The US Department of Labor’s new fiduciary rule is aimed at financial advisors, including brokers, who provide retirement plan services. However, the new rule will impact compliance obligations and potentially, costs for plan sponsors, as highlighted in the following presentation.
In the last several months, plaintiffs have filed multiple class action lawsuits against plan sponsors, plan fiduciaries and stable value fund providers. These lawsuits, which have involved 401(k) plans sponsored by large corporations, have alleged that:
These lawsuits have also included allegations that plan fiduciaries breached their fiduciary duties of loyalty and prudence under ERISA by:
Plan sponsors and plan fiduciaries face a particularly difficult bind with respect to the offering of a stable value investment option as, ironically, they have been challenged for offering stable value funds and equally fornot offering them. For example, in addition to the stable value fund allegations described above, plaintiffs have sued some plans for failing to offer stable value funds, because money market funds—a fixed income investment alternative—have produced historically low returns. In fact, such lawsuits note that most large 401(k) plans offer stable value funds and criticize plan sponsors for their failure to conform.
As a result of this wave of lawsuits, plan sponsors and plan fiduciaries should evaluate the process they use to decide to invest in stable value funds, as well as the process they use to monitor investment management and recordkeeping fees more generally. Plan sponsors and plan fiduciaries must carefully select expert investment advisers and understand the expert’s advice before applying it. Plan fiduciaries that do not currently offer a stable value investment option should examine their fund lineups to ensure that the lineups provide an adequate fixed income investment at a reasonable cost to plan participants.
In addition, plan sponsors and plan fiduciaries should establish and maintain an investment policy, which they should use to rigorously monitor investment options and related fees. Plan fiduciaries should also document the process for making fiduciary decisions and be able to demonstrate that they considered quality, service and price in selecting and monitoring investment options. This documentation of the investment selection and monitoring process is crucial to defending against the recent onslaught of stable value fund and other related lawsuits.
The US Court of Appeals for the Second Circuit’s recent ruling addresses various issues that could arise during a plan administrator’s review of a participant’s benefit claim and appeal and any ensuing litigation, including the deference to be granted upon review in a federal court, civil penalties and the possibility of introducing additional evidence outside the administrative record. This decision demonstrates the need for employers to review their benefit plans’ claims procedures to ensure they comply with applicable law and best practices.
After more than five years of development and revision, the US Department of Labor (DOL) released final regulations to redefine a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code of 1986, as amended (the Code).
Sponsors of nonqualified deferred compensation plans should pay close attention to the special tax withholding rules under the Federal Insurance Contributions Act (FICA) to avoid paying interest and penalties, and potentially being sued by plan participants. FICA tax on nonqualified deferred compensation must be withheld when compensation vests, not later when actually paid out. Failure to withhold FICA tax at the time of vesting will cause the compensation plus any earnings to be subject to FICA tax later as it is distributed to the participant, potentially resulting in higher overall FICA taxes for both the employer and the participant. As shown by the case of Davidson v. Henkel, employees may even successfully sue the employer for causing them to receive lower benefits due to the higher tax burden created by a failure to follow the correct withholding rules.
This article explores the common FICA and Additional Medicare Tax withholding errors and the potential remedies that may be available to employers who fail to timely withhold FICA and/or Additional Medicare Tax on nonqualified deferred compensation.
Since 2014, large church-controlled health systems that offer defined benefit pension plans have seen lawsuits filed as to whether such plans are eligible to qualify for the ERISA church-plan exemption, which governs those arrangements. When a retirement plan meets the ERISA church-plan exemption, it is exempt from the typical funding and vesting requirements of ERISA and the Internal Revenue Code as well as from the ERISA reporting and disclosure requirements. As the church-plan litigation moves to the appellate level, two adverse decisions are reached denying ERISA church-plan exemption to two health systems.
Recent comments from an official with the Department of Labor (DOL) indicate that the DOL’s Employee Benefits Security Administration (EBSA) has begun investigating large defined benefit plans to review how plan administrators are keeping track of benefits owed to terminated vested participants and if they are really paying participants like they should be. According to the February 2, 2015 BNA Pension & Benefits Reporter, Elizabeth Hopkins, counsel for appellate and special litigation for the DOL’s Office of the Solicitor, Plan Benefits Security Division, stated at a pension conference that EBSA is interested in monitoring whether plan administrators are following their own procedures to locate and pay out terminated vested participants. In particular, EBSA is investigating how plan administrators locate and pay out terminated vested participants over the age of 70 ½ who are owed required minimum distributions.
Defined benefit pension plans must provide that they will distribute benefits beginning no later than the required beginning date, which for most plan participants means April 1 of the calendar year following the later of (i) the calendar year in which a participant turns 70 ½ or (2) the calendar year in which the participant retires. As we noted in our recent article on the “Top IRS and DOL Audit Issues for Retirement Plans,” plan sponsors have a fiduciary duty to try to locate missing participants, to contact terminated vested participants, and to begin distributing benefits within required timeframes. Failure to pay required minimum distributions after a participant turns 70 ½ is a plan qualification error, and participants who miss required distributions may be subject to a 50 percent excise tax. The DOL has also indicated that it may impose personal liability on plan fiduciaries for any tax consequences owed to their employees. For all of these reasons, it is crucial that plan sponsors ensure that proper procedures are in place, and that plan procedures are being followed, to locate and contact terminated vested participants.
For the first time, the U.S. Equal Employment Opportunity Commission (EEOC) is suing private employers on behalf of employees alleging sexual orientation discrimination. On March 1, 2016, the EEOC issued a press release announcing it has filed its first two sexual orientation lawsuits alleging violations of Title VII of the Civil Rights Act of 1964 (Title VII).
Ten short years ago, revenue sharing seemingly presented a “win win” opportunity for third-party administrators (TPAs) and defined contribution plan sponsors. TPAs generally retained all revenue sharing payments received from plans’ investment fund companies in exchange for administrative services provided to the investment funds. In recognition of the revenue sharing received from the investment fund companies, TPAs often provided “free” plan administrative services to plan sponsors. Starting in the mid-2000s, however, more plan sponsors began to question the amount of money received by the TPAs under this arrangement, and plaintiffs’ lawyers and the DOL began to monitor and scrutinize revenue sharing.
This article summarizes the evolution of revenue sharing over the past ten years and examines its future through the lens of the recent U.S. Supreme Court decision in Tibble v. Edison and the subsequent uptick in 401(k) fee litigation.
The IRS recently issued guidance providing safe harbor 401(k) plan sponsors with increased flexibility to make mid-year plan changes. Notice 2016-16 sets forth new rules for when and how safe harbor plan sponsors may amend their plans to make mid-year changes, a process which traditionally has been subject to significant restrictions.
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