Means Committee has also approved the SAVERS Act. These bills are not as harsh on the investment managers as the DOL rule. However, their passage could delay the DOL’s final fiduciary rule, since the bills would require an affirmative vote by Congress before the DOL fiduciary rule goes into effect.

Outside of these Washington, D.C. initiatives, employer plan sponsors have been hit with differing forms of “retirement plan malpractice claims.” Three claims filed already this year are highlighted below.

Bell v. Anthem: Here, participants allege that employer plan fiduciaries allowed them to be charged unreasonable administration expenses resulting in $18 million in participant losses. The complaint also alleges that management selected and kept high-cost investments, even investments that were not performing well, instead of replacing them with available, lower cost, better-performing alternatives. While Anthem had recently reduced plan fees by replacing some mutual funds with lower cost alternatives, the plaintiffs claimed the reduced fees were still too high in comparison to market alternatives. In fact, the plaintiffs demonstrated that there was a comparable fund available at half the cost of the one selected. Because Anthem’s plan has over $5 billion in assets and almost 60,000 employees, plaintiffs further argued plan fiduciaries should have used some of that clout to negotiate significantly reduced fees for participants.

In Rosen v. Prudential, the plaintiffs claim that Prudential charged and collected excessive fees. Allegedly, revenue-sharing payments, which are generally legal, were called “services fees” or “reimbursements for expenses incurred” in providing services for, to, or on behalf of the mutual funds. The plaintiffs claim this was blatantly deceptive, because the fees charged had no relationship to the services performed. Further, the complaint hints that “kickback payments” were exchanged by Prudential and other investment service providers as part of a “pay-to-play” scheme. 

Plan sponsors are seeing an increase in this type of “partnership marketing” in the field of retirement plan services. Providers from different companies market a “partnership” of services to plans. When one partner makes a sale to a plan, they then share the plan’s business with other partners. In doing so, they also share fees that are already built into the funds offered as retirement-plan investments. The Prudential complaint demonstrates the risks associated with these fee arrangements, much like a complaint filed recently in Colorado.

Korkorkian v. Great West Life Annuity and Insurance Co. was filed in Colorado on January 16, 2016. The complaint charges that Empower engaged in self-dealing and excess fee generation in its own best interest. Empower was formed in 2014 with the merger of Great-West Retirement Services, the retirement business of Putnam Investments, and J.P. Morgan Retirement Plan Services. The claim is that Empower entered into arrangements with mutual funds, affiliates of mutual funds, fund advisers, sub-advisers, and others for which Empower received revenue-sharing payments “for its own benefit … in violation of the prohibited transaction rules” of ERISA.

Lessons to be Learned

MSEC emphasizes that one of the most important lessons learned from this new breed of case is that as employer plan fiduciaries and trustees, your primary duty is to monitor the plan, pay attention to fees and investments, ask questions, and challenge the providers to demonstrate the value of their services for the revenue-sharing payments most of them receive. When a provider does not provide clear answers and transparent information, do not be afraid to make changes in those relationships. A hassle? Yes. Worth doing anyway? Absolutely.

Plaintiffs’ attorneys look for potentially deep pockets. Employer plan sponsors must carefully watch, listen, and monitor for all sorts of potential claims. Attorneys for employer plan sponsors have said that some of their clients “have had employees in their plans get solicitation letters directly from plaintiffs’ attorneys, looking to identify employees or retirees who participant in 401(k) plans, to see if they’d be willing to sue their plan sponsors.”

Employers need to make sure that plan documents are consistent and that the plan operations follow the written documents. We must ensure that required filings are made, plan disclosures all line up, and that fees are as clear and transparent as possible. Plaintiffs’ attorneys are aggressively searching for the gaps. Employers are well advised to find and correct any missteps before plaintiffs’ attorneys do.